chapter 1, introductory cases - cengage€¦ · web viewaccounting cycle. journal entries. ... at...

Sandretto, June 2, 2010

Synopses: Cases in Financial Reporting

Chapter 1, Introductory Cases

1. Dublin Small Animal Clinic, Inc.1 page; introductoryAccounting cycleJournal entriesIncome statementBalance sheetThis brief case covers the accounting cycle for a start-up veterinarian practice. The first section includes only cash transactions; the second section includes accruals. Students make simple journal entries and then prepare an income statement and balance sheet. The case includes an Excel tutorial that lets students click buttons to make journal entries. As a journal entry is made, the program automatically updates the income statement and balance sheet. The tutorial also includes detailed explanations for the accounting process and for each journal entry. This case is a good introduction to financial accounting for first-year MBA or Executive MBA students.Best uses:First-year MBA/Executive MBA financial accounting

2. Verona Springs Mineral Water2 pages; introductoryAccounting cycleJournal entriesIncome statementBalance sheetStatement of cash flowsThis case covers the accounting cycle for a start-up water bottling firm. It is similar to Dublin Small Animal Clinic, but the Excel tutorial also includes a chart of accounts and an integrated statement of cash flows that is updated as the balance sheet and income statement are updated. This case is a good follow-up to Dublin Small Animal Clinic to reinforce the concepts behind double entry bookkeeping, journal entries, the accounting cycle, and financial statements.Best uses:First-year MBA/Executive MBA financial accounting

of 41

3. Holton-Central Holdings, Inc.2 pages; intermediateAccounting cycleJournal entriesIncome statementBalance sheetInventory journal entriesHolton-Central Holdings covers the accounting cycle for a manufacturing firm acquired out of bankruptcy. It is more complicated than Dublin Small Animal Clinic or Verona Springs Mineral Water because it is an existing company, covers journal entries for raw material, work-in-process, and finished goods inventory, and includes a number of additional accounting topics. The case is excellent as a review and expansion of the material covered in those two introductory cases.Best uses:Undergraduate financial accounting, either as an introduction or as a reviewFirst-year MBA/Executive MBA financial accounting

4. Chang Medical Electronics2 pages; introductoryBond valuationZero-coupon bondsBond refinancingA private equity partner evaluates three possible bond issues that can be used to acquire a privately held firm; the case includes details of each bond issue. The case can be used to cover: (a) the basics of bond pricing, bond yields, zero-coupon bonds, and bond refinancing; (b) accounting for issued bonds, including the effective interest method, or; a combination of the two. This is an introductory bond case that can be used to develop a basic understanding of bonds prior to covering the topic in more detail in cases such as Sirius XM Radio (bond issue combined with preferred stock to avoid bankruptcy—Chapter 3); Harley-Davidson (A) (rapidly increasing long-term debt when the securitization market collapsed in early 2008—Chapter 5), or; Knowles Electronics (private equity acquisition with equity and substantial debt—Chapter 6).Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA financial accountingUse with:Discounted Cash Flows and the Time Value of Money (Chapter 7)Note on Bonds (Chapter 7)Brief Excel Case: Fixed Income Securities (Bonds) (Chapter 8)

of 41

5. Janet O’Brien4 pages; introductoryCost-based reimbursementNeed for rulesNeed for auditingI often pass this case out the first day of class to get students comfortable talking in class. The case covers cost-based Medicaid nursing home reimbursements, which are managed by individual states but funded about equally by each state and the federal government. In the state in which the case is situated, there were few rules about allowable costs and the Governor did not believe the state should interfere with private enterprise. The state had not audited nursing homes for seven or eight years. Over time, the nursing homes became increasingly aggressive in billing the state for high and possibly unallowable costs. Nursing homes billed the state and were reimbursed for items such as educational trips to Hawaii, house boats, mobile homes, high-end automobiles (Mercedes, BMW, and Rolls Royce), high salaries for relatives, and high payments to relatives for items such as lease and service contracts.

The case is easy to understand and most students participate in the discussion. It can be used to discuss why we have accounting rules and audits. It can also be used to discuss why cost-based reimbursement is so complex and why contracts between a governmental unit and private enterprise are so difficult to control; thus leading to an understanding of why alleged fraud is so common. The case takes 10 minutes to read and can be used for a 30-90 minute discussion.Best uses:EthicsUndergraduate intermediate accountingUndergraduate managerial or cost accountingFirst-year MBA/Executive MBA financial or managerial accountingExecutive education

6. Big Cat HPV LLC24 pages; intermediateStartupsFinancial statementsProduct pricing/product featuresCompetitive/strategic analysisProduct costsProduction controlGeneral managementThis case covers the first ten years of operations for a startup recumbent tricycle manufacturer, Big Cat HPV LLC. The case follows Paulo Camasmie and explores the wide range of business issues he experienced when he moved from Brazil to the U.S. in 2000 to start his own firm building recumbent tricycles. As of 2010, Big Cat was the world’s largest recumbent tricycle manufacturer having just introduced its first recumbent bicycle, which

of 41

was an immediate success. The issues discussed include distribution, marketing, sales, product design, production control, cost control, product features, and competitive analysis. All of that can be integrated with the firm’s actual income statements from 2000 through 2007 (later years are omitted for confidentiality).

The case can be used in a wide range of courses. I have taught it in both managerial and financial accounting courses but it can be used in general management, production, marketing, or strategy/policy courses because it covers everything Paulo considered important for his firm during the first ten years of the firm’s operations.

A primary issue is shipping costs. Recumbent tricycles occupy a large amount of shipping space per dollar of production cost; recumbent bicycles occupy less space per dollar of production cost. The case also includes enough cost information that students can evaluate whether Paulo can compete with low-cost producers from Taiwan in 2010, and possibly even lower cost producers from China within a few years.

The case does not include balance sheets, but students can prepare estimated balance sheets based on information in the case. They can also evaluate Big Cat’s prospects for the future. Best uses:Undergraduate managerial or cost accountingFirst-year MBA/Executive MBA financial or managerial accountingExecutive educationValuationA wide range of other MBA courses

Chapter 2, Corporate Governance and Regulation

7. Accounting Irregularities at Xerox7 pages; intermediateCorporate governanceSales-type leasesUnderstated discount ratesAccounting manipulationSec investigationThis case discusses Xerox’s use of low discount rates for its sales-type (capital) leases in South America, and a number of other lease accounting issues. The issues arose when an assistant controller, whose father was a prominent Connecticut judge, raised questions about Xerox’s lease accounting in August 2000. He was fired two days later for “unrelated” reasons.

The SEC began an investigation but management protested that this was nothing more than uninformed opinion from a disgruntled former employee. KPMG forced Xerox to delay its 2000 annual report and then forced Xerox to write down about $350 million of pre-tax profits because of problem leases. Xerox fired KPMG for “unrelated” reasons and then hired PwC, with the expectation that there would be no further write-downs. That might have been the end of the matter but in late 2001 Enron collapsed. It was clear that Arthur Andersen might be forced out of business and that the entire accounting industry would be under far greater scrutiny.

of 41

Possibly because of the outrage towards the accounting profession, PwC forced Xerox to write off an additional $1.9 billion of profits in 2001. Senior Xerox executives resigned and the SEC extracted large fines from KPMG, Xerox, and senior Xerox executives.

The case discusses seven accounting issues raised by the SEC, most of which relate to leases. The case can be used to cover lease basics and numerous other lease issues that can arise in practice. The case can be used in conjunction with Lease Restatements in the Restaurant Industry: 2004-2005, which covers several other lease accounting issues, primarily for operating leases.Best uses:EthicsUndergraduate intermediate accountingFirst-year MBA/Executive MBA financial accountingFinancial reportingFinancial statement analysisValuationUse with:Brief Excel Case: Leases (Chapter 8)

8. Microsoft Corp: Financial Reporting Issues16 pages; intermediateCorporate governanceAccrualsMaterialityDocumentationSEC investigationThis case covers Microsoft’s consent decree with the SEC over unsupported accounting accruals. It is an excellent governance case and also covers numerous accrual issues. Microsoft had very well designed systems at the operating level to prepare and monitor accruals. However, very senior management then made large unsupported accrual journal entries to a general account, allegedly to reach earnings targets. When SEC officials aligned the unsupported adjustments with relevant accounts, they discovered that for one quarter Microsoft actually had negative inventory.

Those activities occurred before Sarbanes-Oxley made such practices subject to civil and criminal penalties. As a result, Microsoft signed a consent decree whereby it neither denied nor admitted guilt, but promised to not engage in those practices in the future. There were no fines and no criminal charges against Microsoft.

The case can be used to discuss several accrual accounting issues. It can also be used to consider what can be done to prevent senior management from overriding internal controls. Finally, the case can be used to consider the motives of senior management. At the time, Microsoft was incredibly profitable, growing rapidly, and had a near monopoly on personal computer software. The adjustments were almost certainly immaterial, probably had little effect on Microsoft’s market value, and the firm’s key shareholders (Bill Gates and senior Microsoft executives) were neither buying nor selling shares.

of 41

Microsoft and many other firms routinely reported earnings per share in excess of analysts’ consensus forecasts. The entire process seemed designed to beat the consensus forecasts for revenues and earnings. Given Microsoft’s market dominance and its fluctuating revenues as it released new versions of Office and Windows, it seems unlikely that Microsoft’s market value would have declined much if revenues or earnings were slightly lower than consensus estimates, since Microsoft still had 95% of the Office and Windows markets. Best uses:EthicsUndergraduate intermediate accountingFirst-year MBA/Executive MBA financial accountingFinancial reportingFinancial statement analysisExecutive education

9. Beazer Homes USA, Inc.: SEC v. Michael T. Rand, Chief Accounting Officer21 pages; intermediateCorporate governanceAccrualsMaterialityDocumentationSEC investigationBeazer homes was the sixth largest U.S. home builder during the 1998-2006 housing boom. Like other major home builders, Beazer’s market value grew by a factor of 8-10 during that period. However, the new home market slowed in 2006 and then collapsed in 2007.

The SEC alleged that Michael T. Rand, Beazer’s chief accounting officer, understated Beazer’s reported profits in every quarter but one from 2000 through 2005 by understating Beazer’s “land inventory” account and by overstating its “cost to complete” reserve. The SEC further alleged that during each of the four quarters in 2006, and in the first quarter of 2007, Mr. Rand increased Beazer’s reported profits by increasing the “land inventory” account, decreasing the “cost to complete” reserve, and fraudulently recording sale-and-leaseback transactions for model homes.

The case provides an excellent overview of the U.S. housing boom and collapse. It can be used prior to New Century Financial Corp (Chapter 3), which covers the collapse of a sub-prime and Alt A mortgage lender. The case is also excellent for covering the practical issues of accrual accounting in uncertain environments.

The SEC charges imply that it is relatively simple to estimate the value of the firm’s “land inventory” and “cost to complete” accounts. The SEC’s complaints on these matters made the valuation process for each process seem far more objective than it actually is in practice, particularly for a rapidly growing firm that almost certainly was relying on less experienced managers and workers, and less experienced accountants.

The case also covers a sale-and-leaseback transaction. Those accounting rules are complex, so again, it might not be clear that Mr. Rand engaged in fraud.

of 41

Finally, the cumulative alleged profit understatement for 2000-2005 was about $72 million for a firm that had about $2 billion of operating profits. In addition, during nine quarters from 2007-2009, Beazer recorded about $1 billion of impairment charges. Given the implicit subjectivity in those nine impairment charges, it seems highly likely that the “land inventory” and “cost to complete” accounts were also highly subjective numbers.

I use this case to consider the subjectivity of various accrual accounts. I also use it to consider who would make the accrual calculations. Beazer constructed housing developments throughout the nation. Michael T. Rand almost certainly was not personally responsible for preparing accrual estimates at the operating level.Best uses:EthicsUndergraduate intermediate accountingFirst-year MBA/Executive MBA financial accountingFinancial reportingFinancial statement analysisValuationExecutive education

10. Corporate Governance at IBM and Google16 pages; intermediateCorporate value statementsCorporate governanceBusiness judgment and competing interestsEthicsIBM and Google are highly profitable and in many ways are among the world’s most ethical companies. Both have impressive and lofty corporate value statements with parts that could be used for not-for-profit organizations. However, IBM and Google are publicly traded and employ tens of thousands of employees—they are not charitable organizations. As they react to competitive challenges, they sometimes need to reduce salaries or benefits, or engage in actions that seriously harm their competitors.

This case includes three instances where IBM faces difficult choices and its value statements seem to be of limited value (reduced pension benefits; lower salaries, and; competitive actions to protect their mainframe business). The case also includes seven instances where Google faces complicated decisions. In six of the instances, Google seems to be going against its value statements and violating various laws. However, in the seventh instance, Google stands up to Chinese censors at potentially great cost.

I use the case to discuss difficult choices corporations often face. I also use it to discuss the real value of value statements. Best uses:EthicsUndergraduate intermediate accountingFirst-year MBA/Executive MBA financial accountingExecutive education

of 41

11. Chrysler, LLC: Bankruptcy12 pages; intermediate to advancedCorporate governanceBankruptcyPriority in bankruptcyNational policy and competing interestsChrysler and General Motors received large U.S. government loans shortly before George Bush left office. As President Obama entered office, it was obvious that Chrysler and General Motors would need additional funding to continue operating. A bankruptcy would be extraordinarily costly and might put thousands of employees out of work just as the economy entered the worst recession since the Great Depression. It seemed highly unlikely any private investor would invest in either firm.

In response, the government proposed a plan for a rapid exit through a Chapter 11 bankruptcy reorganization that would circumvent the legal priority of creditors in bankruptcy. That led some to question whether the plan might lead to a lack of faith in contract law and the courts. However, that does not seem to have occurred.

In the case of Chrysler, the U.S. government sought to: offer equity holders and most unsecured debt holders nothing; offer secured debt holders partial payment; retain unsecured liabilities to the UAW’s pension and retiree health care funds, and; offer equity in post-bankruptcy Chrysler only to the UAW funds. Several State of Indiana pension plans, which owned secured debt, sued to block the reorganization plan. However, on a technicality, the government won the lawsuit. The case is an excellent overview of bankruptcy law. It can also be used to discuss alternative bankruptcy plans, such as liquidation. Another alternative would have been to cancel Chrysler’s obligation to the UAW pension and retiree health care funds. Those liabilities had always been cancelled in prior bankruptcies (for example, steel company and airline bankruptcies).Best uses:EthicsUndergraduate intermediate accountingFirst-year MBA/Executive MBA financial accountingFinancial reportingFinancial statement analysisCorporate financeValuationUse with:Retiree Benefits in the United States (Chapter 7)

12. General Growth Properties: Crises in Securitization

of 41

17 pages; advancedCorporate governanceSecuritizationPiercing a securitization trustBusiness judgment and competing interestsEthicsThe case is an interesting and excellent introduction to securitization, to conflicts of interest, and to corporate governance. This case covers a bankruptcy court ruling that seemed to circumvent securitization trust contract law.

General Growth Properties (GGP) was the nation’s second largest mall owner/operator; it operated more than 200 shopping malls throughout the U.S. About 225 of GGP’s malls were funded though debt issued by a separate securitization trust for each mall. The trust would own the shopping mall, which would have been funded with a cash contribution from GGP, plus the sale of debt secured by the mall property. GGP’s cash contribution was significant and could not be withdrawn until debt holders had been repaid according to a predetermined schedule.

During the recession of 2008-2009, commercial real estate financing was nearly impossible to obtain. Although all GGP’s malls were financially sound, GGP itself was about to declare bankruptcy. Much of its cash contributions to the securitization trusts were funded by debt that needed to be refinanced, and GGP could not obtain refinancing. GGP declared bankruptcy but also caused about 200 of its financially sound malls to also declare bankruptcy, which might let GGP withdraw its excess cash in the securitization trusts, cash that was to have provided a cushion to mall debt holders. GGP argued that it operated each of the 200 malls; if it were forced to liquidate, the individual malls would also be in serious trouble since they lacked managers to operate the malls. The court agreed and let GGP withdraw its cash from the individual securitization trusts. The value of GGP equity immediately rose from $1.00 per share to $16.75 per share, its approximate value in mid-2010.

That court ruling is not expected to apply to securitization trusts where debt is secured by ownership, i.e. mortgages, auto receivables, or credit card receivables. However, it may apply to commercial real estate which involves operating assets that must be managed, so debt funded by commercial real estate is far less secure than in the past, more difficult to value, and far more difficult to refinance. It may lead to significant changes in how securitization trusts are organized. For example, it seems unlikely that originators will be allowed to appoint independent directors in the future.

The case also raises two additional ethical issues. First, GGP’s president and CFO purchased GGP stock on margin; when the firm’s stock price declined in 2008, they needed to provide additional margin. They did so by borrowing a total of $100 million from a trust for the benefit of Mary Bucksbaum Scanlan, daughter of GGP’s deceased former CEO (and niece of GGP’s then CEO). Attorneys who were trustees of that trust were also attorneys for GGP. Subsequently, when GGP was in serious financial difficulty, but before its stock price collapsed to $1.00 per share, the trustees purchased as much as several hundred million dollars of GGP stock using funds in Mary Bucksbaum Scanlan’s trust.

of 41

Best uses:EthicsUndergraduate intermediate accountingFirst-year MBA/Executive MBA financial accountingFinancial reportingFinancial statement analysisCorporate financeValuationUse with:Brief Excel Case: Securitization (Chapter 8)

Chapter 3, Financial Reporting, U.S. GAAP

13. Intel Corporation: Inventory Write-downs9 pages; introductory to intermediateInventory write-downsFinancial disclosureAccounting estimatesIntel, like all other U.S. firms, values its inventory at the lower of cost or market. Intel’s inventory primarily consists of semiconductors that rapidly decline in value as newer products enter the market. Furthermore, inventory demand is difficult to estimate because demand for end products that use Intel semiconductors is highly volatile. As a result, it is difficult to determine whether Intel has excess inventory and difficult to estimate the current value of its inventory.

This case discusses those issues and also includes inventory disclosures in Intel’s quarterly reports from quarter 1, 1996, through quarter 3, 2009. Although inventory valuation is an important component of Intel’s operating results, Intel provides only minimal inventory disclosures. Intel probably has inventory write-downs every quarter, but it apparently mentions inventory write-down only if the write-down is significant. During that 13-year period, Intel never disclosed the amount of a quarterly inventory write-down.

Intel occasionally mentions that it sold previously written-down inventory at a higher than expected price, which led to increased quarterly profits. As with inventory write-downs, Intel never mentions by how much profits increase from the sale of written-down inventory.

The case can be used to introduce the lower of cost or market rules and to evaluate the quality of Intel’s inventory disclosures.Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA financial accountingFinancial reportingFinancial statement analysis

14. Leasing Restatements in the Restaurant Industry: 2004-2005

of 41

11 pages; intermediateOperating lease rulesRestatementsMaterialityPrinciples versus rule based accounting standardsSEC and the PCAOBThis case discusses four detailed operating lease rules that many restaurant chains failed to follow. After the PCAOB released its first inspection reports in mid-2005, about 35 restaurant chains restated their financial statements for minor amounts because of detailed lease rules that had little effect on their income statements or balance sheets. One rule requires that lease costs for leases with escalation clauses must be spread equally over the lease term, even if the escalation only covers inflation. Another requires that the benefit from lease or rent “holidays” must be spread over the entire lease term, including the month of the lease holiday. A third rule requires that build-out allowances must be capitalized, which has virtually no effect on net income, but does add an amount to both assets and liabilities. A fourth rule requires that tenants spread the cost of leasehold improvements over the lease term or the life of the improvement. Some firms recorded costs too quickly because they failed to include a probable lease renewal period; other firms recorded costs too slowly because they included a lease renewal period that was not probable.

This case is excellent for considering the difference between rules based U.S. GAAP and principles based IFRS, which includes none of these four rules. I use the case to consider how difficult it would be to implement these four rules. If a company has one or two high-value leases, it is trivial to implement the rules. However, consider a firm with several thousand low-value leases. Although a firm may prefer a standard lease, if a property owner has a desirable location, that property owner may demand a non-standard lease. As a result, it could be highly cost ineffective to implement these four accounting rules; someone may need to re-evaluate each lease annually.

The case includes a letter from the SEC’s Chief Accountant to the AICPA in response to an AICPA letter asking if it was necessary for firms to restate their financial statements. The letter says absolutely nothing. Because of the potential criminal liability under Sarbanes-Oxley, most firms that had not complied with the lease rules restated their financial statements, even when the differences were immaterial. Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA financial accountingFinancial reportingFinancial statement analysisUse with:Brief Excel Case: Leases (Chapter 8)

15. Bethlehem Steel Corporation: Deferred Taxes

of 41

11 pages; intermediateValuation allowanceBankruptcyCorporate disclosuresDeferred taxesBethlehem Steel, for many years the nation’s second largest steel company, was marginally profitable in 2000. In both 1999 and 2000, Bethlehem had about $1.3 billion of deferred tax assets on its balance sheet, reduced by a valuation allowance of $325-$340 million. In the second quarter 2001, Bethlehem wrote off its entire $984 million of deferred tax assets (valuation allowance equaled deferred tax assets, so the net deferred tax asset was zero). However, in a note to its second quarter 10-Q (July 2001), Bethlehem management stated that the write-off was needed because of technical accounting rules but management expected to be able to utilize the deferred tax assets in the future. In response, many analysts stated that they expected Bethlehem’s stock price to increase. Bethlehem’s stock price remained at about $10 per share following the write-off and then declined to about $5.00 per share over the following three months. In October 2001, three months after it reported the billion dollar write-off, Bethlehem filed for Chapter 11 bankruptcy (reorganization). The firm was unable to obtain financing and its assets were sold in liquidation.

The case is an interesting introduction to deferred tax assets, the valuation allowance, corporate disclosures, and bankruptcy. The case includes a basic explanation of deferred tax accounting. Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA financial accountingFinancial reportingFinancial statement analysisValuation

16. Revenue Recognition (A)8 pages (A); 9 pages (B); intermediate to advancedRevenue recognitionAccrualsPrinciples versus rule based accounting standardsThe (A) case includes revenue recognition notes for seven companies. The (B) case includes revenue recognition notes for six companies. The cases cover a relatively wide range of revenue recognition issues. I sometimes cover one case in class and give one as an exam, where students get the case in advance, but do not know the questions. Because there are six or seven notes, with several revenue recognition issues in each note, students spend a great deal of time understanding the issues prior to the exam. I have used this case twice as an exam and it worked very well both times. Either case takes 60-90 minutes to prepare for class. They each take at least 4-6 hours to prepare for an exam because there are so many issues. However, students seem to like that exam format.Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA financial accounting

of 41

Financial reportingFinancial statement analysisExecutive educationUse with:Brief Excel Case: Revenue Recognition (A) or (B) (Chapter 8)

17. Revenue Recognition (B)9 pages; intermediate to advancedRevenue recognitionAccrualsPrinciples versus rule based accounting standardsSee Revenue Recognition (A).Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA financial accountingFinancial reportingFinancial statement analysisExecutive educationUse with:Brief Excel Case: Revenue Recognition (A) or (B) (Chapter 8)

18. New Century Financial Corporation16 pages; advanced to very advancedSecuritizationSub-prime loansBankruptcyRetained InterestsAccounting rules for off-balance sheet financingThis case covers securitization by one of the first firms to go bankrupt because of sub-prime and Alt A lending. The case gives an overview of an out-of-control mortgage securitization industry with virtually no oversight. It also is interesting because New Century classified some of its securitized mortgages as investments, so instead of including only its retained interest in mortgage securitization trusts (pools) on its balance sheet, New Century included the entire value of the pool’s assets (mortgages) and the entire value of the pool’s liabilities (issued notes).

Many FASB off-balance sheet financing rules are designed to prevent firms from improperly omitting liabilities from their balance sheets. Suppose a firm transfers $1 billion of mortgages to a securitization trust, the trust issues $950 million of notes to investors, and the trust then pays the $950 million to the mortgage originator. Should the mortgage originator only record a $50 million retained interest as an asset, or record $1 billion of mortgages as assets, and the $950 million of notes as liabilities? Most FASB securitization rules are designed to prevent firms from improperly reporting only the $50 million of retained interest. However, firms must provide relatively detailed disclosures about how they value retained interests. New Century seemed to purposely record the entire amount of mortgages in its

of 41

securitization pools as assets, and the entire amount of notes issued by those pools as liabilities, so as to avoid disclosing information about its retained interests.

Legally, when New Century transferred mortgages to securitization pools, it no longer had an obligation to note holders; its only asset was a retained interest in the pools. However, New Century retained an option to reacquire the mortgages. Under FASB rules, New Century “controlled” the mortgages, so it was required to record both the mortgages and notes on its balance sheets. New Century clearly disclosed that rule and clearly also stated that although it could have disclosed its retained interest in the pools, it chose not to do so. That let New Century avoid disclosing the size of its retained interests, which were probably very high. It also let New Century avoid disclosing how it computed its retained interests.

The case is difficult but it does provide a good example of how detailed accounting rules have become and how firms can circumvent those rules.Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA financial accountingFinancial reportingFinancial statement analysisCorporate financeValuationUse with:Brief Excel Case: Securitization (Chapter 8)

19. Sirius XM Radio, Inc. Faces Bankruptcy18 pages; advancedBondsCapital structure and leverageBusiness combinations and goodwillIndustry analysis and corporate strategyCash flowsBankruptcyInability to refinance short-term debtThis case covers the Sirius Radio’s 2008 acquisition of XM Radio and the combined firm’s near bankruptcy in early 2009. Sirius Radio and XM Radio entered the satellite radio market within months of each other, were of about the same size, had about the same capital structure, and had about equal operating losses. The market was simply too small for such high-cost operations.

XM radio had an early lead and seemed destined to control the market with its long-term contracts to broadcast nearly all major professional sporting events. However, Sirius Radio hired Howard Stern to a five-year, $500 million contract. That saved Sirius Radio from immediate bankruptcy but also ensured that both firms would remain unprofitable until one or both declared bankruptcy, or merged.

The case can be used to cover three issues: (a) an unusual business combination that resulted in an immediate $4.8 billion impairment charge; (b) an unusual loan that gave the lender 40% of the firm’s equity, and; (c) the value of Howard Stern to the firm.

of 41

The firms agreed to merge on February 19, 2007, but were unable to complete the merger until July 28, 2008, because the firms needed approval from both the Justice Department and the FCC. Because of accounting rules, XM Radio recorded $6.6 billion of goodwill based on the February 19, 2007, Sirius Radio share price, but immediately wrote off $4.8 billion of that goodwill because the market had declined in the 17 months between the agreement and acquisition dates.

By January 2009, the combined firm was about to declare bankruptcy when it was unable to refinance its debt due to the collapse of the lending market. However, the firm obtained a $500 million loan that also gave the lender preferred stock worth 40% of the company’s total equity. Those terms were highly attractive to the lender if the economy improved, but the lender could easily have lost the entire investment. The economy did improve and the investment is now worth about $2 billion.

Howard Stern’s contract expires in January 2011. There is sufficient information in the case to estimate how much Howard Stern is worth to Sirius XM radio.Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA financial accountingFinancial reportingFinancial statement analysisCorporate financeValuation

20. Dell, Inc.: Financial Restatements24 pages; advancedFinancial restatementsAccrualsCorporate governanceJudgment and accounting errorsDocumentationMaterialityPrinciples versus rule based accounting standards After Michael Dell retired, there were allegations that senior management manipulated accounting numbers to maximize executive bonuses. Dell delayed its 2006 annual report by ten months and then restated four years of accounting financials because of the allegations and SEC investigations. The case covers 20-25 different accounting issues. It is an excellent case in that can students learn about numerous different accounting rules in a real setting, and then discuss whether the rules should even exist, since most of them do not exist under IFRS.

Dell recorded adjustments for at least 20 different accounting items, but the restatement only decreased net income by $100 million for the four years 2003-2006. The total restatement equaled only one tenth of a percent of Dell’s after tax income for the period; the investigation cost $205 million.

I usually tell students that if Dell had hired ten different accounting firms to review its financial reporting, it is likely that five would have determined that net income should have been slightly higher than reported and five would have determined that net income should

of 41

have been slightly lower. The case also describes numerous changes that Dell made to its accounting organization and accounting practices, and that it made to its accounting oversight functions.

The case is excellent for classroom or for an exam, either as a take-home exam or where students are given the case in advance, and then asked questions in the exam. I have used it all three ways. The case takes 90-120 minutes to prepare for class and 4-6 hours to prepare for an exam because there are so many issues. Because there are so many issues, students learn quite a bit when preparing for the exam (similar to Revenue Recognition A and B).Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA financial accountingFinancial reportingFinancial statement analysis

21. The Boeing Company: Retiree Benefits, 200813 pages; intermediate to advancedAccounting for defined benefit retirement plansAccounting for retiree health care benefitsThis is a relatively straightforward case that covers Boeing’s defined benefit pension plan and its retiree benefit health care plan reporting. The case is interesting because Boeing’s pension fund went from being $5 billion overfunded in 2007 to $9 billion underfunded in 2008 because of wide swings in its investment returns. The case is also interesting because Boeing’s retiree health care fund has nearly $8 billion in liabilities and almost no assets (less than $100 million) and because when Boeing computes its expected return on plan assets, it uses a five-year average value of plan assets rather than actual assets.Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA financial accountingFinancial reportingFinancial statement analysisValuationUse with:Retiree Benefits in the United States (Chapter 7)Brief Excel Case: Defined Benefit Retirement Plans (Chapter 8)

22. Carton Medical Devices (A)18 pages; advancedInventory valuationStandard cost systems for discrete-part production manufacturingThis case describes a standard cost system for a discrete part manufacturing firm. The case is clearly more of a cost accounting case than a financial reporting case. However, most students will not take a cost accounting course, so I use this to explain what is needed to compute a reasonably accurate product cost number for either inventory valuation or for cost analysis.

of 41

Best uses:Undergraduate intermediate accountingUndergraduate cost accountingGraduate managerial or cost accountingFirst-year MBA/Executive MBA financial or managerial accounting

Chapter 4, Financial Reporting, IFRS

23. Asset Impairments: the recession of 2008-200915 pages; intermediateImpairmentsAccounting estimatesFinancial disclosuresThis case explains various methods firms use to compute cost under U.S. GAAP and IFRS. The case includes discussions of: historical cost; lower of cost or market (U.S. GAAP); lower of cost or net realizable value (IFRS); fair value under IFRS and U.S. GAAP, and; impairment for goodwill and other assets under both IFRS and U.S. GAAP.

The case then provides impairment notes for three IFRS reporting firms (Nestle, Swatch Group, and Royal Bank of Scotland) and two U.S. GAAP reporting firms (News Corp and CBS Corporation). The IFRS reporting firms have far more detailed disclosures and the disclosures are considerably more informative.

The case is a good introduction to various cost measures. It also provides a good overview of impairment testing and impairment disclosures under IFRS and U.S. GAAP. The case can be used with Vivendi Group: Goodwill Impairment Test (Chapter 4), which provides the impairment disclosure note for Vivendi, a disclosure that is more detailed than any of the five disclosures in this case.Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA financial accountingFinancial reportingFinancial statement analysis

24. Vivendi Group: Goodwill Impairment Test2 pages; intermediateImpairmentsAccounting estimatesFinancial disclosuresThis case includes the impairment disclosure note for Vivendi Group. The disclosure is more detailed than the five notes in Asset Impairments: the recession of 2008-2009 (Chapter 4). It discloses by how much assumptions would need to change before Vivendi would be required to record an asset impairment.Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA financial accounting

of 41

Financial reportingFinancial statement analysis

25. Depreciation in the semiconductor industry17 pages; intermediateDepreciation expenseFinancial disclosuresThis case provides depreciation disclosures for six semiconductor manufacturers, two headquartered in Europe (STMicroelectronics NV and Infineon Technologies), two headquartered in Taiwan (Taiwan Semiconductor Manufacturing Company (TSMC) and United Microelectronics Corporation (UMC)), and two headquartered in the U.S. (Intel and Texas Instruments). Even though depreciation is one of the two largest costs for a semiconductor manufacturer (with R&D), some of the disclosures are very limited, particularly for the two U.S. firms.

I use the case to discuss information that is available in annual reports. The case is useful as background for discussing both depreciation expense and fixed assets. It is also useful for discussing the quality of financial disclosures by different companies. The case also includes information provided by the former CFO of both Taiwan companies. That information can be used to discuss product pricing and competitive advantages.Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA financial accountingFinancial reportingFinancial statement analysis

26. Thomson’s Acquisition of Reuters (A)24 pages; intermediateBusiness combinationsDivestituresIFRSPro-forma resultsValuationThe (A) case is a good introduction to business combinations and to measuring the fair value of acquired assets and liabilities, including intangibles. The case is easy to understand and is interesting. It has an international flavor since the case discusses the acquisition of Reuters, a British company that reports under IFRS, by Thomson, a Canadian company that reports under Canadian GAAP, but that is headquartered in Stamford, Connecticut.

The case covers several interesting issues. First, it describes how Thomson grew through acquisitions, primarily in the newspaper industry, but also in oil and gas exploration and the travel industry. Firms often overpay for acquisitions and have difficulty integrating the acquired firms. Thomson was incredibly successful with nearly all of its acquisitions.

The case then describes how Thomson entirely transformed itself by selling off its oil and gas interests and travel interests to enter electronic publishing, and how it sold off its entire newspaper holdings at the height of their value, and shortly before the entire newspaper

of 41

industry collapsed. Thomson used those funds to expand its electronic publishing. Finally, Thomson sold its major book publishing division, Thomson Learning, to a private equity firm in 2007 at what was probably the height of value for book publishers, and acquired Reuters.

The case can also be used to consider the validity of fair value accounting. Thomson was required to record the fair value of various intangible assets it obtained when it acquired Reuters. Thomson valued four significant intangibles: trade names; customer relationships; developed technology, and; other.

Thomson also reported pro-forma results that show operating profit had the acquisition occurred a year earlier, and pro-forma results for the current period so readers could determine how the combined firm performed relative to the prior year. The case provides enough information for a discussion of whether the acquisition was worth its value.Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA Financial accountingFinancial reportingFinancial statement analysisValuationUse with:Business Combinations (Chapter 7)

27. Thomson’s Acquisition of Reuters (B)7 pages; intermediateIFRS reportingChange to IFRS reportingThis case shows reported net income and shareholders’ equity under both Canadian GAAP and IFRS. It also includes an explanation of Canadian GAAP and IFRS rules for each item that Thomson Reuters would report differently under IFRS.

The case can be used in combination with Thomson (A) to consider differences between Canadian GAAP (which is similar to U.S. GAAP) and IFRS. It can also be used to discuss how difficult it would be to change from either Canadian or U.S. GAAP to IFRS. To facilitate that discussion, the case includes Thomson Reuters’ request to adopt IFRS early. The firm expects that to be a simple conversion because Reuters already reports using IFRS. Most U.S. firms own overseas operations that also report locally using IFRS, so many of them could easily convert to IFRS.Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA Financial accountingFinancial reportingFinancial statement analysis

28. Mitchells & Butlers plc

of 41

15 pages; advancedRevaluation model (fair value) for fixed assetsIFRS reportingSecuritization of fixed assets (pubs)Losses on hedges of anticipated transactionsSegment analysisThis is an interesting case that covers several advanced topics. Mitchells & Butlers is a British pub-restaurant chain. One main issue is that Mitchells & Butlers uses the revaluation method to value its land and buildings. The case describes IFRS cost and revaluation model rules and also includes the firm’s fixed asset disclosure note.

Mitchells & Butlers also reports exceptional items. IFRS specifically prohibits extraordinary items, which U.S. GAAP allows in very limited circumstances. IFRS does not even mention exceptional items, but many European firms report exceptional items separately from normal operating income. There appears to be no difference between extraordinary and exceptional items, other than the name.

Mitchells & Butlers reported a $500 million loss on derivatives contracts over a two year period. Those derivatives were obtained to protect an anticipated real estate transaction that was cancelled. The derivatives included one contract to fix the price at which the firm would acquire real estate, and a second contract to fix the rate at which it would borrow funds to acquire the real estate. Mitchells & Butlers lost money on both contracts, as real estate prices and interest rates both plummeted.

Mitchells & Butlers also used its land and buildings as collateral in a securitization issue that included ten different tranches, four for fixed income notes and six for floating interest rate notes. The securitization note discloses that Mitchells & Butlers purchased interest rate swaps to convert the six floating rate debt tranches to fixed interest rate notes.Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA financial accountingFinancial reportingFinancial statement analysisValuationUse with:Brief Excel Case: Securitization (Chapter 8)

29. Barclays’ Acquisition of Lehman Brothers35 pages; advanced to very advancedBankruptcy/acquisition out of bankruptcyBusiness combinationsBusiness valuation and fair valueDepositionsThis is a fascinating but complex case that covers Barclays’ acquisition of the U.S. operating assets of Lehman Brothers. The case provides background information on the collapse of the sub-prime mortgage market and its effect on firms such as Bear Stearns, Citigroup, Merrill Lynch, AIG, Fannie Mae, and Freddie Mac. The case then describes Barclays’ emergency

of 41

acquisition of Lehman Brothers over a few days time, including the note that describes how Barclays’ recorded the acquisition of Lehman Brothers. For comparison purposes, that note is followed by notes that describe how JP Morgan recorded its acquisitions of Bear Stearns, Washington Mutual Bank, and Bank One. From those four notes, students can argue that Barclays obtained Lehman for as much as $10-$20 billion below its fair value.

On the other hand, at the time there were only four financial institutions in the world that might have been capable of acquiring Lehman Brothers: Barclays, J.P. Morgan, BankAmerica, and Wells Fargo Bank. J.P. Morgan was acquiring Washington Mutual, BankAmerica was acquiring Merrill Lynch, and Wells Fargo Bank was acquiring Wachovia and all three of those acquired firms were in serious financial difficulty.

The case then considers a lawsuit filed by Lehman Brothers charging Barclays with fraud in its acquisition of Lehman Brothers. The claims seem to indicate that Barclays did engage in fraud. However, the lawsuit also includes Barclays’ response, which seems to contradict everything in the Lehman lawsuit.

Both the business combination reporting and the lawsuit are complex but interesting. The case can also include Deposition of Harvey R. Miller Examination by David M. Boies (Chapter 4) as background reading. Mr. Miller is one of the nation’s two leading bankruptcy and restructuring attorneys whereas Mr. Boies is perhaps the leading U.S. corporate litigator. Many students will be deposed in their careers. This is one of the most vigilantly crafted and penetrating set of questions and one of the most careful and precise set of responses a reader is ever likely to encounter.Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA Financial accountingFinancial reportingFinancial statement analysisValuationUse with:Business Combinations (Chapter 7)

30. Deposition of Harvey R. Miller Examination by David M. Boies35 pages (estimate—incomplete); intermediateDepositionsLawsuitsBankruptcyBusiness valuationFair valueMany students will be deposed in their careers. This case is exceptional background reading of the types of questions to expect in a deposition, although rarely are the questions this vigilantly crafted or so penetrating, and rarely are the responses this careful or precise. Mr. Boies is probably the nation’s leading corporate litigator; Mr. Miller is one of the nation’s two leading bankruptcy and restructuring attorneys.

of 41

Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA Financial accountingFinancial reportingFinancial statement analysisValuation

31. SAP: Alternate Financial Reporting Methods13 pages; advancedU.S. GAAP vs. IFRS financial statementsNon-U.S. GAAP and non-IFRS financial statementsAdjustments for changes in exchange ratesAlthough it is a German company, SAP reports using U.S. GAAP in Euros, so its financial statements are comparable to its primary competitors, who all report using U.S. GAAP.

For various reasons, SAP also reports results in non-U.S. GAAP in Euros because it disagrees with some U.S. GAAP rules, and reports in non-U.S. GAAP using constant currency in Euros (same exchange rate as the previous year) because it believes that for some purposes, that is more reflective of the firm’s year-to-year performance.

SAP also reports non-U.S. GAAP using constant currency in U.S. dollars for comparison with U.S. firms. Because it will be required to report using IFRS next year, SAP then reports results using IFRS in Euros, and reports non-IFRS in Euros (same changes it makes to correct for U.S. GAAP rules it disagrees with).

The case provides explanations for all of the different reports listed above and an overview of the remaining significant differences between U.S. GAAP and IFRS reporting rules. Although the case is relatively technical, it does provide an opportunity for students to consider whether there is even close to a correct answer as to what are the best accounting policies.Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA Financial accountingFinancial reportingFinancial statement analysisValuation

Chapter 5, Financial Statement Analysis

32. Harley-Davidson, Inc. (A): Financial Crises, 2008-2009

of 41

20 pages; advancedEffect of the sub-prime loan crises on the securitization marketInability to securitize receivablesEffect of inability to securitize receivables on a firm’s valueDebt capacityAccrualsRetiree fund lossesHarley-Davidson had long been one of the nation’s most profitable firms and had one of the world’s most recognizable and valuable brand names. For years Harley-Davidson reacquired its own stock because its cash flow exceeded its capital needs by so much.

Harley-Davidson financed most of its retail motorcycle sales through Harley-Davidson credit. Harley-Davidson customers are highly loyal, so credit defaults were rare, and the firm easily securitized its high-quality motorcycle receivables. Buyers paid 10-12% interest but were so reliable that Harley-Davidson could contribute $1 billon of receivables and $35 million in cash to a securitization trust, and the trust could then issue $1 billion of 6% notes.

In early 2008, the sub-prime mortgage crises led to a complete collapse of the securitization market. If Harley-Davidson wanted to finance its retail sales, it would need to obtain funds by issuing long-term debt. It did issue debt throughout 2008, but by the end of 2008, Harley-Davidson was near its debt capacity. As a result, it could not continue to finance customer receivables at the same level as in the past.

The case also includes information on several accrual accounts. In the past, the accrual account balances were highly conservative. In some instances, balances seemed to be at least double what would be needed to meet liabilities. As Harley-Davidson’s financial conditions worsened the accruals became less conservative, to the point that in some instances they seemed lower than estimated liabilities. Despite all this, Harley-Davidson’s financial disclosures remained clear and comprehensive, making it easy for students to see how Harley-Davidson’s financial condition worsened as the recession deepened.

The case also includes Harley’s disclosures about major investment losses in its pension and retiree health benefit fund investments. A table compares Harley’s investment losses with lower losses for other pension funds because Harley invests a higher percentage of its retiree funds in equities than most other funds. Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA Financial accountingFinancial reportingFinancial statement analysisValuation

33. Harley-Davidson, Inc. (B): February 2010

of 41

14 pages; advancedIncreased retained interest needed to securitize receivablesDebt to equity ratiosValuationThis case is an extension of Harley-Davidson (A). It shows Harley-Davidson’s financial statements through the end of 2009, when Harley-Davidson reported its first loss in at least 15 years, and when Harley-Davidson could no longer issue additional debt.

The case also shows the details from Harley-Davidson’s last securitization in early 2008 and from Harley-Davidson’s first new securitization in late 2009. In the 2008 securitization, Harley’s securitization trust issued notes equal to about 96.5% of the combined collateral deposited into the trust (motorcycle receivables plus cash). In the 2009 securitization, the securitization trust issued notes equal to about 70% of the combined collateral deposited into the trust. Although that will let Harley-Davidson return to nearly its pre-recession operations, it will either need to stop redeeming stock, or else maintain some level of debt to finance its receivables.

The case can be used with Harley-Davidson (A) to discuss how the availability of financing influences Harley-Davidson’s operations and its market value. Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA Financial accountingFinancial reportingFinancial statement analysisValuationUse with:Brief Excel Case: Securitization (Chapter 8)

34. Apple, Inc.: Retrospective Adoption, Revenue Recognition Rules13 pages; intermediateRevised revenue recognition rules for multiple-element salesFinancial restatementsRetrospective adoptionValuationAICPA Statement of Position 97-2 from 1997 required that if a firm made a multiple element sale that included software, the revenue must be pro-rated over the life of the contract using the subscription model unless the firm had vendor specific evidence as to the value of each element comprising the sale.

When Apple sells an iPhone, it offers free software updates for about two years. Because Apple does not sell the software separately, it has no evidence as to the fair value of the software. As a result, Apple recognized revenue from iPhone sales equally over a 24 month period. If it sold an iPhone for $480, its initial journal entry would be a debit to cash for $480, a credit to revenue for $20, and a credit to unearned revenue for $460.

of 41

Because the cost of software is trivial relative to the value of the hardware, nearly everyone ignored Apple’s reported net income. Instead, they treated the sale as if all revenue should have been recognized on the sale date. As iPhone sales grew, Apple had nearly $12 billion of deferred revenue at year end September 26, 2009.

In October 2009, possibly in response to Apple’s deferred revenue, the FASB issued two Accounting Software Updates that substantially changed reporting rules for sales with multiple elements that include software. The primary change was that firms no longer needed specific evidence for the fair value of each element in a sale that included software; management judgment would be sufficient. This case covers Apple’s January 25, 2010, retrospective restatement of its 2009 financial statements because of changes to those rules. The restatements increased Apple’s 2009 pre-tax net income by $4.1 billion and its 2008 pretax net income by $2.1 billion. The revised financial statements had no detectable effect on Apple’s share price because investors essentially ignored Apple’s use of SOP 97-2. Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA Financial accountingFinancial reportingFinancial statement analysisValuation

35. Arby’s Potential bid for Wendy’s22 pages; advancedBusiness combinationHostile takeoverCapital structure/multiple classes of equityCorporate governanceThis case covers Arby’s acquisition of Wendy’s. Arby’s was far smaller than Wendy’s and far less profitable. The case provides information on the acquisition process, on capital structure, and on corporate governance.

Arby’s was controlled by two individuals who owned a majority of the firm’s class A common stock, which had one vote per share. The public owned class B common stock, which had one-tenth of a vote per share. Arby’s two top executives were paid in excess of $15 million annually even though the firm was operating at about break even.

Arby’s and an investment firm run by the individuals who controlled Arby’s purchased 9.8% of the voting shares in Wendy’s and then accused Wendy’s executives of mismanagement. They also convinced Wendy’s management to spin off two major divisions, Tim Horton’s and Baja Fresh.

In late 2007, Arby’s announced it would acquire Wendy’s. Arby’s management had successfully used similar tactics to gain control of and profit from several other firms. It also tried similar tactics at the much larger Heinz, but without success. The case includes a letter from Heinz to the SEC detailing alleged wrongdoings by Arby’s management and the out-of-court settlements they had agreed to.

The case can be used to discuss capital structure, corporate governance, and the acquisition process. The teaching note discusses the actual acquisition of Wendy’s by Arby’s. The

of 41

acquisition was for stock, the combined firm had only one class of stock, and Wendy’s shareholders received a majority of the outstanding voting stock in the new firm (Wendy’s Arby’s Group Inc.).

This leads to a discussion of the difficulty of ousting existing directors, because they control the proxy process. Outsiders who wish to contest a directors’ election must do so at their own expense. As a result, Arby’s Directors continue to run the combined firm. Since 2007, the firm’s stock declined from the $15-$20 range to about $5 per share. In contrast, most major competitors’ stock price remained steady or increased during that same period.Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA Financial accountingFinancial reportingFinancial statement analysisValuation

36. General Motors Corp: Bankruptcy28 pages; very advancedDefined benefit pension plansRetiree health care plansBankruptcyNegotiationsEthicsCompeting interestsThis case covers GM’s possible bankruptcy and its pension and retiree health care funds. Although the case covers relatively technical pension/retiree health care benefit issues, it is far more interesting than a typical pension case because of the negotiations between the U.S. government, GM, bondholders, and the UAW (Union of Auto Workers).

In 2007, GM was in serious financial difficulty but had an overfunded pension plan. The UAW, concerned about losing its health care benefits in the event of a GM bankruptcy, negotiated an arrangement whereby GM transferred its retiree health care fund obligations to the UAW, paid a significant amount into the fund, and promised to later pay more than $20 billion to the newly UAW managed retiree health care fund. GM also agreed to increase retiree benefits from the overfunded pension plan by $66.01 per employee per month beginning January 1, 2010.

In 2008, as the stock market collapsed, GM’s pension fund shifted to being underfunded. In late 2008 GM and Chrysler received government loans. In early 2009, the U.S. Government proposed a bankruptcy plan that would preserve the firm’s liability to the UAW pension and retiree health care fund. Bondholders were to receive eight cents in cash for each dollar in bonds, plus sixteen cents in new unsecured debt, and 90% of GM’s equity. The case includes a letter from advisers to the creditors that challenges that offer; it ends before the bankruptcy is resolved. The teaching note includes details on the bankruptcy.Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA Financial accounting

of 41

Financial reportingFinancial statement analysisValuationUse with:Retiree Benefits in the United States (Chapter 7)

37. Cisco Systems, Inc., Employee Stock Options20 pages; very advancedEmployee stock optionsIncome tax reporting for non-qualified employee stock optionsFinancial reporting for non-qualified employee stock optionsThis case covers Cisco Systems’ employee stock options disclosures. It includes Cisco’s 2008 income statement, balance sheet, and statement of cash flows, and disclosure notes for Cisco’s employee stock incentive plans and income taxes. The case uses financial statements for 2008 instead of 2009 because Cisco’s employee stock options reporting became more opaque in 2009.

The case covers Cisco’s employee stock options plan from two perspectives. First, the case considers how Cisco computes its employee stock option costs and how it reports those costs in its financial statements. Second, the case considers how Cisco reports the tax effects of employee stock options.

Cisco issues non-qualified stock options to its employees. When employees exercise non-qualified employee stock options, they must report the difference between the stock’s fair value on the exercise date, and the exercise price paid to Cisco to acquire the stock, as taxable income. Cisco then records that taxable income to its employees as a tax deduction on its own federal income tax return.

Cisco computes and records employee stock option costs for accounting purposes using the Black-Scholes or similar option model, and reports a different employee stock option cost for federal income taxes. That is a permanent difference between accounting and tax reporting, but a special rule applies to how the difference is treated on Cisco’s financial statements.

Between 2000 and 2008, Cisco’s reporting for employee stock options became increasingly opaque. By 2008, unless a user was very familiar with employee stock option tax laws, accounting reporting rules for employee stock options, and how Cisco reported employee stock options in the past, it was nearly impossible to understand the effect of Cisco’s exercised employee stock options.

This case discusses Cisco’s relatively clear disclosures from its 2000 financial statements and its relatively opaque disclosures from its 2008 financial statements.Best uses:Financial reportingFinancial statement analysisValuation

38. Merrill Lynch & Co., Inc.

of 41

36 pages; very advancedFair value reportingThe fair value optionMerrill’s own long-term debt reported at fair valueSegment disclosuresValuationThis is a complex but interesting case that covers three topics in great detail: fair value; the fair value option, and; segment disclosures. Those disclosures are closely related in the case. Although complex, they do let students understand why Merrill Lynch collapsed and understand how to value Merrill after the collapse.

The FASB issued new reporting rules for fair value and the fair value option that were required for 2008, but firms could elect early adoption for 2007. Merrill Lynch and most other large financial institutions elected early adoption, so this case includes highly detailed fair value and fair value option disclosures just as the sub-prime mortgage market collapsed.

The case includes Merrill’s financial statements and selected notes from its June 30, 2007, 10-Q and from its December 31, 2008, 10-K. That lets students understand what occurred during the 18-month period when Merrill Lynch went from the world’s largest and most valuable brokerage firm to a bankruptcy that was prevented by an apparently government-forced acquisition by BankAmerica.

The case includes three notes for each time period: fair value, fair value options, and segment disclosures. The fair value notes help students understand the value and limitation of fair value disclosures. One problem is that Merrill Lynch suffered about $70-80 billion of losses from its sub-prime mortgage investments, but reported those as Level 2 investments, not Level 3 investments. As a result, investors probably believed that most of Merrill’s reported fair value numbers were relatively objective and were unlikely to decline by much. The fair value notes can show that the detailed loss and gain reporting for Level 3 assets is highly misleading. Level 3 gains or losses are often offsets to hedges that include securities classified as Level 1 or Level 2 securities, so a major Level 3 reported gain or loss is meaningless. A major Level 3 reported gain could have been hedged with a Level 2 investment; the net effect could have been a nearly complete offset of gains and losses, or a net loss.

The fair value option notes also show that when Merrill adopted the fair value option rules, it elected the fair value option for some available-for-sale securities with unrecognized losses. That let Merrill transfer the unrecognized losses directly to owners’ equity without first recording the losses on its income statement.

The fair value option notes also show that Merrill elected the fair value option for some of its outstanding debt. When Merrill reported major investment losses, and the market value of its debt plummeted, Merrill was required to debit bonds payable so its bonds were reported at fair value. The offsetting credit was to a gain account. Many interested parties criticized the proposed FASB fair value option rule for a firm’s own debt for exactly that reason—it let firms in financial difficulty, with no ability to repurchase outstanding debt, record a gain on that debt as the firm collapsed.

Students can also estimate the profitability by business segment for the 18 month period from June 30, 2007, to December 31, 2008. Merrill has four major business segments: retail and

of 41

institutional brokerage; investment banking; investment management, including mutual funds, and; proprietary trading. During that period the first three business segments remained highly profitable, although they were generally less profitable than prior to the recession. After expenses, Merrill’s proprietary trading group probably lost about $80 billion. Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA Financial accountingFinancial reportingFinancial statement analysisValuationUse with:Fair Value Reporting (chapter 7)

Chapter 6, Valuation

39. Knowles Electronics, Inc (A)20 pages; advancedLeveraged buyouts/private equityCapital structureValuationFinancial projectionsLoan covenantsThe case describes how the founder built his firm into one of the world’s most exceptional manufacturing firms. Knowles Electronics had a nearly 100% market share of the market for hearing aid microphones and speakers (transducers). The firm also sold products off-the-shelf to NASA in the 1960s because its product quality, and all of its quality control systems, exceeded the requirements for NASA’s lunar program.

This case then describes a private equity firm’s acquisition of Knowles Electronics, and the subsequent sale of Knowles to a publicly-traded corporation. The firm issued a new class of stock to the private equity firm and to management, issued mandatorily callable preferred stock to the private equity firm, and raised debt financing from several large banks. Knowles then used that cash to retire old equity securities from the founder’s heirs.

That information is only available for private equity acquisitions if the acquired firm issues publicly-available financial statements. That is rarely the case but in this instance, the private equity firm expected to take Knowles Electronic public in a year at a very large gain, so it agreed to make the debt publicly tradable. When Knowles’ revenues declined, the private equity firm was unable to conduct an IPO, but did need to file financial statements with the SEC because the debt was publicly tradable.

The teaching note includes Knowles Electronics (B), which covers the firm’s subsequent sale to a publicly-traded company, and how that company accounted for the Knowles acquisition. Best uses:Undergraduate intermediate accounting

of 41

First-year MBA/Executive MBA Financial accountingFinancial reportingFinancial statement analysisValuation

40. Anheuser-Busch: 2008 Acquisition Bid14 pages; intermediateBusiness acquisitionsValuationSegment reportingHidden valueAnheuser-Busch (A-B) had long been the world’s largest brewer but through a series of acquisitions, InBev managed to surpass A-B. On June 12, 2008, InBev made an unsolicited $65 per share bid for A-B that was subsequently accepted at $70 per share.

This case presents information that can be used to consider whether the offer was too high. Among the reasons why the price might be too high were large pension obligations, significant outstanding employee stock options, and a price-to-EBITDA ratio of more than 12, even before adjusting for pension and employee stock option obligations. The case includes results from a German academic study showing that brewer acquisitions at an EBITDA multiple above 10 were rarely successful.

Among the reasons why the price might be reasonable were that A-B had several investments InBev might be able to sell to help pay down the debt. They included the Bush Entertainment division (Busch Gardens and Sea World), plants that produced aluminum cans, and a 50% equity interest in Grupo Modelo, brewer of Corona beer. A-B also had a reputation of being run like a private company, with very attractive compensation and benefit packages for all employees. Executives enjoyed lavish offices and high salaries; workers enjoyed high wages; all employees received two cases of A-B products each year; the firm made generous charitable contributions throughout the U.S., and particularly generous contributions in the St. Louis area.

The general tone of the case is that InBev may have overpaid for A-B. However, the case includes a number of disclosures that provide additional information about A-B’s potential value. Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA Financial accountingFinancial reportingFinancial statement analysisValuation

41. InBev: the Anheuser-Busch Acquisition

of 41

18 pages; intermediate to advancedBusiness acquisitionsIFRS reportingValuationCorporate restructuringsThis case lets students prepare a preliminary analysis of whether InBev’s A-B acquisition was successful. The case includes debt repayment schedules for 2008 and 2009, Selected A-B financial disclosures for 2007, selected InBev financial disclosures for 2007, and selected 2009 financial disclosures for the combined Anheuser-Bush InBev.

The case also includes information on actions that reduced expenses and debt. A-B InBev almost immediately: dismissed many former A-B executives; converted lavish St. Louis executive offices to executive cubicles; substantially reduced charitable contributions, and; unilaterally informed suppliers that payment would be made in 120 days instead of 30 days. The firm also sold its canning operations and Busch Entertainment, a small U.S. brewer (Rolling Rock), and InBev Eastern European brewing operations. It used those funds to reduce its debt and substantially extend the payment schedule for the remaining debt.

Shortly before its June 12, 2008 bid for A-B, InBev’s share price was in the €30.00 range. The acquisition closed on December 12, 2008. On November 24, 2008, InBev’s share price reached a low of €10.32, indicating that the market believed InBev substantially overpaid for A-B. However, InBev’s share price is currently €39.23, so A-B InBev substantially outperformed the market for the period beginning shortly before its A-B bid and ending in mid-2010.

By almost any measure, the acquisition has been highly successful. If A-B InBev successfully overturns the three-tier distribution system throughout the U.S., the acquisition will probably become far more successful.Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA Financial accountingFinancial reportingFinancial statement analysisValuation

42. Koss Corporation: Unauthorized Financial Transactions10 pages; intermediateCorporate governanceUnauthorized financial transactionsForensic accountingAuditsThis case considers unauthorized financial transactions at Koss Corporation, a small publicly-traded speaker headset manufacturer headquartered in Milwaukee, Wisconsin.

In late December 2009, a federal complaint charged Koss’s CFO with embezzling as much as $4.5 million from Koss, which had 2009 revenues of only $38.2 million. Two days later Koss issued a press release stating that the embezzlement might be as high as $20 million. On January 4, 2010, Koss issued a press release stating that the embezzlement may have

of 41

exceeded $31 million for the fiscal years ending June 30, 2005 through 2009. Later reports disclosed that the embezzlement ranged from $2,195,477 in fiscal year 2005 to $8,485,967 in fiscal year 2009, and were approximately $5 million per quarter for the two quarters ended September 30, 2009, and December 31, 2010.

The embezzlement was detected when American Express notified Koss’ CEO that the firm was making very large wire transfers of cash to pay off a personal American Express card.

The case takes the perspective of a hedge fund manager who is analyzing Koss’ financial statements in an attempt to value Koss with no more information than previous financial statements and the knowledge that the CFO may have embezzled $35-$40 million during the previous ten years. A quick review of Koss’s annual financial statements from 2005-2009 reveals Koss had virtually no liabilities and that its assets could not have been overstated by the amount of the embezzlement; total assets as of December 31, 2009, were only $28.5 million.

Although accounts receivable and inventories might be overstated by as much as $5 million each, it seems highly unlikely that auditors would miss that much of an overstatement of receivables. Even if receivables and inventory were overstated by a total of $10 million, the remaining $25-30 million embezzled must have been recorded by debiting an expense account and crediting cash. Koss must have been highly profitable before the embezzlement and only moderately profitable after the embezzlement.

Assuming the embezzlement was primarily recorded as an expense, then Koss’ balance sheet is reasonably accurate, so Koss may need only a minor write-off of inventory and receivables. In the future, the major change to Koss’ operations will be that it is far more profitable because no one is embezzling. Koss’ market value should increase as a result of the discovered embezzlement, not decrease, which would have been the initial reaction to a major embezzlement.

Prior to the embezzlement, Koss was trading at about $5.50 per share. After the embezzlement disclosure, Koss’s share price declined to $3.90 per share, but has subsequently risen to $5.65 per share. During that same period the DJIA and SA&P 500 each declined by about 5%. Koss expects to release the results of its investigation in June 2010, so the teaching note will include information that is not now available.Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA Financial accountingFinancial reportingFinancial statement analysisValuation

43. Asher Associates: Acquisition Targets

of 41

10 pages; advancedAcquisitionsValuationEBITDAReceivablesThis case includes information from offering documents for two software firms that an Executive MBA candidate is evaluating for a possible acquisition. The information includes detailed financial information, plus add-backs to adjust reported net income to EBITDA, since the owners of both firms are offering their firm for sale as a multiple of EBITDA.

Many privately held firms have high costs for executive salaries, travel, entertainment, automobiles, and similar items that would be substantially reduced by a new owner. The first firm adds back numerous costs but many of them seem necessary to operate the business.

The first firm also expects the acquirer to pay the current owner for 70% of the cash and 80% of the accounts receivable retained in the business (or have the owner withdraw those amounts prior to the acquisition). Sellers and buyers typically specify the net current assets that will remain in the business at the time of the sale; this adjustment effectively specifies that the acquired firm will probably not have enough cash or receivables to operate without additional funding.

The second firm is an “S” corporation so it will be an asset sale. The acquirer will be able to record as intangible assets the difference between the selling price and the net book value of tangible assets, and then amortize that amount over 15 years. That clearly adds value to the acquired company.

The second company also reports on the cash basis, although from the case it is unclear whether the firm can legally use that method for tax purposes. From the potential buyer’s perspective, that is irrelevant because the buyer will switch to accrual accounting. However, there is a very significant issue related to the cash basis accounting. The firm’s financial statements do not include credit sales and at the time the business is being offered for sale, receivables are very high. That leads to two questions. First, are the receivables collectible? From the case, that does not seem to be a problem. The second question is more of a problem.

The firm did not record accounts receivable for prior years. The firm’s owner recently estimated year-end receivables for prior years so the firm could prepare accrual-based income statements. Those accrual statements show a firm with steadily increasing revenues and profits; in contrast, cash-based income statements show a firm with slowing increasing revenues and declining profits. Because the firm has no records of year-end receivables, the potential buyer has no way to know which set of financial statements is more reliable. Hiring a firm to perform due diligence might help, but the results would still be questionable.

The case presents information that is similar to what a buyer would encounter when evaluating businesses that sell for between $10 million and $50 million (and possibly much larger businesses). Sellers know that buyers often price a business based on EBITDA, information is often of questionable quality, and sellers often adjust EBITDA so as to improperly inflate a firm’s offering price.

of 41

Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA Financial accountingFinancial statement analysisValuationUse with:Business Valuation (Chapter 7)Brief Excel Case: Valuation (Chapter 8)

44. Sunbelt Beverage Corp: Fair Value Litigation10 pages; advancedBusiness valuationsFair valueLitigationThis case covers a recent court ruling by the Delaware Chancery Court on the value of a privately held business. In 1997 the majority shareholders acquired a minority shareholder’s stock at a price the minority shareholder felt was far too low. The minority shareholder sued for relief, and in 2010 the Delaware Chancery Court ruled primarily in favor of the minority shareholder. The case discusses in detail the three primary valuation methods used to value a company (the income approach, or discounted cash flow; the market approach, or market multiples, and; the asset approach, or the sum of what individual assets could be sold for in a timely liquidation).

The case covers a wide range of valuation methods by three valuation experts. The court completely rejected all but one method. That method is based on the Morning Star/Ibbotson discount rates by firm size. The case provides enough information that students can discuss the validity of each valuation method and the validity of the judge’s decisions.Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA Financial accountingValuationUse with:Business Valuation (Chapter 7)Brief Excel Case: Valuation (Chapter 8)

Chapter 7, Topic Notes

45. Discounted cash flows and the Time Value of MoneyDiscounted cash flow analysis using Excel8 pages; introductoryThis note explains discounted cash flow calculations using Excel. It covers the Payment function (PMT), the Net Present Value function (NPV), and the Future Value function (FV). Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA Financial accounting

of 41

Executive educationUse with:Chang Medical Electronics (Chapter 1)

46. Ratio analysis4 pages; introductoryRatio analysisThis note explains 17 different ratios classified according to four categories: profitability and cost ratios; short-term liquidity ratios; long-run solvency ratios; operating efficiency ratios, and; growth measure ratios.Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA Financial accountingExecutive education

47. Note on Bonds4 pages; introductoryBond valuationReported bond yield conventionsBond pricing conventionsAccrued interest conventionsThis note discusses bond mathematics. It includes a discussion of bond valuation and bond yields. It also covers conventions for bond pricing and accrued interest, which are rarely discussed in accounting or finance texts.Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA Financial accountingUse with:Chang Medical Electronics (Chapter 1)

48. Retiree benefits in the United States13 pages; intermediate to advancedDefined benefit plansRetiree health care benefit plansEmployee Retirement Income Security Act of 1974 (ERISA)Pension Benefit Guarantee Corporation (PBGC)This note explains accounting rules for pensions and other retiree benefits. It also includes a discussion of the Employee Retiree Income Security Act of 1974 (ERISA) and of the Pension Benefit Guarantee Corporation (PBGC).Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA Financial accountingFinancial reportingFinancial statement analysis

of 41

Use with:Chrysler LLC: Bankruptcy (Chapter 2)The Boeing Company: Retiree Benefits, 2008 (Chapter 3)General Motors Corp: Bankruptcy (Chapter 5)

49. Fair value reporting7 pages; advancedFair value reportingThe fair value optionThis note explains the most current FASB and IFRS fair value reporting rules and The FASB fair value option rules. It also discusses how the new fair value and fair value option rules are related to the business valuation industry, which has developed manyBest uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA Financial accountingFinancial reportingFinancial statement analysisExecutive educationValuationUse with:Merrill Lynch & Co., Inc. (Chapter 5)

50. Business combinations11 pages; advancedAccounting for business combinationsThis note explains business combinations reporting rules, including rules for recording identifiable intangible assets at their fair value, and rules for valuing goodwill or a gain on acquisition. Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA Financial accountingFinancial reportingFinancial statement analysisExecutive educationValuationUse with:Thomson’s Acquisition of Reuters (A) (Chapter 4)Barclays’ Acquisition of Lehman Brothers (Chapter 4)InBev: the Anheuser-Busch Acquisition (Chapter 6)

51. Business valuation

of 41

Fair valueBusiness valuationThis note discusses business valuation from both an academic point of view and from the point of view of a business valuation expert, who may follow the methods specified by a business valuation certifying organization. The note introduces the idea of discounts, such as lack-of-control discounts, lack-of-marketability discounts, key employee discounts, and concentration risk discounts. These concepts are widely used in business valuation but are rarely discussed in accounting or finance classes. Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA Financial accountingFinancial reportingFinancial statement analysisExecutive educationValuationUse with:Asher Associates: acquisition targets (Chapter 6)Sunbelt Beverage Corp: Fair Value Litigation (Chapter 6)

of 41

Chapter 8, Excel-based Problem Sets

52. Brief Excel Case: Discounted cash flows7 pages; introductoryDiscounted cash flow analysis using ExcelThis problem set includes examples of NPV and PMT calculations, plus two required problems. The first problem is to determine which low-cost auto loan interest option is preferable. The second problem is to determine the cash flows associated with a potential bond issue, and that bond’s NPV under two different market conditions.Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA Financial accounting

53. Brief Excel Case: Revenue recognition (A)3 pages; intermediateRevenue recognitionThis problem requires students to record revenue and notes receivable for a land sale where the buyer pays 10% down and signs a 5-year note for the remaining 90% of the purchase prices.Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA Financial accountingFinancial reportingUse with:Revenue Recognition (A) or (B) (Chapter 3)

54. Brief Excel Case: Revenue recognition (B)2 pages; intermediateRevenue recognitionThis problem requires that students prepare financial statements for a direct-response marketing firm where direct-response marketing costs must be recognized immediately or over an extended period. Students are then asked to compare the two methods.

It also requires students to prepare financial statements for a retail firm that sells extended warranties. The first set of financial statements must report extended warranty payments as revenue on the date of sale. The second set of financial statements must report amounts received for extended warranties as revenue during the periods when the firm expects to incur extended warranty costs. Students must then compare the two methods.Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA Financial accountingFinancial reporting

of 41

Use with:Revenue Recognition (A) or (B) (Chapter 3)

55. Brief Excel Case: Impairments and Restructurings3 pages; intermediateAccounting for asset impairments under IFRS and U.S. GAAPGoodwill impairmentsAccounting for restructuringsThis problem set has three separate problems. The first requires students to prepare a discounted cash flow test for a potentially impaired division. The second problem requires students to record restructuring costs for a firm that revises its estimated restructuring costs. The third problem also requires students to record restructuring costs for a firm that revises its estimated restructuring costs.Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA Financial accounting

56. Brief Excel Case: Fixed Income Securities (Bonds)3 pages; intermediateAccounting for the sale of fixed income securitiesFixed income valuationEarly retirement of fixed income securitiesThis problem set includes three bond problems. The first requires students to calculate the amount received for bonds issued at a premium and the journal entries needed to record the bond issue. It then asks how results would change if the bonds were issued at a discount.

The second problem requires students to calculate the cost of acquiring those bonds at a later date and to the show the journal entries needed to record the acquisition and retirement of those bonds.

The third problem requires students to compute the amount received for a zero-coupon bond issue, and to then show the journal entries for that bond issue.Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA Financial accountingUse with:Chang Medical Electronics (Chapter 1)

57. Brief Excel Case: Leases4 pages; intermediateAccounting for sales-type leasesAccounting for operating leasesThe effect of discount rates on reported revenuesThis problem set requires students to prepare a table showing annual lease payments and outstanding balances for a manufacturer that leases its construction equipment as sales-type

of 41

capital leases. Students must also show related journal entries and must determine the effect of different discount rates on reported income.Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA Financial accountingUse with:Accounting Irregularities at Xerox (Chapter 2)Leasing Restatements in the Restaurant Industry (Chapter 3)

58. Brief Excel Case: Investments in Derivative Securities3 pages; intermediatePricing conventions for derivative securitiesThis problem requires that students compute the gain or loss from an investment in two derivative securities, one of which trades on the Chicago Mercantile Exchange (CME), and one of which trades on the Chicago Board of Trade (CBOT). The problem is simple, but students learn about fixed-income derivative pricing and about contract specifications. In particular, they learn that a quote of 98.26 for a Eurodollar futures contract does not mean the contract price is $98.26; they learn that the value is 98.26 multiplied by $2,500, or slightly less than $250,000.

They also learn that a quote of 109’112 for a Treasury note futures contract does not mean the contract price is $109.112. Instead, the 112 is a quote in thirty-seconds; specifically 11.25 thirty seconds, so in decimals, the quote is $109.351563. For Treasury futures contracts, the quote is multiplied by $2,000, so the value is slightly more than $200,000.

The purpose of this problem set is to illustrate that it is necessary to learn numerous details to price complex securities.Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA Financial accountingFinancial reporting

59. Brief Excel Case: Defined Benefit Retirement Plans5 pages; intermediateAccounting for defined benefit retirement plansService costsInterest costsCost of changes in actuarial assumptionsThis problem set requires that students compute service costs, interest costs, and the cost of changes into a discount rate. This is a relatively rote calculation but it does help students understand what influences pension liabilities.Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA Financial accountingFinancial reporting

of 41

Financial statement analysisUse with:The Boeing Company: Retiree Benefits, 2008 (Chapter 3)

60. Brief Excel Case: Securitization6 pages; advancedAccounting for securitizationsRetained interestsDiscount ratesAssumed default ratesThis case is both a note and a problem set. It explains the basics of securitization and then asks students to compute a firm’s gain or loss from securitizing receivables and to then record gains or losses as the estimated default rate and discount rate change.Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA Financial accountingFinancial reportingFinancial statement analysisBest use:General Growth Properties: Crises in Securitization (Chapter 2)New Century Financial Corp (Chapter 3)Mitchells & Butlers plc (Chapter 4)Harley-Davidson, Inc. (B): February 2010 (Chapter 5)

61. Brief Excel Case: Business valuation4 pages; intermediateDiscounted cash flow valuationsMarket comparable/market multiple valuations This case requires that students modify market multiple valuations and a discounted cash-flow valuation, and then consider which calculations are the most reliable. The required calculations are quite simple but the exercise, which is based on a highly realistic example, helps students understand that most valuations that are not based on quoted market prices in active markets are highly subjective.Best uses:Undergraduate intermediate accountingFirst-year MBA/Executive MBA Financial accountingFinancial reportingFinancial statement analysisValuationBest uses:Asher Associates: Acquisition Targets (Chapter 6)Sunbelt Beverage Corp: Fair Value Litigation (Chapter 6)

of 41

chapter 1, introductory cases - cengage€¦ · web viewaccounting cycle. journal entries. ... at...

Documents