This Primer has been written principally for a one-semester, user-oriented course in financial accounting, using the case method of instruction, and is designed to provide an introductory level of instruction to students who are studying financial accounting for the first time. Its purpose is to provide a user oriented approach to accounting concepts and techniques to help prepare students for work in an environment where understanding financial accounting is important to success. Click here to see why you should use the Primer.
Each chapter is designed to be covered in a one to two weeks, ideally over two or three classes of 1.5 to 2 hours each. Clearly, a great deal depends on the amount of depth that the instructor wishes to pursue and/or how quickly or slowly he or she wishes to move through the material. The Primer also has been used in a half-semester course on financial accounting for MBA students. Here, each chapter was covered in one to two class meetings of 2 hours each.
Students completing the Primer successfully will be knowledgeable about both the uses and the limitations of financial accounting from the perspectives of managers, analysts, shareholders, creditors, governmental bodies, and regulatory agencies. To accomplish this, the Primer places minimal emphasis on the technical aspects of preparing accounting information, covering only those technical matters that are essential to understanding the information. Most of the attention in the Primer is focused on the meaning and utility of the information to managers and other users. Exhibit 1 lists the Primer’s specific learning objectives:
Upon completing this Primer, a student should know:
- The difference between accrual accounting and cash flows
- The importance of a cash budget
- The nature of the information on the income statement, the balance sheet, and the statement of cash flows
- The meaning of some of the more frequently-used terms on a set of financial statements, such as depreciation, prepaid expenses, and allowances for doubtful accounts
- The nature of accounting for inventories
- The nature of accounting for bonds
- The nature of accounting for shareholders' equity
- The role of profit as a source of financing
- Some of the important financing considerations in organizations
- The distinction between accounting issues and financial management issues
- How ratios can be used to analyze an organization's financial statements
- Some other techniques than can be used to analyze financial statements to determine an organization's financial viability
WHY USE THIS PRIMER?
This is a non-traditional text in five important respects: user orientation, interactive learning process, length, organizational focus, and emphasis on the case method of instruction.
While it would be nice if a user orientation could be achieved without working through some of the details of accounting, that is not the goal. However, accounting details are discussed, only to the extent they are needed to understand the concepts and techniques used in most organizations. The term used in most is key in this regard. In general, the text does not cover exceptions to the rules or some of the possible variations on the traditional theme. Of course, the instructor can discuss these matters in class if he or she wishes to do so, supplementing the text, where necessary, with additional readings or exercises.
Interactive Learning Process
The Primer includes problems and mini-tests within the chapters. The idea is to shorten the “feedback loops” in the learning process. Rather than waiting until the end of a chapter to answer questions or analyze problems, students are requested to do so immediately following the discussion of a particular topic. Sometimes, if the discussion of a topic is lengthy, there are problems and mini-tests during the discussion. Despite this emphasis, some students may be tempted to shortcut this process, especially toward the end of the course. The instructor may need to remind the class at regular intervals of the importance of continuing the interactive learning process.
The Primer is only nine chapters long. As such, it is ideally suited for a half-semester graduate-level course where, on average, a single chapter can be covered in one to two class sessions. Most of the chapters contain enough substance, however, that each could be covered at a more reasonable pace over two to three class sessions, and thus the Primer could be used rather easily in a one-semester course. If this approach is followed, students would have more time to digest the material in each chapter, and the instructor would be able to supplement the text with additional readings.
Many texts use manufacturing examples to illustrate accounting concepts and principles. This Primer uses both manufacturing and non-manufacturing examples. Many examples are of service organizations. As students will see, most accounting concepts are universal; thus, the type of organization used to illustrate a point is relatively unimportant. Service and nonprofit organizations are used as examples in recognition of their growing importance in the economy, and to help students see the universal applicability of the concepts. Moreover, most examples have been chosen with the hope that they will “resonate” with the student, as an organization with which he/she has some familiarity. The same is true for the practice cases at the end of the chapters.
Case Method of Instruction
Increasingly, accounting educators are recognizing the importance of using the case method in the teaching of accounting. Its value is that it puts students in the middle of the action, and requires them to be analytical—to apply principles rather than just memorize them. As such, it prepares students for work in a world where analysis, judgment, and attention to nuances increasingly are required for success.
The practice cases are all quite short, and might even be thought of as extended problems. The distinction between an extended problem and a case is not always clear, but a case usually is considered to be a situation where there is no right answer. With most of the cases, there are right answers, although as students will see, there is sometimes more room for judgment than they might initially imagine. Thus, what may seem like a problem frequently has some of the flavor of a more traditional case.
Use of Microcomputers
Given the technology available in the workplace today, students need to become proficient in the use of microcomputers in general, and spreadsheet packages in particular. To this end, several practice cases are good candidates for a relatively simple spreadsheet analysis, and students should be encouraged to use spreadsheet software in preparing their analyses of those cases.
ORGANIZATION OF THE PRIMER
The nine chapters are discussed briefly below.
Chapter 1. Introduction to Financial Accounting
This chapter provides a very brief introduction to financial accounting. It describes the balance sheet, some specific assets and liabilities, and discusses three of the nine fundamental accounting concepts. The chapter also provides some guidance to students in undertaking their first analysis of a set of financial statements. It concludes with a discussion of the operating and financing cycles.
Chapter 2. The Accounting System and Transaction Analysis
The financial accounting process moves in a regular rhythm, called the “accounting cycle.” This chapter discusses that cycle, and also devotes some attention to the technique of “transaction analysis,” i.e. the analysis of economic events that have an impact on an organization’s financial statements, and a determination of the accounting entries associated with them. The chapter also discusses three more of the fundamental accounting concepts, and introduces several new techniques and concepts.
Chapter 3. The Income Statement
In the first two chapters, the focus is on preparing a balance sheet, either via expanding upon the basic accounting equation of Assets = Liabilities + Equity, or via the use of transactions. With knowledge of the techniques for analyzing transactions presented in Chapter 2, students are ready to prepare an income statement. The purpose of this chapter is to discuss the income statement, and to provide some guidance in preparing one. By the time they have completed this chapter, students should be ready to analyze some relatively simple economic events and do the accounting needed to prepare a balance sheet and income statement. The chapter also discusses the last three of the fundamental accounting concepts.
Chapter 4. Some Additional Concepts and Accounts
This chapter discusses several accounts and concepts that, for pedagogical purposes, were omitted in the first three chapters. These topics include prepaid expenses, unearned revenue, accumulated depreciation, bad debts, extraordinary items, dividends, and accelerated depreciation. With the basic conceptual understanding developed in the first three chapters, students should have a relatively easy time seeing how these new topics fit into an accounting system.
Chapter 5. Inventories and Fixed Assets
This chapter discusses the various kinds of inventories that can exist in an entity, placing most of the emphasis on manufacturing inventories, and demonstrating how a company’s cost of goods sold can be calculated for a manufacturing company. It also discusses different methods for inventory evaluation, leases, and several other common fixed assets, such as land and intangibles.
Chapter 6. Liabilities and Shareholders’ Equity
This chapter discusses several new accounts and concepts related to liabilities and stockholders' equity. These topics include bonds, different types of stock, stock splits, treasury stock, and dividends. Again, with the basic conceptual understanding developed in the first three chapters, students should have a relatively easy time seeing how these new topics fit into an accounting system.
Chapter 7. The Statement of Cash Flows
The third statement needed for a complete set of financial statements is the Statement of Cash Flows (SCF). The SCF can be somewhat difficult to understand, so a full discussion of it is deferred until students have attained some initial mastery of the financial accounting material. Students are shown how to prepare a relatively simple SCF, and the meaning and use of the SCF are discussed at some length. Additionally, this chapter discusses the importance of cash, and some of the issues involved in managing an organization's cash.
Chapter 8. Financial Statement Analysis Part I: Ratios
This chapter discusses financial ratios, by far the most common technique used to analyze a set of financial statements. By comparing the relationship between two or more items (i.e. a ratio) on one or more of an organization's financial statements, an analyst can obtain a great deal of insight about how the organization is managing its financial activities. The chapter discusses some of the more common ratios, classifying them into four categories: profitability, liquidity, asset management, and long-term solvency. It shows how the ratios are calculated, and how they can be interpreted.
Chapter 9. Financial Statement Analysis Part II: Accounting and Financial Management Issues
By combining the statement of cash flows, ratio analysis, and a general understanding of the contents of a set of financial statements, students can learn a great deal about how an organization is being (or has been) managed. This chapter discusses a general approach that students can take to perform an analysis of a company’s financial statement, including making a distinction between accounting and financial management issues. It also looks in some depth at the concept of leverage and the role of profit.
TABLE OF CONTENTS For Chapter 1 only. If you would like the entire Table of Contents, please send a request to CrimsonCenter@TheCrimsonGroup.org.
Chapter 1. Introduction to Financial Accounting
ROLE OF FINANCIAL ACCOUNTING
A Brief History
The Fundamental Financial Accounting Statements
Standards and Standard Setters
The Role of Auditors
LEVELS AND FLOWS
Relationship Between Levels and Flows
The Nature of an Account
THE BALANCE SHEET
The Entity Concept
Dual Aspect Concept
Structure of the Balance Sheet
Analyzing the Relationship Between Current Assets and Current Liabilities
Money Measurement Concept
The Double Entry Approach
The Role of Cash
Basis for Equity Changes
PRACTICING WITH THE CONCEPTS
1. The Dual Aspect Concept
2. The Balance Sheet
3. Nature of Asset, Liability, and Equity Accounts
4. Double Entry
5. Equity Creation
6. Non-Cash Activities
FINANCIAL STATEMENT ANALYSIS
The Operating Cycle
The Financing Cycle
Financial Accounting versus Financial Management
SUMMARY OF FUNDAMENTAL ACCOUNTING CONCEPTS COVERED
SUMMARY OF THE CHAPTER
Practice Case. Homeworks, Inc.
APPENDIX TO CHAPTER 1