3. 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. Ethics Case 20–3, Research Case 20–7, and Problem 20–10 are
suitable for student presentation(s). In addition to Communication Case 20–5, Research
Case 20–7 can be adapted to ask students to prepare a memo to the Controller outlining the
findings of the research. Problems 20–12 and 20–13 work well as group assignments.
Questions 20–15, 20–16, and 20–17; Problems 20–1 and 20–8; and Judgment Case 20–10
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 20–7, Judgment Case 20–10 can be adapted to require students
to research the authoritative literature on accounting for the three types of accounting
changes.
As a research activity, have students search the Internet for examples of reported
accounting changes. You might let them use their own creativity in deciding where to look
for examples or you might suggest:
1. Google.
2. EDGAR at www.sec.com, which offers 10K reports students can search for changes.
3. Annual reports from a company websites’ Investor Relations.
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 20–4, 20–6, 20–8,
and 20–9, Problem 20–12, 20–13, 20–14, and 20–16 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.
Judgment Cases 20–10 and 20–11 require students to exercise judgment.
4. Ethical Dilemmas
ETHICAL DILEMMA
The net income of Union Carbide increased in in a single year by over $200 million, due
almost entirely to three changes in accounting principle: (a) the depreciation method was
changed, resulting in lower expense, (b) interest costs during construction were capitalized
rather than expensed, and (c) the method for recognizing investment tax credits (not available
under current tax law) was changed to a method that reduced expenses.
What ethical question does this situation suggest?
You may wish to discuss this in class. If so, discussion should include these elements.
Step 1—The Facts:
The increase in net income of Union Carbide was due almost entirely to: (1) a change in
depreciation method, (2) capitalization of construction interest costs, and (3) a reduction in
expenses due to a change in the method for recognizing investment tax credits. According to
Generally Accepted Accounting Principles all three items should be completely and fully
described in the disclosure notes to prevent misinformation to users of the financial statements.
Some users of financial statements, however, may overlook or not understand the disclosures and
may believe that the increase in net income is due to improved company operations.
Step 2—The Ethical Issue and the Stakeholders:
The ethical issue or dilemma is whether Union Carbide made the changes for the purpose of
artificially increasing reported earnings and, if so, whether that course of action is appropriate.
Stakeholders include the accountants of Union Carbide, external and internal auditors, the
accounting profession, company management, members of the Board of Directors, employees,
current and future creditors, financial analysts, and current and future investors.
Step 3—Values:
Values include competence, integrity, objectivity, loyalty to the company, responsibility for
following accounting principles, and responsibility to users of financial statements.
Step 4—Alternatives:
1. Continue the use of previous accounting methods regarding depreciation, interest
capitalization, and the recognition of investment credit in the disclosure notes.
2. Make the indicated changes.
Step 5—Evaluation of Alternatives in Terms of Values:
1. Alternative 1 would have caused significantly lower reported earnings, perhaps
reflecting objectivity and responsibility to users of the financial statements.
2. Alternative 2 would have caused significantly higher reported earnings, perhaps
reflecting a sacrifice of objectivity and responsibility to users of the financial
statements in favor of catering to the interests of managers and shareholders.
Step 6—Consequences:
Alternative 1
Positive consequences: Users of financial statements would be better informed.
Management and the accountants would maintain their integrity.
Negative consequences: Reported earnings would be significantly lower, with
possible negative impact on managerial performance evaluations and compensation and
possible negative impact on stock prices and shareholders’ wealth (though academic
research would suggest otherwise).
Alternative 2
Positive consequences: the company would reflect a stronger net income. Creditors
may be more willing to loan the firm money in the future and potential shareholders may
be more willing to invest.
Negative consequences: Reported earnings would be significantly higher, perhaps
misleading investors, creditors, and others.
Step 7—Decision:
Student(s) must decide their course of action.
The chapter contains the following ethical dilemma:
ETHICAL DILEMMA
As a second-year accountant for McCormack Chemical Company, you were excited to be
named assistant manager of the Agricultural Chemicals Division. After two weeks in your new
position, you were supervising the year-end inventory count when the senior manager
mentioned that two carloads of herbicides were omitted from the count and should be added.
Upon checking, you confirm your understanding that the inventory in question had been
deemed to be unsaleable. “Yes,” your manager agreed, “but we’ll write that off next year when
our bottom line won’t be so critical to the continued existence of the Agricultural Chemicals
Division. Jobs and families depend on our division showing well this year.”
You may wish to discuss this in class. If so, discussion should include these elements.
Step 1—Facts:
As a newly promoted assistant manager of the Agricultural Chemicals Division of
McCormack Chemical Company, you observe that two carloads of herbicides, deemed to be
unsaleable, are omitted from the ending inventory count. The senior manager states that the
inventory should be included in the count and not written off until the following year. Hopefully,
next year’s net income will not be so critical to the continuation of the Agricultural Chemicals
Division. By deferring the write-off of obsolete inventory until the following year, both current
net income and ending inventory are overstated by the amount of the inventory devaluation. The
following year’s net income will be understated by the amount of the write-down. Even though
retained earnings at the end of the two years will be correct, the principle of periodicity has been
violated.
Step 2—The Ethical Issue and the Stakeholders:
The ethical issue or dilemma is whether your obligations to obey your superior and support
fellow employees are greater than the obligation to correctly report the value of the inventory
and current net income to users of the financial statements.
Stakeholders include you, the assistant manager, the senior manager, other company
managers, other employees and their families, current and future creditors, and current and future
investors in the McCormack Chemical Company.
Step 3—Values:
Values include competence, honesty, integrity, objectivity, loyalty to employees, loyalty to
the company, and responsibility to users of financial statements.
Step 4—Alternatives:
1. Follow the suggestion of the senior manager to defer the inventory write-off until next
year.
2. Insist that the unsaleable inventory be written off in the current year.
3. Report the senior manager’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 and fellow employees.
2. Alternative 2 exhibits the values of competence, honesty, integrity, objectivity, and
responsibility to users of the financial statements.
3. Alternative 3 also illustrates loyalty to the employer at a level higher than that of the
senior manager, but also includes the values of honesty, integrity, and objectivity on
the part of the assistant manager.
4. Alternative 4 supports the values of honesty and integrity, but does not reflect
competence, objectivity, or responsibility to financial statement users.
Step 6—Consequences:
Alternative 1
Positive consequences: You would keep your job and please the senior manager. Fellow
employees would keep their jobs and be able to support their families.
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 the
write-off is material and the misinformation 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 reliable and
relevant information regarding assets and net income. You would maintain your integrity.
Negative consequences: You may incur the disfavor of the senior manager and other top
management resulting in lack of future promotions and loss of your job. You also may lose
the trust and support of other employees.
Alternative 3
Positive consequences: You maintain your integrity. Users may receive more reliable and
relevant information regarding assets and net income if upper management levels or the audit
committee compel fair presentation in the financial statements.
Negative consequences: You may incur the disfavor of the senior manager and other top
management resulting in lack of future promotions and loss of your job. You may lose the
trust and support 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 may have difficulty getting references for a
new job. Users of financial statements still do not receive reliable and relevant information
regarding the unsaleable inventory.
Step 7—Decision:
Student(s) must decide their course of action.
Assignment Chart
Learning Est.
time
Questions Objective(s) Topic
(min.)
20–1 1 Classify accounting changes 5
20–2 1 Three accounting approaches to reporting
accounting changes
5
20–3 2 Change in accounting principle 5
20–4 2 Change in accounting principle 5
20–5 2 Change in accounting principle 5
20–6 3 Change in accounting principle – exception 5
20–7 3 Change in accounting principle – exception 5
20–8 4 Change in estimate 5
20–9 2,4 Distinguish between a change in principle and a
change in estimate
5
20–10 5 Change in reporting entity 5
20–11 5 Change in reporting entity 5
20–12 6 Correcting an error 5
20–13 6 Correcting an error 5
20–14 6 Correcting an error 5
20–15 6 Correcting an error 5
20–16 6 Correcting an error 5
20–17 6,7 IFRS; Correcting an error 5
Brief Learning Est.
time
Exercises Objective(s) Topic
(min.)
20–1 2 Change in inventory methods; FIFO method to
the average cost method
5
20–2 2 Change in inventory methods; average cost
method to the FIFO method
5
20–3 3 Change in inventory methods; FIFO method to
the LIFO method
5
20–4 3 Change in depreciation methods 5
20–5 3 Change in depreciation methods 5
20–6 4 Book royalties 5
20–7 4 Warranty expense 5
20–8 4 Change in estimate; useful life of patent 5
20–9 6 Error correction 5
20–10 6 Error correction 5
20–11 6 Error correction 5
20–12 6 Error correction 5
Learning Est.
time
Exercises Objective(s) Topic
(min.)
20–1 2 Change in principle; change in inventory
methods
15
20–2 2 Change in principle; change in inventory
methods
10
20–3 2 Change from the treasury stock method to
retired stock
10
20–4 2 Change in principle; change to the equity
method
15
20–5 2 FASB codification research; change in
accounting for investments
15
20–6 2 FASB codification research 15
20–7 2 Change in principle; change in inventory cost
method
25
20–8 3 Change in inventory methods; FIFO method to
the LIFO method
10
20–9 3 Change in inventory methods; FIFO method to
the LIFO method
10
20–10 3 Change in depreciation methods 10
20–11 3 Change in depreciation methods 10
20–12 4 Book royalties 15
20–13 4 Loss contingency 10
20–14 4 Warranty expense 15
20–15 4 Deferred taxes; change in tax rates 10
20–16 4 Accounting change 10
20–17 4 Change in estimate; useful life and residual
value of equipment
20
20–18 1,2,3,4,5 Classifying accounting changes 15
20–19 6 Error correction; inventory error 20
20–20 6 Error corrections; investment 15
20–21 6 Error in amortization schedule 20
20–22 6 Error correction; accrued interest on bonds 15
20–23 6 Error correction; three errors 25
20–24 6 Inventory errors 10
20–25 1,2,3,4,5,6 Classifying accounting changes and errors 10
Learning Est.
time
Problems Objective(s) Topic
(min.)
20–1 2 Change in inventory costing methods;
comparative income statements
25
20–2 2 Change in principle; change in method of
accounting for long-term construction
40
20–3 2,3 Change in inventory costing methods;
comparative income statements
25
20–4 2 Change in inventory methods 30
20–5 2 Change in inventory methods 25
20–6 3 Change in principle; change in depreciation
methods
25
20–7 4 Depletion; change in estimate 40
20–8 1,3,4 Accounting changes; six situations 60
20–9 1,2,3,4 Accounting changes; identify type and
reporting approach
25
20–10 6 Inventory errors 35
20–11 6 Error correction; change in depreciation
methods
30
20–12 1,2,3,4,6 Accounting changes and error correction;
seven situations; tax effects ignored
80
20–13 1,2,3,4,6 Accounting changes and error correction;
seven situations; tax effects considered
90
20–14 1,3,4,6 Errors; change in estimate; change in
principle; restatement of previous financial
statements
35
20–15 6 Correction of errors; six errors 30
20–16 6 Integrating problem; errors; deferred taxes;
contingency; change in tax rates
30
20–17 6 Integrating problem; error; depreciation;
deferred taxes
30
Star Problems
Learning Est.
time
Cases Objective(s) Topic
(min.)
Integrating Case 20–1 3 Change to dollar-value LIFO 25
Communication Case 20–2 2 Change in inventory method; disclosure note 45
Ethics Case 20–3 1,2,3 Softening the blow 20
Analysis Case 20–4 2,3 Change in inventory methods; concepts 35
Communication Case 20–5 4 Change in loss contingency; write a memo 30
Analysis Case 20–6 4 Two wrongs make a right? 20
Research Case 20–7 4 FASB codification; researching the way changes
in postretirement benefit estimates are reported;
retrieving disclosures from the Internet 30
Analysis Case 20–8 1,2,3,4 Various changes 25
Analysis Case 20–9 1,2,3,4 Various changes 20
Judgment Case 20–10 1,2,3,4,5 Accounting changes; independent situations 40
Judgment Case 20–11 6 Inventory errors 20
Ethics Case 20–12 6 Overstatement of ending inventory 30
Target Case 4,8 Accounting changes; Target 30
Air France–KLM Case 2 IFRS; restatement; Air France 30