Wayne Thomas
University of Oklahoma
Pop Quiz!
 How would you define teaching?
A) Developing course materials
B) Transmitting knowledge
C) Helping students realize their ability/need to learn
 Answers A) and B) focus on the instructor
 We are in complete control
 Answer C) focuses on the student
 We are not in complete control
 High risk but high reward
Overview of Discussion
 Engaging students by showing them that accounting:
1. Has foundation as a formal science (and more)
2. Has an easy-to-understand purpose
3. Has relevance to decision makers
4. Involves judgments, skills, and choices (personality)
5. Is susceptible to external pressures
6. Is susceptible to manipulation
In the beginning…
 1494 – Luca Pacioli
 Franciscan monk who taught
mathematics (to Leonardo da Vinci)
 Summa de Arithmetica, Geometria,
Proportioni et Proportionalita
(Everything About Arithmetic, Geometry
and Proportion)
In the beginning…
 Practice of mathematics could improve life
 Three essentials for good business:
1. Cash and/or credit
2. A good accountant (elementary mathematics)
3. Proper internal control (debits/credits)
 Merchants should make a lawful and reasonable profit
 Merchants should dedicate their account books to God
In the beginning…
 “Without double entry, businessmen would not sleep
easily at night. Their minds would keep them awake
worrying about their business.”
 “For, if you are not a good book-keeper in your
business, you will go on groping like a blind man and
meet great losses.”
“The very day a debit is born, it has a twin credit.”
“In general, the number of ledger accounts should
be as few as possible.”
“17 equations that changed the world”
1. Pythagorean theorem:
a2 + b2 = c2
2. Information theory:
H = −∑ p(x) log p(x)
3. Theory of calculus:
df/dt = lim[f(t+h) – f(t)]/h
4. Newton’s force of gravity:
F = G • m1m2/d2
5. Normal distribution:
Φ(x) =
(2πσ)-1/2
•
2 2
[(x-μ)
/σ ]
e
…
18. Accounting Equation:
A = L + SE
A − L = SE
Own − Owe = Residual
Resources − Obligations = Value
More Than Math
 Many students think → learning how to count
 Accounting
 Branch of mathematics
 Mathematics = formal science
 Better description → Telling a story
 Accounting
 To tell the story of a company’s operations
 Accounting = social science
 Stories can be told differently
 How would you describe your story?
 How would someone else describe your story?
 Are stories always told truthfully?
What is the true story?
 Report truthfully to shareholders the color of
this dress?
Why did City Bites
choose this image?
 Lady in sunglasses or creepy snowman face?
Fair Value?
$80 Million
$140 Million
One of
my kids
$75 Million
Sometimes we report the reality we
want others to see
Recent CFO survey:
 1 in 5 companies manipulate earnings
 Average manipulation about 10% of earnings
 2/3 of manipulation to increase earnings
 1/3 to decrease earnings (“cookie jar” reserves)
 Many accounting graduates = auditors
 Test the accuracy of financial statements
Easy-to-Understand Purpose
Make Decisions About
Investors
Companies
Easy-to-Understand Purpose
Make Decisions About
Investors
Information
Communicated to
Companies
Activities
Measured by
Framework for Financial Accounting
Make Decisions About
Investors
Information
Communicated to
Companies
Activities
Measured by
Assets
Liabilities
Owners’ Equity
Dividends
Revenues
Expense
Framework for Financial Accounting
Make Decisions About
Investors
Information
Communicated to
Companies
Activities
Measured by
Assets
Liabilities
Owners’ Equity
Dividends
Revenues
Expense
Framework for Financial Accounting
Make Decisions About
Investors
Information
Communicated to
Companies
Activities
Measured by
D E AL O R
Framework for Financial Accounting
Make Decisions About
Investors
Information
Communicated to
Companies
Activities
Measured by
D E A L O R
Framework for Financial Accounting
Make Decisions About
Investors
Information
Communicated to
Companies
Activities
Measured by
D E A L O R
Account Balance
Debit =
Debit =
Credit =
Credit =
Framework for Financial Accounting
Make Decisions About
Investors
Information
Communicated to
Companies
Activities
Measured by
D E A L O R
Account Balance
Debit =
Debit =
Credit =
Credit =
Journal Entry:
Account Name
Account Name
Debit = Credit
Amt.
Amt.
Framework for Financial Accounting
Make Decisions About
Investors
Information
Communicated to
Companies
Activities
Measured by
D E A L O R
1. Bal Sheet: A = L + O
Account Balance
Debit =
Debit =
Credit =
Credit =
Journal Entry:
Account Name
Account Name
Debit = Credit
Amt.
Amt.
Framework for Financial Accounting
Make Decisions About
Investors
Information
Communicated to
Companies
Activities
Measured by
D E A L O R
1. Bal Sheet: A = L + O
A−L=O
Account Balance
Debit =
Debit =
Credit =
Credit =
Journal Entry:
Account Name
Account Name
Debit = Credit
Amt.
Amt.
Framework for Financial Accounting
Make Decisions About
Investors
Information
Communicated to
Companies
Activities
Measured by
D E A L O R
1. Bal Sheet: A = L + O
A−L=O
2. Stmt of O: CS + RE = O
Account Balance
Debit =
Debit =
Credit =
Credit =
Journal Entry:
Account Name
Account Name
Debit = Credit
Amt.
Amt.
Framework for Financial Accounting
Make Decisions About
Investors
Companies
Information
Communicated to
Activities
Measured by
D E A L O R
1. Bal Sheet: A = L + O
A−L=O
2. Stmt of O: CS + RE = O
Account Balance
Debit =
Debit =
Credit =
Credit =
= NI − D
Journal Entry:
Account Name
Account Name
Debit = Credit
Amt.
Amt.
Framework for Financial Accounting
Make Decisions About
Investors
Companies
Information
Communicated to
Activities
Measured by
D E A L O R
1. Bal Sheet: A = L + O
A−L=O
2. Stmt of O: CS + RE = O
Account Balance
Debit =
Debit =
Credit =
Credit =
= NI − D
3. Inc Stmt: NI = R − E
Journal Entry:
Account Name
Account Name
Debit = Credit
Amt.
Amt.
Framework for Financial Accounting
Make Decisions About
Investors
Companies
Information
Communicated to
Activities
Measured by
D E A L O R
1. Bal Sheet: A = L + O
A−L=O
2. Stmt of O: CS + RE = O
Account Balance
Debit =
Debit =
Credit =
Credit =
= NI − D
3. Inc Stmt: NI = R − E
4. Stmt CF: Chg. in Cash
Journal Entry:
Account Name
Account Name
Debit = Credit
Amt.
Amt.
Framework for Financial Accounting
Make Decisions About
Investors
Companies
Information
Communicated to
Activities
Measured by
D E A L O R
1. Bal Sheet: A = L + O
Account Balance
A−L=O
2. Stmt of O: CS + RE = O
Debit =
Debit =
Credit =
Credit =
= NI − D
3. Inc Stmt: NI = R − E
4. Stmt CF: Chg. in Cash
Cash is an A
Journal Entry:
Account Name
Account Name
Debit = Credit
Amt.
Amt.
Accounting Cycle Problems
 Early chapters of course
 Later chapters as well?
 How do estimates of bad debts get reported?
 How does an asset impairment affect financial
statements?
 Analysis of resulting financial statements
Does Financial Accounting Matter
 Firm performance = Net income (= cash + accruals)
 How well is performance measured using cash only?
 $1,000 initial investment
 20 years in stocks with increase in performance
$30,000
$20,000
ΔOCF = $11,876
ΔFCF = $10,519
$10,000
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
$0
Does Financial Accounting Matter
 Firm performance = Net income (= cash + accruals)
 How well is performance measured using cash only?
 $1,000 initial investment
 20 years in stocks with increase in performance
$30,000
ΔNI = $27,100
$20,000
ΔOCF = $11,876
ΔFCF = $10,519
$10,000
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
$0
Does Financial Accounting Matter
 $1,000 initial investment
 20 years in stocks with decrease in performance
$3,000
ΔFCF = $2,027
ΔOCF = $1,625
$2,000
$1,000
ΔNI = $464
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
$0
Involves Judgment, Skills, and Choices
(more than cash flows or historical)
Expanding definition of an expense
 Cash paid for current salaries
 Cash to be paid for current salaries
 Estimates of future losses of assets (not only cash payments):
 Bad debts, Inventory write-downs, Impairments, Warranties
 Assumptions of activity (choice):
 FIFO/LIFO, Depreciation method
 Conservatism:
 R&D and advertising costs
 Contingencies
Wynn Resorts Doubtful Accounts
“Our reserve for doubtful casino accounts receivable is
based on our estimates of amounts collectible…”
Beginning
Actual WriteAllowance
offs
2015
74,678
18,736
2014
73,991
3,219
2013
102,213
40,099
2012
91,854
7,732
2011
114,091
18,391
2010
102,081
16,294
Avg.
93,151
17,412
5.3 times
How does Ford report warranties?
“These costs are estimates based primarily on historical
warranty claim experience.”
Net Income versus Payouts to Shareholders
Each Year for the Largest 1,000 Listed Companies in the U.S.
($ in billions)
$1,400
$1,200
$1,000
$800
$600
$400
$200
$0
1994
1999
Total Payout
2004
2009
Net Income
2014
Cash Dividends versus Stock Repurchases
Each Year for the Largest 1,000 Listed Companies in the U.S.
($ in billions)
$800
$700
$600
$500
$400
$300
$200
$100
$0
1994
1999
Cash Dividends
2004
2009
Stock Repurchases
2014
We’ve come a long way in 500+ years
 But primarily in the last 100 years
Complexities
 Enormous number of measurement/disclosure rules
 Bright-line rules and exceptions
 Disclosure overload
 Fair value – sometimes
 IFRS
 Other Comprehensive Income
 LIFO and other choices
 Indirect method statement of cash flows
FASB Simplification Initiative
 Elimination of Extraordinary Items
 Presentation of Debt Issuance Costs (direct
deduction)
 Inventory at lower of (1) cost and (2) NRV
 Except LIFO and retail method – simplified?
 Classify all deferred tax as noncurrent
 Others
New Revenue Recognition Standard
 Issued in May 2014
 Replaces approximately 200 items of industry-
specific guidance
Five Steps to Revenue Recognition
(Illustration 5-2)
Five Steps to Recognizing Revenue
1. Identify the contract
2. Identify the performance
obligation(s)
3. Determine the
transaction price
4. Allocate the transaction
price
5. Recognize revenue
when (or as) each
performance
obligation is
satisfied
Transactions: Single/Multiple POs*
Legal rights of seller and customer
established
Performance obligation
Single
Multiple
Amount seller is
entitled to receive
from customer
Amount seller is
entitled to receive
from customer
No allocation
required
Allocate a portion to
each performance
obligation
At a
point in
time
Over a
At whatever time is
period of appropriate for
time
each performance
obligation
POs* - Performance Obligations
New Lease Standard
 Operating leases on the balance sheet
 “Right-of-use” asset = PV of lease of payments
 Lease liability
 No change to financing (previously capital) leases
 Classification of Operating vs. Financing
 Bright lines eliminated
Operating vs. Financing
 Classification Criteria (eliminate bright lines)
1. The agreement specifies that ownership of the asset
transfers to the lessee. Similar to current GAAP
2. The agreement contains a purchase option that the lessee is
reasonably certain to exercise. Similar
3. The lease term is for the "major part" of the remaining
economic life of the underlying asset. (> 75%)
4. The present value of the sum of the lease payments equals
or exceeds “substantially all” of the fair value of the
underlying asset. (> 90%)
5. The underlying asset is of such a specialized nature that it is
expected to have no alternative use to the lessor at the end
of the lease term. NEW
Operating Lease
• Compromise needed – put operating leases on the balance
sheet but don’t mess with the income statement. How?
• Decelerated amortization
Four annual payments of $100,000 beginning Jan. 1, 2016,
and each Dec. 31 through 2018.
Useful life of the equipment is 6 years.
Lessor calculated payments using a rate of 10%.
Jan. 1, 2016:
Right-of-use asset
348,685
Lease payable ($100,000 x 3.48658 = $348,685)
348,685
Lease payable
Cash
100,000
100,000
Operating Lease:
Recording Interest and Amortization (combined)
Total lease expense (lease payment) = 100,000 (SL every year)
Interest (10% × carrying amount)
= −24,869
Amortization expense (plug)
75,131
Dec. 31, 2016:
Interest expense (10% x [$348,685 – 100,000])
Lease payable (difference)
Cash (lease payment)
Amortization expense ($100,000 – 24,869])
Right-of-use asset
24,869
75,131
100,000
75,131
75,131
Total Lease Expense: 24,869 + 75,131 = $100,000
Operating Lease:
Interest plus Amortization
 Expense is recorded on straight-line basis
Interest
Expense
Amortization
Expense
Total Lease
Expense
2016
$24,869
$ 75,131
$100,000
2017
17,355
82,645
100,000
2018
9,091
90,909
100,000
2019
0
100,000
100,000
Decelerated
Amortization???
Straight-Line
Expense
New Investments Standard
 Big change: Eliminate available-for-sale classification
for equity investments
 Fair value changes reported in net income (not OCI)
 No longer separate categories for Trading and AFS for
equity investments
 However, Trading and AFS categories remain for debt
investments. Why?
Engaging Classrooms
 Engage them during the 75 minute class
 Videos, news stories, stock price chart, questions,
quizzes, group assignments, games
 Choice might depend on your personality and beliefs
 Interactive lectures (with PowerPoints)
Accounting Equation and Elements of
Financial Statements
Assets = Liabilities + Stockholders’ Equity
 ___________ = resources owned by the company
 _____________________ = amounts owed (debt)
 _______________________ = residual resources
for stockholders (owners)
Accounting Equation and Elements of
Financial Statements
Assets = Liabilities + Stockholders’ Equity
 Assets = resources owned by the company
 Liabilities = amounts owed (debt)
 Stockholders’ Equity = residual resources
for stockholders (owners)
Recording Transactions
1. Received investment of $200,000 cash from stockholders
and distributed common stock to them.
Assets
= Liabilities + Stockholders’ Equity
↑200,000
=0
+ ↑200,000
Recorded transaction:
Cash (+A)
Common Stock (+SE)
200,000
200,000
Concept Check During Lecture
Net income is measured as:
a.
b.
c.
d.
Assets plus liabilities
Revenues minus expenses
Cash received minus cash paid
Total stockholders’ equity
The income statement shows that total revenues
minus total expenses equal net income (or profit).
Concept Check During Lecture
A company purchase equipment on January 1, 2016:
Cost
= $35,000
Estimated residual value
= $5,000
Estimated useful life
= 5 years
Calculate the gain or loss if the equipment is sold on
January 1, 2018, for $20,000 (Straight-line depreciation).
a.
$1,000 loss Loss = Book value − Selling price
= ($35,000 − $12,000*) − $20,000
b.
$2,000 gain
= $3,000
c.
$4,000 gain
d.
$3,000 loss *Depreciation/year = ($35,000 − $5,000)/5
= $6,000/year
Concept Check During Lecture
What is my daughter’s name?
a.
b.
c.
d.
Ellie
Sydney
Olivia
Ashley
Make sure they understand
what’s important to you
Just because you told them
once (see slide #2) doesn’t
mean they know/remember
Engaging Classrooms
 We’re lucky
 Accounting is a big major
 Accounting is a profession
 Accounting is dynamic
 Accounting matters
 Tell them accounting is important
 They don’t know
 You do make a difference
 and sometimes they tell you
Thank You!
Brief Bio
Wayne Thomas earned his undergraduate degree at Southwestern Oklahoma
State University and his Master’s and PhD in accounting from Oklahoma State
University in 1996. He currently teaches at the University of Oklahoma.
He co-authors Intermediate Accounting 8e with David Spiceland, Jim Sepe,
and Mark Nelson (McGraw-Hill). He also co-authors Financial Accounting 4e
with David Spiceland and Don Herrmann (McGraw-Hill).
His research focuses on financial accounting issues related to the impact of
reporting and disclosure practices on capital market participants. From 2008 to
2011, he served as an Editor for The Accounting Review.
Most of all, he enjoys spending time with his wife Julee and four kids, Olivia,
Jake, Eli and Luke.
Intermediate Accounting
David Spiceland
Jim Sepe
Mark Nelson
Wayne Thomas
Financial Accounting
David Spiceland
Wayne Thomas
Don Herrmann