Graduate School of Business Econ 90/190: Introduction to Financial Accounting

STANFORD UNIVERSITY Winter 2010

Financial Accounting
Professor Ilan Guttman

In general terms, financial accounting is the measurement of economic activity for

decision-making. Financial statements are a key product of this measurement process and an
important component of firms’ financial reporting activities. In the past few years, financial
accounting came to the forefront of the national consciousness as the stock market continued to
decline amid faltering investor confidence. The crisis of confidence began with the revelation of
accounting irregularities at some of the United States’ largest companies. However, the
implications extended well beyond the effects of individual accounting or company failures:
investors seemed to lose confidence in the integrity of the financial system as a whole. The
capital markets, whose relative efficiency is based largely on the timely dissemination of relevant
and reliable financial information, were at risk. Clearly, the importance of understanding
accounting has never been so salient.

The objective of this course is not to train you to become an accountant but rather to help
you develop into an informed user of financial statement information. While financial statement
users face a wide variety of decisions, they are often interested in understanding the implications
of financial statement information for the future cash flows and earnings potential of a firm. We
will focus on understanding the mapping between underlying economic events and financial
statements, and on understanding how this mapping affects inferences about future profitability.
Because annual reports are somewhat formidable, we will spend time familiarizing ourselves
with how firms present the information for various accounts in the financial statements,
including the footnotes. We also will discuss the role of the various institutions involved in the
reporting process. By understanding the environment in which financial reporting takes place
you will be in a better position to evaluate critically the disclosures made by firms in published
financial statements.

Several features of the course are used to facilitate these learning objectives. The
textbook provides a conceptual foundation for the course by introducing the accounting
framework and by characterizing accounting principles and alternative methods. We also assign
several articles from the financial press to develop your understanding of the environment in
which accounting standards are set, and the implications for different constituencies of
alternative methods. You are encouraged to read the assigned financial press articles although
we generally will not discuss them in class. Class time will be allocated to a combination of
short lectures and discussions of the assigned materials. The assigned cases serve as a basis of
class discussion and provide a challenging test of your understanding of the topic. They are
based on corporate financial statements and illustrate the issues associated with various
accounting methods and the manner in which the related information is disclosed. In addition,
they demonstrate the “real life” magnitude of income and balance sheet differences under
alternative accounting methods, as well as a variety of financial reporting practices.
Organizational Matters
1. Required Text: Horngren, C., Sundem, G., J. Elliott, and D. Philbrick, Introduction to
Financial Accounting, 9th Edition, Prentice-Hall, 2006. The text is referred to as (T).

2. Syllabus materials are organized according to the order in which they will be discussed in
class. These materials include the cases and other assignments, financial press articles
(some are posted on the course website), and additional class handouts. Syllabus materials
are denoted (S). Materials posted on the course website are denoted (W).

3. Additional course materials, including solutions for the Self-Study problems, templates for
some of the assigned cases, and additional class handouts are provided on the course
website (on CourseWork).

4. Grades for ACCT 210 will be based on a midterm exam, a comprehensive final exam, class
participation, and hand-in homework assignments. The following weights will be used in
calculating your final grade:
Midterm Exam 35%
Final Exam 45%
Homework Assignments 20%
Total 100%

Exams: The midterm and the final exams will be closed book and closed notes. Although
the final exam is cumulative, it will focus mainly on materials covered after the midterm.

Homework Assignments: Homework assignments listed in the course outline need to be

submitted on the date indicated for class discussion. Your write-up of the case should be
short and concise, preferably no longer than one page, and be computer generated (and not
handwritten). You may turn in your homework at the end of the session if you want to
keep it for class discussion. The assignments will be graded based mostly on effort
displayed. You are allowed to discuss the homework assignments and prepare the
assignment write-ups in groups of no more than three students. All students in the group
should contribute to each homework assignment that bears their name. Students who did
not contribute to the preparation of a particular homework assignment should not put their
names on the write up. You may skip up to two homework assignments without any
“penalty”.

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 Financial Accounting
Winter 2010

Course Overview

Session Date Topic

1 Mon Jan 4 Introduction to Course and Financial Reporting

2 Wed Jan 6 Fundamentals of Financial Statements
3 Mon Jan 11 Financial Statements as a Management Planning Tool /
Statement of Cash Flows
4 Wed Jan 13 Statement of Cash Flows / Revenue and Expense
Recognition
Mon Jan 18 Martin Luther King, Jr., Day– NO CLASS
5 Wed Jan 20 Revenue and Expense Recognition / Accounts Receivable
6 Fri Jan 22 Accounts Receivable / Inventories
7 Mon Jan 25 Inventories / Fixed Assets
8 Wed Jan 27 Fixed Assets / Integrating Financial Statements
9 Mon Feb 1 Review and Catch-up
Wed Feb 3 MIDTERM EXAM (9 – 11am)
10 Mon Feb 8 Intangible Assets
11 Wed Feb 10 Intangible Assets / Income Taxes
Mon Feb 15 Presidents' Day – NO CLASS
12 Wed Feb 17 Income Taxes / Bonds
13 Mon Feb 22 Bonds / Shareholders’ Equity
14 Wed Feb 24 Shareholders’ Equity / Financial Securities
15 Mon Mar 1 Financial Securities / Fair Value Accounting
16 Wed Mar 3 Accounting [out of ?] Control: Guest Speaker (time and
location TBD)
17 Mon Mar 8 The Role of Financial Analysts
18 Wed Mar 10 Review
FINAL EXAM (time and location TBD)

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 Financial Accounting
Specific Assignments (Subject to Change)
1: Monday, January 4
Introduction to Course and Financial Reporting

Reading
(T) Chapters 1 and 2
(S) Class Handout, “The Four Primary Financial Statements”

Self-Study
(T) Chapter 1, Problems 1-31, 1-49; Chapter 2, Problems 2-32, 2-38, 2-46

Assignment
(S) Hewlett Packard (assignment questions are provided in the course reader and on
the course website.)

2: Wednesday, January 6
Fundamentals of Financial Statements

Reading
(T) Chapter 3 (pp. 90-100, skim pp. 96-100); Chapter 4
(S) Class Handout, “Double-Entry Bookkeeping”

Self-Study
(T) Chapter 3, Problems 3-38, 3-49; Chapter 4, Problem 4-58

Assignment
(S) Radiation Shields Inc. - Part 1

3: Monday, January 11

3.a Case: Financial Statements as a Management Planning Tool

Assignment
(S) Hanson Ski Products

NOTE: Don’t be intimidated by the sea of numbers. Most of the numbers you need to
construct the balance sheets are directly given in the case. You don’t need to forecast
future sales, develop a schedule for collections, or re-calculate interest expense, etc. All
of this has been (implicitly) done for you in the projected balance sheets, income
numbers, etc. There are only a few numbers you actually need to derive.
An Excel spreadsheet with a useful format for completing the assignment is included
with the case and is also available on the course web site.

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 3.b Statement of Cash Flows

Reading
(T) Chapter 5

Self-Study
(T) Chapter 5, Problems 5-41, 5-42, 5-62

4: Wednesday, January 13

4.a Case: Statement of Cash Flows

Self-Study
(S) Hanson Ski Products – Statement of Cash Flows

Assignment
(S) Statement of Cash Flows: Three Examples

Please answer the following two questions:

a. Examine the contents of the three cash flow statements carefully and analyze the
cash flow situation for each of the three companies. You do not have to answer
the questions included in the case, instead please fill in and submit in class the
template posted on CourseWork.

b. Based on your analysis in part a. above, what is your overall assessment of the
cash flow situation for each the companies? Please rate each of the companies on
a scale of 1-5, where 1 indicates that the corporation will declare bankruptcy next
year, 3 represents a reasonable cash flow situation with few problems noted, and 5
represents an outstanding cash flow situation.

4.b Revenue and Expense Recognition

Reading
(T) Chapter 6 (pp. 230-241)
(S) Class Handout, “Accrual Adjustments”

Self-Study
(T) Chapter 6, Problems 6-34, 6-35, 6-45

Monday, January 18 - Martin Luther King, Jr., Day – NO CLASS

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5: Wednesday, January 20

5.a Case: Revenue and Expense Recognition

Self-Study
(S) Costco Companies, Inc.

Assignment
(S) Microsoft’s Financial Reporting Strategy – Part A
(Assignment questions are provided in the course reader)

5.b Accounts Receivable

Reading
(T) Chapter 6 (pp. 241-251)
(S) Class Handout, “Basic Transactions for Receivables”

Self-Study
(T) Chapter 6, Problems 6-59, 6-67

6: Friday, January 22

6.a Case: Accounts Receivable

Self-Study
(S) Sun Microsystems, Inc.

Assignment
(S) Sears, Roebuck & Co.

6.b Inventories

Reading
(T) Chapter 7 (read pp. 278-282, 288-310; skim pp. 282-287)
(S) Class Handout, “Accounting for Inventories”

Self-Study
(T) Chapter 7, Problems 7-56, 7-71, 7-76

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7: Monday, January 25

7.a Case: Inventories

Self-Study
(S) Chevron Corporation

Assignment
(S) Cisco Systems

7.b Fixed Assets

Reading
(T) Chapter 8 (pp. 334-357)

Self-Study
(T) Chapter 8, Problems 8-49, 8-58, 8-61

8: Wednesday, January 27

8.a Case: Fixed Assets

Reading
(S) Depreciation at Delta Air Lines: The "Fresh Start"
(you do not need to hand in a solution for this case)

Self-Study
(S) Harley-Davidson

8.b Integrating Financial Statements

Assignment
(S) Radiation Shields Inc. - Part 2

9: Monday, February 1
Review and Catch Up

Wednesday, February 3
MIDTERM EXAM (9 – 11 AM)

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10: Monday, February 8

Intangible Assets

Reading
(T) Chapter 8 (pp. 357-362)
(S) Section on “Intangible Assets” (Kieso, Weygandt, and Warfield; John Wiley &
Sons)
(S) Class Handout, “Accounting Goodwill”

Self-Study
(T) Chapter 8, Problem 8-54
(S) Microsoft’s Financial Reporting Strategy - Part B: Software Development Costs
(Assignment questions are provided in the course reader)

11: Wednesday, February 10

11.a Case: Intangible Assets

Assignment
(S) BMC Software, Inc.

11.b Income Taxes

Reading
(T) Chapter 9 (pp. 411-415)

Self-Study
(T) Chapter 9, Problems 9-39, 9-72

Monday, February 15 - Presidents' Day – NO CLASS

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12: Wednesday, February 17

12.a Case: Income Taxes

Self-Study
(S) Philip Morris International

Assignment
(S) Pfizer Inc.

12.b Bonds

Reading
(T) Chapter 9 (pp. 382-404, pp. 415-418)
(S) Class Handout, “Basic Transactions for Bonds”

Self-Study
(T) Chapter 9, Problems 9-40, 9-56, 9-61, 9-74

13: Monday, February 22

13.a Case: Bonds

Self-Study
(S) International Paper

Assignment
(S) MGM Mirage

13.b Shareholders’ Equity

Reading
(T) Chapter 10
(S) Class Handout, “Shareholders’ Equity”

Self-Study
(S) Chapter 10, Problems 10-51, 10-57, 10-75

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14: Wednesday, February 24

14.a Case: Shareholders’ Equity

Self-Study
(S) ConocoPhillips

Assignment
(S) Dell Computer

14.b Financial Securities and Fair Value

Reading
(T) Chapter 11, (pp. 488-500)

Self-Study
(S) Chapter 11, Problems 11-27, 11-28

15: Monday, March 1

Financial Securities and Fair Value

Self-Study
(S) Genentech, Inc.

Assignment
(S) Intel Corp.

16: Wednesday, March 3

Accounting [out of ?] Control: Guest Speaker (time and location TBD)

Reading
(W) White collar crime

Class will take place in Bishop Auditorium at the regular class time.

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17: Monday, March 8

The Role of Financial Analysts

Assignment
(S) Qwest Communications

18: Wednesday, March 10

Review

FINAL EXAM (time and location TBD)