A422-522 Intermediate Accounting 2

I thought it was an interesting class today.

I didn’t spend any more time today on the review of financial statements.  You should be spending time making sure you have all the financial statement equations memorized.  Also, you should be learning the direct form of presenting cash flows from operating activities.

I reminded the class that by Thursday, Jan. 30, you should read a seven part series on IFRS listed on my blog, as well as reading the SEC proposed roadmap for transitioning to IFRS.  We will be talking about it in class on that day.

I presented a lsit of all items on the right side of the balance sheet.  It represents what is called the capital strucure of the company.  Basically, the capital structure of a company where the money comes from for having purchased the resources available to the company.  The money comes either from having borrowed it (with a few exceptions) or from owner contributions.

Current Liabilities

Accounts & other payables
Accruals (usually for employees)
Services or products owed
Current maturities of long term debt
Total current liabilities

Non-current liabilities

Notes Payable (this is non-current portion only)
Bonds payable (this is non-current portion only)
Services or products owed
Pension liabilities
Preferred stock

*** Note, contingent liabilities frequently exist, but unreported on

*** Note, there is no total for either non-current liabilities or for total liabilities.

Stockholders equity

Contributed capital (common stock + additional paid in capital)
Retained earnings
Accumulated items of other comprehensive income
Treasury stock
Total stockholders equity

Then, I talked about the accounting for contingent liabilities, then we talked about chapter 13, exercise 13.  The discussion could have been unsettling, as there was no “right” answer to report, just a number that is at least $900,000.  The discussion was intended to highlight the current state of affairs where the correct number is not always an accountant’s call.  Ultimately, the number reported is decided by corporate executives after consultation with accountants and lawyers.  This is just the way it is.

This leads, possibly, to circumstances where executives wish to report complete fiction. Reporting fiction is called fraud, and can result in jail time.  Don’t do it.  I recommend always keeping six months of take home pay in the bank, and then resign immediately if an executive insists on “fraud.”

Most situations, however, range somwhere between complete fiction and absolute truth.  It’s a gray area where we say judgment abounds.  Actually, its an area where personal preference abounds.  A corporate executive may prefer a more liberal number and you might prefer a more conservative number.  Personal preferences are not related to moral issues.  You might have to go along with someone else’s personal preference.  If you repeatedly disagree with an employer’s personal preferences, then you might want to get back in the job market and search for a better fit.

Class today went too fast.

The major point of today’s class is that the public’s perception of accounting and accountants matters a great deal. Really.

The fate of accounting standards and auditing will be decided by people who either have very little knowledge of them, or else have much to gain by the demise of either. It is the mark of an educated person to be aware of what is happening.

Stereotypes, which don’t honor the person making the stereotypical judgment and belittle the person being judged, never-the-less, are a fact of life.

You might be interested in two essays at The Summa.  I wrote these as humorous pieces.  However, the first is partly serious–forensic accounting is considered to be sexy by accountants.

• Sexy Accounting–Oxymoron or natural coupling
• No Santa, Tooth Fairy or Sexy Accounting

Now, moving on to IFRS. The first paper for the course is going to be on whether or not the U.S. should get rid of its GAAP in favor of IFRS. My views should be well known to you all. You will want to visit my blog to learn more about it.  You should read, by January 29, the arguments for keeping GAAP.  You should also read the complete copy of the Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards by U.S. Issuers.

Finally, you should have completely memorized the form and structure of all four financial statements.  You need to have complete and immediate recall of all items.

Wow.  The classroom is really full.  Combined enrollment is 58, and there are only 60 seats in the room.  If you come late, you don’t have much option as to where you sit.

This is a very key time in financial accounting and regulation.  The U.S. is very heavy into regulation.  Why?   The policy of the U.S. government is to force companies to act in certain ways.  Actually, the U.S. economy is more heavily regulated than almost any other country.  Since one aspect of capitalism is that companies and individuals have complete freedom in the process of capital allocation, I guess it is reasonable to conclude that the U.S. does not have an environment condusive to capitalism.

I don’t know if you yet have visited CFO.COM to sign up for e-mail accounting alerts, but you should if you haven’t.  A recent e-mail alert pointed to an article in the January edition of the magazine.  Titled Which One When?, it discusses possible issues to look for in 2009.  Please make sure that you read this article.

In going over the syllabus, I pointed out that this course is more than simply studying the details of particular accounting rules, and taking tests over them.  There will be many learning experiences that will help you learn how to apply the accounting rules as well as come to an appreciation for what the rules accomplish.  Consequently, this course is going to be a fair amount of work.

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In class I showed an animated film, Hariold Rosenbaum, Chartered Accountant Extreme.  Chartered accountants are the British/Canadian/Australian/South African equivalent to the U.S. CPA.

The five episodes in the series are:

1. Audit Of Evil (aired December 22, 2005)
2. Depreciation To Death (aired December 29, 2005)
3. The Taxable Trap (aired January 5, 2006)
4. Ledger Lad Liquidation (aired January 12, 2006)
5. Dam: It’s Exploding (aired January 19, 2006)

We’ll have a class discussion on these in Thursday’s class.

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It is so important ot have a framework for remembering where everything goes in the financial statements.  I have relied upon the financial statement equations for my framework.

A = L + SHE

R – CGS – S&A = Operating income

Operating income + int rev – int exp + G – L – income tax expense = NI

Beg Cash ± OA ± IA ± FA = End Cash

Beg SHE ± changes = End SHE

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