Financial and managerial accounting

Lectures: 2 sessions / week, 1.5 hours / session

Text: Pratt, J. Financial Accounting in an Economic Context. 5th ed. John Wiley & Sons, Inc. (hereafter cited as Pratt).

Supplement Material: Intel Corporation 2002 Annual Report and SEC Form 10-K (download). The PDF file is 102 pages long, feel free to keep it on your computer and print out only key sections as they are needed.

Case Pack: Includes supplemental readings and cases (hereafter cited to as CP).

Your grade will be based on the following weights:

The T. A.s are important members of the teaching team and are committed to helping you reach the course objective. The T. A.s are also responsible for the help sessions and for grading most of the written assignments and exams. Time with the T. A.s will be scheduled to follow each class.

During class we will use instant messaging to facilitate discussion and questions from those of you who are offsite. Please set up an account before the first day of class.

My goal is to help you develop a framework for understanding financial, managerial, and tax reports. Many at the forefront of accounting education have goals generally consistent with this course objective. For example, Dr. Jean Wyer, a former accounting professor who refers to herself as "Dean" of Cooper & Lybrand's educational programs, told soon-to-be professors at an Accounting Doctoral Consortium to abandon debits and credits. To paraphrase Dr. Wyer:

You should not be teaching debits and credits; they are a holdover from the past that were needed to balance entries and accounts before we had computers. Modern electronic information systems do not have T-accounts or journal entries, and students need only understand a lesson taught the first day of an algebra course to master bookkeeping concepts: Assets = Liabilities + Owners' Equity.

Because 15.514 is likely quite different than you might expect, the next few pages provides an overview of our objectives, how we plan to get there, and additional details about how each class will be structured.

The essential elements of our strategy to help you reach the course goal is outlined in the course challenges. In addition, the structure of each day's class and related assignments are designed complement the challenges.

The course goal is divided into five subordinate challenges that can help you organize the way you learn accounting. For example, they can help you distinguish situations where there is a correct answer from those where judgment is required. You can view the challenges as a series of questions you will ask yourself later in your career as either a preparer or user of accounting information. To reach the course goal, you must meet all five challenges and understand how they relate to each other. Acknowledgement is hereby given to Professor G. Peter Wilson for his authorship of The Five Challenges.

1. The record keeping and reporting challenge
As a preparer of accounting reports (accountant, chief financial officer, controller, or other responsible party), having determined the numbers you want to record for an economic event and having made related accounting or tax policy choices (e.g., having decided to recognize revenues, capitalize expenditures, or claim investment tax credits), how do you record this event, how does it affect accounting reports, and how do you subsequently aggregate information from this event and others to create these reports? As a user of accounting reports (investor, creditor, employee, or other stakeholder), given the accounting numbers management reported for an economic event and their accounting choices, you will want to know how the numbers were recorded and how they affect accounting reports (financial statements, managerial reports, and tax reports). For example, as a user, given that depreciation expense is $10, you will want to know how it was recorded and how this entry impacts financial statements.

2. The computation challenge
As a preparer, having chosen the accounting method you will use to measure an economic event from the acceptable alternatives and having made all of the assumptions about the related business activity that are needed to apply this method, how do you compute the number reported in challenge 1? As a user, knowing the accounting procedures management used to produce the numbers recorded in challenge 1 and the information that was needed to execute them, such as management's assumptions about the related business activity, how would you compute them yourself? For example, as a preparer or user, knowing that a zero-coupon bond matures in 10 years, how do you use the implicit interest rate to compute the periodic interest expense?

3. The judgment challenge
As a preparer, given your knowledge about the underlying business activity, your choices of acceptable accounting procedures, and your own incentives, how do you choose an accounting procedure and exercise related judgment concerning measurement, recognition, and disclosure? As a user, who has access to less information than preparers about this business activity and about preparers' personal incentives to report or misrepresent it, how do you judge the usefulness of numbers reported in challenge 2 to your decision? For example, as a user, how do you evaluate the assumptions management made when they computed depreciation, including the useful life, residual value, and pattern of future expenses? Do you have access to enough information? Ideally, what other related information would you like to have to address your decision?

4. The usage challenge
As a preparer, to exercise the judgment in challenge 3, how do you first learn as much as possible about the decisions that will be influenced by the reported numbers and the consequences of these decisions on yourself, your reporting entity, and users? As a user, how can the reported numbers help you make a more informed decision? For example, how can you use them to assess the reporting entity's performance and how can you benchmark these performance measures against their historical counterparts, competitors' comparables, and strategic targets? As a user, to meet challenge 3, you will also need to know as much as possible about how others use these numbers and the consequences of their decisions (and your own) on management's reporting and business decisions.

5. The search challenge
As either a user or a preparer, how do you locate the information needed to meet challenges 1-4?

The first two challenges relate to procedural activities that generally have a right answer and are most often associated with accounting (e.g., bookkeeping, tax compliance, and producing managerial reports). Traditionally, introductory financial, managerial, and tax accounting courses have focused almost exclusively on these challenges. The judgment challenge is the most difficult to master because it is contextual - you learn judgment by analyzing actual business decisions. The richer the description of the business context in the practice problems you study and the more you know about the reporting managers' character and incentives and reporting alternatives, the more you will be preparing yourself to deal with complex judgments. The search challenge is a prerequisite for the other four challenges. For example, users of financial reports must first know where companies report their accounting policies to judge the quality of the related numbers (meet the judgment challenge) and they must know where to find the appropriate formulas to meet the computation challenge. Some of the other challenges are also interdependent. For example, users must understand how the numbers were computed to judge their usefulness.

Professional conduct is built upon the idea of mutual respect. Such conduct entails (but is not necessarily limited to):

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