The University of Illinois Executive MBA                                                   July 13, 2004




             ...
3. Planning and budgeting.
       a. Sales budgets
       b. Expense budgets by department and divisions
       c. Profit ...
Course Structure
        In the past, financial accounting consisted of a few rules and several guiding principles. Now, t...
I assign numerical grades for each assignment (maximum of 100 points for each assignment). At the
end of the term I weight...
I. Accounting Camp, July 30-31 Session

Prior to Accounting Camp.
Skim:
A Conceptual Framework for Financial Reporting    ...
Case:                    Janet O’Brien, CPA                                                 Course packet
Assignment:     ...
Saturday, August 6   1st afternoon session
Topic:               Leveraged buyouts; debt
Case:                Knowles Elect...
II. Assignments
Monday, August 16
Topic:          Revenue recognition; Advertising capitalization; Accounting changes
Case...
Read:          Chapters 9-10, Palepu.
Assignment:    Prepare the case.

Wednesday, August 18
Topic:       Valuing risky bu...
Friday, August 20
Topics:        Leases and investments in securities
Case:          Xerox                                ...
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Case: Circuit City Stores, Inc

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Case: Circuit City Stores, Inc

  1. 1. The University of Illinois Executive MBA July 13, 2004 Tentative Syllabus Managerial Perspective on Financial Accounting Accountancy 401X; Fall 2004 Michael J. Sandretto, 225C David Kinley Hall (217) 244-6410 (office); (217) 352-4832 (home, before 10:30 p.m.) sandrett@uiuc.edu or michaeljsandretto@earthlink.net Texts: Antle, Rick, and Stanley J. Garstak, Financial Accounting, Southwestern (United States), second edition, 2004 (Antle). Palepu, Krishna G., Paul M. Healy, and Victor L. Bernard, Business Analysis and Valuation: Using Financial Statements, Text Only, Southwestern (United States), fourth edition, 2004 (Palepu). Background: Accounting is called the language of business for at least two reasons. First, accounting terms such as sales, revenues, profit, net income, costs, gross margin, expense, and capitalize are widely used in business. Any businessperson is expected to understand those terms. Second, managers rely on accounting to understand an organization’s economic condition at a point in time and its economic performance over a period of time. As a result, they use accounting information to communicate with others. Managerial Perspective on Financial Accounting will help you understand publicly available financial statements for publicly traded companies and financial statements prepared for internal use. It is also an introduction to financial statement analysis and valuation methods. The basic financial accounting methodology, double-entry bookkeeping, was first published in 1494. However, double-entry bookkeeping was first used in the 1100s to help merchants monitor economic performance of their trading ships in the Mediterranean. Since those rules are nearly identical to the ones we now use, it is safe to say that managers and others find accounting useful, even if the rules are far from perfect. To understand the benefits and weaknesses of accounting, it helps to understand why managers use financial accounting. Those needs are often different from the needs of investors or financial analysts, and include the following: 1. Understand an organization’s financial condition. a. Does the firm have adequate funding? b. Can it pay dividends? c. Does it have sufficient resources to acquire another firm? 2. Understand an organization’s operating performance. a. Is performance improving or worsening? b. How profitable is each product or product line? c. How well has a manager performed? d. Is an offer to buy one of your divisions, or your entire firm, a fair offer? e. If your firm wishes to acquire another firm or division, is the price fair? f. Should your firm invest in another firm or extend it credit? 1
  2. 2. 3. Planning and budgeting. a. Sales budgets b. Expense budgets by department and divisions c. Profit plans for divisions and the entire organization 4. Communicate plans and goals to those within the organization or to external constituents such as shareholders, lenders, suppliers, customers, and regulatory agencies. 5. Management control. Compare actual results with plans to understand the effect of past decisions and learn from them. a. Compare actual and planned revenues and expenses b. Compare actual and planned profits. Objectives This course does not cover all the above topics and some are covered only briefly, but most are covered in great detail in three later courses, Financial Management; Security Analysis and Investments; and Managerial Accounting. To a considerable extent, this course lays the groundwork for those courses and for an overall understanding of business. The primary objective of Managerial Perspective on Financial Accounting is to prepare you to understand financial statements. You may not be able to understand financial statements by the end of the course. However, you will have the background that will enable you understand financial statements by the time you complete your EMBA, if that is what you wish to do. To do that you will need to understand the mechanics of the income statement, balance sheet, and statement of cash flows. You will also need to understand footnotes, because during the past fifteen years, business and accounting have become highly complex and footnotes explain much of that complexity. We will also discuss accounting irregularities. During the past three years, dozens of high-profile companies reported massive accounting problems. However, problems were relatively widespread for at least six or seven years . We will consider reasons for these problems throughout the course. We will also consider complex accounting issues. For example, in finance you may be asked to value Cisco Systems. You will naturally begin with Cisco’s net income, after deducting taxes. From Cisco’s income statement, you may notice that Cisco’s 2000 provision for income taxes was $1.373 billion and its net income after that $1.373 billion tax provision was $2.668 billion. If you begin your analysis with $2.668 billion of net income, you will have made a serious error. Buried deep within the footnotes you can learn that Cisco paid no Federal Income taxes in 2000, received a tax refund for prior year Federal income tax payments, because of tax losses in 2000, and will receive a reduction to 2001 Federal taxes because of the size of its 2000 tax loss. You will learn how to value cash flows in finance; you will learn the details of cash flow in this course. The purpose of a financial accounting course also depends on its order within the program. Because it is in the first module of this EMBA program, Managerial Perspectives on Financial Accounting lays the groundwork for later courses. The following is a quote about financial accounting from an EMBA student who will graduate in 2002. “… it’s a great lead in to Professor Lins’ course (Financial Management). Many times this past semester members of my study group were kicking themselves for not listening better during accounting, since many of the accounting concepts . . . are used in the Finance course. I suggest you stress to the class of 2003 how important it is for them to grasp some of the accounting concepts you’re presenting, since they lay a foundation for the rest of the program.” 2
  3. 3. Course Structure In the past, financial accounting consisted of a few rules and several guiding principles. Now, the FASB has hundreds of mandatory rules, as does the SEC. There are far too many accounting rules to cover in a single accounting class or even in the course work for an accounting degree. We will cover several accounting topics in some detail, but this course does not cover the finer points of accounting. Rather, it provides a broad exposure to how managers can use financial accounting to manage their business, report the results of operations, and communicate with others. The course consists of four parts: 1. Accounting camp. Introduction to double entry bookkeeping, discounted cash flows, and financial reporting. In-class exercises. 2. The five-day week. Understand financial statements, revenue recognition, depreciation, inventory valuation, discounted cash flows, costs, expenses, and liabilities. 3. Group Projects. Projects may consist of: a. An evaluation of two or three companies in an industry, including whether their accounting changed over time; b. A detailed study of one company, which may be a group member’s employer; c. Some other project approved by the instructor. If you have a project for group member’s employer, the project should include some accounting component, but can be primarily related to some other field, such as marketing, production, out-sourcing, or relocation. Each write-up should consider pensions, taxes, leases, depreciation, and other detailed accounting issues, where relevant. You should also evaluate the financial condition and performance of each company. You may wish to include projected financial statements and a valuation based on those projections. However, finance covers valuation in far more detail in finance, so valuation is not the crucial part of this write-up. Each group will have about 45 minutes for their presentation, depending on the number of groups. That will include five minutes for setup, twenty minutes for a presentation, and five minutes for questions. 4. Final Exam. The exam will consist of five or six questions taken from footnotes, financial statements, or articles. The exam may include any topic covered in this course. The exam is open-book, open-notes, and you may use computers, calculators, and the Internet (not including e-mail). Grading: Grading is based on a mid-term and final examination, a group case presentation, a group project, 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: Group project. Write-up and presentation 40% Final examination 35% Class participation 25% 3
  4. 4. 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 four assignments, and rank scores from high to low. I then assign grades based upon the following approximate grade distribution. However, I also look for reasonable breaks between letter grades, such as 1.5 points instead of .2 points. The following is an approximate grade range from past EMBA classes. I normally assign grades of B or lower only if a student makes little effort in the class. A 30% A- 35% B+ 30% B or lower 5% We will discuss the grading system during accounting camp. If you have any suggested changes, please let me know as soon as possible. Once the course begins on Monday, August 19, I will not change the grading system. The University considers any changes to a grading system after the course begins to be capricious grading. 4
  5. 5. I. Accounting Camp, July 30-31 Session Prior to Accounting Camp. Skim: A Conceptual Framework for Financial Reporting 101-118 The Mechanics of Financial Accounting 101-119 The Balance Sheet 101-108 The Income Statement 101-109 The Statement of Cash Flows 101-107 Chapters 1-3, Antle. Skim: Chemalite, which we will cover Friday, July 30, 2004. Preparing Cases: Many assignments state: “Prepare the case.” You need not prepare a case write- up. Instead, prepare to contribute to the class discussion. To do that, carefully consider both accounting and managerial issues. I will not collect case write-ups, other than one group case write- up for each study group, as described in 5, above. Friday, July 30 1st morning session Topic: Double entry bookkeeping; financial statements Case: Chemalite, Inc. 177-078 Assignment: Prepare the case. Double entry bookkeeping was first published in 1494. It ses only addition and subtraction yet is so unintuitive it is like learning a foreign language. That is especially true for those with strong math backgrounds. The problem is that sometimes a plus sign indicates an increase while in other cases it indicates a decrease. For example, suppose we have an account balance of $5,000. In some cases $5,000 + $2,000 equals $7,000; in other cases $5,000 + $2,000 equals $3,000. That method is based on an obscure but sophisticated branch of mathematics with reasonable rules. However, unless you are familiar with that branch of mathematics, it may initially seem like nonsense. As a result, it usually takes 6-8 weeks to become moderately comfortable with double entry bookkeeping. Friday, July 30 2nd morning session Topic: Double entry bookkeeping; financial statements Case: Chemalite, Inc. 177-078 Assignment: Prepare the case. Friday, July 30 1st afternoon session Topic: Cost-based reimbursement 5
  6. 6. Case: Janet O’Brien, CPA Course packet Assignment: Prepare the case. Friday, July 30 2nd afternoon session Topic: Computerized accounting systems; financial statements Case: Verona Springs Mineral Water Case packet Assignment: Prepare the case Tutorials: Dublin Small Animal Clinic (A) Case packet Verona Springs Mineral Water Case packet Each tutorial consists of a one-page case, a document titled Instructions, Journal Entries, and Definitions, and a related Excel tutorial. During the following week, f you have time, spend a few minutes reading the case, a few minutes reading the first page of the instructions, and then proceed to the Excel spreadsheets and begin the tutorials. These materials are available on my Web page: http://www.cba.uiuc.edu/sandrett/sandretto.htm. Saturday, July 31 1st morning session Topic: Revenue Recognition Read: Revenue Recognition Guidelines 103-066 Case: Revenue Recognition Exercises 103-065 Assignment: Prepare the case. Saturday, July 31 2nd morning session Topic: Expense or capitalize costs; revenue recognition Case: Microsoft’s Financial Reporting Strategy 100-027 Required: Prepare the case Saturday, July 31 1st afternoon session Topic: Double entry bookkeeping; costs in manufacturing firms Case: Monterrey Manufacturing Company 197-023 Assignment: Prepare the case Saturday, July 31 2nd afternoon session Topic: Discounted cash flows and bonds Read: Discounted Cash Flows Case packet Case: Chang Medical Electronics (A) Case: Giant Cinema 204-052 Assignment: Prepare the cases Friday, August 6 1st morning session Topic: Discounted cash flows Case: Merck & Company: Evaluating a Drug Licensing Opportunity 201-023 Required: Prepare the case Saturday, August 6 2nd morning session Topic: Restructurings Case: Palm, Inc. Case packet Required: Prepare the case. 6
  7. 7. Saturday, August 6 1st afternoon session Topic: Leveraged buyouts; debt Case: Knowles Electronics, Inc. Case packet Required: Prepare the case. Friday, August 6 2nd afternoon session Topic: Financial projections Case: Startup Course packet Required: Prepare the case. 7
  8. 8. II. Assignments Monday, August 16 Topic: Revenue recognition; Advertising capitalization; Accounting changes Case: Circuit City Stores, Inc. (A) 191-086 PolyMedica Corporation (A) 104-023 Skim: Chapter 3, Antle. Chapter 6, Palepu Assignment: Questions at the end of the case. Monday, August 16 Topic: Revenue recognition; allowance for uncollectable notes; related party transactions Case: Patton, Corp. 188-027 Read: Chapter 4, Antle. Assignment: Prepare the case. Monday, August 16 Topic: Inventory valuation methods Case: LIFO or FIFO? That Is the Question 192-046 Read: Chapter 9, Antle. Assignment: Questions and the end of the case. Monday, August 16 Topic: Fixed assets and depreciation Case: Depreciation at Delta Air Lines and Singapore Airlines (A) 198-001 Accounting Fraud at WorldCom 104-071 Read: Chapter 11, Antle. Chapter 4, Palepu Assignment: Questions at the end of the case. Tuesday, August 17 Topic: Changes in accounting estimates and methods; financial statement analysis Case: Harnischfeger 186-160 Read: Chapter 7, Antle. Chapter 3, Palepu. Assignment: Prepare the case. Tuesday, August 17 Topic: Interim financial statements (quarterly financial statements) Case: Standard International 100-064 Read: Measuring Interim Period Performance 100-002 Assignment: Prepare the case. Tuesday, August 17 Topic: Deferral of revenues and expenses; related party transactions Case: Kansas City Zephyrs Baseball Club, Inc. 187-088 Read: Chapter 7, Palepu. Assignment: Prepare the case. Tuesday, August 17 Topic: Ratio analysis; financial statement analysis Case: Sears, Roebuck and Co. Vs. Wal-Mart Stores, Inc. 101-011 8
  9. 9. Read: Chapters 9-10, Palepu. Assignment: Prepare the case. Wednesday, August 18 Topic: Valuing risky businesses Case: The Great Atlantic & Pacific Tea Company, Inc. 104-070 Read: Bond Ratings 104-060 Wednesday, August 18 Topic: Business plans; financial projections; venture capital Case: Olympic Financial Ltd. 197-081 Read: Chapters 10-11, Palepu. Assignment: Prepare the case. We will discuss the case and then discuss financial projections. Thursday, August 19 Topic: Earnings per share; shareholders’ equity Case: Hicorp, Inc. (plus handouts on Comprehensive Income) 198-014 Read: Chapter 13, Antle. Introduction to Stockholders’ Equity 103-019 Assignment: Group write-up and presentation. Thursday, August 19 Topic: Extraordinary and unusual accounting items; classified income statement Case: Warnaco Group, Inc. (A), pp. 264-269, Stickney 101-068 Read: Chapters 11-12, Palepu. Assignment: Group write-up and presentation. 9
  10. 10. Friday, August 20 Topics: Leases and investments in securities Case: Xerox Class handout Case: General Motors Corp. Class handout Read: Chapter 12, Antle, pp. 235-237 and pp. 242-245. Chapter 4, Palepu, pp. 4-3 to 4-4. Assignment: Group write-up and presentation. Friday, August 20 Topic: Pensions Case: IBM Corp (B) 100-033 Read: Retiree Benefits 197-021 Assignment: Group write-up and presentation. Friday, September 3 Topic: Income taxes Case: Deferred Taxes and the Valuation Allowance at Lucent Technologies Inc. (A) 103-064 Read: Chapter 14, Antle. Assignment: Group write-up and presentation. Friday, September 3 Topic: Employee stock options Case: E-Bay and Cisco Systems, Inc., class handout s eBay Inc.: Internet Success or Fairy Tale? 104-049 Read: Introduction to Employee stock options 286-104 Assignment: Group write-up and presentation. Saturday, September 4. Group presentations, double session. Please limit your presentations to 30-45 minutes each, including set-up time and questions. Saturday, September 18 Take-home Final Examination is due. You may download the exam from the Web and return it by the start of the next session (about two weeks). The exam is open-book and open-notes. You may use the Internet and any resource other than another person. Please type your answers; you may submit them when the next class session begins at the EMBA office. 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. 10

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