Kevin's Accounting 402 Blog

Office Hrs Monday 2/20

2012-02-19T06:39:00.001-08:00

I've got a 2:30 meeting on Monday, so my office hours will be from 1:00 - 2:30 for those of you wanting to review your exam.

Wiley Plus Solutions

2012-02-14T09:21:00.001-08:00

I have posted the solutions to Wiley Plus for Chapters 20 and 23 to Moodle under Midterm #1. Enjoy!

Summary of Week 3

2012-02-08T11:32:00.000-08:00

We started the week by talking about the direct method. The direct method is more focused on explicitly highlighting cash inflows and cash outflows. Companies report cash collected from customers as the inflow, and cash paid to suppliers, the government (for taxes), and to other parties in operating expenses as the outflow. We went through some formulas that help to get at these.

We also talked about how to prepare the investing and financing sections of the statement of cash flows. Both sections make use of the direct method, meaning that we focus on cash inflows and outflows. For the investing section, inflows come in the form of proceeds from selling long-lived assets or investments, while outflows occur when we buy long-lived assets or investments. For the financing section, inflows come in the form of money borrowed from creditors or proceeds from selling equity, while outflows occur when we pay back debt, re-purchase stock, or pay dividends.

We had a brief discussion of the pros and cons of the direct versus indirect method. Basically, the indirect method is easier, but some argue that the direct method is more informative about cash inflows and outflows. The indirect method does highlight the differences between accrual income and cash flow, which can be nice when evaluating the quality of earnings.

We also walked through some other technical details related to cash flow. The first group involved thinking about other non-cash expenses (like depreciation) that need to be added back to net income when using the indirect method. For example, when firms show an increase in their deferred tax liability, this will decrease net income (through income tax expense), but there is no cash piece. The second group had us think about issues such as stock options and pensions. Recall that issuing stock options yields compensation expense but no cash outlay, so this needs to be added back to net income (net of tax of course because of the deferred taxes piece). Additionally, any change in the funded status of a pension fund needs to be adjusted for because we want to end up with cash contributed to the plan not pension expense (that is in net income).

Chapter 24: Full Disclosure

We began the full disclosure chapter with a discussion of the full disclosure principle. Basically it says that financial reporting should present any financial facts that are significant enough for an informed decision maker to care. Disclosure comes from a lot of sources ranging from financial statements, the notes to the financial statements, other management communication (such as MD&A and forecast), and info provided by people outside the firm (analysts, journalists, etc.).

We discussed the idea of subsequent events (i.e. events that happen after the fiscal year end, but before final publication of the financial statements). If the subsequent event provided additional information about conditions that existed at the balance sheet (like resolution of a pending lawsuit), then firms need to go back and adjust the F/S at the balance sheet date. If the event is a new event (like a fire at the factory), you don't have to retroactively adjust your financials, but you do have to disclose the existence of the significant subsequent event.

We went through the idea of segment reporting, which requires firms to provide information about their different business lines using the same framework that management uses to run the firm. Firms must provide segment details about segments that pass at least one of the following tests:

Segment revenue is at least 10% of total revenue for all segments
Segment Profit or loss is at least 10% of the greater of the total segment profit for all profitable segments or the total segment loss for all loss segments
Segment assets are at least 10% of total assets for all segments
75% of segment stuff is covered

When segment reporting is required, firms must disclose a general background about the segment, give profit and loss results, total assets, and reconciliations between the reported segment figures and what is on the balance sheet/income statement for the overall firm.

Wiley Plus AE23-16

2012-02-06T06:01:00.001-08:00

So the goof in Wiley for 23-16 was worse than I thought. For some students it is basically impossible to get the right answer per Wiley, so I have just decided to give everyone credit for the full problem.

Professional Headshot

2012-02-03T06:17:00.000-08:00

One of the things that the department likes to do is showcase past accounting majors at our accounting career opportunities fair every fall. We will be bringing in a professional photographer next week on Wednesday (2/8) to take headshots of our students. Please do your best to come to class that day, and dress professionally (at least from the waist up).

I managed to dig up this comic that was in my school newspaper when I was an undergrad that I think sums it up...

AE23-16 Wiley Plus

2012-02-02T08:00:00.000-08:00

There may be a slight error in your homework assignment for Chapter 23 on problem 23-16. Some of you may note that the change in land is not equal to the amount of land acquired by issuing common stock. This is an oversight by WileyPLUS - just pretend that the amount of land issued is equal to the change in land balance and call it a day. Since it is a non-cash transaction, there will be no consequence on the SCF.

Class on Friday, February 3rd

2012-01-31T10:12:00.000-08:00

So I am going to try an alternative to formal lecture on Friday to see how it works. Instead of a traditional lecture, I will be posting a 25-minute video to Moodle that will cover some loose ends that remain from the Pensions chapter, and another cash flow example from Chapter 23. The video will be available by 10AM on Friday on the Moodle site.

In preparation for this lecture, I have posted a series of conceptual pension related questions, along with the template for the cash flow problem to Moodle. I would like for you to spend a little time before Friday thinking about the conceptual questions, particularly as they relate to the IBM pension footnote that is already posted. If you email me your thoughts about these questions by 10AM on Friday, I will consider it when assessing your class participation points for the course.

There is one catch - I really do want you to watch the video, because the material covered is fair game for the exam just like a regular lecture would be. I have the ability to track viewing statistics, and will only pursue this as an option if eighty (80) percent of the class watches the video by the time we meet again on Monday.

Hopefully this will work out!

Shorter office hours today (1/30)

2012-01-30T06:22:00.000-08:00

I have to cut my office hours short today - I will only be available until 2:30...

KWW Chapters 23 and 24

2012-01-27T11:42:00.001-08:00

I've posed pdfs of KWW for chapters 23 and 24 to Moodle...

Wiley Plus - Important

2012-01-27T11:08:00.000-08:00

I wanted to let you know that I was only able to get our Wiley Plus subscription until February 16th. This means that you will have to complete all assignments by then - the system won't even be available after that, so you will be out of luck. Make sure you take note of this in your schedule....

Summary of Weeks 1 & 2

2012-01-27T11:06:00.000-08:00

My plan is to post a Friday summary of what we talked about during the week.

Due next week: Wiley plus chapter 20 on Wednesday

Chapter 20: Pensions
We began our discussion on Pensions with a review of the type of pension plans. In defined contribution plans, employers are only obligated to provide a specified contribution towards the nest egg of employees, and therefore employees bear all of the risk. This type of plan is becoming increasingly common through the rise of 401(k) plans, and the accounting for them is really straightforward because the amount contributed for employees becomes a form of compensation expense.

Defined benefit plans are a whole other beast, and are the basis for most of the chapter. Our goal for the chapter will be to answer two big questions regarding these defined benefit plans. First, what is the pension obligation to be reported on the balance sheet, and what is the current period pension expense to be put on the income statement?

A pension plan is going to have some assets (money that the firm has transferred to it to cover pension expenses), and some liabilities (obligations to pay benefits to employees). Since the pension plan is a separate entity, we don’t actually list these on the balance sheet of the firm (except to the extent they are different, which is a comment on the funded status that is discussed below).

There are a few ways to think about the obligation facing the pension plan. One option is to only consider vested benefits, which are those that have already been “unlocked” by employees. This idea comes up when pension benefits are based on an employee’s entire career with the firm, but employees must work for the company for a specific amount of time before they formally become eligible. A second option is to consider both vested and unvested benefits, but with estimates made assuming current salary conditions. The FASB, however, recognizes that since pension benefits are usually based on employee salaries at the end of their career (which tend to be higher), it makes sense to think of the obligation on a projected basis. This gives rise to the projected benefit obligation (PBO) that requires the use of actuaries to help calculate the present value of pension benefits earned by employees to date.

On the income statement side, there are five components of pension expense. The first is service cost, which measures the increase in the PBO because employees worked in the current year. Note that employees can’t receive negative benefits, so it is always positive. The second is interest on the liability, which is basically the amount of interest on the outstanding PBO. This is also always going to be positive, and is calculated by taking the PBO and multiplying it by the settlement rate. The third the actual return on plan assets, which considers the fact that the more assets the pension plan has, the more resources are available to cover the pension obligation. Note that pension expense is reduced for positive asset returns, and increased for negative asset returns. The fourth involves amortization of prior service cost, which comes up when a firm amends or creates a pension plan and provides benefits retroactively for employees’ prior service. These costs are amortized over the remaining service life of the employees that are receiving these particular benefits (i.e. not everyone). Note that prior service costs are stored up in a stockholder’s equity account called “accumulated other comprehensive income”. The fifth is called gains and losses, and deserves its own paragraph because it is so much fun.

The gains and losses piece can come up the asset or liability front, and they are both stored up in the accumulated OCI account. In terms of the asset side, the FASB has argued that since returns on plan assets can be pretty volatile (see crisis, financial) in the short term but fairly smooth in the long run, then it makes more sense to calculate return on plan assets using an expected rate of return provided by actuaries. An asset gain or loss comes up when there is a difference between the actual and expected returns. On the liability side, this comes up when the actuaries make some change in their assumptions that alters the amount of the PBO. This can come up because of things like changes in the assumed rate of salary growth, or the overall discount rate used to put the PBO in terms of present value. Most of the time asset and liability gains/losses balance each other out, but if they don’t we use the corridor approach to amortize some of the excess to pension expense. If the amount in accumulated OCI at the beginning of the year exceeds 10% of the greater of the beginning PBO or plan assets, then the excess is amortized over the remaining service life of all employees.

Even though we don’t formally put the plan assets and liabilities on the underlying firm’s balance sheet, we do include the funded status. For example, if the plan’s assets are less than the PBO, then the firm is going to have to pony up some cash in the future to make up the difference. This doesn’t have any impact on the income statement (we used accrual accounting to deal with that through pension expense), but we do include a pension liability based on the obligation. Alternatively, if the plan assets exceed the PBO, then the firm will have a pension asset. Given that the accumulated OCI amount is a stockholder’s equity account, it is on the balance sheet as well.

Chapter 23: Cash Flows
We started talking about the cash flow statement on Wednesday, which is designed to provide investors with information regarding how the company spent its cash during the period. In a nutshell, it explains the difference between beginning and ending cash. Firms are required to list cash flow from operating, investing, and financing activities. Operating cash flow relates to the day-to-day activities of the firm; investing cash flow relates to the purchase and sale of long-lived assets or investments; and financing cash flow relates to the borrowing of money and paying it back.

Whether a company has positive or negative cash flow in these categories can tell a lot about where the firm is in it’s life cycle, as well as it’s overall health. Firms typically have positive cash flow from financing activities early in their life because they have secured some outside financing, and negative cash flow from investing activities because they are spending that cash on things like machinery and equipment. Pay special attention to how these different categories relate as well – we discussed four different combinations and what that might mean for the firm. For example, positive operating and financing cash flow mixed with negative investing cash flow suggests a profitable firm with remaining growth opportunities, while positive operating cash flow mixed with negative financing cash flow suggests a cash cow whose best investment opportunity is to pay back debt or buy back some equity shares. Also be wary of positive investing cash flow – this suggests that the firm is selling off assets, which can be a big problem if it is offsetting negative operating cash flow. Being able to come up with companies in each category is useful.

There are two methods to calculate operating cash flow. Under the indirect method, firms start with net income and make tweaks to it to transition to cash flow from operations. The first adjustment is to add back non-cash transactions such as depreciation and amortization expense. This comes up because depreciation serves to reduce net income, but there is no cash consequence from it. The second set of adjustments relate to changes in current account balances. Net income only relates to revenue earned in the current period and the matching expenses, but there are often differences from a cash flow perspective. For example, an increase in accounts receivable suggests that customers didn’t pay for everything sale included in revenue, so we need to adjust net income downward. The third adjustment is to take out gains or losses from the sale of long-lived assets. If an asset is sold for something other than book value, then there will be a gain or loss included in net income. Since the proceeds from the sale get included in cash from investing activities (where they belong), leaving the gain or loss in net income would cause the gain or loss to be included twice. Therefore we subtract out gains and add back losses when calculating operating cash flow.

IBM Pension Footnote

2012-01-24T12:30:00.001-08:00

I've posted the pension footnote for IBM from their 2009 Annual Report. It might be a good idea to check it out before class...

Wiley Plus Link

2012-01-23T06:48:00.001-08:00

Several students have had problems getting to the Wiley Plus site for the course - try this link...

http://edugen.wileyplus.com/edugen/class/cls255567/

KWW Chapter 20

2012-01-20T07:48:00.001-08:00

I've posted a pdf of Chapter 20 for those of you that don't have your book. I'll do the same for the other chapters by the time we need them.

Twitter

2012-01-19T12:54:00.001-08:00

I have a Twitter account (LoyolaAC202) for the course, and if enough people follow it then I will tweet info as the course progresses.

Wiley Plus

2012-01-19T12:51:00.000-08:00

You all should have gotten an email from the Wiley Plus system saying you have been added to my course. If not, go www.wileyplus.com and log in to see if it is there.

The assignments for Chapters 20 and 23 are there - they need to be completed by 10PM on the due date in the course schedule. You get four (4) chances for each problem - after that it will be marked wrong. Anything done late will receive a 30% penalty.

Welcome to AC402!

2011-12-14T13:20:00.000-08:00

Welcome to Accounting Information Systems (AC402) for Spring 2012. You probably got here because you were looking for more information about the course, so here is an attempt at some answers...

First, the Moodle site is just about up and running. Note that I use Moodle primarily as a document repository - all course announcements and supplemental information will be posted to this blog. I have posted the syllabus, and recommend you print it out and review it before the first day of class because I won't be bringing copies with me.

Second, there is no textbook to buy. Instead, I have posted a pdf file titled "Electronic Readings Packet" to the Moodle site that you will need as the course progresses. However, the first part of our course will involve coverage of three exhilarating chapters from Intermediate, so hopefully you kept your text. I also hope you kept your Auditing text, but that will be useful primarily for review only.

Finally, is there anything that you can do to prepare for the course? Yes! Add the movie Office Space to your Netflix queue and watch it before the spring semester starts. I use a lot of references to the movie during class, and it will be a lot easier if you are familiar with what I am talking about. Plus, it is a really funny movie. The department has a few copies of the DVD that we can loan out to you once the semester starts as well.