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    HE HE Document Transcript

    • THE STATE UNIVERSITY OF NEW JERSEY SCHOOL OF BUSINESS CAMDEN ACCT 670—PROBLEMS IN FINANCIAL REPORTING 53:010:670:J6 OR 52:010:491:J6 SPRING 2007 Professor Sungsoo Kim Phone (856)225-6584 E-Mail sungsoo@camden.rutgers.edu Web Page http://www.camden.rugers.edu/ (course materials under construction) Class Meeting Times & Place see attached schedule “A pupil from whom nothing is ever demanded which he cannot do, never does all he can.”—John Stuart Mill Course Materials Required Financial Reporting and Analysis, 3rd Edition, Prentice Hall, 2005 by Revsine, Collins and Johnson. Recommended Periodic reading of Wall Street Journal and/or Business Week Course Objectives This course is designed to increase your ability to identify and analyze the problems in financial reporting. It should improve your ability to use the disclosures in a firm’s annual to determine its accounting policy for a particular type of transaction and to determine how that policy choice both affect its primary financial statements and reflects the underlying economics of the firm. This course should also improve your ability to use financial statements as part of an overall assessment of the firm’s strategy and the potential rewards and risks of dealing with the firm (as an investor, creditor, supplier, employee, etc). An important objective of the course is to provide experience in doing research to solve problems in real financial statements. Much like the real world, you will be expected to solve problems with minimal guidance on exactly how to proceed. Rather, you will be expected to use recourses such as textbooks, notes from your previous classes, and examples in the course handouts to learn the mechanics so that you can apply them to the problem at hand. Thus, this course assumes a solid understanding of basic financial accounting (i.e., accounting for financial analysis). The some portion of the course focuses on how corporate financial statements report particular economic events. We will discuss the generally accepted accounting principles for these events, their limitations, their alternatives, and the notion of earnings quality. The principles we will cover are, in general, consistent with Financial Accounting Standard Board (FASB) as well as International Accounting Standards. By the end of the course you should feel comfortable analyzing the complex transactions of the financial statements in published annual reports, and you should be able to come to a reasoned conclusion about a company’s financial health and be able to make comparisons across firms and periods over time.
    • -2- Evaluation I will evaluate your overall performance in the course by applying the following weights to the following activities: Class Participation 10% Homework/Case Analyses 10% Financial Reporting Project 30% Project Presentation 20% Mid-term Exam 30% Grades: No fixed grade distribution exists for this course. Consistent with other electives in this program, the grade distribution will likely involve 35-40% of the students receiving A grades, and 50- 65% of the class receiving B+ or lower grades. The final distribution will reflect the collective performance of all the individuals in the course. Although grades may be important to some individuals in the short run, it is more important that you strive to master the material to the best of your ability. Setting and achieving high standards of excellence will make all the difference in the long run. Class Participation: Your learning and the success of this course rely heavily upon your preparation and discussion of the cases and topics. I expect you to come to each class with well-reasoned comments, questions and analysis of each case and the related chapter readings. In evaluating your contribution, I will not simply emphasize the quantity of comments per se, or on whether you offered the "right" solution. Typically, no single "right" solution exists, and moreover, there is much to be gained by examining a wide variety of viewpoints. You can provide very valuable contribution to class discussion by posing questions, raising alternative viewpoints, and providing well-reasoned challenges to expressed views. I expect to be able to call on you for comments during the course of any given class. Homework/case analyses: I will collect and grade the assigned homework/case at the end of each chapter. Again, evidence that you attempted all part of cases will earn full points. The homework/case/reading assignment should be handed in at the beginning of the class. Please keep a second copy so that you can follow along in class. For each class session, you should familiarize yourself with the topics covered in the assigned chapters from the textbook. Each day, there will be problems and/or cases assigned from the textbook. Some of these problems will be for class discussion and some will be to write up and turn in as your homework. Some of the problems will be for topics we initially discussed in a prior week and some will be to introduce new topics that we will discuss that week. It is very important that you review all of this material before you come to class. In this way you will be best prepared to get the most out of class by following and participating in the discussion, and by asking questions about concepts that are not clear. ACC 670/Summer 2005/6/26
    • -3- Financial Reporting Project This project will consist of team-based analysis of financial statement information and the valuation of two companies of your team’s choice. Students may work in teams of not more than two on this assignment. Each group will make a 20-minute presentation on their company and their reporting analysis. This exercise provides an opportunity for students to apply and refine the valuation and analysis tools of the course. I (and prior students from similar projects) strongly recommend that you start on this project and work on it throughout the course. Do not leave this project until the deadline. If you do you will be surprised by how difficult it is to do this task well and you will not maximize your potential to learn the tools of this course. More specific guidelines for this project are described at the end of the syllabus and will be discussed during the course. On the first day of class, I will ask you to form groups of 2 students. Your group will assume the role of a financial analyst and present your research to a client (e.g., an individual investor or a portfolio manager). Your client has asked you to analyze the financial statements of two companies from the same industry. It will be most efficient if you complete your report in stages as you do these assignments. Regardless, you should complete the following tasks by the following dates: • Form a group and choose two companies by July 28 class. By e-mail send me a list of the group member names and companies you have chosen. Companies may be chosen on a first come first served basis and only one group will be permitted per industry. You should receive an e- mail reply approving your company choices. • By e-mail send me copies of the most recent annual report (PDF format from the company website) for each company by August 1. Mid-term Examinations There is a midterm examination for this course. Due to the speed of coverage and the tight schedule I will not be able to offer a make-up exam. The exam will consist of short written answers and problems. The exams will be based in large part on the annual report of a particular company. Questions will rely both on the actual numbers in the report as well as ‘made-up’ numbers. Prior to each exam, I will specify which portions of the annual report you will be responsible for. It is your responsibility to read and understand the material. Success on any examination depends largely on your preparation and the application of common sense. The exams in this course are very similar to the cases we are about to cover in class, so that completely understanding the cases is an important step in preparing for the exams. You should also be sure to work through the old exams. Also, keep in mind that It is much more difficult to “catch up” than “keep up,” and you will do better on the exams if you keep up during the semester. Honor Code The honor code of this university will be strictly upheld. The principles of the code are principles to which all professionals must adhere. Your participation in this course comes with the expectation that your work will be completed in full observance of the Honor Code. Academic dishonesty in any form is unacceptable, because any breach in academic integrity, however small, strikes destructively at the University's life and work. The principles of academic honesty, integrity, and responsible citizenship govern the performance of all academic work and student conduct at the Rutgers University as they have during the long life of this institution. Your acceptance of enrollment in the University presupposes a commitment to the ACC 670/Summer 2005/6/26
    • -4- principles embodied in the Code of Student Conduct and a respect for this most significant Rutgers tradition. Your reward is the practice of these principles. ACC 670/Summer 2005/6/26
    • -5- Day Schedule 1) Jan 22 Chapter 1 RCJ Introduction Chapter 1 The Economics and Institutional setting for Financial Accounting 2) Jan 29 Chapter 2 RCJ Accrual Accounting and Income Determination HW: P2-3 Reading: “Case Histories of Fraud and Abusive Earnings Management” 3) Feb. 5 Chapter 3 RCJ Chapter 3 Additional topics in Income Determination HW: P3-5 Case: Worldcom Communication 4) Feb. 12 Chapter 4 Structure of Balance Sheet and Cash Flows HW: P4-14 Reading: “How are earnings managed? Examples from Auditors” 5) Feb. 19 Chapter 6 RCJ Chapter 6 Role of Financial Information in Valuation HW: P6-7 6) Feb. 26 Chapter 7 Contracting HW: P7-2 Midterm Exam: coverage to be announed 7) Mar 5 Chapter 8 RCJ Chapter 8 Receivables HW: P8-21 Mar. 12 Spring Break 8). Mar. 19 Chapter 9 RCJ Chapter 9 Inventories HW: P9-12 Case: Callaway golf 9) Mar. 26 Chapters 10 & 11 RCJ Chapter 10 Long-Lived Assets and Depreciation Chapter 11 Liabilities HW: P10-7; P11-9 ACC 670/Summer 2005/6/26
    • -6- 10) Apr. 2 Chapters 12 & 13 RCJ Chapter 12 Leases Chapter 13 Income tax reporting HW: P12-6: C13-2 11) Apr. 9 Chapters 14 RCJ Pension and Post-retirement benefit HW: P14-8 Case: Bethlehem Steel 12) Apr. 16 Chapter 15 RCJ Owner’s Equity HW: P15-9 Reading: “Innovation in Preferred Stock: current developments and implications for financial reporting” 13) Apr. 23 Chapter 16 RCJ Inter-corporate Equity Investment HW: C16-1 Chapter 18 RCJ Overview of International Reporting Differences and Inflation HW: P18-6 14) Apr. 30: Presentation ACC 670/Summer 2005/6/26
    • -7- FINANCIAL REPORTING PROJECT You are to evaluate two companies from the same industry as potential investments to bring before the Portfolio Selection Committee at the financial analysis company where you work. Your report should be in the form of a report addressed to your boss, John Salvatore. Here are his instructions. The Portfolio Selection Committee is looking for under-valued firms with strong upside potential to add to the firm’s investment portfolio and to recommend to clients. I would like you to choose two companies from the same industry in US., and compare the financial performance of these two companies. Your report should be no longer than 20 double-spaced pages, including tables and exhibits. Each page should have normal margins (about one inch all the way around) and normal fonts (e.g. 12 point Times New Roman for text and 10 point Times Roman for tables). Your report should be a narrative that is accompanied by brief tables, not tables that are accompanied by brief text. The report should contain the following sections a. Business/Industry Analysis. You should summarize the strategy of the two companies and the competitive environment in which they operate. This analysis should include the main opportunities available to the companies and the main risks to their future success. b. Evaluation of quality of earnings and accounting disclosure. You should perform thorough analyses associated with the quality of earnings and accounting disclosure. This part should include your assessment of the companies’ accounting choices, and consistency in its application, and comparability across the firms. Where available you can also include the issues associated with accounting measurements, recognition and allocation, etc. c. Redflags/off-balance sheet-items: Together with b. quality of earning analysis this is an important part of the paper. Try to read financial statements with footnote and identify possible red flags items, and especially, off-balance sheet items they might have. d. Cash Flow Analysis. For both companies you should analyze (a) the difference between the net income generated each year and the cash from operations generated each year, and (b) other sources and uses of cash each year, especially cash flows to and from shareholders. e. Summary and Recommendation. This section should be very brief, no more than half of a page, but it should clearly summarize your conclusions. The report is due on the last day of class. ACC 670/Summer 2005/6/26