NEEDLES POWERS LEADING EDGE TEXTBOOKS TIME FLIES WHEN YOU RE HAVING FUN! TEACHING IDEA

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1 NEEDLES POWERS LEADING EDGE TEXTBOOKS Our Textbooks Financial Accounting /Crosson Principles of Accounting /Crosson Financial/Managerial Accounting Principles of Financial Accounting Needles/Crosson Managerial Accounting Gray/Needles Financial Accounting: A Global Approach Our Software /Jarett Fingraph Financial Analyst Introduction to Financial Accounting Bridge CD: Mastering The Accounting Cycle Visit our website at: instructors/course_intro.html To order or obtain information call the Houghton Mifflin Faculty Services Center: If you have any suggestions for current events and/or concerns, please send them directly to me using this address. Comments are welcomed. We value your input about our books, other products, and service. Use this address to let us know how we are doing. If you wish to unsubscribe to this service, let us know by simply sending your request to bneedles@needles-powers.com. An Author-Produced Newsletter Vol. 2, No. 3 TIME FLIES WHEN YOU RE HAVING FUN! Here are some more ideas to make your classes more exciting and current. The teaching resources described below are contained in the attached pdf file in a form that you can print out for reference and reproduce for your classes. ACCOUNTING IN THE NEWS Topics: Classification, preferred stock, debt to equity More Truth-in-Labeling for Accounting Carries Liabilities The Wall Street Journal, August 28, 2003 See pdf file for details and discussion questions. REAL-WORLD CASE Topic: Ethical Reporting, Revenue Recognition, Rules versus Principles Is it acceptable aggressive accounting or fraudulent financial reporting? Lucent Technologies. See pdf file for case with solution. TEACHING IDEA Topic: Let s put beginning accounting students on the right path from the start. Bel Needles DePaul University Marian Powers Northwestern University

2 ACCOUNTING IN THE NEWS: A TEACHING POINT BY NEEDLES & POWERS Topics: Classification, preferred stock, debt to equity More Truth-in-Labeling for Accounting Carries Liabilities The Wall Street Journal, August 28, 2003 Preferred stock can have many different characteristics but is commonly considered to be part of a company s stockholders equity. An issue of whether it should be classified as debt is raised for certain types of preferred stock, called mandatorily redeemable stock. In other words, these are securities that a company must redeem (pay back) at fixed future dates or under predetermined circumstances and that carry a fixed dividend. The Wall Street Journal reports that the popularity of these types of securities has soared in recent years, in part because they have allowed companies to raise money without having to show more debt on their balance sheet. For example, AOL Time Warner has $1.5 billion of these kinds of securities. The FASB has recently determined that these mandatorily redeemable securities should be classified as debt and the dividends on these securities should be considered interest expense on the income statement and the statement of cash flows. CMS Energy, a utility company, has cautioned that reclassifying its mandatorily redeemable preferred stock as debt will cause it to approach the debt limits in agreements with bank lenders. This situation could hinder its efforts to access financing or raise money and could result in defaults under one or more of the loans.* Discussion questions: 1. What characteristics do mandatorily redeemable stocks possess that would cause the FASB require them to be classified as debt? 2. Why would a company want to show less debt and more stockholders equity? 3. What might be the consequences if CMS Energy defaults on one or more of its loans? 4. What is the effect on the income statement and the statement of cash flows of showing dividends on mandatorily redeemable stock as interest expense instead of as dividends? * Michael Rapoport and Jonathan Weil.. More Truth-in-Labeling for Accounting Carries Liabilities The Wall Street Journal, August 28, 2003

3 Topic: Ethical Reporting, Revenue Recognition, Rules versus Principles Is it acceptable aggressive accounting or fraudulent financial reporting? Lucent Technologies The SEC is conducting an investigation into possible fraudulent accounting practices at Lucent Technologies, Inc. The probe focuses of whether Lucent improperly booked $679 million in revenue. The SEC is looking at how Lucent recognized revenue on sales to its distribution partners, who may not have sold the products or even may not be able to sell the products. This practice is known as stuffing the channels. In an adjustment, the company took back an $452 million in revenue it had sent to its distribution partners but never actually sold to end customers. Normal accounting practice does not allow recording as revenue shipments to distributors on consignment, that is, with the right of return if not sold. It is not clear what rights of return exist in this case, but analysts have been critical of Lucent s aggressive practice. Lucent maintains the practice is legal. * What is the different between aggressive accounting and fraudulent financial reporting? Can Lucent s revenue recognition practice be legal but also fraudulent? * SEC Probes Lucent Accounting Practices, The Wall Street Journal, February 9, 2001.

4 SUGGESTED SOLUTION TO REAL WORLD CASE: There is often a fine line between aggressive accounting, which is the use of legitimate accounting methods to achieve business purposes, and fraudulent financial reporting, which is the intentional misrepresentation of financial information for business purposes. The former is acceptable, whereas the latter is unethical and perhaps illegal. Some business executives argue that if an accounting practice is within the rules, it is by definition not fraudulent. Others, including the SEC, argue that it is important to look at the substance of the transaction. In the case of Lucent, the company shipped products to distributors when it knew that the distributors may not be able to sell the products, (and in fact, many of the distributors eventually did go bankrupt). Thus, even though the transactions might technically be classified as sales under accounting rules, assuming that they are not consignments, they distorted the reality of the situation and were fraudulent. It is therefore possible for a transaction to follow accounting rules and still be fraudulent.

5 TEACHING IDEA Let Put Beginning Accounting Students On The Right Path From The Start This is the third, and last, in a series of teaching ideas based on the Board of Examiners discussion of the new computer-based CPA examination. This document is very important because it represents the ultimate goal for most accounting majors, all of whom start in a beginning accounting course. We cannot raise them to the level of the CPA examination in the beginning accounting course but we can start them on the right path. The new examination will require students to demonstrate understanding, analysis, and judgment. Specifically, they will be required to: Interpret and apply the relevant professional literature. Comprehend professional standards and apply these standards during the course of an engagement. Recognize business-related issues and their relevance to evaluating an entity s financial condition. Evaluate, analyze, and process entity information for reporting in financial statements. Identify financial accounting and reporting methods and select those that are suitable. Address, analyze, and resolve issues in the conduct of an engagement. These objectives form a very good framework for what many are doing in the beginning accounting by taking a more conceptual user approach. We ask follow-up questions to seek understanding to exercises and problems, refer to FASB standards, use conceptual cases, cite real world examples, analyze annual reports, and assign Internet cases. All of these activities put students on the path to understanding, analysis and judgment.