978-1259722660 Chapter 1 Lecture Note Part 2

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3. Group/Research Activity

The debate over principles-based versus rules-based accounting standards provides an excellent

opportunity for class discussion, in-class debate, or for a writing assignment. One suggestion is

to form groups of 4 or 5 students to research the issue. Assign half of the groups to defend a

principles-based approach and the other half to defend the rules-based approach. There are

numerous articles written on the subject. A Google search will find many hits. For example, a

link to an Accounting Horizons article entitled “Rules-Based Standards and the Lack of

Principles in Accounting” appears below.

http://aaajournals.org/doi/abs/10.2308/acch.2005.19.1.25?code=aaan-site

4. International Accounting Activity

What are the advantages and disadvantages to accounting convergence? Two recent articles in

Accounting Horizons provide an excellent overview of the research evidence:

Luzi Hail, Christian Leuz, and Peter Wysocki (2010) Global Accounting Convergence

and the Potential Adoption of IFRS by the U.S. (Part I): Conceptual Underpinnings and

Economic Analysis. Accounting Horizons: September 2010, Vol. 24, No. 3, pp. 355–394.

Luzi Hail, Christian Leuz, and Peter Wysocki (2010) Global Accounting Convergence

and the Potential Adoption of IFRS by the U.S. (Part II): Political Factors and Futre

Scenarios for U.S. Accounting Standards. Accounting Horizons: December 2010, Vol. 24,

No. 4, pp. 567–588.

Suggestions:

Have your students write a paper summarizing the issue and the papers’ results. Alternatively,

have a debate in which different groups of students take pro- vs. con-convergence positions.

5. Professional Skills Development Activities

The following are suggested assignments from the end-of-chapter material that will help your

students develop their communication, research, analysis and judgment skills.

Communication Skills. In addition to Communication Case 1–7, Judgment Case 1–12 can be

adapted to ask students to write a letter to the client. Communication Case 1–6 and

Judgment Case 1–1 do well as group assignments. Ethics Case 1–8 and Judgment Cases

1–9 and 1–10 create good class discussions. Judgment Cases 1–11, 1–13 and 1–16 are

suitable for student presentation(s).

Research Skills. In their careers, our graduates will be required to locate and extract relevant

information from available resource material to determine the correct accounting practice,

perhaps identifying the appropriate authoritative literature to support a decision. Research

Cases 1–2, 1–3, and 1–4 and Exercises 1–3 and 1–4 provide excellent opportunities to help

students develop this skill by introducing them to some important resources available on

the Internet.

Analysis Skills. The “Broaden Your Perspective” section includes Analysis Cases that direct

students to gather, assemble, organize, process, or interpret data to provide options for

making business and investment decisions. In addition to Analysis Case 1–13, Brief

Exercise 1–1, Exercises 1–1 and 1–2, and Real World Case 1–15 also provide opportunities

to develop and sharpen analytical skills.

Judgment Skills. The “Broaden Your Perspective” section includes Judgment Cases that

require students to critically analyze issues to apply concepts learned to business situations

in order to evaluate options for decision-making and provide an appropriate conclusion.

This chapter includes Judgment Cases 1–1, 1–9, 1–10, 1–11, 1–12, and 1–14. The

AirFrance–KLM case’s question 3 requires consideration of potential departures from

IFRS.

6. Ethical Dilemma

The chapter contains the following ethical dilemma:

ETHICAL DILEMMA

You have recently been employed by a large retail chain that sells sporting goods. One of

your tasks is to help prepare periodic financial statements for external distribution. The chain’s

largest creditor, National Savings & Loan, requires quarterly financial statements, and you are

currently working on the statements for the three-month period ending June 30, 2018.

During the months of May and June, the company spent $1,200,000 on a hefty radio and TV

advertising campaign. The $1,200,000 included the costs of producing the commercials as well

as the radio and TV time purchased to air the commercials. All of the costs were charged to

advertising expense. The company’s chief financial officer (CFO) has asked you to prepare a

June 30 adjusting entry to remove the costs from advertising expense and to set up an asset

called prepaid advertising that will be expensed in July. The CFO explained that “This

advertising campaign has led to significant sales in May and June and I think it will continue to

bring in customers through the month of July. By recording the ad costs as an asset, we can

match the cost of the advertising with the additional July sales. Besides, if we expense the

advertising in May and June, we will show an operating loss on our income statement for the

quarter. The bank requires that we continue to show quarterly profits in order to maintain our

loan in good standing.”

You may wish to discuss this in class. If so, discussion should include these elements.

Step 1—The Facts:

One of your tasks as an employee of a large sporting goods chain is to prepare financial

statements for external use. You are currently preparing quarterly statements for the quarter

ending June 30, 2018 that will be given to the chain’s largest creditor, National Savings & Loan.

The CFO has asked you to capitalize (charge to a prepaid asset) the $1,200,00 cost for an

advertising campaign conducted in May and June of 2018. The capitalization of advertising will

prevent an operating loss for the quarter and maintain the company’s good standing with the

creditor. The CFO believes that the commercials improved sales in May and June and expects the

advertising effect to continue in July. The matching principle states that expenses are recognized

in the same period as the related revenue. In some situations it is impossible to determine in

which periods revenues will be earned from expenses such as advertising. Because of the

difficulty in estimating the effect of advertising expenditures, accounting principles dictate that

advertising should be recognized as an expense in the period incurred.

Step 2—The Ethical Issue and the Stakeholders:

The ethical issue or dilemma is whether your obligation to challenge the CFO’s request for

capitalization of the advertising expense is stronger than your obligation to your employer’s

financial interests.

Stakeholders include you, the accountant, the CFO, other corporate managers, company

employees, the bank and other creditors, and current and future investors.

Step 3—Values:

Values include competence, honesty, integrity, objectivity, loyalty to your employer, and

responsibility to users of financial statements.

Step 4—Alternatives:

1. Follow the suggestion of the CFO to record the advertising costs as a prepaid asset.

2. Record the advertising costs as an expense in the quarter ending June 30, 2018.

3. Report the CFO’s request to a higher level of management, the audit committee, or the

auditors.

4. Resign from the company and seek employment elsewhere.

Step 5—Evaluation of Alternatives in Terms of Values:

1. Alternative 1 illustrates loyalty to the employer.

2. Alternative 2 exhibits the values of competence, honesty, integrity, objectivity, and

responsibility to users of the financial statements.

3. Alternative 3 illustrates loyalty to the employer at a level higher than that of the CFO, but

also includes the values of honesty, integrity, and objectivity on the part of the accountant.

4. Alternative 4 supports the values of honesty and integrity, but does not reflect competence

or responsibility to financial statement users.

Step 6—Consequences:

Alternative 1

Positive consequences: You would keep your job and please the CFO. The company would

remain in good standing with the bank.

Negative consequences: Users of the financial statements would be misinformed. Users of

financial statements may sue the company upon learning the truth if the amount of advertising is

material and affects their financial decisions. You may lose your self-respect and the respect of

co-workers.

Alternative 2

Positive consequences: Users of financial statements would receive more conservative

information concerning advertising costs. You would maintain your integrity.

Negative consequences: You may incur disfavor with the CFO and other top management,

resulting in a loss of future promotions or your job. You also may lose the trust of other

employees.

Alternative 3

Positive consequences: You would maintain your integrity. Users may receive more

conservative information concerning advertising costs if upper management levels or the audit

committee compel fair presentation in the financial statements.

Negative consequences: You may incur disfavor with the CFO and other top management,

resulting in a loss of future promotions or your job. You also may lose the trust of other

employees. Whistle blowers often are not rewarded.

Alternative 4

Positive consequences: You maintain your integrity and avoid conflict with management and

other employees.

Negative consequences: You have no job and you may have difficulty getting references for a

new job. Users of financial statements still do not receive correct information regarding

advertising costs.

Step 7—Decision:

Student(s) must decide their course of action.

Assignment Chart

Access to the FASB codification is required for any exercises like 1-3 and 1-4. FASB

controls access to the codification, but they have an academic program that departments

can sign up for. If your school has paid for a site license of the Academic Accounting Access

Program, faculty and students will have free access to the FASB Codification. Check with

your accounting department to determine if your school has registered for this program.

All of the features available with the Professional View version ( http://asc.fasb.org ) are

included with the Academic Accounting Access Program.

Learning Est.

time

Questions Objective(s) Topic

(min.)

1–1 1 Function and primary focus of financial

accounting

1–2 1 Efficient allocation of resources 5

1–3 1 Investment-credit decision 5

1–4 1 Investment-credit decision 5

1–5 1 Objective of financial accounting 5

1–6 2 Cash versus accrual accounting 5

1–7 3 Generally accepted accounting principles 5

1–8 3 Roles of the SEC and FASB 5

1–9 5 Role of the auditor 5

1–10 5 Sarbanes-Oxley Act 5

1–11 4 Economic consequences of accounting standards 5

1–12 4 FASB’s standard-setting process 5

1–13 6 Purpose of the conceptual framework 5

1–14 7 Relevance and faithful representation 5

1–15 7 Components of relevance and faithful

representation 5

1–16 7 Cost effectiveness 5

1–17 7 Materiality 5

1–18 7 Financial accounting elements 5

1–19 8 Assumptions underlying GAAP 5

1–20 8 Going concern assumption 5

1–21 8 Periodicity assumption 5

1–22 9 Broad accounting principles 5

1–23 9 Historical cost; justification 5

1–24 9 Revenue recognition criteria 5

1–25 9 Expense recognition criteria 5

1–26 9 Full-disclosure principle 5

1–27 9 Fair value hierarchy 5

1–28 9 Measurement attributes 5

1–29 10 Revenue/expense and asset/liability approaches 5

1–30 11 Conceptual framework under IFRS 5

1–31 11 International standard setting 5

1–32 11 Accounting convergence 5

Brief Learning Est.

time

Exercises Objective(s) Topic

(min.)

1–1 2 Accrual accounting 15

1–2 7 Financial statement elements 5

1–3 7,8,9 Basic assumptions and principles 10

1–4 7,8,9 Basic assumptions and principles 10

1–5 7,8,9 Basic assumptions and principles 10

1–6 11 IFRS organizations 5

Learning Est.

time

Exercises Objective(s) Topic

(min.)

1–1 2 Accrual accounting 20

1–2 2 Accrual accounting 15

1–3 3 FASB codification research 15

1–4 3 FASB codification research 15

1–5 3 Participants in establishing GAAP 10

1–6 7 Financial statement elements 10

1–7 7 Concepts; terminology; conceptual framework 10

1–8 7 Qualitative characteristics 10

1–9 7,8,9 Basic assumptions, principles, and constraints 10

1–10 7,8,9 Basic assumptions and principles 15

1–11 8,9 Basic assumptions and principles 15

1–12 7,8 9 Basic assumptions and principles 15

1–13 7,8,9 Basic assumptions, principles, and constraints 15

1–14 7,8,9 Basic assumptions, principles, and constraints 15

1–15 6,7,8,9 Multiple choice; concept statements, basic

assumptions, principles

Learning Est.

time

Cases Objective(s) Topic

(min.)

Judgment Case 1–1 3 The development of accounting standards 30

Research Case 1–2 3 Accessing SEC information through the Internet 35

Research Case 1–3 4 Accessing FASB information through the

Internet

Research Case 1–4 3 Accessing IASB information through the Internet 40

Research Case 1–5 3,4 Accounting standards in China 60

Communication Case 1–6 7 Relevance and reliability 30

Communication Case 1–7 4 Accounting standard setting 60

Ethics Case 1–8 4 The auditors’ responsibility 30

Judgment Case 1–9 7 Qualitative characteristics 20

Judgment Case 1–10 4,7 GAAP; comparability and the role of the auditor 20

Judgment Case 1–11 7 Cost effectiveness 30

Judgment Case 1–12 9 Revenue recognition 20

Analysis Case 1–13 9 Expense recognition 25

Judgment Case 1–14 9 Capitalize or expense? 20

Real World Case 1–15 7,9 Elements; disclosures; The GAP 20

Judgment Case 1–16 11 Convergence 20

Target Case

Air France–KLM Case

Target Corporation, Financial statements,

accounting principles

Air France–KLM, Financial statements,

accounting principles