Week 6 Assignment Accounting Capstone Article Review Using the LIRN, the University’s Library resources, find an article that covers a topic that you have studied in the course and provide a 3-5 page summary of that article. This summary should be in (APA format) double-spaced, single-sided, Courier New Font, 12 pitch, 1 inch margins, with no grammar or spelling errors; APA includes a title page and a reference page at the end. The cover page and reference pages will not be counted in the 3-5 pages. You must cite your reference. HOW DO YOU MEASURE DAMAGES? LOST INCOME OR LOST CASH FLOW? By: Wagner, Michael J. Journal of Accountancy. Feb1990, Vol. 169 Issue 2, p28-33. 5p. , Database: Business Source Complete In the burgeoning field of litigation services, one common role played by the CPA is as an expert on damages. As a general mle. attorneys are unfamiliar with the different ways to compute damages and normally leave it up to the expert to decide how damages should be computed. Moreover, the law itself gives little guidance to CPAs on the proper way to compute damages. Damage statutes usually don't prescribe an exclusive way of doing it. Statutes authorizing the award of damages often use this kind of language: "Damages are to be awarded in an amount which will make the plaintiff whole" or "damages are to be awarded in the amount of the benefit ofthe bargain." So how should an accountant choose between calculating damages as lost income or lost cash fiow to the plaintiff? This article explains the difference between the two methods and the factors to be considered when making a decision about which approach to use. TYMS Of PAMAOtt The first consideration is typically the type of damages that are being computed. Damages may be in the form of out-of-pocket losses or lost profits. Out-of-pocket fosses are generally computed on a cash basis. Damages are the total amount of cash paid less any cash received. However, there are certain situations in federal class action securities litigation in which out-of-pocket damages are computed as the difference between what a security was purchased or sold for and what it was actually worth on that transaction date. This difference is attributable to the alleged fraud or misrepresentation that affected the security's price. In these circumstances, the computation of out-of-pocket loss is not a simple cash basis computation but requires sophisticated econometric tech MICHAEL J. WAGNER, CPA, JD. is a partner of Price Waterkouse in Los Angeles, Catifurnia. He is a member ofthe A merican Institute of CPAs MAS practice standards and administrution subcommittee ami the auditing standards boant litigation service task force. A coauthor wilh Peter H. Frank ofthe AICPA MAS Technical Consulting Practice Aid no. 7, Litigation Sen'iees, lie is a member ofthe California Society of CPAs. niques to determine the value of the securities in question. For computing tost profits, there's less guidance on which approach to u.

1. Week 6 Assignment
Accounting Capstone
Article Review
Using the LIRN, the University’s Library resources, find an
article that covers a topic that you have studied in the course
and provide a 3-5 page summary of that article.
This summary should be in (APA format) double-spaced, single-
sided, Courier New Font, 12 pitch, 1 inch margins, with no
grammar or spelling errors; APA includes a title page and a
reference page at the end. The cover page and reference pages
will not be counted in the 3-5 pages. You must cite your
reference.
HOW DO YOU MEASURE DAMAGES? LOST INCOME OR
LOST CASH FLOW?
By: Wagner, Michael J. Journal of Accountancy. Feb1990, Vol.
169 Issue 2, p28-33. 5p. , Database: Business Source Complete
In the burgeoning field of litigation services, one common role
played by the CPA is as an expert on damages. As a general
mle. attorneys are unfamiliar with the different ways to compute
damages and normally leave it up to the expert to decide how
damages should be computed. Moreover, the law itself gives
little guidance to CPAs on the proper way to compute damages.
Damage statutes usually don't prescribe an exclusive way of
doing it. Statutes authorizing the award of damages often use
this kind of language: "Damages are to be awarded in an amount
which will make the plaintiff whole" or "damages are to be
awarded in the amount of the benefit ofthe bargain." So how
should an accountant choose between calculating damages as
lost income or lost cash fiow to the plaintiff? This article
explains the difference between the two methods and the factors
to be considered when making a decision about which approach
to use.
TYMS Of PAMAOtt The first consideration is typically the type

2. of damages that are being computed. Damages may be in the
form of out-of-pocket losses or lost profits. Out-of-pocket
fosses are generally computed on a cash basis. Damages are the
total amount of cash paid less any cash received. However,
there are certain situations in federal class action securities
litigation in which out-of-pocket damages are computed as the
difference between what a security was purchased or sold for
and what it was actually worth on that transaction date. This
difference is attributable to the alleged fraud or
misrepresentation that affected the security's price. In these
circumstances, the computation of out-of-pocket loss is not a
simple cash basis computation but requires sophisticated
econometric tech
MICHAEL J. WAGNER, CPA, JD. is a partner of Price
Waterkouse in Los Angeles, Catifurnia. He is a member ofthe A
merican Institute of CPAs MAS practice standards and
administrution subcommittee ami the auditing standards boant
litigation service task force. A coauthor wilh Peter H. Frank
ofthe AICPA MAS Technical Consulting Practice Aid no. 7,
Litigation Sen'iees, lie is a member ofthe California Society of
CPAs.
niques to determine the value of the securities in question. For
computing tost profits, there's less guidance on which approach
to use. The choice is really up to the expert CPA. Either the
income or the cash fiow approach is valid and will be
acceptable to the court. There's no common practice among
CPAs and often a CPA will use the approach he or she is most
comfortable with. However, here are some factors to consider
when deciding on which approach to use.
HOW MUCH IS BHNO CIAIMEP? One factor to consider is the
amount of damages being claimed. Why should that make a
difference? A large number of capital items may have to be
purchased to reach the incremental level of sales or ser'ices
estimated in the damage claim. Since capital items aren't
expensed on the income statement but, instead are depreciated
over their useful lives, there can be a difference in the estimate

3. of damages depending on the approach used. A simple example
will explain this problem. Exhibit 1 on page 31 illustrates the
results of using the cash basis and the income basis approaches
to damages. It shows the amount of cash or income that would
have been generated if the legal violation had not occurred. The
top portion of the exhibit shows the calculation of cash basis
damages over the three-year damage period. In year one of the
damage period, capital items totaling $9,000 would have to be
purchased in order to achieve the incremental revenue estimated
in the damage claim. Therefore, under the cash basis damages
method there's a loss of $3,000 in the fu'st year. Under the
income basis damages method, there's a profit of $3,000.
Looking at the total three-year period, the problem seems to
resolve itself because the timing differences between the two
approaches even out; both methods anive at the same amount of
damages—$12,000. However, there still are two problems.
SHORHNINO THE TIMi FRAMl The first problem is explained
by exhibit 2 on page 31. This exhibit is identical to exhibit 1
except there's no third year. In this example, the capital
improvements neces
JOURNAL OF ACCOUNTANCY, FEBRUARY 1990 29
COMPUTING DAMAGES
sary are the same as the first example— $9,000. The economic
life of these capital improvements is the same as well—three
yeai-s. The difference is that now the damage period is only two
years rather than three years in length. Notice the difference in
the total column. Now, under the cash basis damages method,
damages total $4,000. The income basis damages method
computes damages at $7,000. Obviously, the difference is the
amount ofthe net book value ofthe capital improvement. The
asset was put on the books at $9,000 in year one. By the end of
year two, there was $6,000 of depreciation taken resulting in a
net book value of $3,000. Subtracting the value of the asset
remaining on the plaintiffs balance sheet from the computation
of damages using the income method results in an adjusted
damage figure of $4,000 ($7,000 - $3,000). I have used only one

4. example ofthe many types of differences between a cash fiow
statement and an income statement. Any accrual item irill lead
to a difference between the cash fiow and income statements
fora particular plaintiff. These include • Accounts receivable. •
Accounts payable. • Accrued salaries or bonuses.
• Accrued interest on a loan that requires no interest payments
until maturity.
COMPUPOTY
Obviously, if the CPA were to attempt to model the plaintiffs
entire financial performance assuming the legal violation had
not occurred, all the balance sheet effects of the incremental
business would have to be considered. It's been my experience
that many damage studies ignore the complexity of modeling
how the plaintiffs balance sheet would change as a result of
estimating the amount of cash fiow or income lost. It's often
more difficult and speculative to estimate some of the working
capital changes than the revenue and expense items related to
the plaintiffs incremental business. Unless all these
complexities are estimated, there might be a difference between
the cash flow method and the income method of computing
damages. Financial Accounting Standards Board Statement no.
95, Statement of Cash Flows, should help the damage expert
because the differences between cash flow statements and
income statements will be available for the plaintiff for the
periods before, during and after the damage period.
AT A GLANCE
• THERE ARE two basic approaches to damage assessment—the
cash fiow approach and the income approach. Neither the law
nor attorneys generally tell their expert CPAs which method to
use. • OUT-OF-POCKET LOSSES are generally computed on a
cash basis, but for computing lost profits, the choice is left up
to the expert CPA. Either the income or the cash flow approach
is valid and will be acceptable to the court. • THE AMOUNT
OF DAMAGES being claimed is an important consideration
because there couid be a large number of capital items that may
have to be purchased to reach the incremental level of sales or

5. services estimated in the damage claim. Any accrual item will
lead to a difference between the cash fiow and income
statements. • A MAJOR PROBLEM RESULTING from the
differences between the cash flow approach and the income
approach is the discounting of future damages back to the date
of judgment.
• NORMALLY. CPAs CAN EXPECT a higher present value of
future damages under an income approach rather than a cash
flow approach if the onty differtmce between the approaches is
the depreciation or amortization of capitalized items. • THE
PROBLEM WITH the timing differences between the
recognition of revenues and expenses between the cash flow and
income methods also arises when calculating prejudgment
interest. • CPAs SHOULD NOT CONC'LUDE the income
approach always will result in a higher estimate of damages
than the cash flow approach because ofthe different timing
assumptions between these methods. In fact, just the opposite
might occur. The CPA damage expert should be aware of this
possibility. • THE LONGER THE DAMAGE period, the more
the author prefers the cash basis approach to damages because
of the better estimate of present value and prejudgment interest
when they're based on cash receipts and expenditures.
30 JOURNAL OF ACCOUNTANCY, FEBRUARY 1990
COMPUTING DAMAGES
Financing assumptions. My simple example of the difference
between the purchase of the capital items and their depreciation
on the plaintiffs projected income statements also can be
affected by how the purchases are financed. If the capital items
are financed by bon'owing all the money, under a complete
analysis of cash flow there's no net cash outflow in year one
except whatever interest and principal repayments would occur
in that year. In fact, under this assumption, the income basis
damages might be lower than the cash flow damages by the end
of the damage period— if balance sheet changes are ignored.
CAICUIATINO PmSiWT VALUl The second major problem
resulting from the differences between the cash flow approach

6. and an income approach is the calculation of prejudgment
interest on the damage amount or the discounting of future
damages back to the date of judgment. Exhibit 3 on page 33
illustrates the second problem, using the damage study in
exhibit 1. In this illustration, I assume damages are prospective
and the date of judgment is year zero. The exhibit shows the
differences in the estimates of damages if the $12,000 of
damages is brought back to a present value as of the end of year
zero. It's assumed in discounting the yearly damage amounts
that they're lost equally during the year, so a middle-of-the-year
assumption is made as to loss for each year. Therefore, year one
damages are discounted for one half of a year to the end of year
zero. Year two damages are discounted for one-and-a-half years
and year three damages are discounted for two-anda-half years.
The discount rate is assumed to be 10% for all years. Using
these assumptions, there's a $756 difference in the present value
of damage estimates between the cash basis and income basis
approaches of calculating damages. Looking at year one under
the cash basis approach, it's clear the large negative cash
outflow that results from the incremental capital improvement is
given a lot of weight in the discounting process because it's
necessary to make this expenditure before any of the
incremental income can be earned. Because this negative cash
outflow is discounted for only one half of a year, it has a large
negative present value. Under the income basis approach, this
expense is spread out over the three-year damage period (the
capital expenditure is depreciated), causing these costs to have
a
EXHIBIT 1 A comparison ofthe cash basis and income basis
damages methods (Three-yeat damage period)
Cash basis damages
Year one
Year two
Yeaf three Total
Inaemfiiira! lipemtmg cash flow IfKtementol copitol
improvement

7. Cosh basis damages
Income basts damages
Incremenicl opera^n9 cash tiow Inuemental depretkition Income
bosis domoges
S6,000 (9,000) (S3,000)
56,000 (3,000) 53,000
S7,0D0
$7,000
57,000 (3,000) S4,000
58,000
$8,000
$8,000 (3,000) 55,000
S21,000 (9,000) $12,000
521,000 (9,000) $12,000
EXHIBIT 2 A comparison of the cash basis and income basis
damages methods (Two-year damage period)
Cash basis damages
Incremenrol operating tash flow Incrementol copttal
impfovemenf Cash bosis domages
Income basis damages
IrKremento) operating cosh flow Intremenlol depteciction
Year one
$6,000 (9,000) ($3,000)
56,000 (3,000)
Year two S7,000
$7,000
s;,ooo (3,000)
Total
S13,000 (9,000) S 4,000
$13,000 (6,000) Income bosis damoges $3,000 $4,000 $ 7,000
lower present value due to the longer period of discounting—
with a resulting higher present value of total damages.
Novnally, CPAs can expect a higher present value of future
damages under an income approach rather than a cash flow
approach if the only difference between the approaches is the
depreciation or amortization of capitalized items. This assumes

8. that the capital expenditure is made with cash and is not
boirowed. A number of other balance sheet changes also would
tend to give a higher present value to the income approach over
the cash flow approach. Examples include • Increases in
accounts payable. contittued on page S3
JOURNAL OF ACCOUNTANCY, FEBRUARY 1990 31
COMPUTING DAMAGES
' EXHIBIT 3 Difference in present value of damages between
cash basis damages and income basis damages
Year Cash basis damages one
Incrementol operating cash flow S6,000 Inciemenfol capitol
improvemenf (9,000)
Cash basis damages (53,000)
Present vfllueyeofOrtc 10% (52,860)
Income basis damages
Inaemental operating cosh flow $6,000 Incremental depreciation
(3,000) Income bosis domages 53,000
Present value year 0 fa 10% $2,860
Difference in present value of damage amounts
Year two
$/,000
$7,000
56,067
$7,000 (3,000) 54,000
53,46/
Year three
$8,000
58,000
$6,304
58,000 (3,000) $5,000
$3,940
Total
$21,000 (9,000) 512,000
$9,511
521,000 (9,000) 512,000
$10,267

9. (5756)
EXHIBIT4 Difference in future value of damages between cash
basis damages and income basis damages
Cash basis damages
Increnientcl operating cosh flow Incrementol capitol
improvement
Cash bosis damoges Future value year 3 fdi 10%
Income basis damages
Incfententnl operating cash flow Incremental depreciotion
Income basis damages Future value yeor 3 fni 10%
Year one
S6,000 (9,000)
(53,000) ($3,807)
56,000 (3,000)
$3,000 $3,807
Year two
57,000
$7,000 $8,076
S/,000 (3,000)
54,000 54,615
Difference in future value of damage amounts
Year three
58,000
58,000 $8,390
58,000 (3,000)
$5,000 $5,244
Total
521,000 (9,000)
$12,000 $12,659
521,000 (9,000)
$12,000 $13,666
($1,007)
• Increases in prepaid expenses. • Accruals of interest income.
Conversely, some differences between the cash flow and income
approaches might cause the present value of the cash basis
approach to be higher than the income basis approach. If as the

10. incremental business is estimated, it's also estimated that
accounts payable would increase, this would cause
the income basis approach to have a lower present value. The
reason is because the expense is incurred earlier in the future
period on the income statements than on the cash flow
statements. Other examples include accrual of interest expense,
salaries or bonuses.
PMJUPOMEKT IMTIMST The same problem with the timing
differences between the recognition of revenues and expenses
using the cash flow and income methods also arises when
calculating prejudgment interest. Using the same $12,000 of
damages outlined in exhibits 1 and 3, I computed the difference
in damage estimates, assuming the end of year three is the date
of judgment and that prejudgment interest is awarded at a rate
of 10% per year compounded. This calculation is shown in
exhibit 4 at left, using the same midyear convention shown in
exhibit 3. also at left. The difference between the cash basis and
income basis damage approaches is even larger here. Now it's
$1,007 instead of $756. This is because under the cash basis
approach, the large negative cash outflow in year one earns
negative interest for a full two-and-a-half years rather than
being spread out over the two-and-a-half-year period under the
income approach. CPAs should not conclude the income
approach always will result in a higher estimate of damages
than the cash fiow approach because of tfie different timing
assumptions between these methods. In fact, just the opposite
might occur depending on the assumptions made as to how the
incremental business would be financed and what balance sheet
changes would occur along with the changes in the income
statement. The point here is there might be differences. The
CPA damage expert should be aware of this possibility and
account for any differences in the estimate of damages.
A PRiraHINCl FOR THi CASH BASIS Generalizations about
litigation service engagements are difflcult because of the
unique factual situations that arise. However, in my experience,
the longer the damage period, the more I prefer the cash basis

11. approach to damages because the estimates of present value and
prejudgment interest are better when they're based on cash
receipts and expenditures. Although discounting future earnings
rather than cash flow is common, it lacks the theoretical
justiflcation of discounting cash flow.
· Tax Brackets and Deductions
Conduct online research for federal income tax brackets for the
current year. Which tax bracket do you fit into for your gross
household income? How close is your gross household income
to the next lowest tax bracket? Create a list of possible
deductions for your household. Are you able to reduce your
taxable income enough to place you in the next lowest tax
bracket? If not, what are some steps you could take to do so
(this year or next year)?
Criteria:
The requirements below must be met for your paper to be
accepted and graded:
· Write a minimum of 400 words (approximately 2 pages) using
Microsoft Word.
· Attempt APA style, see example below.
· Use font size 12 and 1” margins.
· Include cover page and reference page.
· At least 60% of your paper must be original content/writing.
· No more than 40% of your content/information may come
from references.
· Use at least two references from outside the course material,
preferably from EBSCOhost.
· Text book, lectures, and other materials in the course may be
used, but are not counted toward the two reference requirement.
· Reference material (data, dates, graphs, quotes, paraphrased
words, values, etc.) must be identified in the paper and listed on
a reference page.
· Reference material (data, dates, graphs, quotes, paraphrased
words, values, etc.) must come from sources such as, scholarly

12. journals found in EBSCOhost, online newspapers such as The
Wall Street Journal, government websites, etc.
· Sources such as Wikis, Yahoo Answers, eHow, etc. are not
acceptable.
· Annotated Bibliography
Overview:
An annotated bibliography is a research tool that will help you
to keep track of the sources you encounter while working on
larger research projects. Generally, an annotated bibliography
reflects an exhaustive search of a topic; for this class, we will
treat this assignment as an introduction to the tool rather than to
expect a complete bibliography.
This tool is related directly to a References page, except here,
we follow each of your five citations with a brief (100 words or
less) explanation of:
1. Who the author is and their relevance to the subject we are
exploring.
2. Who the intended audience is.
3. How this citation relates or contrasts to at least one of our
other sources.
4. How this source helps to further our discussion of the topic.
Through this assignment, we ask that you read the criteria for
the Researched Argument essay (found in the week 6
assignment), choose a topic, and begin researching that topic
(note that you should have already chosen a topic through last
week's assignment and discussion forum).
To receive full credit for this assignment, you must have five or
more annotations in your bibliography.
This is essentially summarizing each source, so try to treat it as
a tool to help you and others find their way through this topic.
An annotated bibliography should be on its own page. Please
review the example here.
Checklist for Annotated Bibliography:
5. Does this bibliography meet the assignment criteria?

13. 6. How does the formatting of this assignment look? Does it
follow basic APA guidelines for a Reference page? (i.e. Times
New Roman font, double-spaced, no extra spacing between
paragraphs, first line of the citation flush left with all following
lines indented, etc.?).
7. Are the annotations brief, clear, and informative? Do they
avoid personal opinion? Do they act as a reference guide?
8. Imagine you are writing an essay about the same subject (you
will be). If you came upon this in your research, how useful
would you find this bibliography to be?
9. Do this bibliography contain at least five citations?
· Week 5 Case Questions
Select TWO court cases (from different chapters) from the list
below, and respond in writing to the case questions.
1. Henshel v. Clair County Road Commission (Ch 10, p 343)
2. Keith v. County of Oakland (Ch 10, p 350)
3. Adeyeye v. Heartland Sweetners (Ch 10, p 364)
4. Lichenstein v. University of Pittsburgh Medical Center (Ch
11, p 388)
5. Petty v. Metropolitan Gov’t of Nashville & Davidson County
(Ch 11, p 369)
The requirements below must be met for your paper to be
accepted and graded:
. Write between 750 – 1,250 words (approximately 3 – 5 pages)
using Microsoft Word in APA style, see example below.
. Use font size 12 and 1” margins.
. Include cover page and reference page.
. At least 80% of your paper must be original content/writing.
. No more than 20% of your content/information may come from
references.
. Use at least three references from outside the course material,
one reference must be from EBSCOhost. Text book, lectures,
and other materials in the course may be used, but are not

14. counted toward the three reference requirement.
. Cite all reference material (data, dates, graphs, quotes,
paraphrased words, values, etc.) in the paper and list on a
reference page in APA style.
References must come from sources such as, scholarly journals
found in EBSCOhost, CNN, online newspapers such as, The
Wall Street Journal, government websites, etc. Sources such as,
Wikis, Yahoo Answers, eHow, blogs, etc. are not acceptable for
academic writing.