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Second Round Electronics

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ISSUES IN ACCOUNTING EDUCATION Vol. 28, No. 4 2013 pp. 983–1007

American Accounting Association DOI: 10.2308/iace-50497

Second Round Electronics: A Case for Critical Thinking
Nathalie Johnstone, Brandy Mackintosh, and Fred Phillips
ABSTRACT: This instructional case requires students to provide advice to a client who is currently the sole owner of a for-profit company that reconditions and sells used electronics. The client is considering purchasing a similar company with the vision of expanding into the sales and service of emerging technologies. The target company’s unaudited financial statements contain questionable accounting choices and judgments that appear to enable the company to meet external financial reporting constraints. In their role as financial advisers, students are expected to use critical thinking skills to identify and evaluate questionable choices in the target company’s financial statements. This case is suitable for use in introductory and intermediate financial accounting as well as introductory auditing and assurance courses, and can be used as a context for inclass discussion, as a basis for exam questions, and/or as a writing assignment. Assessment rubrics and Teaching Notes accompany the case for use by instructors. Keywords: financial accounting; policy choices; loan covenants; ratio analysis.

THE CASE econd Round Electronics (SRE) is a privately owned company that reconditions and sells used consumer electronics. Its product offerings include home and car audio systems, televisions, and other devices with touch-sensitive monitors, such as smartphones and computer tablets. SRE’s sole owner, Jeff Hasting, started the company 15 years ago after obtaining a degree in electronics repair at a local college. Jeff has been very happy with SRE’s results to date. SRE has developed into a successful company with relatively stable profits and a solid financial condition. Jeff is a very competitive person, however, and he feels that SRE could be even more successful, so he would like to see his company expand into selling and servicing emerging technologies for corporate customers. Jeff has been working closely with Rachel Becker, SRE’s controller, to explore opportunities for SRE to become a bigger player in the local electronics market and increase its profitability. An idea that they have been tossing around is to acquire a company that produces complementary technologies for SRE’s products. Such an acquisition could lead to synergies that increase SRE’s market presence and drive greater profitability. Jeff has asked you to analyze a company that he and
Nathalie Johnstone and Brandy Mackintosh are Assistant Professors and Fred Phillips is a Professor, all at the University of Saskatchewan.
The authors thank their students, Doug Kalesnikoff, an anonymous associate editor, and three anonymous reviewers for comments on a prior version of the case.

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Rachel believe could be a good acquisition. Jeff makes it clear that he does not want you to advise him on business strategy; that is something he prides himself on having well in hand. Rather, he wants from you an insightful, focused financial analysis of the potential acquisition target. Somewhat out of character, he quietly admits that he and Rachel ‘‘know SRE’s accounting inside and out, but we’re not that familiar with the accounting choices made by other companies and how it affects their financial results. We realize that accountants make all kinds of judgments and choices when preparing financial statements, and we would value your input on identifying and evaluating how these professional judgments may have affected the financial reporting for our target company. Our banker suggested that a financial due diligence report would help us to become aware of the financial risks that may exist at the potential acquisition target, and that is why we have asked for your assistance.’’ Background Information on the Potential Acquisition Target The company at the top of Jeff and Rachel’s potential acquisition list is Custom App Company (CAC). Like SRE, CAC operates in reconditioned electronics. But rather than focus on selling consumer products, CAC also provides corporate installation, training, and custom programming services. CAC is smaller than SRE, with only a few employees, but CAC is known for its innovative work. CAC is a private company, owned by Brendan Zamble. CAC neither is required to have an external audit nor does it make its financial statements readily available to outside users. CAC’s only external financial statement users are the Internal Revenue Service and CAC’s bank. Jeff has been in discussions with Brendan, CAC’s president, over the past year about a potential buyout, so he has obtained excerpts from CAC’s financial statements for the years ended June 30, 2012, 2011, and 2010. Jeff and Rachel believe CAC offers the kind of performance that SRE could use to boost its own market presence and profits. Jeff has provided you with excerpts from CAC’s financial statements (see Exhibit 1). He also has provided you with notes from his discussion with Brendan (see Exhibit 2). These notes convey information relevant to various accounting policy alternatives from which the management at CAC has adopted the specific accounting policies described in the notes to the financial statements. At the risk of overloading you with information, Jeff also gives you a copy of SRE’s income statements (see Exhibit 3) to use as a benchmark when evaluating CAC. Although CAC has been in business for only five years, it has reported good growth in net revenues, with better growth than SRE in 2012. Your Task SRE’s executives, Jeff Hasting and Rachel Becker, realize that acquiring another company is a complex process that requires careful decision-making and analysis. Anticipating that Mr. Zamble may be overly optimistic when judging the value of his company and the strength of its financial position, Mr. Hasting and Ms. Becker have asked you to prepare a financial due diligence report that analyzes the financial situation at Custom App Company (CAC). To ensure that Mr. Hasting and Ms. Becker understand the scope of this work, you clarify that due diligence does not involve a formal audit. Rather, the focus of your work and your report will be on identifying and explaining in detail key financial concerns that Mr. Hasting and Ms. Becker should be aware of before proceeding with acquisition negotiations. This focus will lead you to evaluate the appropriateness of CAC’s accounting policies and identify any observations that suggest CAC’s policies may not best portray the company’s financial condition. Finally, you will raise in your report any imminent concerns about CAC’s financial condition that arise from CAC’s accounting policy choices, including any consequences that would arise if CAC were to make alternative accounting choices. You reiterate that your report will not provide a generic financial statement analysis but instead will focus on evaluating CAC’s specific accounting choices and judgments. Mr. Hasting and Ms. Becker agree to these terms, so you begin to analyze the information available to you.

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EXHIBIT 1 CAC’s Comparative Financial Statements
Custom App Company Income Statements For the Years Ended June 30 2012 Revenues from Sales and Service Sales Revenue Service Revenue Total Revenues Sales Returns and Allowances Net Revenues Cost of Goods Sold Gross Profit Expenses Selling, General, and Administrative Costs Depreciation Expense Research and Development Interest Expense Bad Debt Expense Computer Rent Expense Income before Income Taxes Provision for Income Taxes Net Income $180,000 210,000 390,000 3,000 387,000 156,000 231,000 178,314 30,000 9,000 3,240 1,200 — 9,246 1,387 $7,859 Custom App Company Balance Sheets At June 30 2012 Assets Current Assets: Cash and Cash Equivalents Accounts Receivable (net of allowances of $600 in 2012, $750 in 2011, $354 in 2010) Inventories Total Current Assets Equipment, net (Note 2) Other Assets Total Assets 2011 2010 2011 $252,000 136,500 388,500 13,500 375,000 129,000 246,000 131,036 24,000 36,000 1,420 1,944 21,000 30,600 4,590 $26,010 2010 $255,000 135,000 390,000 15,000 375,000 127,500 247,500 132,794 24,000 54,000 1,756 1,950 21,000 12,000 1,800 $10,200

$15,000 90,000 39,000 144,000 78,000 11,400 $233,400

$30,000 75,000 28,800 133,800 48,000 12,000 $193,800

$24,000 35,400 17,460 76,860 72,000 12,000 $160,860

(continued on next page)

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EXHIBIT 1 (continued)
Custom App Company Balance Sheets At June 30 2012 Liabilities and Stockholders’ Equity Current Liabilities: Accounts Payable Taxes Payable Other Accrued Liabilities Total Current Liabilities Long-Term Debt (Note 3) Total Liabilities Stockholders’ Equity: Common Shares Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity 2011 2010

$65,868 1,387 14,737 81,992 46,259 128,251 36,510 68,639 105,149 $233,400

$43,500 4,590 13,320 61,410 18,000 79,410 36,510 77,880 114,390 $193,800

$30,600 1,800 10,800 43,200 29,280 72,480 36,510 51,870 88,380 $160,860

Custom App Company Statements of Cash Flow For the Years Ended June 30 2012 Operating Activities Net income Addback: depreciation Changes in non-cash working capital accounts Net cash generated by operating activities Investing Activities Cash used to purchase equipment Cash received from selling other assets Net cash generated by (used in) investing activities Financing Activities Installment note borrowings Principal paid on notes Cash dividends paid Net cash generated by (used in) financing activities Increase (Decrease) in Cash Cash, Beginning of Period Cash, End of Period $7,859 30,000 (4,618) 33,241 (60,000) 600 (59,400) 54,000 (25,741) (17,100) 11,159 (15,000) 30,000 $15,000 2011 $26,010 24,000 (32,730) 17,280 0 0 0 0 (11,280) 0 (11,280) 6,000 24,000 $30,000 2010 $10,200 24,000 (25,270) 8,930 0 0 0 0 (11,280) 0 (11,280) (2,350) 26,350 $24,000

(continued on next page)

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EXHIBIT 1 (continued)
Note 1: Significant Accounting Policies Basis of Accounting—The company prepares its financial statements in accordance with U.S. generally accepted accounting principles. Revenue Recognition—The company records revenue from sales when the customer takes possession of the product. Sales returns are reported in the month that goods are returned by the customer. Revenue from service contracts is recorded at the time of contract signing unless contracts extend for more than 12 months, in which case the revenue is recognized ratably over each month of the contract. Bad debts are estimated by the percentage-of-credit revenue method. The average estimated bad debt rate is based on experience and management’s judgment. Write-offs of customer accounts are determined and recorded at each year-end. Inventory—The company records its inventory of reconditioned electronics at cost, as determined using the first-in, firstout (FIFO) method. Cost includes amounts paid to acquire used or damaged inventory from electronics retailers as well as direct costs incurred for necessary reconditioning work. Equipment—The company records equipment at cost (see Note 2). Computer equipment is depreciated on a straightline basis over ten years. Office and store equipment is depreciated on a straight-line basis over five years. Note 2: Equipment 2012 Computer Equipment Less: Accumulated Depreciation Computer Equipment, net Office and Store Equipment Less: Accumulated Depreciation Store and Office Equipment, net Equipment, net $60,000 (6,000) 54,000 120,000 (96,000) 24,000 $78,000 2011 $0 (0) 0 120,000 (72,000) 48,000 $48,000 2010 $0 (0) 0 120,000 (48,000) 72,000 $72,000

Note 3: Long-Term Debt 2012 Installment Note Payable, due June 30, 2017; 6 percent annual interest; annual payments due June 30 Interest-Only Note Payable, principal due June 30, 2013; 6 percent annual interest; annual payments due June 30 $46,259 2011 $0 2010 $0

0

18,000

29,280

EXHIBIT 2 Important Items Regarding CAC




Beginning in May 2012, Brendan replaced several multiyear service contracts with new, tenmonth contracts. Other contract terms with these customers are substantially unchanged. CAC continues to provide services in relatively equal amounts each month of the contract. Customers are expected to pay for the service contracts within 15 days of the end of each month of service. CAC held a massive year-end sale during the last week of June 2012 in an attempt to control CAC’s growing inventory levels. CAC only sells inventory to businesses, and therefore all

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sales were made on account. CAC allows customers with a sales receipt to return merchandise within three months of purchase. The year-end sale succeeded in reducing CAC’s inventory of computer and television monitors, but the company still has a significant quantity of refurbished computer equipment on hand. Sales returns have not been consistent from year to year, making it difficult to estimate returns for the period. As a result, Brendan has recorded sales returns in the period they occur. The unit cost of inventory has been stable, with only a slight decrease in recent periods. Market value of the inventory is dependent on current market trends and the current economic environment. Competitors frequently make aggressive pricing decisions, which CAC will match for either short or long periods. As a result, it is often difficult to distinguish between a permanent decline in value and a temporary decrease. Given the uncertainty in the market prices, Brendan has chosen to value the inventory at cost to be consistent from year to year. During its start-up years, CAC signed a 6 percent interest-only note that was to mature in 2013. CAC was permitted, but not required, to make periodic principal repayments on this note. Until July 1, 2011, CAC had been renting computer equipment (e.g., PCs, a wireless network, and a point-of-sale system) for use in its business. On July 1, 2011, CAC decided to replace this rented equipment with new equipment that it purchased at a total cost of $60,000. To finance its purchase of computer equipment, CAC negotiated a new note payable to the bank. The bank has requested that the financial statements be prepared in accordance with U.S. generally accepted accounting principles but is not requesting an audit at this time. The bank has stated that it could ask for audited financial statements in the future, depending on the financial results. Because its previous note would soon mature, CAC repaid the remaining amount owed on its previous note and signed a new installment note effective July 1, 2011. Proceeds from the new note were used to fund a portion of the purchase cost of the equipment. The new installment note includes loan covenants requiring that CAC not exceed a debt-to-assets level of 55 percent and that it maintain a minimum current ratio of 1.75. The debt-to-assets ratio is calculated using total liabilities, and the current ratio is calculated in the customary way. Breach of these loan covenants could result in severe financial consequences for CAC, such as allowing the lender to renegotiate the loan at a higher interest rate, demand that certain assets be pledged as additional security, or even demand immediate repayment of the loan. The original principal on the new note on July 1, 2011, was $54,000. The new note carries an annual interest rate of 6 percent and requires an annual payment of $10,981.64 each year on June 30, which will fully repay the installment note by June 30, 2017. The increase in CAC’s 2012 selling, general, and administrative costs is attributable to CAC having hired an additional employee to meet the increased volume of service contracts. Also included in selling, general, and administrative costs is the rent expense incurred by CAC to lease its current facilities.

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EXHIBIT 3 SRE’s Comparative Income Statements
Second Round Electronics Income Statements For the Years Ended June 30 2012 Revenues from Sales and Service Sales Revenue Service Revenue Total Revenues Sales Returns and Allowances Net Revenues Cost of Goods Sold Gross Profit Expenses Bad Debt Expense Depreciation Expense Selling, General, and Administrative Costs Other Expenses Income before Income Taxes Provision for Income Taxes Net Income $495,000 21,000 516,000 19,650 496,350 171,000 325,350 2,700 33,000 176,700 69,450 43,500 6,525 $36,975 2011 $477,000 27,000 504,000 17,700 486,300 167,700 318,600 2,400 33,000 169,500 73,200 40,500 6,075 $34,425 2010 $541,500 24,000 565,500 19,500 546,000 165,900 380,100 2,825 33,000 179,725 88,050 76,500 11,475 $65,025

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CASE LEARNING OBJECTIVES AND IMPLEMENTATION GUIDANCE Key Features of the Case The primary goal for the Case is to engage students in evaluating accounting choices involving policies and estimates, and in considering the effects of these choices on outcomes reported in the financial statements. In doing so, students learn to conduct financial analyses to satisfy specific information needs. Far too often in previous years, when we had assigned ‘‘annual report projects,’’ we observed students adopting an indiscriminate approach to financial statement analysis, in which they calculated an extensive array of ratios and then superficially told a story that explained each ratio. Instead, we aspire to make the ratios the key concerns in the mystery of this Case. The Case context places students in the role of a financial accountant preparing a ‘‘due diligence report’’ that will advise a client about the financial condition of a company being considered for potential acquisition. Simply put, this context asks students to evaluate whether the target company’s assets are reported at amounts that can be recovered through future operations and whether its liabilities will be fulfilled in due course. Using simple ratio analysis (i.e., the current ratio and debt-to-assets ratio), students also can evaluate whether the target company complies with its loan covenants or whether it risks having to accelerate repayment. The Case is intended to stretch students beyond the mechanics of financial statement preparation and analysis. The Case should help students become aware that many financial reporting decisions involve judgment, choice, and uncertainty, which in turn can impact the decisions made by users of financial reports. Within the context of this Case, students also can learn that adherence to accounting standards is not just a regulatory requirement; by following accounting standards in this Case, the resulting financial information better satisfies the needs of the business practitioner evaluating the target company’s financial position. Our ultimate goal with this Case is to help students become more critical consumers of accounting information by encouraging them to challenge management’s accounting policies and estimates. Learning Objectives By successfully completing the required Case analysis, students can learn to: 1. Assess a company’s financial situation by reviewing financial statements and related information about its business decisions; 2. Identify accounting ‘‘issues’’ that arise from errors or possible bias in judgment; 3. Recognize the underlying theme of how loan covenants can influence accounting and business decisions that pervade the identified issues; 4. Use their understanding of financial reporting incentives and their knowledge of introductory accounting topics to determine how alternative accounting decisions could impact a company’s financial condition; 5. Develop critical thinking skills by identifying issues and alternatives, applying relevant knowledge and facts, and tentatively reaching decisions about appropriate courses of action; and 6. (Optional) Prepare a formal written report, using proper grammar, structure, and business and accounting language, to explain to someone with little accounting experience how financial incentives may have influenced financial results. We label learning objective 6 as optional because instructors might use this Case only for in-class discussion rather than as a writing assignment.
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Literature Review In a review of published instructional resources, Phillips and Mackintosh (2011) noted that only two existing integrative cases were available at that time for use in the introductory financial accounting course. They created a third case by writing about a company (WAG) that was being sold at a price based on its recent earnings; these earnings had been influenced by questionable accounting choices and decisions involving inventory costing, depreciation, intangible cost capitalization and amortization, bad debts, and revenue recognition. More recently, Claiborne and Wilcox (2011) have published a fourth integrative case (HH) that asks students to journalize and later calculate financial ratios for two hypothetical companies that apply different accounting choices to otherwise identical transactions. The HH case involved accounting choices relating to inventory costing and depreciation methods, bad debt estimates, and capital versus operating leases. The present Case (SRE) complements these existing cases, thereby providing greater case choice that will enable instructors to alternate between cases from year to year, or to use one case as a discussion case and another as an assessment case. We believe having a more complete set of cases is beneficial in allowing instructors to regularly adopt new case scenarios, thereby countering the ‘‘solution leakage’’ that inevitably occurs as students pass down class notes and assignments from semester to semester. The present Case (SRE) complements and differs from existing published cases in three significant ways. First, although SRE includes some of the same issues as WAG and HH (i.e., choices involving depreciation and bad debts), it introduces new accounting issues involving sales returns, debt classification, and inventory valuation, and presents new contexts (e.g., revenue recognition for service contracts rather than product sales) that do not exist in any of the four integrative cases that have been published. Second, unlike HH, which considers how accounting choices affect quantitative calculations, and WAG, which considers how qualitative factors potentially impact the income statement and company valuation, SRE considers how both quantitative and qualitative factors impact the balance sheet and compliance with loan covenants. Third, unlike WAG, which excludes ratio analysis, and unlike HH, which focuses on the post hoc interpretation of financial statement ratios, SRE includes ratios as a central motivating factor that influences accounting choices. This orientation nudges students to develop professional skepticism in a manner supported by the auditor’s fraud triangle—a topic relevant to introductory and intermediate financial accounting, as evidenced by its recent introduction into several introductory financial accounting textbooks (e.g., Kimmel et al. 2013; Phillips et al. 2013). By adopting a professional skepticism mindset, students are more likely to recognize circumstances that could cause financial statements to be misstated (Nelson 2009). We strive to ensure that students understand that professional skepticism and critical thinking imply being alert to compromising situations that can affect the financial statements. To ensure students do not perceive the questionable management behavior in this Case as the norm, instructors who use this Case should remind students that debatable accounting choices may be made not with intent to deceive, but rather as a result of natural managerial optimism. Implementation Guidance Applicable Courses and Uses This Case is intended primarily for an introductory financial accounting course. It provides a vehicle for instructors to help students integrate financial reporting topics and accounting decisions typically dispersed throughout financial accounting textbooks, and present their analyses in a format that requires evaluation of accounting policies. Our review of several introductory financial accounting textbooks indicates that the topics in the SRE Case are consistent with those addressed at the introductory level. Our experience suggests that even students not yet trained in critical
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thinking are able to comprehend the issues in this Case. The Case is challenging for students at this level because they must integrate topics from across the first accounting course and must integrate both qualitative and quantitative information dispersed throughout the Case; but despite these challenges, they are able to complete a reasonable analysis when provided support from their instructors. The direct feedback from our introductory-level students demonstrates that they appreciated the realism and challenge presented by this Case. Consequently, we firmly believe that these materials are appropriate for an introductory financial accounting course at the undergraduate level. Although we have not tested this Case in other accounting courses, its context seems suitable for several other undergraduate or graduate courses. For example, it could be used early in an intermediate financial accounting course, as a review of key topics in introductory financial accounting that can be later built on with more-complex, intermediate issues. This Case also could be used in an introductory auditing course, especially when evaluating accounting policy choices for evidence of management bias or when discussing the expanded scope of professional accounting services (e.g., due diligence investigations). A final use of this Case could be in a case or capstone course at the upper undergraduate or graduate level; if it is used in such a course, we recommend replacing the detailed Case task requirements with the simple requirement to ‘‘prepare a report that responds to Mr. Hasting’s needs.’’ We have successfully used the Case in a context similar to a capstone course, with senior undergraduate accounting students preparing for business case competitions. Although these seniors were able to identify all the issues in the Case, they reported that they found the Case intellectually challenging. The majority of our experience has been in using the Case in an introductory financial accounting course, so that context provides the focus for the following discussion. This Case can be used as a context for in-class discussion, as a basis for exam questions, and/or as a writing assignment. To assist instructors in using the Case in discussion, we provide guiding questions in Appendix A of this section of the paper and answers to these questions in Appendix A of the Teaching Notes. The questions can be discussed in their entirety in a single class meeting of 60–75 minutes, or selected questions can be taken up as the related topics are introduced throughout the course. As the discussion questions show, the Case not only encompasses subjective accounting judgments and choices but also provides a means for reviewing objective problem-oriented matters such as calculating depreciation, and producing and interpreting amortization schedules for installment notes. To leverage the objective problem-oriented aspects of the Case fully, we have developed multiple-choice questions that can be used on exams, or in online homework assignments that students complete before or after class. The multiple-choice questions are presented in Appendix B of this section of the paper, and solutions are presented in Appendix B of the Teaching Notes. Our primary use of the Case to date has been as a writing assignment, the details of which are discussed in the ‘‘Assignment Parameters’’ section of this paper. One concern that has been raised about using accounting judgment/choice cases as writing assignments is that students develop model responses, which can be combined with instructor feedback to yield solutions that can be leaked to successive classes. This ‘‘solution leakage’’ then constrains the number of times the case can be used. Having experienced this constraint ourselves, we have adopted a practice of rotating case uses over time. When we use a case for the first time, we typically assign it as a take-home writing assignment. In its second use, the case is assigned for advanced reading and assessment involving objective multiple-choice questions. In subsequent uses, the case is assigned for class discussion, serving as a ‘‘learning case’’ rather than assessment vehicle. By rotating case uses in this way, instructors can derive maximum value from initially preparing the case. However, we agree that this approach does not eliminate concerns about solution leakage, so a continuing need exists for new cases to be developed and published.
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Preparing Students To find this Case useful and achievable, students should be introduced to or prepared to research the following financial accounting topics:
       

Loan covenants and the implications of not attaining them; Financial ratios (specifically the debt-to-assets and current ratios); Revenue recognition criteria and policies; Collectability of accounts receivable and estimation of bad debts; Valuation of inventory at the lower of cost and market; Depreciation methods and estimates for long-lived tangible assets; Estimation and reporting of sales returns and allowances; and Accounting for installment notes and classifying long-term debt liabilities.

Given that the above topics span all but the last week of the course, we set a case submission deadline for the week before the final class meeting. We found this timing allowed us to avoid the usual end-of-semester crush of deadlines in other courses taken by the students, while also ensuring we had discussed the topics prior to the case deadline. Our students indicated, in a post-case survey, that they would have appreciated additional practice time for just the final topic (reporting installment notes). In our course, only two days elapsed between this topic and the submission deadline. Instructors can alleviate this criticism that too little time existed between the case deadline and the in-class discussion of debt classification by: (a) discussing debt classification earlier in the course, e.g., when introducing the classified balance sheet; (b) delaying the submission date of the case to the last class meeting; or (c) reducing the weight allocated to discussing debt classification in the case analysis. With this being an integrative Case containing several other topics, omitting the debt classification topic will not materially impede the learning outcomes that can be achieved through the Case. Students will be ideally equipped for this Case if their review of the preceding topics highlights the choices and judgments that accountants make. For example, prior to using this Case in our course, students learned about the judgments involved in using the allowance method for receivables, when applying the lower of cost and market rule to inventories, and when estimating residual value and useful lives as part of determining depreciation. Throughout the course, we illustrated a variety of financial ratios and how certain decisions or judgments can impact these ratios favorably or unfavorably. We reviewed the various stages of a service company’s earnings process to highlight trade-offs between revenue recognition at the point of contract signing, service provision, and collection from customers. Admittedly, a positive benefit of using this Case was that it nudged our class discussions away from a mechanical focus, and toward the judgments and choices inherent in accounting practice. These in-class discussions were supported by assigned textbook readings (Phillips et al. 2009). In addition to ensuring adequate technical knowledge, students will benefit from discussing expected communication and critical thinking skills, and the nature of professional skepticism. Wolcott and Lynch (1997) provide detailed guidance on developing critical thinking skills in the classroom, which we use to frame our discussion of Case analysis objectives and expectations. We briefly discuss professional skepticism, drawing on the alternative views of neutrality and ‘‘presumptive doubt’’ discussed by Nelson (2009). To guide students further, we provide the grading rubric shown in Appendix C.1 We distributed the rubric to students as an appendix to the
1

Andrade (2005) discusses advantages and disadvantages of rubrics, specifically noting that they support development of thinking skills elicited by open-ended projects. See Camp and Schnader (2010) for other techniques aimed at developing critical thinking in accounting.

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Case so that they could see the basis on which their responses would be evaluated. We felt that providing a detailed rubric as additional guidance was appropriate both to enhance transparency and to provide further support because our students had limited prior experience with cases, as they reported to us anecdotally at the start of the course. Specifically, they indicated that although some had discussed cases in other courses, they had not submitted written case analyses. We advise instructors who choose to distribute Appendix C with the Case to discuss with their students the intentionally vague specification of and explanations for issues 2a–2i. Our presumption was that it would be obvious to students that these details were withheld so that issue identification would be a key learning objective for students, but it was not so obvious to the students. We also advise instructors to forewarn students that strong overall Case responses would be possible even if a report did not address all the technical issues listed in the rubric. Although our students appreciated the rubric pointing out that the Case issues involved asset valuation, liability reporting, and accounting policy selection, several expressed anxiety with not having identified the same number of issues as were listed in the rubric. To help students understand how to organize and structure their analysis of an integrative case, we discussed the WAG case one week prior to the deadline for the SRE Case. Our discussion of WAG focused on identifying areas of judgment and choice, considering the alternative judgments and choices that could have been made, and relating the effects of those alternatives to financial statements users. Through the WAG case discussion, our students began to learn to consider alternative accounting choices and use evidence to reach an appropriate decision, and in turn relate these decisions to users’ needs. For instructors who prefer to assign the SRE Case as a writing assignment without discussing other similar cases, we have provided writing advice in Appendix D, which can be distributed to students with the Case. The final step we took in preparing our students was to forewarn them that they would not find direct answers for the SRE Case in their textbook. Instead, their textbook would provide them with the relevant accounting standards to consider when evaluating the issues in the case. We explained to students that to do well on the SRE Case, they would need to think broader and deeper than their prior homework assignments required, in the ways outlined in the grading rubric that we distributed with the Case. Assignment Parameters To maximize our students’ time with the Case, we provided it for download from the course website during the first week of the semester. We also advised students to read the Case immediately after we had completed the accounting cycle chapters, and to think about the SRE Case each time a new topic was introduced during the semester. We assigned students the task of preparing a written report, either individually or in self-selected pairs.2 We encouraged students to work in pairs to prompt thinking from multiple perspectives and aid in identifying alternatives. To motivate students to spend an adequate amount of time thinking about and preparing responses, the SRE Case score was given a weight equal to 15 percent of the total course grade. This weight seemed sufficient to entice completion of the Case; of the 322 students completing the course, 318 (99 percent) submitted a response for SRE. A post-case survey indicated that, on average, respondents spent 12.5 hours analyzing and preparing their written submission (inner quartile range ¼ 8–15 hours). To encourage students to review and edit prior to submitting their reports, we limited reports to 1,500 words. This length appeared adequate for most students.
2

Readers interested in the advantages and disadvantages of student-selected versus instructor-assigned groups should see Hilton and Phillips (2010).

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Evaluating Student Analyses To assist instructors in evaluating written student analyses, the Teaching Notes provide both a complete discussion of each major issue embedded in the Case and a detailed grading rubric (in Appendix C of the Teaching Notes). The detailed grading rubric in the Teaching Notes expands on the rubric in Appendix C in this section of the Case by identifying specific embedded issues and expected analyses. As these rubrics show, we embedded six major issues in the Case. Each issue potentially affected the Case company’s compliance with existing loan covenants, which were tied to the current ratio and debt-to-assets ratio. For each issue, students were expected to identify the accounting choice made by the company, describe an acceptable alternative choice, present evidence that could be used to determine the more appropriate accounting choice, and conclude by indicating how the favored choice would affect the company’s financial statements and its compliance with the loan covenants. Higher (lower) scores were awarded for more (less) complete and accurate analyses. We indicated each student’s score by shading the cell of the rubric into which the report was assessed on each dimension within the communication, technical accounting, and critical thinking skill categories. The scores shown in each cell in Appendix C were then aggregated to yield a score out of 50 total points for each student. Experiential Feedback Student performance. By assigning this task to a large number of introductory financial accounting students who represented a variety of majors, we were able to observe a broad range of competencies. Our students’ performance ranged from poor to excellent along every dimension. The average Case score across 318 students was 65 percent, with scores ranging from 12 percent to 93 percent. In comparison to other grades in the course, the average on the SRE Case was 11 percent lower than the average on the homework assignments (76 percent) and 9 percent lower than the final exam average (74 percent). While the average on the SRE Case was lower than other evaluation methods in the course, it was 13 percent higher than the average student grade reported for the WAG case (Phillips and Mackintosh 2011, 601). Thus, as a point of comparison, these data suggest the SRE Case was somewhat less difficult than the WAG case.3 As the rubric in Appendix C shows, student performance was assessed for writing, technical analysis, and critical thinking proficiency. Scores in the writing and critical thinking skills sections of the rubric were high; the most common problems related to technical writing execution, such as grammar deficiencies, use of overly casual wording, and spelling errors. Most students seemed to have attended to advice presented in the rubric and raised in our earlier discussions of the WAG case to include headings (to enable the report to be easily referenced during a meeting) and a cover letter (to summarize the key issues detected in their analysis of the Case). The greatest challenges our students encountered related to the analyses of specific accounting issues. Rather than merely describe how accounting is done in generic situations, students were challenged to critically evaluate how the accounting had been done in a specific context. That context required that students approach each issue from the perspective of the potential buyer of a target company. Thus, the key issue pertaining to inventory was not whether FIFO and weighted average were acceptable costing methods, but rather whether the reported inventory cost was recoverable through future sales.4 Further explanations of the differences between stronger and
3

4

As Phillips and Mackintosh (2011, 601) report, the average initial score on WAG (52 percent) was 18 percent lower than the average score of 70 percent achieved on homework assignments, tests, and midterms. To discourage discussions of FIFO versus weighted average, we intentionally selected an industry in which costs were likely to decline over time, and we indicate in the case that recent unit costs were relatively stable. Thus, the target company’s use of alternative inventory costing methods would not materially change the reported costs of inventory and goods sold.

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weaker analyses of each accounting issue, based on our analyses of literally hundreds of Case responses, are presented in the Teaching Notes. Student perceptions. To gain insight into students’ experiences in analyzing the Case, we administered a survey after Case analyses had been submitted (but before students received feedback). In our survey, we asked students to rate their level of competence prior to and after completing the Case.5 Students were asked to rate on a scale from 1 to 10, with 1 being not competent at all and 10 being reasonably competent. The questions follow: 1. Prior to completing this Case, how competent did you feel in analyzing accounting issues? 2. After completing this Case, how competent do you feel in analyzing accounting issues? Survey respondents represent six different course sections, taught by four instructors, of whom three are the authors of these materials. To encourage candid responses, students were asked not to indicate their names on the survey questionnaire. Of the 318 students who submitted a case for grading, 246 (77 percent) completed the survey that inquired about their experience with the Case. On average, these 137 women and 109 men were 20.1 years old and had completed 1.6 years of university, and most (86 percent) were enrolled in the business school, expressing an interest in majoring in accounting (39 percent), finance (18 percent), marketing (7 percent), management (6 percent), human resources (7 percent), or an area yet to be decided (22 percent). The students generally agreed that the Case had fully achieved the learning objectives stated earlier, with the understandable exception of the communications objective; students had not yet received feedback on their writing at the time they completed the survey. The average rating for each of the stated learning objectives (on a 5-point scale) was (a) 4.2, (b) 4.3, (c) 4.3, (d) 4.3, (e) 4.2, and (f ) 3.6. Students reported that their confidence in analyzing accounting issues was lower before completing the Case (average ¼ 5.7 out of 10) than after completing the Case (average ¼ 7.6 out of 10); this difference represented a statistically significant increase (p , 0.001). More than 91 percent recommended that instructors at other universities use the Case. In addition to these quantitative evaluations, students were invited to answer open-ended questions that asked whether anything in the Case was unclear, whether any additional information should be provided, what additional topics should have been discussed prior to assigning the Case, and whether they found the Case a valuable learning opportunity. In response to the question about potential lack of clarity, the only source of confusion was that the Case did not specify when cash was received for the target company’s service contracts (we now explain in the Case that customers were expected to pay during the first 15 days following each month of service). Other comments about unclear facts within the Case were used to edit and refine the previous version of the Case, leading to the revised, published version. The most commonly requested additional information was a more detailed grading rubric that identified the issues embedded in the Case. Because issue identification is the second learning objective intended for this Case, we did not revise the rubric for this request. Despite these few concerns, a large majority of students expressed positive views about the learning opportunities presented by the Case. The following comments are representative of most students’ comments.
 

‘‘I found this assignment to be both difficult and different from most others I have had in university. I think this is a good thing.’’ ‘‘It really made me think about what I have learned throughout the course, gave me the opportunity to apply my knowledge, and helped to clarify certain topics I was uncertain about.’’

5

Research has documented that retrospective self-assessment questions, such as those used in our survey, are accurate and valid measures (D’Eon et al. 2008).

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‘‘It taught me that accounting is a lot more than just number-crunching. It was exciting when you spotted a potential issue.’’ ‘‘It provides opportunities to analyze and critically evaluate the majority of the accounting issues covered in first year accounting.’’

A few students indicated that they did not value the Case, for reasons indicated below.
 

‘‘This case was very hard; things should be a little more obvious.’’ ‘‘I don’t think this is good because this is the basic accounting class. Why do we have to analysis this? We can do case analysis in the third or four year.’’

Our experience leads us to recommend that other instructors consider helping their introductory financial accounting students by reminding them to approach the Case from the viewpoint of their client. Holding a brief in-class discussion to establish this perspective would help students to think about accounting issues from a user perspective rather than the preparer perspective often adopted in textbook readings. Depending on the students, instructors might also need to explicitly instruct students to discuss the purchaser’s key concern when evaluating receivables (i.e., is there evidence to suggest the net amount may not be fully collectible?), inventory (i.e., does any evidence suggest the inventory cost is not recoverable through future sales?), depreciation (i.e., is the book value a fair representation of the benefits to be derived from the computer equipment over its remaining life?), and revenue (i.e., is the company likely to realize the full amount reported as sales revenue, and are revenues from service contracts sustainable in the future?). Some instructors might even feel it necessary to discuss how ratios can be used in evaluating accounting choices and estimates that require significant judgment. This additional discussion would remove some of the detective work built into the Case but could possibly produce a benefit of focusing students on how the company’s existing accounting methods currently fail to (but could be revised to) address the client’s information needs. TEACHING NOTES Teaching Notes are available only to non-student-member subscribers to Issues in Accounting Education through the American Accounting Association’s electronic publications system at http:// aaapubs.org/. Non-student-member subscribers should use their usernames and passwords for entry into the system where the Teaching Notes can be reviewed and printed. Please do not make the Teaching Notes available to students or post them on websites. If you are a non-student-member of AAA with a subscription to Issues in Accounting Education and have any trouble accessing this material, then please contact the AAA headquarters office at info@aaahq.org or (941) 921-7747.

REFERENCES
Andrade, H. G. 2005. Teaching with rubrics: The good, the bad, and the ugly. College Teaching 53 (1): 27– 30. Camp, J. M., and A. L. Schnader. 2010. Using debate to enhance critical thinking in the accounting classroom: The Sarbanes-Oxley Act and U.S. Tax Policy. Issues in Accounting Education 25 (November): 655–675. Claiborne, M. C., and K. A. Wilcox. 2011. Home heaters: A holistic view of the financial statements. Issues in Accounting Education 26 (November): 797–806. D’Eon, M., L. Sadownik, A. Harrison, and J. Nation. 2008. Using self-assessments to detect workshop success: Do they work? American Journal of Evaluation 29 (1): 92–98. Issues in Accounting Education Volume 28, No. 4, 2013

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Hilton, S., and F. Phillips. 2010. Instructor-assigned and student-selected groups: A view from inside. Issues in Accounting Education 25 (February): 15–33. Kimmel, P. D., J. J. Weygandt, and D. E. Kieso. 2013. Financial Accounting: Tools for Business Decision Making. 7th edition. Hoboken, NJ: Wiley. Nelson, M. W. 2009. A model and literature review of professional skepticism in auditing. Auditing: A Journal of Practice & Theory 28 (November): 1–34. Phillips, F., R. Libby, and P. Libby. 2013. Fundamentals of Financial Accounting. 4th edition. Burr Ridge, IL: McGraw-Hill. Phillips, F., R. Libby, P. Libby, and T. Anderson. 2009. Fundamentals of Financial Accounting. 2nd Canadian edition. Toronto, ON: McGraw-Hill Ryerson. Phillips, F., and B. Mackintosh. 2011. Wiki Art Gallery Inc.: A Case for Critical Thinking. Issues in Accounting Education 26 (August): 593–608. Wolcott, S. K., and C. L. Lynch. 1997. Critical thinking in the accounting classroom: A reflective judgment developmental process perspective. Accounting Education: A Journal of Theory, Practice and Research 2 (1): 59–78.

APPENDIX A Questions for In-Class Discussion The Setting 1. Why did Jeff Hasting hire you? What advice does he need? What advice does he not need right now? 2. Describe how Jeff Hasting will use the report you provide him. Is he likely to share the information in your report with the current owners of Custom App Company (CAC)? How does anticipating this affect the way you should prepare the report? 3. What level of accounting knowledge do Mr. Hasting and Ms. Becker have? How will this affect the way you prepare your report? 4. Which source(s) of financial accounting rules has CAC used? Who has evaluated the accounting policies followed by CAC? 5. Are any other external parties, other than Mr. Hasting as a potential purchaser, relying on the financial statements of CAC? Has this user placed any restrictions on CAC that may be of concern to Mr. Hasting? Specific Topics 6. Has CAC been profitable from 2010 through 2012? Has CAC generated positive operating cash flows from 2010 through 2012? Compare these observations to the changes in CAC’s financial position (e.g., ratio of liabilities to assets) over the past three years. Are your observations of net income, cash flow, and changes in financial position consistent? Should these observations be brought to the attention of Mr. Hasting? 7. If SRE acquires CAC, what amount of cash would Mr. Hasting expect to recover from CAC’s accounts receivable? Is there qualitative or quantitative evidence suggesting that CAC may have difficulty collecting the accounts receivable currently reported on the balance sheet? How has CAC’s accounts receivable changed over the past three years? Given these changes in accounts receivable, what changes would you have expected to see in the Allowance for Doubtful Accounts? Is the change in the Allowance for Doubtful Accounts between 2011 and 2012 consistent with the change in accounts receivable? Is the policy used by CAC to estimate uncollectible credit sales acceptable under GAAP? What is the problem with how CAC has accounted for its uncollectible sales made on account?
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8. At what value does GAAP require inventory to be reported? How does this requirement protect an acquirer like Mr. Hasting from overpaying for CAC’s inventory? If SRE acquires CAC, what minimum dollar amount would Mr. Hasting expect to recover from CAC’s inventory? Is there qualitative or quantitative evidence suggesting that CAC may have difficulty recovering this amount? How would an overstatement of inventory value on the balance sheet affect the financial statements and other restrictions? Explain why a potential overstatement of inventory should be of concern to Mr. Hasting. 9. What amount is CAC required to pay each year on its bank loan? Use a loan amortization calculator, such as the one online at http://bretwhissel.net/amortization/, to determine how much of the annual payment relates to principal versus interest. Specifically, in the 2012 and 2013 fiscal years, how much principal is CAC required to repay? In what balance sheet category should the required 2013 principal repayment be reported? Has CAC reported the 2013 principal repayment correctly? What effect would changing CAC’s reporting have on the external restrictions placed on the company? 10. How does CAC record revenue from its service contracts? How would signing a significant number of short-term service contracts (less than 12 months) near June 30 (CAC’s year-end) affect the service revenue and accounts receivable reported at year-end? What effect would the timing of reporting revenue from these contracts have on the company’s current assets and total assets, and on its current and debt-to-asset ratios? What would be a more appropriate policy for recognizing short-term contract revenue? 11. What is CAC’s business policy for accepting sales returns? What is CAC’s accounting policy for sales returns? Under CAC’s current accounting policy, are the returns from CAC’s year-end inventory reduction sale likely to occur in the same period as the sales revenue? How could CAC revise its accounting policy to account for sales revenue and returns in the same period? How would this revised policy change CAC’s financial statements? 12. What method does GAAP require companies to use when determining depreciation? What method does CAC use? Is CAC’s choice of method acceptable? Has CAC followed its stated method when calculating 2012 depreciation? Is there any aspect of CAC’s depreciation practice that you should bring to the attention of Mr. Hasting? Why? 13. Which financial ratios would be relevant to creditors such as the bank? Why are these ratios of concern to the bank? What other ratios would be of concern to Mr. Hasting?

APPENDIX B Multiple-Choice Questions 1. Which of the following properly calculates and interprets the change in CAC’s net profit margin? a. CAC’s net profit margin increased from 2.03 percent in 2011 to 6.94 percent in 2012, suggesting an increase in CAC’s ability to generate profits from revenues. b. CAC’s net profit margin decreased from 6.94 percent in 2011 to 2.03 percent in 2012, suggesting a decrease in CAC’s ability to generate profits from revenues. c. CAC’s net profit margin decreased from 0.07 percent in 2011 to 0.02 percent in 2012, suggesting a decrease in CAC’s ability to generate profits from revenues. d. CAC’s net profit margin decreased from 6.94 percent in 2011 to 2.03 percent in 2012, suggesting an increase in CAC’s ability to generate profits from revenues.

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2. CAC has a note payable that carries loan covenants requiring the debt-to-total assets ratio not exceed 55 percent. Which of the following events would have increased the risk of violating this loan covenant? a. The risk of violating the loan covenant would be increased when CAC paid cash to purchase inventory. b. The risk of violating the loan covenant would be increased when CAC used its cash to pay suppliers on account. c. The risk of violating the loan covenant would be increased when CAC used its cash to pay for rent expense that has been incurred. d. The risk of violating the loan covenant would be increased when CAC reduced research and development spending. 3. Is the revenue recognition policy used by CAC for the ten-month service contracts in accordance with the revenue recognition principle? Why or why not? a. Yes, the ten-month service contract policy is in accordance with the revenue recognition principle, because CAC reports revenue when the contract is signed. b. Yes, the ten-month service contract policy is in accordance with the revenue recognition principle, because CAC reports revenue using the FOB shipping point. c. No, the ten-month service contract policy is not in accordance with the revenue recognition principle, because CAC reports revenue as it is earned each month. d. No, the ten-month service contract policy is not in accordance with the revenue recognition principle, because CAC reports revenue before it fulfills its obligation to provide a service to customers over the ten months of the contract. 4. Which of the following statements does not use the fraud triangle appropriately when identifying the risks of financial misreporting at Second Round Electronics (SRE)? a. Because Custom App Company’s (CAC’s) financial statements are not audited, the opportunity for misstating the financial results is heightened. b. Because CAC is a small company with only a few employees, the risk of financial reporting misstatements is lowered. c. The risk of financial reporting fraud is heightened because Brendan has shown a tendency to rationalize accounting policy choices that overstate assets. d. The pending acquisition of CAC by SRE increases the incentive for misstating the financial results. 5. CAC’s notes to the financial statements indicate the company reports its inventory at cost. What facts suggest a write-down may be required but has not been recorded by CAC? a. The inventory turnover has deteriorated from 2011 to 2012, and therefore it is taking longer to sell CAC’s inventory. b. CAC’s inventory contains a significant quantity of refurbished computer equipment after the year-end sale. c. Despite a 28.6 percent decrease in sales revenue in 2012, CAC’s inventory has increased 35.4 percent in 2012. d. All of the above. 6. CAC’s gross margins (excluding service revenue) have declined dramatically, from 45.9 percent in 2011 to only 11.9 percent in 2012. Which of the following statements could explain this change?
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a. CAC has increased its markup when establishing the selling price of its products. b. CAC is encountering increasing difficulty in recovering its costs of inventory through sales. c. CAC has been able to decrease its cost of sales by obtaining products at lower costs. d. None of the above. 7. What method for recording bad debts does CAC use, and is this method in accordance with generally acceptable accounting principles? a. CAC uses the direct write-off method, which is not in accordance with GAAP. b. CAC uses the allowance method with estimates based on aging of receivables, which is in accordance with GAAP. c. CAC uses the allowance method with estimates based on percentage of sales, which is in accordance with GAAP. d. CAC uses the allowance method with estimates based on percentage of sales, which is not in accordance with GAAP. 8. Which of the following suggests CAC has not adequately allowed for bad debts in 2012? a. b. c. d. CAC has increased its bad debt estimation percentage between 2011 and 2012. CAC has changed its bad debt estimation method between 2011 and 2012. CAC has decreased its bad debt estimation percentage between 2011 and 2012. CAC’s accounts receivable turnover has increased in 2012 from 2011.

9. What would be the financial impact if CAC were to increase its estimate of bad debts in 2012? a. b. c. d. CAC’s bad debt expense would increase. CAC’s net income would decrease. CAC’s current ratio would decrease. All of the above.

10. CAC reported $387,000 in net revenues in 2012. What amount of cash did CAC collect in 2012 from its customers? a. b. c. d. $387,000. $372,000. $90,000. $75,000.

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APPENDIX C Assessment Rubric for Distribution with the Case
Poor


Explanation Document looks like an essay rather than a professional report. 0


Fair 1½ Report lacks one or more elements in ‘‘Excellent’’ category (did not adequately segment or label sections, or tables appear difficult to read). 1½
 

Excellent 3

1. Writing Skills a. Appearance



What does the submission look like? Does it appear to be a well-organized and professionally presented report?

b. Tone and Audience 0







Organization and flow are apparent on first glance: submission begins with a brief cover letter, followed by (labeled) report segments and well– documented analyses. Presents analysis and advice in a confident yet respectful manner. 1½


3

c. Structure





Not addressed to client; reads as if written to professor, close friend, or accounting expert. Lacks organization; sentences/paragraphs ramble/are incomplete. 0


Addressed to client but uses overly casual wording or jargon unfamiliar to the client; lacks confidence. Some repetition or back– tracking of topics; did not prioritize order of issues.

Clear sense of purpose and progression toward a conclusion.

3

d. Technical Writing Execution



How does the report read? Is it written at a level and with a tone appropriate for the client? Is the content easy to comprehend? Is the written analysis succinct, and does it progress logically? Is the report competently written? Does it convey the level of care that a client would expect in a professionally written report?


0 One or more spelling or capitalization errors exist; grammar deficiencies are intolerable; . 1,600 words.



1½ No spelling/cap errors; limited number of tolerable grammar deficiencies; and/ or between 1,500 and 1,600 words.



3 No spelling/cap/grammar errors; direct, active writing; and , 1,500 words in body (, 350 in cover letter).

Johnstone, Mackintosh, and Phillips

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2. Technical Accounting Skills  Details intentionally a. Explain why CAC’s accounting omitted. methods should be evaluated by SRE Details omitted.

0



Details omitted.

1



Details omitted.

2

(continued on next page)

APPENDIX C (continued)
Poor


Explanation Details omitted. 0


Fair Details omitted. 1


Excellent Details omitted. 2



Details intentionally omitted.
  

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b. Assess CAC’s current financial situation c. Valuation of Asset #1



Details intentionally omitted.

Second Round Electronics: A Case for Critical Thinking

d. Valuation of Asset #2



Details intentionally omitted.

e. Policy Adopted for Asset #3



Details intentionally omitted.

Adequately addresses fewer 0 than two of the following: –identifies accounting choice; –describes alternative choice; –presents sufficient evidence; –concludes with f/s impact. Adequately addresses fewer 0 than two of the following: –identifies accounting choice; –describes alternative choice; –presents sufficient evidence; –concludes with f/s impact. Adequately addresses fewer 0 than two of the following: –identifies accounting choice; –describes alternative choice; –presents sufficient evidence; –concludes with f/s impact.
 

2 Adequately addresses two or three of the following: –identifies accounting choice; –describes alternative choice; –presents sufficient evidence; –concludes with f/s impact. 2 Adequately addresses two or three of the following: –identifies accounting choice; –describes alternative choice; –presents sufficient evidence; –concludes with f/s impact. 2 Adequately addresses two or three of the following: –identifies accounting choice; –describes alternative choice; –presents sufficient evidence; –concludes with f/s impact.

Adequately addresses all of 4 the following: –identifies accounting choice; –describes alternative choice; –presents sufficient evidence; –concludes with f/s impact. Adequately addresses all of 4 the following: –identifies accounting choice; –describes alternative choice; –presents sufficient evidence; –concludes with f/s impact. Adequately addresses all of 4 the following: –identifies accounting choice; –describes alternative choice; –presents sufficient evidence; –concludes with f/s impact. (continued on next page)

1003

1004

APPENDIX C (continued)
Poor


Explanation 0


Fair 1


Excellent 2

f. Reporting Liability #1



Details intentionally omitted.

g. Accounting Policy on . . .



Details intentionally omitted.



0



2



4

h. Accounting Policy on . . .



Details intentionally omitted.



0



2



4

i. Other financial matters



Details intentionally omitted.



Adequately addresses one or fewer of the following: –identifies accounting error; –describes correct treatment; –concludes with f/s impact. Adequately addresses fewer than two of the following: –identifies accounting choice; –describes alternative choice; –presents sufficient evidence; –concludes with f/s impact. Adequately addresses fewer than two of the following: –identifies accounting choice; –describes alternative choice; –presents sufficient evidence; –concludes with f/s impact. Does not identify or adequately explain other financial matters relevant to CAC’s future viability. 0


Adequately addresses two of the following: –identifies accounting error; –describes correct treatment; –concludes with f/s impact. Adequately addresses two or three of the following: –identifies accounting choice; –describes alternative choice; –presents sufficient evidence; –concludes with f/s impact. Adequately addresses two or three of the following: –identifies accounting choice; –describes alternative choice; –presents sufficient evidence; –concludes with f/s impact. Identifies one other financial matter relevant to CAC’s future viability, but explanation is weak. 1


Adequately addresses all of the following: –identifies accounting error; –describes correct treatment; –concludes with f/s impact. Adequately addresses all of the following: –identifies accounting choice, –describes alternative choice, –presents sufficient evidence, –concludes with f/s impact. Adequately addresses all of the following: –identifies accounting choice; –describes alternative choice; –presents sufficient evidence; –concludes with f/s impact. Identifies one other financial matter and clearly explains why it is relevant to CAC’s future viability.

2

Johnstone, Mackintosh, and Phillips
(continued on next page)

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APPENDIX C (continued)
Poor


Explanation Provides reasonable analysis of , 3 of the issues in 2c–2h. Does not provide fully supported analysis for even one of the issues in 2c–2h. 0


Fair 0


Excellent


Provides reasonable 1 analysis of 3 of the 6 issues in 2c–2h. Provides fully supported analysis of one of the issues in 2c–2h and partially supported analysis of one other. 1


Provides reasonable 2 analysis of 4 of the 6 issues in 2c–2h. Provides fully supported analysis of two of the issues in 2c–2h. 2

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Does not address most important issues first.

0



Focuses on most important issues but also includes some irrelevant topics.

1



Focuses on most important issues and does not meander into irrelevant topics.

2

3. Critical Thinking Skills  Does the report identify a. Breadth an adequate number of issues with CAC’s accounting?  For most issues, does the b. Depth report adequately identify alternative accounting choices, present evidence that calls into question CAC’s current choices, and conclude with their impact on CAC financial statements and on Mr. Hasting?  Does the report focus on c. Prioritization the most important issues that could affect CAC’s financial viability and its attractiveness to SRE, or does it instead distract the client with concerns about business decisions already made?  Does the report identify d. Integrated the theme that unites many of the issues, rather than present issues in a piecemeal way? Does the report relate the issues to their potential impact on the client’s decision?


Does not identify the theme 0 that pervades the issues and impacts the client.



2 Recognizes that issues affect f/s but does not relate to users outside the company.



Recognizes that issues affect f/s as well as users outside the company in specific ways.

4

1005

Total ¼ ____/50 points

1006

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APPENDIX D Advice about Preparing a Report The Process of Case Analysis






Read the Case and grading rubric a few times to gain a clear understanding of your purpose. Realize that your client has come to you for advice on financial accounting issues. Something is an ‘‘issue’’ if it would influence Mr. Hasting’s plans for CAC. Mr. Hasting admits he is unfamiliar with accounting choices or estimates that companies can use when applying accounting policies; based on this information you should make every effort to inform your client about items where an evaluation of CAC’s financial results may depend on how CAC has chosen to account for its transactions. Related to this, explain what would likely happen if CAC were to make different accounting choices. What would be the implications for CAC and the other parties to whom CAC is accountable? Do not report on every single item in the Case; rather, focus on those that have a significant impact on CAC and that ultimately could affect Mr. Hasting and SRE. Try not to be one-sided; a balanced, objective report that considers and evaluates the facts will be most useful to Mr. Hasting. If you are having difficulty identifying ‘‘issues,’’ consider preparing common-size financial statements for CAC, as this may assist in identifying accounts that are unusual in comparison to prior years and may suggest areas warranting further analysis and evaluation. Before drafting your report, create notes that summarize CAC’s key accounting choices and the effects of those choices on its financial results. Be specific, using Case facts that make it clear you are addressing issues that apply in this particular Case setting and not another (generic) case setting. Where CAC’s accounting choices may not adequately portray its transactions, identify an alternative and present evidence to evaluate its suitability. After determining the best alternative, consider its impact on your clients. Before writing your report, prioritize the order of issues in terms of those that have the greatest impact. Consult the grading rubric frequently when outlining your response.

The Final Written Product
 





Realize that your clients are likely to refer to your report when discussing matters with Mr. Zamble; a properly segmented report with meaningful headings will make it easier to use. Your report should be addressed to your clients, not to your professor. Write in a way that depicts how you would explain the issues to your clients if you were meeting with them faceto-face. Avoid using jargon or terms that are difficult for a non-accountant to understand. Avoid overly casual or nonchalant language (e.g., ‘‘I came up with’’); more formal writing is needed when communicating in a professional situation. You may write in the first person, using the words ‘‘I’’ or ‘‘we.’’ Write with confidence, but do not use a tone that is condescending, biased, or lacking in respect for your clients. Demonstrate sensitivity to your clients’ need for objective, wellbalanced analysis. Be sure you identify and correct all spelling, punctuation, capitalization, and grammatical errors. Allowing these kinds of errors to exist in a professional report has a significant adverse impact on the perceived quality of your work. As a professional whose livelihood depends on a reputation for excellence, you cannot afford to convey the impression of careless or sloppy work.
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Write concisely; unnecessary words make the report difficult to read. Carefully edit and revise your writing; when doing so, challenge whether each word, phrase, sentence, and paragraph is useful to your clients. Stating accounting facts is not enough; you need to be able to relate them to your clients in a way that they understand. Think of your report as a written explanation that ‘‘teaches’’ your clients what you have found. Include a brief, onepage cover letter outlining your main findings. Rather than include an exhaustive list of discussions and analyses in your report, include only those points that are relevant to identifying financial risks at CAC. Mr. Hasting and Ms. Becker are busy people, so they are not interested in reading lengthy, meandering reports. Limit the body of your report to no more than 1,500 words. Place all calculations in numerically sequenced tables that are appended to your report, just as the exhibits in this Case follow the body of the Case. Within the body of your report, reference the specific tables where supporting calculations are presented.

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