An Integrated Approach to Beginning Financial Accounting and Finance Courses

7/21/2019 An Integrated Approach to Beginning Financial Accounting and Finance Courses

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ISSUES IN ACCOUNTING EDUCATION American Accounting AssociationVol. 27, No. 1 DOI: 10.2308/iace-500902012pp. 299336

An Integrated Approach to BeginningFinancial Accounting and Finance Courses

Victoria B. McWilliams and Michael F. Peters

ABSTRACT: In response to external pressures for a business curriculum that

recognizes how business decisions are made, the Villanova School of Business has a

six-credit-hour, team-taught course that integrates the introductory financial accounting

course with principles of finance. The class provides students with a betterunderstanding of how the two disciplines relate, and students leave the course with a

richer, more robust awareness of both topic areas and how they come together. One

theme throughout the course is the use of financial statements and other financial

information in valuation of financial instruments such as stocks and bonds. This course

better prepares for most business environments, which increasingly requires profes-

sionals to complete tasks assuming skills from both disciplines. This manuscript

describes the course, its benefits and drawbacks, the content, as well as examples of

materials created for the course to facilitate student learning.

Keywords: accounting; finance; integration.

INTRODUCTION

In a traditional business curriculum, the core body of knowledge is offered in discrete

components, with each topic area covered in a standalone course. Practitioners and academics

frequently view this model of business education as taking a silo approach to discipline

coverage, which tends to ignore the interrelatedness of business areas. However, over time, there

has been an increasing demand for curriculum change that recognizes and responds to the evolving

business environment in which decisions rarely are made in isolated business silos.

The accrediting body for business colleges, the American Assembly of Collegiate Schools of

Business (AACSB), has been calling for business schools to address the need for curriculum change

(Smith 1995; AACSB 2002) for years. Most recently, the Report of the Management EducationTask Force,Management Education at Risk, to AACSB addresses the need to develop courses that

facilitate boundary-spanning business thinking (AACSB 2002, 20). The thought behind these

courses is to encourage integrating concepts, as appropriate, to break down functional silos and,

subsequently, better educate students to make business decisions in a world where technology is

increasingly lessening the distinction among the traditional business functions.

Victoria B. McWilliams is a Professor and Michael F. Peters is an Associate Professor, both at Villanova

University.

We are grateful to the editor and reviewers for their comments that helped improve the manuscript and the contributionsof Professor James M. Emig. We would also like to thank the research assistance of Roxanna Brandao.


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During this period of AACSBs call for curricular change, the Villanova School of Business

was also hearing a call from business constituents who had ideas about integration and the

undergraduate curriculum. From the employers who hire the programs graduates to the

businessmen and women who sit on the schools advisory boards, the message was consistent that

an integrated and cross-functional undergraduate curriculum would benefit students. Therefore,the business school established a committee to propose updates and innovation to the

undergraduate curriculum. One result of the committees proposal was to integrate the

three-credit-hour Introduction to Financial Accounting course with the three-credit-hour

Principles of Finance course.

The resulting class is a six-credit-hour, team-taught course that integrates accounting and

finance and provides the students with a better understanding of how the two disciplines relate. The

students who take the course leave with a better awareness of both topic areas; they have a better

grasp of material and a deeper appreciation of the application and relevance of accounting and

finance. Students take the course during the sophomore year, with approximately half of the

sophomore class registering for one six-credit-hour class each semester. The class meets twice aweek for 2.75 hours, and both professors are there for every class, interacting with each other as

appropriate to ensure that students understand the interrelatedness of the two topics.

Initially, teams were identified that would ultimately be teaching the course, with each team

consisting of an accounting and a finance professor. A year was spent discussing content and, after

considerable dialogue, all teams agreed on content to be included in the class, with the

understanding that each team would determine their own method of delivery. While there has been

a considerable learning curve as the course was taught, the outcome is a class that provides a far

richer experience for students than the standalone accounting and finance courses. To be certain,

there are costs and complexities associated with the integrated class. Professors are teaching as part

of a team, rather than independently, and must, therefore, be more flexible. By combining the

accounting and finance courses, content overlap was eliminated, allowing for the course to be

streamlined and the focus to be on the integration, at the expense of dropping a very small number

of traditional topics. There is less time to cover all material (because more time is spent on

integration); however, the material covered is seen by the student with better understanding and

greater applicability. In addition, many concepts covered in principles of finance require grounding

in accounting principles. The class is six credits as opposed to three, and requires much more work

on the students part, since the material is taught at a much higher level when accounting and

finance are integrated. The course workload remains a hurdle that some students have trouble

mounting.

Additionally, using two professors to teach one six-credit-hour course initially appeared that it

would increase the delivery cost, since each professor gets full credit (e.g., six teaching credits) for

the course. The reason professors get full credit is that they are required to attend all class sessions,

and it is essential that each professor actively participate when he or she is not the primary instructor

in order to facilitate the course integration. When the classes were separate (i.e., under the old

curriculum), there were approximately 2027 students per section. Under the new curriculum, class

sizes were increased to 4550 students; thus, the larger class size offsets the cost of giving full

credit to the professors. As a result, there is minimal change to the per-student cost. All in all,

though, the course is a good change to the curriculum.

The remainder of the article describes the actual content of this integrated course, followed by

the course deliverables. The next section describes the teaching and learning strategies, along with

our learning objectives for this course, and then discusses the qualities and characteristics that

successful instructors must have in order to succeed teaching in this model. The final section

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COURSE CONTENT AND LEARNING OBJECTIVES

At first glance, the course content appears to be similar to what is taught in a typical beginning

accounting and/or finance class. And that assumption is partly true because the fundamentals need

to be taught prior to teaching the integration.1 However, what distinguishes the new content, when

compared to when the courses were conducted separately, is the link between accountinginformation and valuation. This link impacts how the current combined course is taught throughout

the semester, even though the actual combination of material is not formally taught until after Exam

1. For example, for each topic in financial accounting, the professors discuss how the accounting

information impacts the two primary inputs to the valuation model. Once valuation is formally

taught, students use the accounting information in the finance valuation component. In the finance

piece, using complete financial statements is a staple of practically every valuation problem, which

was not the case when it was a separate course. It was clear early on that valuation was, at best,

mentioned in the accounting class, and the financial statements and associated accounting issues

were either absent or not given their fair treatment in the finance class. The integrated course brings

these concepts together so that students receive a more dynamic application of the link betweenfinancial statements and valuation.2

It is crucial to understand that the students need a fundamental understanding of accounting in

order to begin the finance material in this course, as well as to prepare them for subsequent

accounting courses. Therefore, from day one, the immediate challenge was how to teach the

fundamentals of accounting and principles of finance and, at the same time, set the stage for

integration. So, approximately the first three-and-a-half to four weeks are spent on how to build,

understand, and interpret the financial statements, as that sets the stage for later accounting concepts

and principles of finance. Because the finance professional must know how to understand and

interpret financial statements, the first learning objective is to have students perform the traditional

role of building financial statements and to also understand how to read and interpret the financial

statements.Before beginning the development of financial statements, however, it is important for students

to have a basic understanding of the corporation. Therefore, we discuss the following immediately

preceding the financial statement discussion:

An overview of the corporation (i.e., the firm); The firms role in the economy; and The firms objectives (i.e., to maximize shareholder wealth).

Finance assumes that managers make decisions to create value for the firm, and a lecture that

introduces this context on the first day makes for a smoother transition into accounting. This lecture

is similar to the first lecture in principles of finance. Shareholder wealth is defined as the marketvalue of the firm (most students are familiar with stock price, the typical measure of firm value), and

that this value is a function of risk and return. The general concept of making decisions to create

value and the notion of risk and return is the first area of integration for the course, which then

allows for a segue into discussing the importance of accounting information in helping to determine

1 Much planning prior to implementation went toward coordinating each topic. Coordination was needed to settleon timing of presentations, terminology used (often, accounting and finance textbooks use different terms for thesame concept; for example, with bonds, yield to maturity in finance is referred to as effective rate in accounting),and definitions. Coordination also meant avoiding teaching the same issue that often arose when separate courseswere taught (e.g., financial ratios, present value).

2 One question that often arose is that, if done correctly, the two separate courses should naturally flow together.While this approach is the ideal, that is not the case in practice. In the authors academic experience acrossseveral institutions the instructors that taught accounting and finance did not meet to coordinate or integrate the

An Integrated Approach to Beginning Financial Accounting and Finance Courses 301


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risk and return. The next step is to teach the fundamentals of accounting: building, understanding,

and interpreting the financial statements. Throughout this step, we refer back to the risk and return

concepts from this lecture.

The discussion about building financial statements is done in typical fashion and includes

debits/credits, journal entries, posting, and t-accounts, but excludes trial balances, subsidiary

ledgers, reversing entries, etc. However, with the integrated class, we now provide more theory

behind the financial statements in an attempt to link it to valuation. For example, the professors

introduce the intuition behind book value of the firm, and then compare total stockholders equity

(excluding preferred stock) to market value, and discuss why these numbers differ, and then

introduce a real-life example that compares the two. With the income statement, the professors

present the traditional approach of revenue recognition and matching, but then discuss how net

income changes book wealth and why this information is the starting point in calculating the

returnscomponent that one needs to calculate market value. Details are minimal, but students are

given something to think about until a later segment when the professors discuss this topic in more

detail. This part of the course also includes how to build and understand the direct method of

statement of cash flows.The final step of the first several weeks of the course is how to interpret the financial

statements. The goal here is to again link the financial statements (in this case, financial ratios) to

risk and return factors that determine the market value of the firm. The coordination between the

professors produces a common set of ratios with a common definition to avoid confusion with

terminology and formulas. The course is designed to purposely limit the number of ratios in order to

focus on general learning concepts. Typical of many textbooks, the ratios are separated into the

following categories:

Growth (ROE, Dividend Payout) Profitability (ROA, ROS, Asset Turnover) Solvency (Debt/Assets, Current Ratio, Quick Ratio) Working Capital (A/R, Inventory, A/P Turnover, plus the net of these three)

Again, the course is designed to present the material in typical fashion and to use these ratios to

assess risk and return. For example, high solvency risk may lead to higher risk assessments in the

valuation model, or higher growth can help size up the future return component of firm value. At

this point in the semester, students know that risk and return are two inputs to determine firm value,

but do not know how to calculate firm value. That is, they are learning how financial statements can

be used to size up these inputs. So, while many beginning accounting classes discuss financial

ratios, in the integrated class students go a step further by using these ratios as inputs to valuation.

In addition to the traditional methods for using ratios for analysis, as described above, thefinancial ratios provide an early opportunity for integration with the discussion on working capital

management. The learning that takes place allows students to learn how to link the financial

statements with the firms choice of different levels of current assets to support its sales.

Additionally, a discussion focuses on how the firm decides to finance its asset base by choosing to

use either short-term or long-term financing alternatives. The firms choice influences risk and

return and has implications for the firms financial statements. The financial statements and financial

ratio discussion lead to the second learning objective: students recognize the relationship between

financial information (financial statements and other information, such as ratios) and the inputs to

the valuation model.

After students have digested the financial accounting concepts, they are ready to move on to

concepts that involve determining value; however, before they can do so, they must understand

time value of money, which is taught in traditional fashion. Up to this point, the class is able to



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financial statements and valuation techniques, they are at the point in their learning in which the

professors can integrate more and begin to take full advantage of the benefits of combining the two

functional areas into a single course. The next topic in the course is bond valuation, and it begins

with a discussion of how the market determines interest rates on bonds. We then take the market

value of bonds calculated in finance and continue with the accounting discussion. We focus on theeffective interest method, and emphasize that the accounting rules are meant to capture the

economic reality of the bonds on the books at the issue date. Since the firms true borrowing cost is

its yield-to-maturity (e.g., effective interest rate), this true cost is reflected as part of interest expense

each period. The class does a redemption and discusses it within the context of its pros and cons

(income statement impact versus interest rate risk impact), which provides a good way to integrate

and close out this topic.

The topic following bonds is stock valuation; it begins with a discussion of the rate of return on

stocks. The discussion focuses on risk and return for common stock; standalone risk, and

diversification and its importance. The final part of this discussion centers around the concepts of

diversification and the importance of market risk and the Capital Asset Pricing Model, including adiscussion of the stocks beta and determinants of beta. For example, students are asked to describe

the financial statement differences between firms with a high and low beta. In all cases, students

describe a high beta firm as one that has more volatile earnings, which suggests that the goal of

linking accounting information to valuation is working. For the stock valuation discussion, the

focus is on valuing dividends using the dividend growth model.3 Different assumptions about

dividend growth are introduced, which leads to versions of the valuation model that are very

challenging to students. However, with practice, the students grasp the concept that stock price

represents an estimate of the present value of future dividends. In a typical finance class, the inputs

to the valuation model are given without much appreciation for how this information can be found

in the financial statements. With the integrated class, these inputs are linked to the financialstatements in a more formal way, using the following:

Dividends declared are backed into via the financial statements. Growth in cash flows/income is partly influenced by prior years growth as measured by a

metric from the financials (e.g., net income, dividends, etc.). Risk is influenced by certain ratios, and so on.

Once students understand stock valuation, the discussion then focuses on stockholder

equity-related accounting issues such as dividends, stocks, and treasury stock. This discussion is

similar to what is typical in beginning-level accounting courses. Each lecture topic described so far

includes an in-class assignment that incorporates each of these topics (discussed in a later section).For example, a question in this assignment has students use the financial statements to examine

details of a treasury stock purchase, compare to the intrinsic value of the firm that they calculated

(again, this calculation relies on the financial statements), and then perform an analysis to determine

whether the purchase was a good use of shareholder monies. As can be gleaned from the above, the

3 This part of the course requires a trade-off between the accounting and finance sides. On the one hand, thedividend growth model is used in finance textbooks and is a fairly simple calculation. Its simplicity is a greatbenefit for a beginning-level course. On the other hand, dividends are just the realized portion of net income, andmay not always be an accurate indicator of firm value. The professors handle this issue by emphasizing that thereare various metrics used to calculate firm value and briefly discuss these metrics (i.e., dividends, free cash flows,operating cash flows, net income). The professors then emphasize two points: each of these metrics is a derivationof net income and that, in the long run, net income is perfectly correlated with cash flows. This part of thediscussion is consistent with our message in that net income measures assets/value generated on behalf of



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primary learning objective in the second part of the course is to actually use the financial statements

and other information to value financial instruments.

The final third of the course addresses specific accounting issues: accounts receivables,

inventory, and property, plant, and equipment, with the latter topic taught in conjunction with

capital budgeting. These topics are taught in their traditional accounting format, including bad debt

expense for A/R, inventory methods/write-offs for Inventory, and depreciation methods for PP&E.

In all cases, we link the consequences of accounting decisions to firm value. For example, with

A/R, the discussion emphasizes how estimates could be used to manipulate earnings and, in turn,

firm value. We created an assignment that has students restate financial statements based on a bad

debt manipulation, and then calculate its impact on stock price (assuming investors did not adjust

the manipulated earnings figure). The class also reemphasizes how accrual net income can be used

to predict future cash flows. For example, if the firm experiences a permanent spike in bad debt

expense, a reduction in net income and future cash flows is expected, which again can impact firm

value. With inventory, the discussion focuses on the LIFO-FIFO trade-off between LIFO cash flows

and FIFO financial statements, and its implications for firm value. The LIFO-FIFO debate is never

resolved, but the importance of accounting methods is emphasized, along with their potential

impact on perceived earnings growth, cash flows, and firm value. In addition, the discussion also

includes write-offs, potential earnings management associated with write-offs, and how the

financial statements can be restated to correct for earnings management.

We link to finance by discussing how write-offs (a non-cash income statement item) help

predict future cash flows, to again reiterate the idea that accrual accounting can be used to determine

the inputs to the valuation model. With PP&E, the discussion includes financial statement

differences in depreciation methods, the tax effect of such differences, and how to adjust the

financials for these differences. Much of the PP&E discussion is fairly straightforward, but part of

its purpose is to set the stage for capital budgeting. In particular, we use the discussion of different

depreciation techniques and depreciation tax shields to prepare the students for determining theafter-tax cash flows that they will see in the capital budgeting discussion. In addition to

understanding the specific accounting topics discussed above, the learning objective is also such

that students understand the relationship between accounting choices, net income, cash flows, and

firm value.

Prior to the capital budgeting discussion, students learn how to determine the firms weighted

average cost of capital ( WACC), which is needed for the capital budgeting decision. Capital

budgeting is taught in its traditional approach initially, but then we go outside the finance box to

link it to accounting. Capital budgeting allows us to reiterate many themes previously discussed

when linking financial statements to value (in this case, projected financial statements). For

example, students learn how to calculate the cost of capital using the financial statements andrelevant market information, to convert income flows to cash flows, and then how the final metrics

(net present value and IRR) make sense with historical financial ratios.

To summarize, this section on course content also describes our learning objectives, which can

be stated as follows:

An understanding of fundamental accounting and finance concepts, such as building and

interpreting financial statements, ratios, time-value of money, etc. An understanding of the link between the financial information (i.e., financial statements,

ratios, etc.) and the value of financial instruments (i.e., bonds and stock).4

4 This objective includes an understanding of how financial information impacts the inputs to value, and how suchinformation is used to calculate value It also includes the use of projected financial information to calculate



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An understanding of how accounting choices impact the financial statements, cash flows, and

the value of financial instruments.

DELIVERABLES AND TEACHING AND LEARNING STRATEGIES

In order to deliver to our students a truly integrated successful learning experience, it wasnecessary to provide the tools that would form the basis for teaching and that would facilitate

student learning. The typical starting point in most courses, the basis for student learning, is the

course textbook. However, one challenge in teaching this course is the lack of undergraduate

textbooks that integrate principles of accounting and finance.5 The accounting textbook, for

example, is useful for accounting cycle problems and the finance textbook for present value

problems. But neither could be relied on to bring the integrative component that was part of the

learning outcome of our course. Because textbooks are such a central part of how students approach

studying, it was important to find a way to use them, but not completely rely on them. That is, the

textbook was a first step, but fell short of what was needed to deliver to our students a truly

integrated learning experience. These issues become more pronounced after Exam 1, once the classfocuses on integration topics such as bonds or inventory. We believed that the only way to reach the

learning objectives was to design assignments for the class. To that end, we created separate

assignments (i.e., deliverables) for each topic that allowed us to deliver to the students a truly

integrated perspective of how accounting and finance related. Each assignment is designed to be

very difficult and conducive to group brainstorming/discussion.6 Many problems from the

assignments are done in class as part of the learning process, so that the professors can walk around

and provide immediate help to students. Through each of the assignments, we created a way of

teaching that allowed us to deliver to our students an integrated course that set out for them a

learning strategy that resulted in a truly integrated course.

Each assignment begins with the four financial statements, financial ratios, and other

disclosures (about four pages in total). Because the financial statements are the primary tool to link

accounting and finance, they are the focal point of each assignment (and each exam; exams are

designed using a similar format as the assignments). Questions from the assignments discuss

concepts touched on in lecture, but not in the text, which allows us to discuss and help students

learn the integrated material. The questions are very challenging because students must find the

appropriate information in the financial statements, and the nature of this information is difficult

without having a concrete understanding of these statements. For the most part, the sea of

information and level of difficulty create excellent discussion and trial-and-error mistakes, which

facilitate the learning process. Many groups will need hints from the professors to get some

momentum.

The next few paragraphs summarize a few attempts at integration with these assignments,recognizing that the list of examples that are used in class is significantly more extensive. For

example, with the financial ratios, the discussion focuses on both sides of leveragethe good and

bad. Therefore, the discussion includes two firms in which the only difference is that one firm is

more levered with funded debt than the other firm. The highly levered firm shows a much higher

ROE and Debt/Assets, but the same ROA, ROS, and Asset Turnover. One question asks students to

determine why one firm appears more profitable than the other firm despite all the similarities on the

5 There are graduate-level textbooks that integrate accounting and finance, but these are at too high of a level forundergraduates.

6 One future change to this course is to make the assignments case-like. Currently, the assignments have case-likeelements, but need some fine-tuning to become more like a case. Another change that is currently being discussedis to introduce a true case that brings together different learning objectives from the course Since a case that



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financial statements. It is a great lesson in how leverage can increase returns (i.e., higher ROE), but

increase risk at the same time. Through the example, students see how leverage impacts two inputs

to the valuation model, but in different ways. Another assignment pits creditors against owners. For

example, total assets, liabilities, and stockholder equity are identical, even though the assignment

varies the mix of assets. One firm carries significantly more cash than another firm and such

differences lead to lower profitability, but less risk. So, while creditors like this strategy in the short

run, as the firm is more liquid, it comes at the expense of profitability. We created these assignments

for almost every topic throughout the semester. Students work in groups often during class time, so

that professors can walk around and provide guidance. As noted above, the background information

for the exams is similar in nature to the assigned problems.

As the semester progresses and students become more comfortable with the fundamentals of

accounting and finance, the in-class assignments are meant to continue to bring about higher levels

of learning. For example, with the bond assignment, many problems require students to use

financial statements and other information to value bonds or back into market yields at various

points throughout the bonds life. Students use this information in many ways: to prepare the

interest or bond redemption journal entry, to discuss the trade-off between income statement effectsand interest rate risk, etc. A similar example is with stocks. It requires students to calculate the

intrinsic value of the stock after being informed that the firm had better information about its future

prospects. The assignment also includes stock buybacks. One integration question has students

determine whether the stock buyback creates shareholder value. To answer this question, students

have to calculate the intrinsic value of the firm (as discussed above, using financial statements as a

starting point). Students use this information to calculate a return from this buyback and eventual

sale, and then compare this return to financial ratios to see if the firm is better off investing in

internal projects. After this calculation, students are able to discuss whether the stock buyback was

used to improve shareholder wealth, manipulate EPS, apply excess cash, etc. The breadth of this

discussion was not possible when the two courses were taught separately.One theme in finance that created confusion is its reliance on tax law concepts versus GAAP. For

example, capital budgeting problems in finance textbooks are very rudimentary and rely on the tax

law for depreciation (e.g., MACRS), but did not use the tax law for other expenses and revenues. In

addition, the presence of MACRS raises more questions than are needed (e.g., why is the depreciation

in years greater than the depreciable life, what do we do when the tax law differs from GAAP, etc.).

But most importantly, it creates a wall that made it too complicated to reconcile between future cash

and income flows. We work around this issue by providing depreciation expense without mentioning

how it is calculated. Students then use the financial statements and market information to calculate the

WACC, and then use the projected income statements and balance sheets to convert income to cash

flows. With the WACC and future cash flows, students calculate net present value and IRR for theproject to determine whether to adopt it. Arriving at WACC and future cash flows is a slog, but a very

worthwhile learning experience. The assignment then has students show how the future cash flows

used in capital budgeting are just a reallocation of income flows and that, in aggregate, the two are the

same, a learning experience that arises solely because of the integrated course. The integration makes

capital budgeting a much richer topic than typically presented in finance classes.

Overall, the concepts covered when the two courses were independent were never brought

together in a cohesive manner that allows for the relevance of the topics to be taught to the students.

The nature of the integrated course, by definition, allows us to bring out the significance and joint

importance of both accounting and finance so that the students can apply the concepts in a more

meaningful way. In all cases, the in-class assignments and exams include problem-solving questions

that center on a firms financial statements, ratios, and other information that ultimately lead to effects

on firm valuation. Through the materials developed for the course and the learning strategies used



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INSTRUCTOR QUALITIES AND CHARACTERISTICS

The six-credit-hour integrated course is team-taught with two professors, one from accountingand one from finance, always present. Both are equally responsible for course content, coursegrading, and course delivery. It takes tremendous effort and coordination to make the course run

smoothly, and not everyone will find that she or he is cut out to teach this type of course. Theindividual professors are no longer in control of their classroom, but are sharing thedecision-making process for everything that happens in the class. There are distinctive qualitiesand characteristics that individuals should have in order to succeed as members of a teaching team.The authors believe that being humble and accepting that there may be a better way of coveringcourse material is a good place to begin. Each member of the team may bring a different, andpossibly better, perspective about a concept, and keeping an open mind will allow each teammember to learn and to grow. And having a willingness to learn new things is crucial, since eachteam member probably is not as familiar with their partners area as the individual is with their ownarea. It takes much hard work to figure out how to integrate each members area with the othersarea, and each team member must be willing to do so, buy into the concept of integration, and take

ownership of it; otherwise, the concept is doomed from the start. Each team member will be facedwith the need to compromise and coordinate along the path of figuring out how to blend accountingwith finance in a truly meaningful manner. Each members willingness to coordinate with the otheras the team tries to be creative will go a long way toward achieving the goal of true integration. It isalso crucial to carefully choose partners and to plan to stick with that individual over time.

There is a definite learning curve to meaningfully teach this type of class. It does not happen

after a single semester. It will take several years to get this course to the point where the instructors

are pleased with content and the outcome for students. Therefore, staying with the same team

member for as long as possible is a good idea, so that the team can continue building and improving

the integrated team-taught course over time.

IS THE LEARNING EXPERIENCE FROM THIS COURSE TRULY DIFFERENT?

To answer this question, we provide information on three methods that measure whether

learning took place due to the new curriculum. During this discussion, the old curriculum refers to

when the introduction to financial accounting and principles of finance were two separate courses,

and the new curriculum refers to when the two are combined into an integrated course. In addition,

as noted in an earlier section of the article, there are several learning objectives with this course.

One learning objective that flows from these is the extent to which students use the learning from

this course to improve their performance in other subsequent classes. This issue is discussed in

more detail in Method 2 of evidence of learning.

Method 1: Identification of Questions from Deliverables under the New Curriculum thatWere Not Possible under the Old Curriculum

As noted, two learning objectives of this course are the use of financial statements and other

financial information in valuation of financial instruments, and how accounting choices impact the

financial statements, cash flows, and value of financial instruments. Our goal was to expand

students skill set surrounding financial reporting without compromising their learning of the

fundamentals of accounting and finance.7 Thus, the new curriculum teaches new skills that were not

possible when we offered separate classes.

7 For example, about 35 percent of the possible points on Exam 1 of the new curriculum are based on anaccounting cycle problem. Students scored a 74 percent on this part of the exam under the new curriculum. Thispercent approximates or is slightly higher than the average scores on the first exams under the old curriculum



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For Method 1, we compared the in-class assignments and exams under the new curriculum to

test bank questions from accounting and finance textbooks, cases in introductory level accounting

and finance courses, and our prior exams under the old curriculum. We focused on questions that

relate the financial statements to valuation, as such questions separate this course from our previous

approach. While we focus on several themes that capture the relation between financial statements

and firm value, the details that back up these themes are well represented when one examines our

deliverables (i.e., assignments, exams), which are summarized by the following questions:

1. Did the discussion of the balance sheet and income statement address the valuation

component of these statements?

2. Are detailed financial statements the starting point for finance problems, with the exception

of time value of money? Are detailed present value examples used to derive accounting

numbers?

3. Did the discussion of financial ratios address their use as inputs to the valuation model?

4. Are detailed financial statements used to arrive at intrinsic value?

5. Does it include a discussion of how certain accruals play a role in estimating future cashflows?

6. Does it discuss a link between incorrect accounting estimates/methods and firm value?

7. For capital budgeting, does it calculate cost of capital using detailed financial statements and

a reconciliation that shows income flows to equal cash flows?

We examined whether these themes are found in the accounting and/or finance textbooks,

exam banks, cases, and old exams when the courses were separate. As we approached our analysis,

we thought that the deliverable that would most likely meet the learning objectives for the

integrated part of this course would be the cases. In addition, because the integrated learning

concepts were more likely to be part of the finance course (because, in theory, it is supposed to

build on their accounting knowledge), we thought that some of these deliverables would morelikely include some of the themes listed above.

To identify the accounting and finance textbooks, we asked four publishers to provide us a list

of the bestselling books within each discipline, and we obtained copies of the textbooks. For the

cases, we searched published cases in accounting and finance, in addition to reviewing Harvard

Business Review cases. Table 1 summarizes the results of this comparison. In this table, we separate

the findings into three classifications, which are detailed at the bottom of the table. In general,

however, a classification of 1 indicates no integration in a particular theme. A classification of

2indicates that, for a specific theme, there is a mention of a link between accounting and finance,

although it is superficial. The 3classification indicates that, for that particular theme, carefully

constructed financial statements are used to arrive at finance valuation and risk return analysis

achieving integration, similar to the learning objectives.8 Assuming the textbook and cases mirror

the nature of these courses, the results from this analysis suggest that the deliverables in the

integrated class differ significantly from what is being taught in typical beginning accounting and

finance courses.

We then reviewed final exam questions from tests under the old curriculum and compared them

to final exam questions from tests under the new curriculum. The new curriculum was meant to

expand the sphere of learning so that students still understand the fundamentals of accounting and

finance, but also are able to learn concepts that were not possible under the old curriculum. That

said, our goal was to identify questions in the new curriculum final exam that were not possible

8 It is important to note that this analysis in no way gives judgment about the textbooks or the cases. The overallteaching goal of the market targeted by the textbooks/cases is much different than our class and so the



11/39

TA

BLE1

IntegrationinAccountingandFinanceTextbooksandCases

BalanceSheet

andIncome

Statement

Address

Valuation

Detailed

Financial

Statementsare

S

tartingPoint

forFinance

Problems.

De

tailedPresent

Va

lueExamples

U

sedtoDerive

Accounting

Numbers

FinancialRatio

s

UsedasInputs

totheValuation

Model

Detailed

Financial

Statements

UsedtoArrive

atIntrinsic

ValueStock

Valuation

Inclu

des

Discussionof

HowAc

cruals

PlayaR

olein

Estimating

Future

Cash

Flows

Discussesthe

Linkbetween

Incorrect

Accounting

Estimatesand/or

Methodsand

FirmValue

ForCapital

Budgeting,

Ca

lculatesCost

ofCapitalUsing

D

etailedF/S,

Reconciles

betweenIncome

and

CashFlows,

an

dCompares

Ou

tputtoOther

Investment

O

pportunities

viaF/S

ses

Accoun

ting

Bruns

(2009a):Delta

2

1

1

1

2

2

NA

Chap

man

(2009):

Biovail

2

1

1

1

2

2

NA

Bruns(2008):

Talbots

2

2

1

1

2

2

NA

Brunsetal.

(2008):

Merrim

ack

2

1

1

1

2

2

NA

Bruns

(2009b):Lyons

2

3

1

1

3

1

NA

Cohe

nand

Fields(

2007):

Double

Click

2

2

1

1

2

1

NA

(continued

on

nextpage)



12/39

TABLE1(continued)

BalanceSheet

andIncome

Statement

Address

Valuation

Detailed

Financial

Statementsare

StartingPoint

forFinance

Problems.

De

tailedPresent

Va

lueExamples

UsedtoDerive

Accounting

Numbers

FinancialRatio

s

UsedasInputs

totheValuation

Model

Detailed

Financial

Statements

UsedtoArrive

atIntrinsic

ValueStock

Valuation

Includes

Discussionof

HowAc

cruals

PlayaR

olein

Estimating

Future

Cash

Flow

s

Discussesthe

Linkbetween

Incorrect

Accounting

Estimatesand/or

Methodsand

FirmValue

F

orCapital

Budgeting,

Ca

lculatesCost

ofCapitalUsing

D

etailedF/S,

Reconciles

bet

weenIncome

and

CashFlows,

an

dCompares

OutputtoOther

Investment

O

pportunities

viaF/S

Finance

Lipso

n

(2008):

Panera

2

1

1

1

1

1

1

Luehrman

andHeilprin

(2009b):Blaine

2

1

2

1

1

1

1

Luehrman

andHeilprin

(2009a)

:

Midland

2

1

2

1

1

1

1

Mayfield

(2006):

Netflix

2

1

1

1

1

1

1

McArthurand

Yong(2009):

Ceres

2

1

1

1

1

1

1

Staffordetal.

(2002):

Ocean

1

1

1

1

1

1

1

xtbooks

Accoun

ting

Reim

ers

(2011)

1

1

2

1

1

1

NA

(continued

on

nextpage)



13/39

TABLE1(continued)

BalanceSheet

andIncome

Statement

Address

Valuation

Detailed

Financial

Statementsare

S

tartingPoint

forFinance

Problems.

De

tailedPresent

Va

lueExamples

U

sedtoDerive

Accounting

Numbers

FinancialRatio

s

UsedasInputs

totheValuation

Model

Detailed

Financial

Statements

UsedtoArrive

atIntrinsic

ValueStock

Valuation

Inclu

des

Discussionof

HowAc

cruals

PlayaR

olein

Estimating

Future

Cash

Flows

Discussesthe

Linkbetween

Incorrect

Accounting

Estimatesand/or

Methodsand

FirmValue

ForCapital

Budgeting,

Ca

lculatesCost

ofCapitalUsing

D

etailedF/S,

Reconciles

betweenIncome

and

CashFlows,

an

dCompares

Ou

tputtoOther

Investment

O

pportunities

viaF/S

Edmondset

al.

(201

1)

1

1

2

1

1

1

NA

Libbyetal.

(2011)

1

2

2

1

1

1

NA

Harrisonet

al.

(201

0)

1

1

1

1

1

2

NA

Porte

rand

Norton

(2011)

1

2

1

1

1

1

NA

Kimmeletal.

(2009)

2

1

1

1

1

1

NA

Phillipsetal.

(2011)

2

1

2

1

1

2

NA

Finance

Berk

etal.

(2009)

2

1

1

2

1

1

2

Blocketal.

(2001)

2

1

2

2

1

1

2

Brealeyetal.

(2009)

2

1

2

2

1

1

2

Brighamet

al.

(200

9a)

2

1

1

2

1

1

2

(continued

on

nextpage)



14/39

TABLE1(continued)

BalanceSheet

andIncome

Statement

Address

Valuation

Detailed

Financial

Statementsare

S

tartingPoint

forFinance

Problems.

De

tailedPresent

ValueExamples

U

sedtoDerive

Accounting

Numbers

FinancialRatio

s

UsedasInputs

totheValuation

Model

Detailed

Financial

Statements

UsedtoArrive

atIntrinsic

ValueStock

Valuation

Inclu

des

Discuss

ionof

HowAc

cruals

PlayaR

olein

Estimating

Future

Cash

Flows

Discussesthe

Linkbetween

Incorrect

Accounting

Estimatesand/or

Methodsand

FirmValue

ForCapital

Budgeting,

Ca

lculatesCost

ofCapitalUsing

D

etailedF/S,

Reconciles

betweenIncome

andCashFlows,

an

dCompares

Ou

tputtoOther

Investment

O

pportunities

viaF/S

Brighamet

al.

(200

9b)

2

1

1

2

1

1

2

Damodaran

(2011)

2

1

1

1

1

1

2

Gitm

an

(2009)

2

1

1

2

1

1

2

Keow

netal.

(2008)

2

2

1

2

1

1

2

Lasher(2008)

2

1

1

2

1

1

2

Melicherand

Norton

(2008)

2

1

1

2

1

1

2

Parrinoand

Kidwell(2009)

2

1

1

2

1

1

2

Ross

etal.

(2008)

2

1

1

2

1

1

2

Nointegration.

Mentionsthelinkbetweenaccountingand

financesuperficially.

Forfinance,usesskeletalfinancialstatementswithoutactualintegrationorderivationofnumbersinthe

ancialstatements.

Foraccounting,verybrieflymentionsthataccountingnumbersmayimpactinvestorriskorfuturereturns,butverybrieflymoreforthe

sakeofexposure

g.,

inaparagraphorafewsentences).Does

notshowhowriskimpactsinputsto

thevaluationmodel(similarlywithreturn).

Integrationofconceptsbyusingdataobtainedbycarefullyconstructedfinancialstatementstoarriveatfinancevaluationandriskreturnanalysis.



15/39


16/39


17/39

3: student can perform a majority of financial calculations, understands meaning, and draws

implications from the financial analysis.

The instructors then combined the results from the financial analysis subpart questions to arrive

at a final performance result. The results showed that 17 percent of students scored a 0, 56

percent a 1, 15 percent a 2, and 12 percent a 3. The combined mean was 1.12. In the

accreditation report, it was noted that financial analysis was the weakest area and the area of greatest

variability across students (when compared to marketing, management, and general business).

The students in the new curriculum will not have completed this capstone course until Fall

2011/Spring 2012. As a result, we have no similar data for those that went through the new

curriculum. However, as a substitute, we identified four questions from our final exam that involved

financial analysis. Comparable to the capstone case, the final exam in the integrated course has, for

TABLE 2

Descriptive Statistics and ANCOVA

Panel A: Descriptive Statistics

n Final Pointsa GPA Majorb Timing Finance Classc Class Standing

Old Curriculum 64 78.74 3.32 72% A/F Before: 19 3% Freshman

(8.96 ) (0.408) 28% Non-A/F Same: 24 81% Sophomore

After: 21 14% Junior

2% Senior

New Curriculum 69 84.54 3.37 87% A/F Before: 0 1% Freshman

(8.83) (0.392) 13% Non-A/F Same: 2 27% Sophomore

After: 67 72% Junior

0% Senior

Totals 133 81.75 3.35

a For all sections, total points were out of 100.b

A/F indicates Accounting/Finance major.c Timing of the Introductory Finance class relative to Managerial Accounting. The Finance class was either taken before,

at the same time, or after the Managerial Accounting class.This table provides descriptive statistics and the ANCOVA associated with the test that compared performance in themanagerial accounting class between the old and new curriculum.

Panel B: ANCOVA

SS

Degrees of

Freedom MS F p-value

Intercept 592.69 1 592.69 20.04 ,0.01

Grades 5323.26 1 5323.26 179.97 ,0.01

Major 107.05 1 107.05 3.62 0.06

Year 15.37 1 15.37 0.52 0.47

Curriculum 254.76 1 254.76 8.61 ,0.01

Finance Class 2.00 1 2.00 0.068 0.80

Error 3726.81 126 29.58

Gradesrepresents the overall GPA for the individual students.Majorrepresents 1 for Accounting/Finance, and 2for non-Accounting/Finance.Year represents class standing; 1 for freshman/sophomore, 2 for junior/senior. As shown in Panel A, the vastmajority of students were sophomores and juniors.



18/39

cash flow statements, along with background information. Each of these four questions on our final

exam requires students to extract information from financial statements, and involves additional

processing relative to the questions described above in the management course. The additional

processing includes an additional number of times that students need to refer to the statements, and

additional number of processing steps when compared to the case questions (comparison is

summarized in Table 3, Panel A). The goal here is to identify questions that require students to

analyze financial statements, either as a final answer or to obtain information that will help generate

final answers, similar to the case in the capstone course. The primary constraint is finding questions

that are of equal difficulty; instead, the final exam questions that have a financial analysis

component include questions that are at a much higher level than the case questions.13

In order to make comparisons, we then created an algorithm to convert the answers for the final

exam questions into the same categorical format as the case questions. The final step of this process

was to collapse the four categories for each deliverable (final exam under new and case under old)

into two categories. For example, the final column in Panel A of Table 3 shows the raw scores on

the final exam that were classified into the 0/1category (low financial analysis and minimal level

of understanding); the remainder were assigned into the 2/3category (high financial analysis and

higher level of understanding). While we do not have this same detailed information regarding the

capstone case questions, we did collapse the four into two categories: categories 0and 1as

students performing less than 50 percent of financial calculations and minimal evidence of

understanding, and 2and 3as more than 50 percent and higher level of understanding, etc.

Similar to the final exam questions, the data for the case were aggregated by student across each

question so we could separate students into low and high performing. Finally, we performed a Chi-

square test to see if the number of low (high) performing students under the old curriculum was

greater (less) than under the new curriculum. The results are summarized in Table 3, Panel B. The

results suggest that students under the new curriculum are able to perform financial analysis at a

much higher level compared to students under the old curriculum (v2 9.48; p0.0021).14

CONCLUDING COMMENTS

The purpose of this paper is to describe the new undergraduate course at Villanova University

that integrates the Introduction to Financial Accounting and Principles of Finance courses. The goal

in combining the courses into a single team-taught course is to provide a richer and more dynamic

learning experience that corresponds to how these two disciplines exist in practice, and to overcome

the artificial barriers that exist between these classes when taught separately. There are several

learning objectives, with one being how financial statements and other financial information link to

firm value. This article provides descriptive evidence that the learning objectives achieved by the

new course are not being met when the accounting and finance courses are separate, but are met

when combined into one course.

13 One limitation of this analysis is potential differences in the grading scheme between the professors in themanagement capstone course and the accounting/finance course (i.e., the authors). While we cannot be certainthat these potential differences impacted the results, we took several steps to account for such differences. Thefirst was to choose final exam questions that were inherently more difficult than the capstone case questions (SeePanel A, Table 3; specifically, columns # times referred to financial statementsand # processing steps). Inaddition, we created high thresholds for students to be classified as high financial analysis for the final examquestions. For example, student needed to score 83 percent on Q1, 80 percent on Q2 and Q3, and 67 percent onQ4 from our final exam to be classified as high financial analysis (see last column in Panel A, Table 3).

14 As noted above, financial analysis was a primary weakness with the old curriculum. Similar to our argumentswith the managerial accounting course, under the new curriculum, students learn this skill under one system (ascompared to two systems when separate classes) So these results are not surprising only in the sense that the



19/39

TABLE 3

Capstone Case Financial Analysis Qs versus Comparable Final Exam Q

Panel A: Descriptive Information about the Questions and the Process We Applied to

Conform to the Capstone Case Algorithm.

# Times Refer

to F/S

# Processing

Steps

Possible Points

(Average

Score) on Final

Exam

Scores that

were Assigned

a 0/1 (2/3)

Number

Assigned 0/1

(2/3)c

New Curriculum Final

Exam Questions

Q1: Ratiosa 1 0 7.00 05 NA

(6.00) (67)

Q2: Sale of Asseta 6 3 5.00 03 NA

(3.90) (45)Q3: Redeem Bonda 2 3 5.00 03 NA

(3.60) (45)

Q4: C/Budgetinga 7 8 12.00 07 NA

(8.00) (812)

Average 4 3.5 Total 20

(27)

Old Curriculum Case

Questions

Q1: Why Diversityb 0 0 NA NA NA

Q2: Change in Profitb 1 2 NA NA NA

Q3: Change in Ratio

b

2 2 NA NA NAQ4: Change in Debtb 2 2 NA NA NA

Q5: Explain Ratiob 1 2 NA NA NA

Average 1.2 1.6 Total 38

(14)

a Q1 requires students explain three ratios, and how such ratios can be used to identify misstatements in a particularaccount. It is a relatively easy question and similar in difficulty to a capstone case question. Q2 requires students towork backward by extracting information from the three financial statements to be used to back into the journal entryfor the sale of a depreciable asset. It is harder than the capstone case questions. Q3 requires students to extractinformation from the financial statements to calculate a bonds market value and use this information, plus otherinformation from the financial statements, to prepare a journal entry for the bond redemption. It is a much harderquestion than the capstone case questions. Q4 requires students to calculate cash flows from projected balance sheets

and income statements, and then use as an input to a capital budgeting problem. It is the most difficult of the fourquestions.

b Q1 has students answer the question Why did the firm diversify?Q2 requires students to calculate and explain whathappened to operating profit from 1997 to 1999. Q3 requires students to describe how the total debt to total SE positionchanged from 1997 to 1999. Q4 requires students to identify the ratio that reflects the change in debt position from1997 to 1999 using only income statement line items. Q5 has students calculate and explain this ratio.

c The results used in the Chi-square analysis in Panel B were based on the combined performance across all questions(four questions for the final exam and five for the capstone case) in order to evaluate each students overallperformance.

(continued on next page)



20/39

Since its implementation, feedback has been received about this course from all the Big 4 firms

and the schools advisory councils.15 The feedback has been overwhelmingly positive, with the

primary comment being that the integrated course corresponds exactly to the direction of business,

especially with the growth of fair-value accounting. Overall, the accounting department has been

encouraged to investigate integrating with other classes. While much progress has been made with

this class, more work needs to be done. The authors would like to further develop assignments into

cases that expand on the current integration of these two classes. We would also like to have a case

that brings together many of the concepts discussed throughout the class. One of the concerns prior

to implementation was whether this course should be done at the introductory versus the senior

level. While both sides of the argument have merit, great benefits have been achieved by teaching

the integration in the introductory course. Students learn how the concepts fit together from the

ground up and can take these skills into their interviews, internships, and later courses.16 It ispossible that the benefits of integrating accounting and finance are so great that it would also benefit

our accounting and finance majors to have a capstone course, required in their senior year, to bring

together major concepts learned throughout their academic tenure. It is clear that business decisions

are not made in a vacuum. The more we can help prepare our students to understand how

accounting and finance relate, the better prepared they will be to function in the current business

environment. We believe that the benefits of the integrated introductory course are clear.

TEACHING NOTES

Teaching Notes are available only to full-member subscribers to Issues in AccountingEducation through the American Accounting Associations electronic publications system athttp://

aaapubs.org/.Full-member subscribers should use their usernames and passwords for entry into the

system where the Teaching Notes can be reviewed and printed. Please do not make the Teaching

Notes available to students or post them on websites.

If you are a full member of AAA with a subscription to Issues in Accounting Education and

have any trouble accessing this material, then please contact the AAA headquarters office atinfo@

aaahq.orgor (941) 921-7747.

TABLE 3 (continued)

Panel B: Descriptive Statistics and Chi-Square Data Inputs

Pre-New Curriculum

(Capstone Case Questions)

Post-New Curriculum

(Final Exam Questions)

Low-Level Financial Analysis 38 (73.1%) 20 (42.6%)

High-Level Financial Analysis 14 (26.9%) 27 (57.4%)

52 47

Average GPA 3.36 3.33

Average Number Acc/Fin 9.00 2.00

Number Acc/Finance Majors 61% 81%

15 When we make office visits to the firms, we make presentations to our alums that are in the office (often as high as

60 alums). While the focus of these presentations was not this course, we nevertheless discussed it to highlightcurriculum changes.

16 An analogy would be the common assumption that the best approach to teach a foreign language is to begin

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21/39

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a0ee9f74c803aaf66de5c964edc1e384Luehrman, T., and J. Heilprin. 2009b. Blaine Kitchenware, Inc.: Capital structure. Harvard Business Review

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http://www.gfme.org/issues/pdfs/Management%20Education%20at%20Risk.pdfhttp://www.gfme.org/issues/pdfs/Management%20Education%20at%20Risk.pdfhttp://hbr.org/product/the-talbots-inc-and-subsidiaries-accounting-for-go/an/3254-PDF-ENGhttp://hbr.org/product/the-talbots-inc-and-subsidiaries-accounting-for-go/an/3254-PDF-ENGhttp://hbr.org/product/depreciation-at-delta-air-lines-the-fresh-start/an/4013-PDF-ENGhttp://hbr.org/product/merrimack-tractors-and-mowers-lifo-or-fifo/an/3217-PDF-ENGhttp://hbr.org/product/merrimack-tractors-and-mowers-lifo-or-fifo/an/3217-PDF-ENGhttp://hbr.org/product/biovail-corporation-revenue-recognition-and-fob-sa/an/4011-PDF-ENGhttp://hbr.org/product/biovail-corporation-revenue-recognition-and-fob-sa/an/4011-PDF-ENGhttp://hbr.org/product/panera-bread-company/an/UV1066-PDF-ENGhttp://hbr.org/product/panera-bread-company/an/UV1066-PDF-ENGhttp://cb.hbsp.harvard.edu/cb/pl/11319578/11319580/a0ee9f74c803aaf66de5c964edc1e384http://cb.hbsp.harvard.edu/cb/pl/11319578/11319580/a0ee9f74c803aaf66de5c964edc1e384http://hbr.org/product/blaine-kitchenware-inc-capital-structure-brief-cas/an/a0ee9f74c803aaf66de5c964edc1e384http://cb.hbsp.harvard.edu/cb/pl/11319578/11319580/a0ee9f74c803aaf66de5c964edc1e384http://hbr.org/product/biovail-corporation-revenue-recognition-and-fob-sa/an/4011-PDF-ENGhttp://hbr.org/product/merrimack-tractors-and-mowers-lifo-or-fifo/an/3217-PDF-ENGhttp://hbr.org/product/the-talbots-inc-and-subsidiaries-accounting-for-go/an/3254-PDF-ENGhttp://www.gfme.org/issues/pdfs/Management%20Education%20at%20Risk.pdfhttp://hbr.org/product/blaine-kitchenware-inc-capital-structure-brief-cas/an/a0ee9f74c803aaf66de5c964edc1e384http://cb.hbsp.harvard.edu/cb/pl/11319578/11319580/a0ee9f74c803aaf66de5c964edc1e384http://hbr.org/product/panera-bread-company/an/UV1066-PDF-ENGhttp://hbr.org/product/panera-bread-company/an/UV1066-PDF-ENGhttp://hbr.org/product/biovail-corporation-revenue-recognition-and-fob-sa/an/4011-PDF-ENGhttp://hbr.org/product/merrimack-tractors-and-mowers-lifo-or-fifo/an/3217-PDF-ENGhttp://hbr.org/product/depreciation-at-delta-air-lines-the-fresh-start/an/4013-PDF-ENGhttp://hbr.org/product/the-talbots-inc-and-subsidiaries-accounting-for-go/an/3254-PDF-ENGhttp://www.gfme.org/issues/pdfs/Management%20Education%20at%20Risk.pdf


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Harvard Business Review (May 15). Available at: http://hbr.org/product/ceres-gardening-company-

funding-growth-in-organic-/an/4017-PDF-ENG

Melicher, R. W., and E. A. Norton. 2008. Introduction to Finance: Markets, Investments, and FinancialManagement. New York, NY: John Wiley and Sons.

Parrino, R., and D. Kidwell. 2009.Fundamentals of Corporate Finance. 13th Edition. New York, NY: John

Wiley and Sons.

Phillips, F., R. Libby, and P. A. Libby. 2011. Fundamentals of Financial Accounting. 3rd Edition. New

York, NY: McGraw-Hill Irwin.

Porter, G. A., and C. L. Norton. 2011. Financial Accounting. 7th Edition. Mason, OH: South-Western.

Reimers, J. L. 2011.Financial Accounting: A Business Process Approach. 3rd Edition . Upper Saddle River,

NJ: Prentice Hall.

Ross, S. A., R. W. Westerfield, and B. D. Jordan. 2008. Essentials of Corporate Finance. 6th Edition. New

York, NY: McGraw-Hill Irwin.

Smith, K. R. April 1995. Individually or Collectively, Schools Need to Start Journey towardTransformation. Presidential Address to the American Assembly of Collegiate Schools of Business

(April). St. Louis, MO: AACSB.

Stafford, E., K. Luchs, and A. Chao. 2002. Ocean Carriers. Harvard Business Review(April 18). Available

at:http://hbr.org/product/ocean-carriers/an/202027-PDF-ENG

APPENDIX A

This appendix includes the following three deliverables for the Financial Management and

Reporting class.

1. In-Class Assignment: Stockholders Equity.

2. In-Class Assignment: Capital Budgeting.

3. Exam 2: March 30, 2010.

The first two are in-class assignments completed by students in groups. As noted in the paper,

the authors created these deliverables. If the groups did not finish the assignment during class

(which was not uncommon), then they were required to complete them on their own (sometimes

handed in for grading). There were nine in-class assignments, although one or two assignments

were lengthy and encompassed several topics. The third deliverable included in this appendix is a

sample of Exam 2, which was also created by the authors.

In Class Assignment: Stockholders Equity

Mack Corporation

Comparative Balance Sheets

At December 31 2009 2008 2007

Cash 210,000 780,000 1,530,000

Accounts Receivable 315,000 265,000 240,000

Inventory 436,000 405,000 330,000Prepaid Insurance 15,000 18,000 21,000

Total Current Assets 976 000 1 468 000 2 121 000

http://hbr.org/product/netflix-com-inc/an/201037-PDF-ENGhttp://hbr.org/product/netflix-com-inc/an/201037-PDF-ENGhttp://hbr.org/product/ceres-gardening-company-funding-growth-in-organic-/an/4017-PDF-ENGhttp://hbr.org/product/ceres-gardening-company-funding-growth-in-organic-/an/4017-PDF-ENGhttp://hbr.org/product/ocean-carriers/an/202027-PDF-ENGhttp://hbr.org/product/netflix-com-inc/an/201037-PDF-ENGhttp://hbr.org/product/ceres-gardening-company-funding-growth-in-organic-/an/4017-PDF-ENGhttp://hbr.org/product/ocean-carriers/an/202027-PDF-ENGhttp://hbr.org/product/ceres-gardening-company-funding-growth-in-organic-/an/4017-PDF-ENGhttp://hbr.org/product/netflix-com-inc/an/201037-PDF-ENG


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Mack Corporation

Statement of Cash Flows

For the 12 Months Ended December 31 2009 2008

Cash received from customers 3,960,000 3,375,000

Cash paid to suppliers (2,470,000) (2,036,000)

Cash paid for salaries and wages (646,000) (831,000)

Cash paid for insurance (114,000) (99,000)

Cash paid for interestBonds (60,000) (60,000)

Cash paid for interestNotes Payable (76,911) (69,591)

Net Cash from Operating 593,089 279,409

Investment in Land (300,000) (1,420,000)

Investment in Building (930,000) (640,000)

Sale of Building 343,000 287,000

Sale of Land 277,000 1,233,000

Net Cash from Investing (610,000) (540,000)

Proceeds (Payment) Notes Payable 594,911 39,591

(Purchase) Sale Treasury Stock (1,100,000) (504,000)

Dividends Paid (48,000) (25,000)

Cash from Financing (553,089) (489,409)

Net Change in Cash (570,000) (750,000)

Beginning Cash 780,000 1,530,000

Ending Cash 210,000 780,000

Mack and Industry Financial Ratios

2009 2008

2009/2008

Industry

Return on Equity 0.27 0.19 0.14

Dividend Payout 0.18 0.15 0.10

Return on Assets 0.10 0.09 0.10

Return on Sales 0.11 0.12 0.11

Asset Turnover 0.92 0.77 1.02

Current Ratio 1.39 3.46 2.35

Quick Ratio 0.75 2.46 1.75

Debt/Assets 0.70 0.53 0.35

Accounts Receivable Days 26.40 27.11 19.50

Inventory Days 60.91 70.23 41.50

Accounts Payable Days 25.59 31.73 28.40

Summary: Cash Conversion Days 61.71 65.61 32.60

Other Information Regarding Mack Corporation

Common Stock: The firm has 400,000 shares authorized and 100,000 shares issued at year-end



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Treasury Stock: The firm purchased 1,000 shares of treasury stock at year-end 2007, 12,000 at

year-end 2008, and 20,000 at year-end 2009.

Market Valuation: The market price of the stock was $31 at year-end 2006, $35 at year-end

2007, $42 at year-end 2008, and $55 at year-end 2009.

For valuation purposes, industry experts use the dividend valuation model to value thecommon equity interest of industry firms. Potential investors required rate of return

for this firm is 14 percent; growth rate is 13 percent for 2010 and 2011, and then

declines to 12 percent for all later years.

Market Returns: The stock returns for the market as a whole were as follows: 15.7 percent in

2007, 8.2 percent in 2008, and 12.1 percent in 2009.

Stockholders Equity In-Class Questions

1. a. For Mack, calculate the average stock return from 20072009.

b. Calculate the standard deviation over this same period.c. Calculate the coefficient of variation over this period.

2. Assume that the CAPM holds, Mack Corporation has a beta of 1.50, and the 30-year U.S.

Treasury bonds sell at an 8 percent yield. Using the CAPM, calculate the firms required

rate of return.

3. Calculate the dollar amount of dividends that were declared during 2009.

4. a. Calculate the (intrinsic) value of the firms stock price at year-end 2009 using the

dividend growth model.

b. Compare the intrinsic value to the market value of the firm. Explain the difference.

c. Compare the intrinsic value and market value to the book value of the firm. Explain the

difference.

5. Prepare the journal entry to record the 2009 purchase of treasury stock.

6. Recalculate 2009 earnings per share, 2009 current ratio, and 2009 debt-to-assets assuming

the firm never purchased treasury stock (i.e., has zero treasury stock at year-end 2009), and

instead left the monies in cash.

7. Assume that management made a bold prediction to investors at year-end 2008 that 2009

EPS would be a minimum of $6.50 and that this would confirm the strong growth rate

experienced by the firm. At the same time, a member of the firms board of directors

complained about the use of capital to purchase Treasury Stock and said that management

should reinvest the monies back into the firm. Clearly, management believes that thepurchase of treasury stock over the past three years increased shareholder value. Who is

correctmanagement or the member of the board? Use numbers to support your answer.

8. There are three parts to this question:

a. Assume that the firm wants to purchase 5,000 more treasury shares in early 2010 and

then sell these same 5,000 shares at year-end 2010 when, at that time, the firm believes

that the market price will approximate $62 per share (below its year-end 2009 intrinsic

value). All else equal, is this purchase a good use of capital?

b. Are creditors happy with the decision to purchase the treasury stock?

c. Suppose that on January 1, 2010, the firm sells the 1,000 shares of TS purchased in 2007;

the firm sold this stock at the market price at year-end 2009. Prepare the journal entry to

record this transaction. Also, how does this transaction impact the three financial



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In-Class Assignment: Capital Budgeting

Mack Corporation

Comparative Balance Sheets

At December 31 2009 2008 2007

Cash 210,000 780,000 1,530,000

Accounts Receivable 410,000 360,000 300,000

Less: Allowance for Doubtful Accounts (4,100) (14,616) (1,500)

Net Accounts Receivable 405,900 345,384 298,500

Inventory 436,000 405,000 330,000

Prepaid Insurance 15,000 18,000 21,000

Total Current Assets 1,066,900 1,548,384 2,179,500

Land 1,650,000 1,630,000 1,400,000Buildings 2,300,000 1,760,000 1,400,000

Less: Accumulated Depreciation (560,000) (490,000) (440,000)

Net Buildings 1,740,000 1,270,000 960,000

Total Long-Term Assets 3,390,000 2,900,000 2,360,000

Total Assets 4,456,900 4,448,384 4,539,500

Accounts Payable 215,000 134,000 185,000

Salaries and Wages Payable 63,000 49,000 40,000

Dividends Payable 93,216 44,178 0

Notes PayableLine of Credit 356,000 205,000 98,000

Total Current Liabilities 727,216 432,178 323,000

Notes PayableLong Term 778,032 961,219 939,680

Bonds Payable 1,000,000 1,000,000 1,000,000

Add: Premium on Bonds Payable 89,826 105,753 121,062

Net Bonds Payable 1,089,826 1,105,753 1,121,062

Total LT Liabilities 1,867,857 2,066,973 2,060,743

Total Liabilities 2,595,073 2,499,151 2,383,743

Contributed Capital 1,500,000 1,500,000 1,500,000

Retained Earnings 1,167,827 925,233 691,757

Treasury Stock (806,000) (476,000) (36,000)

Total Stockholders Equity (SE) 1,861,827 1,949,233 2,155,757

Total Liabilities and SE 4,456,900 4,448,384 4,539,500

Mack Corporation

Income Statement

For the 12 Months Ended December 31 2009 2008 2007

Sales Revenue 4,010,000 3,400,000 2,300,000



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Salaries and Wages Expense (660,000) (840,000) (750,000)

Depreciation ExpenseBuilding (115,000) (88,000) (70,000)

Bad Debt Expense (11,000) (18,000) (8,000)

Insurance Expense (117,000) (102,000) (95,000)

Total Expenses (3,423,000) (2,858,000) (1,863,000)Operating Income 587,000 542,000 437,000

Interest ExpenseNotes (52,740) (66,946) (51,647)

Interest ExpenseBonds (44,072) (44,691) (45,285)

Loss from Inventory Write-Off 0 (86,000) 0

Gain (Loss) Sale of Buildings (2,000) 45,000 (1,700)

Gain (Loss) Sale of Land (3,000) 43,000 7,000

Total Other (101,812) (109,637) (91,633)

Net Income Before Taxes 485,188 432,363 345,367

Income Tax Expense (30 percent rate) 145,556 129,709 103,610

Net Income 339,631 302,654 241,757

Earnings per share 4.04 3.40 2.44

Mack Corporation

Statement of Cash Flows

For the 12 Months Ended December 31 2009 2008

Cash received from customers 3,938,484 3,335,116Cash paid to suppliers (2,470,000) (2,022,000)

Cash paid for salaries and wages (646,000) (831,000)

Cash paid for insurance (114,000) (99,000)

Cash paid for income taxes (145,556) (129,709)

Cash paid for interestBonds (60,000) (60,000)

Cash paid for interestNotes Payable (52,740) (66,946)

Net Cash from Operating 450,188 126,461

Investment in Land (300,000) (1,420,000)

Investment in Building (930,000) (640,000)

Sale of Building 343,000 287,000

Sale of Land 277,000 1,233,000

Net Cash from Investing (610,000) (540,000)

Proceeds (Payment) Notes Payable (32,188) 128,539

(Purchase) Sale Treasury Stock (330,000) (440,000)

Dividends Paid (48,000) (25,000)

Cash from Financing (410,188) (336,461)

Net Change in Cash (570,000) (750,000)

Beginning Cash 780,000 1,530,000

Ending Cash 210,000 780,000



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Equipment 400,000 400,000 400,000 400,000 400,000

Less: Accumulated Depr. 0 (132,000) (312,000) (372,000) (400,000)

Net Equipment 400,000 268,000 88,000 28,000 0

Other 0 0 0 0 0

Total Long-Term Assets 400,000 268,000 88,000 28,000 0

Total Assets 600,000 538,000 398,000 358,000 0

Accounts Payable 140,000 161,000 175,000 182,000 0

Total Liabilities 140,000 161,000 175,000 182,000 0

Equity 460,000 377,000 223,000 176,000 0

Total L Equity 600,000 538,000 398,000 358,000 0

Projected Income Statements

2010 2011 2012 2013

Sales Revenue 440,000 510,000 560,000 630,000

Documents

An Integrated Approach to Beginning Financial Accounting and Finance Courses