• Financial Accounting

    Presenting Topics from Accounting, 24 Edition

    Presented by: Lynn Shuster, Central Penn College

    These are some of the ways I present topics in chapters 1, 2, 3, 4, 6, 7, 8 and 10 from Accounting 24th edition. 

    Blueprint Assignments

    Submitted by: Debbie Luna

    Use the Blueprint assignments as class quizzes which promote discussion and critical thinking.

    Costing Methods

    Submitted by: Marcye Hampton, University of Central Florida

    Visual view of how different costing methods effect on Inventory costs using 2 purchases of apples at two different purchase prices.

    Visual using Lego

    Submitted by: Wanda Wong, Chabot College

    I use Lego to teach inventory flow systems (FIFO, LIFO, and Average Cost). Different color represents different cost. Purchase (adding) legos at the bottom, then FIFO will remove from the top; LIFO will remove from the bottom.

    Cash Flow Statement - Operating Activity Changes from Current Assets and Current Liabilities

    Submitted by Linda Summey, Central Carolina Community College

    When analyzing the changes in current assets and current liabilities in the operating activity section of the Cash Flow Statement (Indirect Method), use this mnemonic: add CLI CAD. Thus add to Net Income the Current Liability Increases and Current Asset Decreases. Then subtract from Net Income the Current Liability Decreases and Current Asset Increases. This is not an original thought and I am not sure who came up with "add CLI CAD".

    Comprehensive Analysis of Firm and Competitor (in Financial Statement Analysis)

    Submitted by Tim Michael, University of Houston Clear Lake

    I assign a firm, and have the students identify its industry and competitor. They then use the spreadsheet template from their financial analysis text to input 5 years of financial data and conduct a full analysis in 3 parts. Part 1 is the set of spreadsheets, which I critique and give back early. Part 2 is a company and industry analysis, including key parameters for that type of industry. Part 3 is a full ratio analysis and critique of the firm's performance in context with their competitor and industry. It helps if your library has access to Key Business Ratios (hard copy or online) and also I rely on RMA eStatement Studies (and hardcopy) to give students some industry numbers for comparison (in addition to the ones the students generate themselves).

    Writing Enhanced Course in Financial Accounting as Part of Required Core

    Submitted by Michael Ulinski, Pace University- Pleasantville

    Students have a parallel writing requirement including short assignments and longer semester projects based on Accounting research topics. Students are required to meet with writing tutors in our writing center and use a writing rubric to improve skills.

    Financial Accounting — Journalizing and Creating Balance Sheets and Income Statements

    Submitted by Brad Van Kalsbeek, University of Sioux Falls

    For my Principles of Accounting I course (financial accounting), we incorporate the game of Monopoly and have students create journal entries and financial statements based upon their game of play. Two students usually make up a team, but each is required to journalize all the transactions and create an income statement and balance sheet. We usually play the game 3 times in a semester, that way the balance sheet grows from each day of play.

    Helping Students Journalize Correctly

    Submitted by Sheila Lapp, Northwest Technical College

    Usually two days of the semester the students play Monopoly. After each roll I have them write down what the journal entry would be for the transaction. I have also used this to give an exam. I would roll the dice and they would journalize the entry. Students find this fun while still learning.

    Teaching Merchandising Accounting for Financial Accounting and Merchandising Accounting

    Submitted by Anna Boulware, St. Charles Community College

    Separate your class into enough teams where there are 6 teams total. Give each Team a table tent with their team # on it. Team 1, Team #2, etc. Give each team 10 Hershey kisses or similar wrapped candy to start with. Provide a list of merchandising transactions where the teams have to "do the transactions as well as journalize them on their own paper. Each team will buy, sell, pay for their purchases and receive payment from their customer(s) (The other teams). When each team has recorded their transactions as well as given up their candy for each transaction, then each team must also create an income statement for their Team. The instructor will write each team's net income on the board and then have them talk about which team showed a profit that was better than the rest...this usually gets a lot of people talking about gross profit, selling prices, etc. Lastly, we talk about the team that still has a lot of candy in their inventory that didn't sell and what are the ramifications of that.

    Tax Issues and Public Revenue

    Submitted by June Hanson, UIU-online

    I post a link to a current federal budget issue. Then I post the link to the federal budget and ask students to go to their state and find out what the ramifications are to their state. I use the ADOT link to illustrate how the American recovery act benefited the AZ federal and state road system through the federal grants. I then post a journal entry to illustrate how record this money and the actual object codes. I ask the students to follow the same format. I can tailor this to either a tax class or a government accounting class. This is the additional link I use: http://money.cnn.com/2011/01/21/news/economy/spending_taxes_debt/index.htm.

    Par Value vs. Trading Value of Common Stock

    Submitted by Rich Mandau, Piedmont Technical College

    I use a large old coin (or picture of an old coin) to illustrate the par value concept. I say the state value on this Silver dollar coin is one dollar. This is similar to the par value of stock. If I took the coin to a coin shop they would pay me $10.00 for it because of its age and condition. Its stated value is still one dollar, but its traded value over par is more.

    Dollar Value LIFO

    Submitted by Myrtle Clark, University of Kentucky

    The problem is a multi-period mini-case. Students will see how the dollar-value layers are added from one year to the next. They will also see what happens when layers are liquidated.

    Follow the directions listed in the Dollar Value LIFO Exercise handout.

    Many students have trouble understanding dollar-value LIFO. This exercise is designed to lead students through a simple dollar-value LIFO problem so that they can clearly see what the dollar-value layers mean. The exercise is set up so that students can see the logic of the steps involved. It is then useful as a guide when they do homework problems and as a study aid when getting ready for their exam.

    Additional Materials

    Dollar Value LIFO Exercise handout

    Introduction to Accounting for Inventory

    Submitted by Myrtle Clark, University of Kentucky

    An introduction to the topic of inventories should include the following:

    1. Description of kinds of inventory:
      • Retail and wholesale businesses:
        • Merchandise inventory.
         
      • Manufacturing businesses:
        • Raw materials.
        • Work in process.
        • Finished goods.
         
       
    2. Inventory systems:
      • Periodic.
      • Perpetual.
       
    3. What is included in inventory cost?
      • Items to include.
      • What constitutes "cost?"
      • Effect of purchase discounts.
      • Effect of returns and allowances.
       
    4. Inventory valuation methods:
      • Specific identification.
      • Average cost method.
      • FIFO.
      • LIFO.
       

    Presenting this information in the above order is logical, and students find that the development of concepts and applications falls into place and is easily grasped.

    I use a series of exercises designed to help students think about certain topics in such a way that they are able to participate in the development of ideas, concepts, and applications. These exercises stress concept development, particularly measurement and reporting issues (not journal entries), as the focus of accounting. Journal entries are made, but the material is presented in a way that the journal entries flow logically from ideas rather than being goals in and of themselves. I also stress the output from the journal entry process, that is, the impact on financial reporting.

    Inventory Valuation: LCM

    Submitted by Myrtle Clark, University of Kentucky

    When teaching the concept of LCM, the following outline is helpful:

    1. Explain that:
      Decline in value = Loss of utility
      Loss = Decline below cost
      The loss must be recognized in the accounting records
    2. The procedure to recognize this loss is called LCM
    3. Market = Replacement cost (typically): Subject to ceiling and floor. Market is between
      ceiling and floor.
    4. Floor = Net realizable value (NRV): NRV = Selling price less predictable cost to completeand dispose. Product cannot be worth more than can be realized from sale.
    5. Ceiling = NRV – Normal profit: Deters serious understatement at amounts below normal
      replacement cost.

    The procedure is explained as follows—first in outline form and then as a flowchart:

    • Step 1: Determine cost:
      For example, FIFO, LIFO, weighted average.
    • Step 2: Determine market:
      • Calculate RC (replacement cost).
      • Calculate the ceiling (NRV).
      • Calculate the floor (NRV – Normal profit).
      • If RC > ceiling, Market = NRV.
      • If RC < floor, Market = NRV – Normal profit.
      • Else, Market = RC.
       
    • Step 3: Compare market to cost.
      Select the smaller of the two.

    3099 lcm

    When teaching the concept of LCM, providing students with an outline gives them a road map so that they know where they are going and why.

    Inventory Valuation: LCM Application

    The following exercise emphasizes the concepts and application of LCM to value inventory. Students work through a simple case designed to accomplish the teaching goals (student learning objectives) that follow.

    How to Use the Exercise

    This exercise is a logical follow-up to the discussion of LCM. I outline the LCM procedure and show the students a flowchart of the LCM procedure.

    The exercise stresses the following:

    1. Cost is determined first by an inventory costing procedure.
    2. How to calculate the LCM floor and ceiling.
    3. How to determine market.
    4. How to apply LCM when cost and market are known.

    Pass out copies of the exercise to the students. Sufficient space is provided in the exercise for students to write their answers. The students work on the exercise in small groups. Go over the exercise with the class using PowerPoint (overheads can also be used effectively).

    Follow the information outlined in the handout: LCM Exercise.

    Rationale

    Student Learning Objectives

    1. Know how to determine "market" for LCM:
      1. Calculate:
        1. The ceiling, NRV.
        2. The floor, NRV - Normal profit.
        3. Select the appropriate value for market.
         
      2. Calculate the LCM inventory value assuming LCM is applied on:
        1. An item-by-item basis.
        2. An aggregate basis.
         
       
    2. Additional Materials

      LCM Exercise handout

     

    Completed-Contract Method: Application of Approach

    Submitted by Myrtle Clark, University of Kentucky

    The following exercise helps students understand when and how to apply the completed-contract method of accounting for long-term construction-type contracts. Students work through a simple case designed to accomplish the teaching goals (student learning objectives) that follow.

    Student Learning Objectives

    Understand that uncertainty with regard to the amount and timing of future cash flows implies that accountants should use the completed-contract method of accounting for long-term construction-type contracts.

    1. Calculate the total profit on these contracts and when profit is recognized.
    2. Understand how costs accumulate, what amounts should be reported in the balance sheet each year, and which accumulated amounts are considered assets and liabilities at the balance sheet date.
    3. Know how to make journal entries to record transactions and events so that the accounts can accumulate the required balance sheet and income statement amounts.

    How to Use the Exercise

    This exercise is a logical follow-up to the discussion of concepts related to accounting for long-term construction-type contracts. I use it following the concepts exercise on when to use the percentage-of-completion method.

    Pass out copies of the exercise (Completed-Contract Method) to the students. Sufficient space is provided in the exercise for students to write their answers. Students work on the exercise in small groups. The exercise is formatted so that the students should be able to easily determine how to calculate the values to be reported in financial statements.

    Students work on valuation and financial statement amounts first. These amounts are discussed in class. Students then understand the concepts and can make an easy transition to the journal entry phase. Journal entries can be done in class or as a homework exercise.

    Rationale

    The reasons this exercise is used and is not an exercise on how to apply the percentage-of-completion method are threefold:

    1. If the percentage-of-completion method is not appropriate, the completed- contract method is used. This idea is learned in the concepts exercise.
    2. The completed-contract method is similar to accounting concepts and applications, which the student already knows (e.g., cost accounting and point of sale recognition of revenues and cost of sales). It is therefore a logical first step in learning how to accumulate cost and the need to defer profit.
    3. Once the student has learned the completed-contract approach, it is easy to make the transition to learning the percentage-of-completion method. Cost accumulation is the same. We simply add recognition of profit during construction.

    Additional Materials

    Completed-Contract Method Exercise handout

    Revenue Recognition: Production vs. Completion of Production

    Submitted by Myrtle Clark, University of Kentucky

    Description

    The economist’s view of the revenue-earnings process

    An economist would say that revenue is earned as the product is being produced. Production adds value, value added increases wealth, and wealth increases from non-owner sources increases profits.

    This idea is consistent with the way people view their wages. A working person considers that wages are earned while he or she works. For example, it may take three days to make a widget. After the first day, the widget maker has earned a full day's wages. However, the widget company has not realized anything from the sale of the widget because the widget isn't ready to sell.

    Nevertheless, the economist would argue that the eventual receipt of assets is being earned while the product is being made ready for sale. For long-term construction-type contracts, the production process may span a number of years. Each year, part of the total profit is earned as progress is made toward completion of the project.

    The accountant's view of the revenue-earnings process

    The accountant views the revenue recognition process from a realization perspective. Certainty plays a big role in when revenue is recognized. The more certain the accountant is regarding the eventual realization of revenue from the sale of the product, the more likely the accountant is to recognize revenue and profits early.

    Because long-term construction-type contracts span a long period of time, there may be too much uncertainty to recognize profit until the job is completed and realization is assured. On the other hand, if there is enough certainty regarding realization, the accountant will recognize profit as it is earned, that is, during production (the economist's view). Hence, accountants employ two approaches to account for long-term construction-type contracts:

    1. Percentage of completion—profit is recognized during production.
    2. Completed contract—profit is recognized when production is complete and the exchange takes place (like point of sale).

    Selection of which method to use requires an analysis of certainty with regard to the amount and timing of future cash flows.

    Rationale

    It is helpful to teach the topic of accounting for long-term construction-type contracts in five phases:

    • Phase 1: Introduce the concepts in terms of the analogy to economics given above. Discuss the percentage-of-completion method versus the completed-contract method in conceptual terms.
    • Phase 2:Discuss when to apply the percentage-of-completion method. Ask students to do the Percentage-of-Completion Concepts Exercise.
    • Phase 3: Describe the completed-contract approach. Ask students to do the Completed-Contract Application Exercise.
    • Phase 4: Describe how application of the percentage-of-completion method is similar to and different from the completed-contract approach. Ask students to do the Percentage-of-Completion Application Exercise.
    • Phase 5: Discuss what happens when the terms of the contract are changed and when a loss is anticipated on the contract. Ask students to do the Long-Term Construction-Type Projects Anticipated Losses Exercise.
     

    Percentage of Completion: Application of Approach

    Submitted by Myrtle Clark, University of Kentucky

    Description

    The following exercise helps students understand how to apply the basic accounting concepts associated with accounting for long-term construction-type contracts when the percentage-of-completion method is used.

    Students work through a simple case designed to accomplish the teaching goals (student learning objectives) that follow.

    How to Use the Exercise

    This exercise is a logical follow-up to the Completed-Contract Method Exercise. The student has just been exposed to the rationale and cost accumulation approach used to implement the completed-contract approach. Because this exercise uses a variation of the same case used to learn the completed-contract method, the student is able to make an easy transition to the percentage-of-completion method.

    Pass out copies of the exercise (see Percentage-of-Completion Exercise handout) to the students. Sufficient space is provided in the exercise for students to write their answers. Students work on the exercise in small groups. The exercise is formatted so that the students should be able to easily determine how to calculate the values to be reported in financial statements. First, the students work on valuation and financial reporting. These valuation and reporting issues are discussed in class. Students then understand the measurement and reporting concepts and can make an easy transition to the journal entry phase of the exercise. Journal entries can be done in class or as a homework exercise.

    Student Learning Objectives

    1. Understand that certainty with regard to expected amounts and timing of future cash flows implies that accountants should use the percentage-of-completion method of accounting for long-term construction-type contracts.
    2. Know that the total profit is the same regardless of the method selected (completed-contract method or percentage-of-completion method). The only income statement difference is the timing for profit recognition.
    3. Understand that cost accumulation is the same as under the completed-contract method.
    4. Know how and why balance sheet amounts differ from the completed-contract method.
    5. Make journal entries to record transactions and events so that the accounts can accumulate the required balance sheet and income statement amounts.

    Additional Materials

    Percentage-of-Completion Exercise handout

    Percentage of Completion: When to Use the Method

    Submitted by Myrtle Clark, University of Kentucky

    Description

    The percentage-of-completion method recognizes profit during production. Percentage of completion is appropriate when:

    1. A high level of certainty exists regarding expected cash flows.
    2. A reliable basis exists for determining the percentage completed at the end of the accounting period.

    The following exercise helps students understand the accounting concepts associated with the use of the percentage-of-completion method.

    How to Use the Exercise

    1. Begin by briefly discussing the use of the percentage-of-completion method versus the completed-contract method:
      1. Describe the goal of each method.
      2. Explain why there are two methods.
      3. Explain when to use each method.
       
    2. Pass out copies of the exercise (see Percentage-of-Completion Concepts Exercise handout) to the students. Tell students that the eight cases are independent of each other and they are to concentrate only on the simple set of facts presented for each case. The students work in small groups to decide in which of the eight cases it would be appropriate to use the percentage-of-completion method.
    3. Go over the exercise with the class allowing different groups to present their views.

    Student Learning Objective

    Understand when it is appropriate to use the percentage-of-completion method of accounting for long-term construction-type contracts.

    By thinking about a number of different, independent cases, students will see for themselves when and why it is appropriate to use the percentage-of-completion method.

    Additional Materials

    Percentage-of-Completion Concepts Exercise handout

    Return Privileges: When to Defer Revenue

    Submitted by Myrtle Clark, University of Kentucky

    Description

    The following exercise helps students understand the accounting concepts associated with sales for which the right to return exists. It also provides students with material that is useful when they begin to study for their exam.

    How to Use the Exercise

    1. Begin by briefly discussing why return privileges is an accounting issue: The seller cannot control the "fickle customer." Lack of control creates uncertainty. Uncertainty implies that the sale may not be realized. 3099 clark 9a
    2. Outline the accounting requirements of SFAS No. 48. The following outline gives a concise overview of these requirements: 3099 clark 9b
    3. Pass out copies of the exercise (Return Privileges Concepts Exercise handout) to the students. Ask students to look at the list of independent situations and decide whether each situation implies that there is too much uncertainty for revenue to be recognized. That is, for each case, independently of all others, should "Gross profit be deferred? Yes or no." Students work on the exercise in small groups.
    4. Go over the exercise with the class using PowerPoint.

    Student Learning Objective

    1. Know when the existence of return privileges implies that the accountant should defer recognition of revenue.
    2. Understand why the existence of return privileges may result in deferred revenue.

    By thinking through the examples in the exercise, students will see for themselves that uncertainty regarding realization of revenue is the key to understanding when and why revenue is deferred when accounting for sales with return privileges.

    Additional Materials

    Return Privileges Concepts Exercise handout

    Return Privileges: Application of Concepts

    Submitted by Myrtle Clark, University of Kentucky

    Description

    The following exercise helps students understand how to apply the generally accepted accounting principles, or GAAP (SFAS No. 48), for sales when the right to return exists. It also provides students with material that is useful when they begin to study for their exam.

    Students work through a simple case designed to accomplish the teaching goals (student learning objectives) that follow.

    How to Use the Exercise

    This exercise is a logical follow-up to the discussion of concepts related to the issue of accounting for sales when the right to return exists. It naturally follows the Return Privileges Concepts Exercise and uses a case with differing assumptions similar to those that were used to develop and understand the concepts. This provides consistency to the two discussions and thereby better assists the learning process.

    1. Pass out copies of the exercise (Return Privileges Application Example handout) to the students. Sufficient space is provided in the exercise for students to write their answers. Students work on the exercise in small groups. The exercise is designed to provide structure to the student's thought process. Students first concentrate on measurement and then on implementing the measurement into the accounting process. In this way, journal entries become a logical extension (or means) of the measurement and reporting process.
    2. Go over the exercise with the class using PowerPoint. The PowerPoint presentation adds the dimension of T accounts to aid the discovery process.

    Student Learning Objectives

    1. Understand that when return privileges are insignificant, their existence is ignored. This implies that the sale is recorded in the usual manner.
    2. Know how to handle significant return privileges when the amount to be returned can be estimated and when it cannot.
    3. Understand that deferral of gross profit means that both revenue and cost of sales must be adjusted, and how.

    Additional Materials

    Return Privileges Application Example handout

    Uncollectible Accounts: Concepts and Approaches

    Submitted by Myrtle Clark, University of Kentucky

    Description

    The following exercise helps students understand the accounting concepts associated with accounting for bad debts. It also provides students with material that is useful when they begin to study for their exam.

    Student Learning Objectives

    1. Describe the two approaches to recognition of uncollectible accounts expense:
      1. Direct write-off.
      2. Allowance method.
       
    2. Explain the timing for recognition of each.
    3. Identify which approach is an income statement approach and which is a balance sheet approach.
    4. Give examples of situations that imply a balance sheet measurement or an income statement measurement approach.
    5. Give examples of situations that provide better balance sheet measures (net realizable value).
    6. Know which example(s) is (are) based on the matching concept.
    7. Know which example(s) is (are) consistent with the conceptual framework's definition of income

    How to Use the Exercise

    1. Begin by briefly discussing the two approaches in theoretical terms.
    2. Pass out copies of the exercise (Uncollectible Accounts Concepts Exercise handout) to the students. Sufficient space is provided in the exercise for students to write their answers. Students work on the exercise in small groups.
    3. Go over the exercise with the class using PowerPoint.

    Rationale

    By thinking through the examples given, the students will see for themselves when and why each approach makes a difference in terms of income statement and/or balance sheet measurement and reporting. They will also be challenged to think in terms of which approach provides for better recognition and measurement of uncollectible accounts.

    Additional Materials

    Uncollectible Accounts Concepts Exercise handout

    Uncollectible Accounts: Applying the Allowance Method

    Submitted by Myrtle Clark, University of Kentucky

    Description

    The following exercise helps students understand how to apply the accounting concepts associated with accounting for bad debts when a company uses the allowance method. It also provides students with material that is useful when they begin to study for their exam. Students work through a simple case that accomplishes the teaching goals (student learning objectives) that follow. How to Use the Exercise
      This exercise is a logical follow-up to the discussion of concepts related to accounting for bad debts. It naturally follows the Uncollectible Accounts Concepts Exercise and uses the same examples that were used to develop the concepts. This provides consistency to the two discussions and thereby better assists the learning process.

       

      1. Pass out copies of the exercise (Uncollectible Accounts Application Exercise handout) to the students. Sufficient space is provided in the exercise for students to write their answers. Students work on the exercise in small groups. The exercise is designed to provide structure to the student's thought process. The student concentrates first on measurement, then on implementing the measurement into the accounting cycle. This approach emphasizes measurement and reporting objectives and de-emphasizes journal entries. The journal entry becomes a logical extension of the measurement and reporting process rather than a goal in and of itself.
      2. Go over the exercise with the class using PowerPoint, which adds the dimension of use of T accounts to aid the discovery process.

      Student Learning Objectives

      1. Calculate periodic bad debt expense assuming:
        1. An income statement approach.
        2. Balance sheet approaches:
          1. Based on the balance in accounts receivable.
          2. Using aging of accounts receivable.
          1. Know how to age accounts receivable.
          2. Understand how the different approaches have different effects on the income statement due to differences in expense measures, and also how the measurement of "net realizable value" differs under different balance sheet measurement approaches.
          3. Know how to make journal entries to record bad debt expense.
           
        3. Additional Materials

          Uncollectible Accounts Application Exercise handout

         
     

    Long-Term Construction-Type Contracts: Reporting Anticipated Losses

    Submitted by Myrtle Clark, University of Kentucky

    Description

    The following exercise helps students understand how to report anticipated losses on long-term construction-type contracts under both the completed- contract method and the percentage-of-completion method.

    Students work through a simple case designed to accomplish the teaching goals (student learning objectives) that follow.

    Student Learning Objectives

    Understand how to account for anticipated losses when:

    • The percentage-of-completion method is used to account for long-term construction-type contracts.
    • The completed-contract method is used to account for long-term construction-type contracts.

    How to Use the Exercise

    Pass out copies of the exercise (Long-Term Construction-Type Projects Anticipated Losses Exercise handout) to the students. Sufficient space is provided in the exercise for students to write their answers. Students work on the exercise in small groups. The exercise is formatted so that the students may easily determine how to calculate the values to be reported in financial statements.

    Rationale

    This exercise is a logical extension to the discussion of accounting for long-term construction-type contracts in general. It uses a variation of the same case in the Completed-Contract Application Exercise and the Percentage-of-Completion Application Exercise. As a result, the student finds the exercise easy to follow and makes a natural transition from the simpler "anticipated profit" situation to the more complex topic of loss anticipation.

    Additional Materials

    Long-Term Construction-Type Projects Anticipated Losses Exercise handout

    Inventory Methods

    Submitted by Florence McGovern, Bergen Community College

    Description

    Ask the students to describe a stock mutual fund to provide for the possibility that some may not be familiar with what it is. It is important that mention be made of the fact that the market value of the shares vary according to the date purchased. I also bring up dollar cost averaging so that the students can understand how that approach may benefit them and it piques their interest when they can relate accounting to their personal financial situation. Then present a simple example of holding shares of a stock mutual fund acquired at various prices, as per below:

      Shares Cost/Share Total Cost
    5/1/X7 100 $20 $2,000
    6/15/X7 10 25 250
    7/30/X7 40 30 1,200
    Total Shares Available 150   $3,450
    Shares Sold 100 ?  
    Ending Shares 50 ?  

    ASK: Assume that you sold 100 shares of the stock in December 2007 at the market price of $35/share? What is the gain you need to report on your tax return?

    Usually students respond first that you need to take an average, $3,450/150 = $23/share x 100 shares = $2,300. The gain would be $1,200 ($3,500 - $2,300); an option under IRS rules.

    ASK: To minimize your taxable gain, which shares would you like to consider as sold?

    You may need to remind students that a higher cost is needed to obtain a lower gain. We would have to specifically identify the shares we want to sell as the ones with the higher costs; 40 shares @ $30, 10 shares at $25 and then the remaining 50 @ $20 = $1,200+$250+$1,000=$2,450. The gain using specific identification would be $1,050 ($3,500-$2,450) if you specifically identify in advance of the sale which shares are to be sold.

    Discuss how the specific ID method reflects LIFO in this case; emphasize the lowest gross profit result in times of inflation.

    ASK: Assume you have a substantial loss this year and want to maximize your gain on this transaction. Which shares would you want to include as the cost of the 100 shares sold?

    The 100 shares purchased at $20 apiece, a cost of $2,000 would result in a gain of $1,500 ($3,500-$2,000). You can select this method also under IRS guidelines; the FIFO method.

    SUMMARIZE: Return to each method and verify the ending inventory cost by extending each quantity by the specific cost level and then summing the amounts. Summarize the four inventory costing methods showing the impact on the student as an individual taxpayer and the advantages and disadvantages of each.

    Rationale

    Relate the inventory costing methods to a personal financial situation the students may encounter. Reinforce the methods of inventory costing. Compare the impact on net income of the various methods of inventory costing and the advantages and disadvantages of each.

    Illustration of Cost of Goods Sold - Perpetual vs. Periodic Systems

    Submitted by Florence McGovern, Bergen Community College

    Description

    TASK: To compute the amount of money the student spent over the weekend.

    QUESTION: If you are a PERPETUAL type of person, how could you compute the amount of money you spent over the weekend?

    ANSWER: You would want to constantly monitor your spending and know the amount spent at any point during the weekend. Every time you took money out of your wallet you might want to record it using pencil and paper.

    At the end of the weekend the paper might show the following:

    • Movies = $20
    • Popcorn & Soda = 12
    • Dinner = 50
    • Total = $82

    QUESTION: What is the advantage and disadvantage of this?
    ADVANTAGE: Know how much is spent at any point in time.
    DISADVANTAGE: Constant record keeping must be performed.

    TASK: To compute the amount of money the student spent over the weekend.

    ASSUME: You are a PERIODIC type of person, how could you compute the amount of money you spent over the weekend?

    What information would you need to know to calculate the amount spent (used up) at the end of the weekend?

    ANSWER: The beginning and ending amounts of cash would have to be known. In addition, if there were any additions to the cash during the weekend, this would also have to be known. Illustrate as per below:

    Beginning of the weekend, cash balance $10
    + Paycheck received on Saturday $100
    = Cash available to be spent this weekend $110
    Amount of cash in your wallet Sun. evening ($28)
    = Cost of the Weekend $82

    Rationale

    Students can relate to this situation personally. It's a simple way to illustrate the difference between the two systems using the calculation of how much money they spent over the weekend.

    True Interest Rate for Leased Cars Compared to Purchase

    Submitted by John Mills, University of Nevada - Reno

    Description

    I have developed a project that students seem to find enjoyable and can sink their teeth into. The project requires that a student(s) pick up a copy of The Wall Street Journal, find a car lease ad, and determine how much cash will ultimately be paid if the car is purchased at the end of the lease. Included in this exercise is the determination of the actual interest rate the customer is paying. The ad only gives the monthly payments, not the actual interest rate the company charges. While one student(s) does this, another student(s) goes to an auto dealer of the same car as the leased car, obtains the price of the car, and the monthly payment (auto dealers also do not reveal the interest rate). Then the class can discuss which is the better deal: the leased car or the purchase of a new car. Actual interest rates usually shock some students.

    Rationale

    Many texts provide a brief discussion of the benefits of leasing versus the purchasing of assets, but I have never seen a good illustration of the cost differentials of each method. In addition to providing an understanding of leases, this exercise also gives students a better understanding of the time value money concept.

    Categorizing Transactions for Statement of Cash Flows

    Submitted by John Mills, University of Nevada - Reno

    Description

    The class should realize that the income statement reflects changes in the operating section of the balance sheet, that is, the current assets and current liabilities. Thus, the operating section of the SCF represents both the income statement and the current asset section of the balance sheet. How do you keep the company going on a long-term basis? You buy and sell assets; therefore, the remaining assets on the balance sheet reflect an investing activity. Where do you get the funds for the operating and investing activities? These funds come from issuing either long-term debt or equity, that results in a financing activity. At this point, a simple example will illustrate this concept.

    Ask the students to classify the following items as (a) operating activities added to net income, (b) operating activities deducted from net income, (c) investing activities, (d) financing activities, and (e) significant noncash investing and financing activities.

    1. Purchase of equipment.
    2. Redemption of bonds.
    3. Sale of building.
    4. Depreciation.
    5. Exchange of equipment for furniture.
    6. Issuance of capital stock.
    7. Amortization of intangible asset.
    8. Purchase of treasury stock.
    9. Issuance of bonds for land.
    10. Payment of dividends
    11. Pension expense exceeds amount funded.

    Answers

    1. Equipment is a long-term asset and therefore is an investing activity.
    2. Bonds are on the liability side of the balance sheet and therefore are a financing activity.
    3. The sale of a building represents disposing of a long-term asset and therefore is an investing activity.
    4. Many students automatically associate depreciation with fixed assets. It is always necessary to remind them of the difference between depreciation and accumulated depreciation. Depreciation goes on the income statement but does not represent any cash flow out; therefore, since income is associated with the operating section of the SCF and is subtracted, it must be added back to the operating section.
    5. Make sure students realize that no cash has been exchanged.
    6. Any issuance of stock is a financing activity.
    7. Again, make students realize that this is an income statement activity (expense) and therefore goes into the operating section of the SCF, but since there is no cash, it is added.
    8. Any transactions dealing with debt or equity goes into the financing section of the SCF.
    9. No cash involved.
    10. Stress that the payment of dividends reduces equity and therefore goes into the financing section of the SCF.

    Pension expense goes in the income statement making it an operating activity. Since pension expense exceeds the actual cash, it is subtracted.

    Rationale

    When students study the statement of cash flows (SCF), they realize that all yearly transactions must be classified into the three categories of operating, investing, and financing cash flows. Unfortunately, most students memorize the specific transactions and do not think in conceptual terms. The key to a better understanding of the SCF is to make students realize the relationship between the balance sheet and the SCF and the income statement. Just as the SCF has three sections, the balance sheet can also be divided into three equivalent sections.

    LIFO vs. FIFO

    Submitted by Robbie Sheffy, Tarrant County College District Fort Worth, TX

    Description

    For FIFO, you demonstrate that each purchase invoice is filed in order as it comes in (using the file folder), then when an item is sold, the invoice removed from the file folder is the first one in the folder (queue based). For LIFO, you demonstrate that each invoice is placed on the spindle as it comes in so when an item is sold, the last invoice is removed from the spindle to the sold file (stack based).

    Rationale

    Many students are visual learners; this is a concrete example of the difference between queue based and stack based inventory methods and it emphasizes that we are allocating costs based on purchase invoices not on what is happening with the actual physical product.

    Additional Materials

    • 3 sheets of paper, each in a different color. (Each sheet of paper represents a purchase invoice. )
    • 1 file folder
    • 1 spindle — this can be something as simple as a block of wood with a nail through it.
     

    Financial Analysis

    Submitted by Lauren Smith, Front Range Community College

    Description

    I have used several different approaches with this depending on class size; however the concept is the same. Students analyze the financial statements of a company using financial ratios in their accounting textbook. The first year I did this, I had students send for annual reports and 10-Ks. Now with that information easily available on the internet, students obtain the information directly from company websites and/or Edgar, etc. I also have the students do a class presentation on their analysis findings.

    In addition, I have them do five years of analysis to give them a clear picture of trends. I also have them compare the ratios to a major competitor of that particular company. Last fall, I had a very small class, so I broke students into groups and all students analyzed the same company.

    I provide students with an excel template for their analysis; this helps them see more clearly what they need to accomplish and eliminates the hazard of them worrying too much about cranking out the numbers so that they can spend their time analyzing the outcomes and still complete the project on time!

    Rationale

    We start introducing ratios in Accounting I, however I don't think students understand how they are really used until they do this project in Accounting II -- they are able to analyze all of the ratios together.

    Cost Assigned to Ending Inventory Using Perpetual LIFO

    Submitted by Leslie S. Thysell, John Tyler Community College

    Description

    This method consists of two steps. The first step isolates unsold units from those that are sold. The second step applies cost to the unsold units to determine the answer. Students are provided a grid at first to arrange the data and compute the answer. Most quickly abandon the grid as the technique is simple and they can do it without it. The advantage of this method is that all the units in the appropriate group are identified before any dollar amounts are introduced. The following are examples based on exercises from the Ninth Edition of Wild and Reeve's Financial & Managerial Accounting.

    Rationale

    Beginning students often make arithmetic errors when computing the cost assigned to ending merchandise inventory using the perpetual LIFO cost assumption. This alternate method can be used to verify an answer computed by more traditional methods. Or, it can be used for the only calculation when all that is required is the calculation of the cost assigned to ending units using perpetual LIFO. (Many students find this method less complicated and less time consuming then the method provided in the current text material that I am using.)

    Additional Materials

    Examples 1 and 2

    How to Make Percentage of Completion Simple

    Submitted by Linda Whitten, San Francisco State University

    Description

    I added a few lines to the spreadsheet and found that it seems to clarify student's thinking on this topic. This is so easy that maybe you already use this procedure. My schedule includes the following lines:

    Contract price
    + Prior periods’ costs to date
    + Current period’s costs
    = Costs to date
    + Est. costs to complete
    = Est. total costs
    = Est. gross profit
    x Percentage completed to date
    = Gross profit to recognize to date
    − Total gross profit recognized in prior periods
    = Gross profit to be recognized this period

    Rationale

    Students often find preparing a schedule for the percentage-of-completion method difficult. I added a few lines to the spreadsheet and found that virtually all the students could do the schedule successfully on the exam; since it seems to clarify their thinking (we do these steps anyway).