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  • 1. Strategic Accounting: Using Pro Forma Evaluations for Student Learning Gains Facilitators: James Bagwell James Bogert Gregory Kordecki Clayton College & State University Georgia Association of Accounting Educators 2001 Annual Meeting North Georgia College & State University
  • 2. Why teach Strategic Accounting?
    • AICPA Vision Statement
    • IMA cites knowledge, skills, and abilities as what Corporate America wants
    • Shift toward attention-directing, critical thinking, and opportunity-finding attributes of business decision making
    • Create pathways for business growth
  • 3. Why don’t we teach Strategic Accounting?
    • Pro forma analysis for decision-making has only limited coverage in our textbooks and e-texts
    • There is not enough time to add any new material
    • It is probably covered sufficiently in Corporate Financial Management and Strategic Management
    • Limited exposure on the CPA Exam
    • Students may think it is too difficult
    • It is a part of the MBA Curriculum
    • It is comfortable to analyze the past with certainty
  • 4. Mandate for Change
    • The votes have been counted!
    • Only 1 percent of high school students nationally are considering a career in accounting
    • Only 2 percent of college students nationally are selecting accounting as their undergraduate major, representing a 50% decline since 1990
    • We are losing many prospective accounting majors to Finance and Information Technology, because these disciplines are viewed as being Cool and Exciting!
    • High salaries can be earned with a 4-year degree
  • 5. The New CPA Vision
    • CPAs are the trusted professionals who enable people and organizations to shape their future. Combining insight with integrity, CPAs deliver value by:
    • - Communicating the total picture with clarity and objectivity
    • - Translating complex information into critical knowledge
    • - Anticipating and creating opportunities
    • - Designing pathways that transform vision into reality
  • 6. New CPA Core Competencies
    • Communication and leadership skills
    • Strategic and critical thinking skills
    • Focus on the customer, client, and market
    • Interpretation of converging information
    • Technologically adept
  • 7. New Opportunities for CPAs
    • Expanded CPA role in strategic management
    • Need to apply a broader range of knowledge and skills
    • Greater opportunities to add value in business decision-making
    • Enhanced image for the profession
  • 8. What about the other business majors?
    • Most students who take Principles of Accounting classes don’t major in Accounting
    • Management, Marketing, Finance, and Information Technology majors focus on future goal attainment, rather than on historical data
    • All business majors, including accounting majors, need to be focused on the future vision when taking accounting classes
    • All business entities are asking: “How can we improve our results for the better in the future?”
  • 9. Our Link to the Future
    • Strategic Accounting is our link to the future
    • We are not diminishing the importance of GAAP, GAAS, or the IRC
    • We are focusing on using this information for future-oriented strategic decision-making
    • We are using technology based models to obtain information and knowledge for strategic purposes
    • We are focusing on adding value for business through the creation of expanded opportunities
  • 10. Our Short - Run Goal
    • To implement an Excel-based model whereby students could
      • In a single course
      • Over one semester
    • Develop several business opportunity scenarios leading to future cash flows and ultimate market valuation that reflects various business decisions
  • 11. Our Long - Run Goal
    • Expand the Strategic Accounting project to include:
      • Several course sites in the curriculum
      • Over several semesters
    • We believe our students will benefit from both a cross-functional and longitudinal exposure
      • Will foster interdisciplinary knowledge creation and analysis
      • Over learning is better than no learning
  • 12. The Strategic Accounting Model
    • Currently fully operational in the required BBA capstone course in Strategy & Policy
    • We would like to extend and download into several other points in the curriculum, both in the junior business core, as well as in upper level accounting courses (AIS in Spring 2001)
    • We would like to introduce some basics in the required freshman Introduction to Business course and in the sophomore Accounting Principles courses
  • 13. The Environment
    • Innovative faculty
    • Integrated curriculum
    • Comparative advantage in computer technology
    • Students on the forefront of change
  • 14. Notebook Computer Initiative
    • All students have a notebook computer
    • Enhances opportunities for both classroom and homework applications
    • Prepares students for the workplace in the current business environment
    • Encourages the students to embrace flexibility and future change in business
  • 15. Strategic Accounting Model Introductory Procedures
    • Professor emails Excel template and preliminary instructions to students for advance study
    • Each student comes to class with their laptop to one of the University’s model classrooms
    • Professor demonstrates one or more data sets, emphasizing how the Pro Formas will change with revised assumptions
    • Professor demonstrates financial statement linkages
  • 16. Strategic Accounting Model Application Goals
    • Students will individually download real world corporate data
    • Students will perform sensitivity analysis by varying some of the assumptions (e.g., percent changes, annual increase in revenue)
    • Students will use Excel features and prepare the pro forma financials
    • Students will generate pro forma cash flows, apply net present values, find reasonable “market” valuation
    • Students will encounter ultimate decision-making
  • 17. Applications for the Strategy and Policy Course
    • The Strategic Accounting Model is used to perform a comprehensive business analysis
    • Before using the model in the main strategy project, the professor actually tests individual students in the class in an on-line setting
    • Students may elect from a pool of real companies or massaged data, over which there is no advance notice
    • Students have the full class period to enter values, manipulate formulas, determine NPV, find intrinsic market valuation, and draw conclusions
  • 18. Applications for the Accounting Information Systems Course
    • On its initial run, the Strategic Accounting project will be scaled-down relative to other information technology course components
    • Students will be introduced to the project in Spring 2000
    • Students will work in small teams and will submit findings for a grade, but no in-class testing
  • 19. Why use AIS as a Site?
    • Our AIS course is a required course in the accounting core
    • The course emphasizes flowcharting, controls, and cycles
    • The course design is integrative in nature, making use of accounting projects related to other accounting courses
    • The Strategic Accounting project is consistent with the blend of both managerial and financial concerns
  • 20. Challenge for the Academy
    • Be responsive to the needs of the business market
    • Strategic Accounting is a natural way to transition
    • Preparation for professional exams will not be diminished
    • Student experience with financial models is a value added enhancement for their future careers
    • They depend on us to teach them what they need to know in the future!
  • 21. Applying the Strategic Accounting Model
    • 1. Perform model start-up procedures
    • 2. Research historical financial statements
    • 3. Establish trend assumptions and financial statement line item changes
    • 4. Project the Income Statement
    • 5. Project the Cash Flow statement
    • 6. Project the Balance Sheet
  • 22. Applying the Strategic Accounting Model
    • 7. Forecast results of future years
    • 8. Calculate intrinsic value stock price
    • 9. Determine market value worth
    • 10. Evaluate a Takeover Offer
    • 11. Perform Merger Analysis
    • 12. Perform Acquisition Analysis
  • 23. 1. Start-up - Prepare the Integrated Financial Statements
    • Students receive Strategic Accounting Model in advance and review for class discussion
    • Excel spreadsheet formulas are included, but students are required to enter some formulas and designate necessary cell references by revising assumptions and data sets
    • Model highlights items with point breakdown, which is helpful to mark milestones in progress and to determine points to be received in grading
  • 24. 2. Research Historical Financial Statements
    • Indirect method is assumed for the operating activities section of the cash flow statement, as well as sufficient detail on investing and financing activities
    • 3 or 4 years of account balances are better than 2 for identifying account relationships and for identifying trends
    • Historic balances are entered under heading labeled “Actual,” and projected amounts under heading labeled “Projected”
  • 25. 3. Establish Assumptions on Trends
    • Set assumptions on sales growth, cost of goods sold as a percent of sales, working capital changes, equipment acquisitions and dispositions, and account relationships
    • Use those assumptions so the providers are committed to achieving the results indicated by the forecast; i.e., develop the corporate budget as a forecast to which all key players are committed
    • Enter assumptions that may change from year to year across the top, and those that are fixed on the appropriate row in the model
  • 26. 4. Project the Income Statement
    • If the income statement line item values have been computed in the assumptions, copy the values to the income statement, by entering = cell reference
    • Be sure that the assumptions are programmed in Excel so that revenues appear as positive values and expenses are negative, so that cash flows then carry the correct sign
    • Helps is available alongside financial statement items
  • 27. 5. Project the Cash Flow Statement
    • If the change assumptions were computed at the top, copy the values associated with asset changes and depreciation to the cash flow statement, but be sure to change the sign of each value
    • Copy the values associated with payables and equity accounts to the cash flow statement, and be sure to maintain the same sign of each value
    • In the appropriate statement cell, enter “=cell reference”, changing the sign if necessary
  • 28. 6. Project the Balance Sheet Accounts
    • Most balance sheet account projection is equal to the previous column balance sheet amount plus the current column assumption change amount
    • The retained earnings projection is equal to the previous column balance sheet amount plus the current column net income and dividends paid
  • 29. 7. Project the Future Years
    • Once appropriate formulas have been applied to make a 1-year projection (so that assets = liabilities + owner equity), you can copy the entire projection column to the right to project the future years
  • 30. 8. Calculate Intrinsic Value Stock Price
    • If you add the cash flow from operations to the cash flow from investing activities subtotals, you have a cash flow stream that you can discount to compute the cumulative net present value of the firm, given its strategy defined by the strategic assumptions
    • The cumulative net present value of the firm is its intrinsic market value
  • 31. 8. Calculate Intrinsic Value Stock Price (continued)
    • Theoretically, this is what the total shares outstanding are worth
    • Divide the cumulative net present value of the firm by the number of shares outstanding to get the intrinsic value of a share of stock
    • If the intrinsic value exceeds the market value of the stock, the stock is undervalued and it may be a good candidate to buy and hold until it is fairly priced
  • 32. 9. Determine Market Value Worth
    • Use market value as its cost in Time 0, and use the sum of the cash flows from operations and investing activities for future periods
    • Total the cash flows for the periods you will consider
    • Discount the cash flow stream (cash flows for Time t = 0, 1, 2, 3, 4, etc) by dividing each period cash flow by (1 + discount rate) ^ t.
  • 33. 10. Evaluating a Takeover Offer
    • Record the offer as a negative value (buyer’s perspective) in the Time 0 column before the first forecast column
    • Compute the Cumulative Net Present Value
    • If the Cumulative Net Present Value is positive, the investment is wealth-enhancing, given the assumptions
    • To compute the internal rate of return, substitute different values in the rate formula until the cumulative net present value approximates 0
  • 34. 11. Perform Merger Analysis
    • Compare the Cumulative NPVs of two possible merger candidates
    • Decide upon synergies (increased revenues from more complete product lines and reduced overhead from redundancy) that increase cash flows
    • The result usually indicates that a stock swap combination of related firms will have a larger positive cash flow than the firms operated separately
    • The ratios must be beneficial to both parties
  • 35. 12. Perform Acquisition Analysis
    • If one firm plans to acquire the other for cash, the cost of the target is important
    • The larger firm may be able to offer more to the target’s shareholders for their stock than the stock market will pay for the target’s existing cash flow stream
    • As long as the acquiring firm pays the target shareholders less than the full amount of the expected increase in value of the combined firm, the acquiring firm’s shareholders will also theoretically enjoy increases in stock value
  • 36. Behavioral Implications
    • Stock options motivate corporate managers to complete value-enhancing mergers
    • Individuals should position themselves working in line jobs or in working for successful acquiring firms
    • Students should be position themselves to maximize success in their career strategies
    • Students depend on accounting educators to teach them what they need to know, not only to survive, but to thrive on success presented by changing future opportunities!
  • 37. We Enjoyed Our Time with You!
    • Would you please help us out on the next leg of our research and complete the brief survey?
    • We would be pleased to follow up with you on any matter – we can be reached by phone through our general number 770-961-3410 or through individual emails:
      • [email_address]
      • [email_address]
      • [email_address]