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. Analysis Case 18–2, Exercise 18–23, and Problem 18–6 are suitable
for student presentation(s). In addition to Communication Cases 18–3 and 18–6, Research
Case 18–4 can be adapted to ask students to prepare a memo to the Controller outlining the
findings of the research. Communication Cases 18–3 and 18–10 require group interaction.
Problem 18–12 and Analysis Case 18–7 do well as group assignments. Questions 18–11,
18–21, Exercise 18–14, and Research Case 18–9 create good class discussions.
Research Skills. In their professional lives, 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. In
addition to Research Case 18–4, Communication Cases 18–3 and 18–10 provide excellent
opportunities to help students develop this skill. In addition, Judgment Case 18–5 can be
adapted to require students to research the authoritative literature on accounting for stock
splits.
Analysis Skills. The “Broaden Your Perspective” section includes Analysis Cases that direct
students to gather, assemble, organize, process, or interpret date to provide options for
making business and investment decisions. In addition to Analysis Cases 18–2 and 18–7,
Exercise 18–1, Problem 18–7, and Real World Case 18–1 also provide opportunities to
develop analysis 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. In
addition to Judgment Case 18–5, Communication Case 18–3 also requires students to
exercise judgment.
6. Ethical Dilemma
The chapter includes the following ethical dilemma.
ETHICAL DILEMMA
Interworld Distributors has paid quarterly cash dividends since 1985. The dividends have
steadily increased from $.25 per share to the latest dividend declaration of $2.00 per share. The
board of directors is eager to continue this trend despite the fact that revenues fell significantly
during recent months as a result of worsening economic conditions and increased competition.
The company founder and member of the board proposes a solution. He suggests a 5% stock
dividend in lieu of a cash dividend to be accompanied by the following press announcement:
“In lieu of our regular $2.00 per share cash dividend, Interworld will distribute a 5%
stock dividend on its common shares, currently trading at $40 per share. Changing the form of
the dividend will permit the Company to direct available cash resources to the modernization
of physical facilities in preparation for competing in the 21st century.”
What do you think?
You may wish to discuss this in class. If so, discussion should include these elements:
Step 1—The Facts:
The founder of Interworld Distributors suggests distributing a 5% stock dividend in lieu of its
regular $2.00 per share cash dividend. The board of directors wants to continue providing
dividends to shareholders despite the fact that revenues have recently declined. The stock
dividend will permit Interworld to conserve cash and reinvest cash resources in modernization of
physical facilities. Shareholder percentage of ownership in the company does not change as a
result of a small stock dividend. Distribution of a small stock dividend results in a
reclassification of retained earnings to paid-in capital. Retained earnings are reduced just as if a
cash dividend had been paid. Per share stock prices usually decline after a company issues a
small stock dividend in order to maintain the same overall value of investment in the company.
The company founder is attempting to produce the illusion that current shareholders will be
receiving a real dividend and camouflage the fact that revenues have declined.
Step 2—The Ethical Issue and the Stakeholders:
The ethical issue or dilemma is whether the board’s obligation to protect the company’s
image (and perhaps their jobs) is greater than its obligation to protect investors’ and creditors’
interests by providing full disclosure of relevant information.
Stakeholders include the founder of Interworld, other members of the board of directors,
company management, employees, current and future creditors, and current and future investors.
Step 3—Values:
Values include honesty, integrity, objectivity, loyalty to the company, loyalty to shareholders,
and responsibility to users of financial statements.
Step 4—Alternatives:
1. Distribute and record a 5% stock dividend to current holders of common stock.
2. Do not declare a stock dividend.
Step 5—Evaluation of Alternatives in Terms of Values:
1. Alternative 1 illustrates loyalty to protecting the company image to current shareholders.
2, Alternative 2 reflects values of honesty, integrity, objectivity, and responsibility for fair
reporting to current shareholders and to other users of the financial statements.
Step 6—Consequences:
Alternative 1
Positive consequences: The company and its management may look better in the eyes
of some shareholders. The company reserves cash to invest in the future modernization of
plant facilities.
Negative consequences: Some shareholders may falsely believe they are receiving a
distribution of value from the company. Users of the financial statements would be
misinformed. The founder and the board may lose the respect of some shareholders and
the financial community.
Alternative 2
Positive consequences: The founder and board members maintain self-respect and
gain the respect of the financial community. Users of the financial statements are better
informed regarding the true financial position of the company.
Negative consequences: Shareholders become displeased about the lack of dividend
distribution and reinvest elsewhere. The stock price per share may decline due to the lack
of a dividend distribution. Some managers’ jobs may be in jeopardy.
Step 7—Decision:
Student(s) must decide their course of action.
Assignment Chart
Learning Est.
time
Questions Objective(s) Topic
(min.)
18–1 1 Sources of shareholders’ equity 5
18–2 1 Sources of shareholders’ equity 5
18–3 1 Sources of shareholders’ equity 5
18–4 1 Sources of shareholders’ equity 5
18–5 1 Sources of shareholders’ equity 5
18–6 1 Sources of shareholders’ equity 5
18–7 1 Sources of shareholders’ equity 5
18–8 1 Sources of shareholders’ equity 5
18–9 1 Sources of shareholders’ equity 5
18–10 1 Sources of shareholders’ equity 5
18–11 1 Sources of shareholders’ equity 5
18–12 2 Comprehensive income 5
18–13 2 Comprehensive income 5
18–14 3 Statement of shareholders’ equity 5
18–15 4 Shares sold for consideration other than cash 5
18–16 4 More than one security sold for a single price 5
18–17 4 Share issue costs 5
18–18 5 When shares are retired 5
18–19 5 Treasury shares 5
18–20 8 Stock dividends 5
18–21 8 Stock splits 5
18–22 8 Reverse stock split 5
18–23 8 Stock dividends 5
18–24 A Quasi-reorganization 5
Brief Learning Est.
time
Exercises Objective(s) Topic
(min.)
18–1 1 Comprehensive income 5
18–2 4 Stock issued 5
18–3 4 Stock issued 5
18–4 4 Stock issued 5
18–5 5 Retirement of shares 5
18–6 5 Retirement of shares 5
18–7 5 Treasury stock 5
18–8 5 Treasury stock 5
18–9 5 Treasury stock 5
18–10 8 Cash dividend 5
18–11 7 Effect of preferred stock on dividends 5
18–12 7 Property dividend 5
18–13 8 Stock dividend 5
18–14 8 Stock split 5
18–15 8 Stock split 5
18–16 9 IFRS; reporting shareholders’ equity 5
Learning Est.
time
Exercises Objective(s) Topic
(min.)
18–1 2 Comprehensive income 25
18–2 2 FASB codication research; reporting other
comprehensive income in shareholders’ equity
15
18–3 2 Earnings or OCI? 10
18–4 4 Stock issued for cash; Wright Medical Group 15
18–5 4 Issuance of shares; noncash consideration 20
18–6 4 Redeemable shares 15
18–7 4 Share issue costs; issuance 15
18–8 4,7 Reporting preferred shares 15
18–9 4 New equity issues; offerings announcements 15
18–10 5 Retirement of shares 15
18–11 5 Retirement of shares 15
18–12 5 Treasury stock 20
18–13 5 Treasury stock; weighted-average and FIFO cost 15
18–14 5 Reporting shareholders’ equity after share
repurchase
20
18–15 5 Change from treasury stock to retired stock 20
18–16 5 Stock buyback; Ford press announcement 20
18–17 6,7 Transactions affecting retained earnings 15
18–18 7 Effect of cumulative, nonparticipating preferred
stock on dividends—3 years 35
18–19 8 Stock dividend 10
18–20 8 Stock split; Hamni Financial Corporation 15
18–21 8 Cash in lieu of fractional share rights 15
18–22 1,5,8 FASB codification research 15
18–23 6,7,8 Transactions affecting retained earnings 35
18–24 1 Profitability ratio 15
18–25 9 IFRS; equity terminology 10
Learning Est.
time
Problems Objective(s) Topic
(min.)
18–1 4 Various stock transactions; correction of journal
entries
25
18–2 5 Share buyback—comparison of retirement and
treasury stock treatment
35
18–3 5 Reacquired shares—comparison of retired
shares and treasury shares
30
18–4 5,7 Statement of retained earnings 25
18–5 6,7,8 Shareholders’ equity transactions; statement of
shareholders’ equity
50
18–6 1,3–8 Statement of shareholders’ equity 35
18–7 1,2,3,4 Reporting shareholders’ equity: comprehensive
income; Cisco Systems
50
18–8 3,4,7 Share issue costs; issuance; dividends; early
retirement
15
18–9 7 Effect of preferred stock characteristics on
dividends
15
18–10 4,5,6,7,8 Transactions affecting retained earnings 20
18–11 8 Stock dividends received on investments;
integrative problem
20
18–12 1,4,5,6,7,8 Various shareholders’ equity topics;
comprehensive
65
18–13 18A Quasi reorganization
[based on Appendix 18]
25
Star Problems
Learning Est.
time
Cases Objective(s) Topic
(min.)
Real World Case 18–1 4 Initial public offering of common stock; Dolby
Laboratories
10
Analysis Case 18–2 1,3,6,7 Statement of shareholders’ equity 35
Communication Case 18–3 1,9 IFRS; Is preferred stock debt or equity?; Group
interaction 30
Research Case 18–4 2 FASB codification; comprehensive income;
locate and extract relevant information and
authoritative support for a financial reporting
issue; integrative; Cisco Systems
20
Judgment Case 18–5 5,6,7,8 Treasury stock; stock split; dividends; Alcoa 15
Communication Case 18–6 4 Issuance of shares; share issue costs; prepare a
report
45
Analysis Case 18–7 1 Analyzing financial statements; price-earnings
ratio; dividend payout ratio 30
Ethics Case 18–8 4 The Swiss label maker; value of shares issued
for equipment 25
Research Case 18–9 1,6 Researching the way shareholders’ equity
transactions are reported; retrieving financial
statements from the Internet
50
Communication Case 18–10 1 Should the present two-category distinction
between liabilities and equity be retained?;
Group interaction
30
Target Case 1,5 Statement of shareholders’ equity; share repur-
chases; Target
30
Air France–KLM Case 9IFRS; reporting shareholders’ equity; Air
France–KLM
30