The University of Illinois Executive MBA
Revised August 5, 2000
Managerial Perspective on Financial Accounting
Accountancy 401X; Fall 2000
Michael J. Sandretto, 302 Commerce West
(217) 244-6410 (office); (217) 352-4832 (home, before 10:30 p.m.)
sandrett@uiuc.edu or mjsandretto@ibm.net
Texts:
Stickney, Clyde P. and Roman L. Weil, Financial Accounting: an Introduction to Concepts, Methods,
and Uses, Ninth Edition, The Dryden Press, Harcourt College Publishers (Fort Worth, Texas), 2000.
Stickney, Clyde P. and Paul R. Brown, Financial Reporting and Statement Analysis: A Strategic
Perspective, fourth edition, The Dryden Pres, Harcourt College Publishers (Fort Worth, Texas), 1999.
Afterman, Allan B., SEC Regulation of Public Companies, Prentice Hall (Englewood Cliffs, New Jersey),
1995.
Course Objectives:
Accounting is often called the language of business. It is management’s primary tool for learning
about an organization’s economic condition and performance and for communicating that information to
others. Managerial Perspective on Financial Accounting is a course for managers about accounting.
While it is designed for general mangers, it is useful to investors, regulators, and those in technical
positions. The course should help you:
1.
2.
3.
4.
5.
6.
Understand and evaluate an organization’s financial condition and operating performance.
Plan future operations and estimate the results of current decisions.
Communicate plans and goals with others.
Compare actual results with plans to understand the effect of past decisions and learn from them.
Help control an organization
Communicate the results of operations to external constituents such as shareholders, lenders,
suppliers, customers, and regulatory agencies
Objectives of accounting
Accounting has been developed over at least the past 500 years. Accounting includes several
systems, including its most basic system, double entry bookkeeping. There are other major systems such
as cost accounting systems that help determine and control costs. Cost systems are separate from
financial accounting systems such as double entry bookkeeping, but the better cost systems are closely
integrated with financial accounting and production systems.
Accounting also consists of many rules about how to record transactions or events. The primary rulemaking bodies in the U.S. are the Financial Accounting Standards Board (FASB), a private rule-making
body, and the Securities and Exchange Commission (SEC), a part of the Federal Government.
The purpose of financial reporting has changed over the years. Until about 1960, its primary
objective was to correctly value assets while retaining the historical cost principle. That is, accountants
record transactions at their historical cost. Traditionally, accountants did not change recorded amounts
for increases or decreases in market values. With value as an objective, accountants tended to focus on
how items such as inventory valuation and depreciation methods would affect the balance sheet.
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In about 1960 accountants began shifting focus to economic performance. With that objective,
accountants focused on the income statement and on matching revenues with costs that generated those
revenues. In the mid-1970s accountants again shifted focus to providing information useful for predicting
future cash flows, which analysts use to estimate a firm’s value. Currently, accounting rules are a mixed
bag. Some rules focus on valuation, some on matching costs and revenues, and some on helping with
cash flow predictions. In some cases accountants retain the historical cost principal; in other instances
they record current asset values.
Changes in Business and Accounting
Within the past ten or fifteen years publicly available financial statements began to include
considerably more information than in the past. At the same time, those financial statements have
become less useful for valuing companies.
Part of the problem lies with the nature of business. In the past, most of a company’s value
consisted of physical assets, supported by simple financial structures. Now, intangibles such as patents,
trademarks, copyrights, and software are often a firm’s main assets. In many cases, intangibles are shown
on a firm’s balance sheet at a minimal value or a value of zero. At the same time, financial structures
became more complex. Companies now issue large quantities of employee stock options and many issue
debt convertible into stock, or preferred stock that must be converted into debt. These financial structures
make it more difficult to analyze a business than in the past.
A second problem is that companies are more complex. They are larger, operate in more
countries, and use complex hedging to limit their risk. As a result, it is far more difficult to estimate the
value of a firm’s assets, to determine a firm’s performance, and to estimate a firm’s future cash flows.
A third problem is that companies change far more rapidly, so reported net income may be a poor
predictor of future income. Examples include major and frequent restructurings at companies such as
AT&T and the explosive growth at Internet companies such as e-Bay.
Finally, analysts, investment managers, and other outsiders place far more pressure on
management. In the past, a board of directors often consisted of a friends and relatives of a company’s
Chief Executive Officer (CEO). Now, because of pressure from the SEC and major shareholders such as
CALPERS (California Public Employees’ Retirement System), most boards are independent and they
regularly remove CEOs. As a result, companies probably distort their accounting earnings more than in
the past. This is a major concern at the SEC.
Course Objectives
In the past, financial accounting consisted of a few rules and several guiding principles, such as
historical cost, materiality, and matching revenues with expenses. Now, the FASB has hundreds of
mandatory rules, as does the SEC. There are far too many complex accounting rules to cover in a single
accounting class, or even in the course work required for an accounting degree.
We will cover several accounting topics in some detail, but this course is not designed to cover most
of the finer points of accounting. Rather, it is designed to provide a broad exposure to how managers can
use accounting to manage their business, how they can report the results of operations, and how they can
use external auditors to help communicate with others. The course consists of four parts:
1.
Accounting camp. An introduction to double entry bookkeeping, cost accounting, discounted cash
flows, and financial reporting.
2.
The five-day week and the two classes before mid-term. Understand financial statements, revenue
recognition, depreciation, inventory valuation, discounted cash flows, costs, expenses, and liabilities.
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3.
After mid-term and before group presentations. An introduction to special topics such as pensions,
employee stock options, restructurings, and company valuations. Each study group will prepare one
group write-up/case presentation. That will include a 5-15 page case write-up, a 2-5 page Executive
Summary for your classmates, and a 30-35 minute PowerPoint presentation, followed by 5-10
minutes of questions..
4.
A group project that may consist of either (1) an evaluation of two, three, or four companies in an
industry; (2) a detailed study of one company, which may be a company where a group member is
employed; (3) a comparison of a traditional firm, such as General Electric or GM, with a highgrowth high-tech firm such as Cisco, or with an Internet startup such as e-Bay; or (4) some other
project approved by the instructor. If you have a project for a company where a group member is
employed, the project need not be strictly related to accounting; all that is necessary is that there is a
reasonable accounting component to the study.
Each write-up should consider detailed accounting issues such as pensions, where relevant. The
write-up should also evaluate the financial condition and performance of each company, and may
include a valuation based on projected financial statements for one or more companies. Each group
will have 30 minutes for their presentation. That will include five minutes for setup, 20 minutes for
a presentation, and five minutes for questions.
Grading:
Grading is based on a mid-term and final examination, a group case write-up and presentation, the
group projects, and class participation. Class participation grading begins Monday, 14 August; class
participation in the accounting camp does not count toward your final grade. Grade weighting is as
follows:
Mid-term examination
Group case write-up and presentation
Group project write-up and presentation
Final examination
Class participation
15%
15%
30%
25%
15%
I assign numerical grades for each assignment (maximum of 100 points for each assignment). At the
end of the term I weight scores by the above percentages, add scores for the six assignments, and rank the
scores from high to low. I then assign grades based upon the following approximate grade distribution,
although I also look for reasonable breaks between letter grades, such as 1.5 points instead of .2 points.
:
A
AB+
B
25%
30%
25%
20%
The only consideration I give to an improved grade between the mid-term and the final examination
is a 25% weight to the final examination and a 15% weight to the mid-term. Once the course begins on
Monday, August 14, I will not change the grading system. The University considers any changes to a
grading system after class begins to be capricious grading.
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Assignments
Accounting camp covers the first four chapters of Stickney and Weil. Please review the following
sections of Stickney and Weil prior to class Monday, August 14:
Chapter 1, pp. 3-23.
Chapter 2, pp. 43-54
Chapter 3, pp. 101-111
Chapter 4, pp. 168-173 and pp. 198-201
I will pass out more detailed assignments two weeks prior to class.
Monday, August 14
Case: Patton, Corp.
Reading: Chapter 6, pp. 303-318, Stickney and Weil.
188-027
Assignment: Analyze the case.
Tuesday, August 15
Case: Circuit City Stores, Inc. (A)
Reading: Chapter 6, pp. 319-329, Stickney and Weil.
Assignment: Questions at the end of the case.
Wednesday, August 16
Case: LIFO or FIFO? That Is the Question
Reading: Chapter 7, pp. 252-380, Stickney and Weil.
Assignment: Questions and the end of the case.
Thursday, August 17
Case: Depreciation at Delta Air Lines and Singapore Airlines (A)
Reading: Chapter 8, pp. 410-441, Stickney and Weil
Assignment: Questions at the end of the case.
191-086
192-046
198-001
Friday, August 18
Case: Kansas City Zephyrs Baseball Club, Inc (to be passed out later).
Reading: Skim Chapter 5, pp. 231-260, Stickney and Weil.
Assignment: Analyze the case.
Friday, August 25 (short week)
Case: Baylor Books
Reading: Chapter 1, pp. 3-14, Stickney and Brown
Assignment: Questions at the end of the case.
198-082
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Saturday, September 2 (long week)
Case: Harnischfeger
186-160
Reading: Auditors and Their Opinions, 197-113; Chapter 1, pp. 15-39, Stickney and Brown
Assignment: Questions at the end of the case.
Friday, September 8 (short week)
Mid-term examination. This exam will consist of five or six questions based on footnotes from annual
reports, income statements, balance sheets, statements of cash flow, or articles from business publications
or the Internet. Topics may include, but are not limited to the following: revenue recognition,
depreciation, inventory valuation, discounted cash flows, capitalization versus expensing, and costs and
cost allocations.
During the following ten weeks we will have group presentations. I will randomly assign
your group case by Friday, August 18.
Saturday, September 16 (long week)
Case: 3-2, Specialty Retailing Analysis: The Gap and The Limited, pp. 187-197, Stickney and Brown
Reading: Chapter 3, pp. 124-159, Stickney and Brown
Assignment: Analyze the case.
Friday, September 22 (short week)
Case: Hicorp, Inc.
198-014
Reading: Appendix 3.1, pp. 160-163, and Chapter 11, pp. 587-599, Stickney and Brown.
Assignment: Group write-up and presentation 2. Bloomington
Saturday, September 30 (long week)
Case: Chemdex
898-076
Reading: Chapter 5, pp. 264-275, Stickney and Weil; Chapter 10, pp. 687-721, Stickney and Brown
Assignment: Read the case and text. We will discuss the case and I will then describe how to prepare
cash flow projections.
Friday, October 6 (short week)
Case: International Paper, Case 4-1, pp. 264-269, Stickney and Brown
Reading: Chapter 4, pp. 201-238, Stickney and Brown
Assignment: Group write-up and presentation 3. Champaign 3
Saturday, October 14 (long week)
Case: Arizona Land, Case 5-1, pp. 343-353, Stickney and Brown.
Reading: Chapter 5, pp. 283-302, Stickney and Brown; Chapter 1, pp. 1-13, Afterman.
Assignment: Group write-up and presentation 4. Chicago 2
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Friday, October 20 (short week)
Case: America Online: 1996-1999
100-090
Reading: Chapter 5, pp. 320-328, Stickney and Brown; Chapter 2, pp. 15-27, Afterman.
Assignment: Group write-up and presentation 5. Springfield
Saturday, October 28 (long week)
Case: American Airlines and United Airlines: a pension for debt, pp. 446-453.
Reading: Chapter 6, pp. 370-397, Stickney and Brown; Lease accounting and analysis, 100-003; Chapter
3, pp. 29-44, Afterman.
Assignment: Group write-up and presentation 7. Chicago 1
Limit your analysis to lease accounting; use the two most recent years available on www.pwcglobal.com.
Friday, November 3 (short week)
Case: American Airlines and United Airlines: a pension for debt, pp. 446-453.
Reading: Chapter 6, pp. 398-410, Stickney and Brown; Chapter 4, pp. 47-65, Afterman.
Assignment: Group write-up and presentation 8. Peoria/Bloomington
Limit your analysis to pensions and use the two most recent years available on www.pwcglobal.com.
Saturday, November 11 (long week)
Case: E-Bay and Amazon.com, to be passed out later
Reading: Employee stock options; Chapter 5, pp. 67-76 and Chapter 6, pp. 79-85, Afterman.
Assignment: Group write-up and presentation 9. Champaign 1
Friday, November 17 (short week)
Case: Fly-by-Night, Case 9-2, pp. 659-669, Stickney and Brown.
Reading: Chapter 9, pp. 619-643, Stickney and Brown
Assignment: Group write-up and presentation 9. Champaign 2
Thanksgiving Break—No Class
Friday, December 1 (Long week). Double Session for Group projects.
Saturday, December 9 (long week)
Final Examination. This exam will consist of five or six questions based on footnotes from annual
reports, income statements, balance sheets, statements of cash flow, or articles from business publications
or the Internet.
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Case: Circuit City Stores, Inc. (B)
192-036
Case: Depreciation at Delta Air Lines and Singapore Airlines (B)
198-002
Reading: Auditors and Their Opinions
197-113
Case: Harnischfeger
186-160
Case: Hicorp, Inc.
198-014
Case: Chemdex
898-076
Reading: Auditors and Their Opinions
197-113
Case: In-process R&D
Case: Gains and losses on securities
Case: Consolidated Financial Statements
Case: Hicorp, Inc.
198-014
Internet companies
(1 hour) A number of Internet companies have either gone out of business recently, or
announced their auditors issued a “Going Concern” opinion, which states that the firm may be unable to
continue as a going concern because it may run out of cash.
Using the Internet, The Wall Street Journal, or a local newspaper, collect information on at least
two or three Internet companies that announce they will discontinue operations or may soon run out of
funds. Be prepared to discuss your findings in class.
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