1. HowdoIoffer$10perquestion?Icantfigurethatout.
2. The numbers below correspond to the questions on page 12 of the attached PDF. Iwanttogetanotherpointofviewbeforesubmittingmyanswer.
3. 2.HowdidCiscodeterminetheamountoftheimpairmentcharge?Doesthisseemlikeareasonableprocess?
4. 3.Howdoestheimpairmentchargecomparetocostofgoodssold?HowmuchinventorydoesCiscostillhavelistedasanassetaftertheimpairmentcharge?Doesitappearthattheimpairmentchargewastoolarge?Toosmall?Takentooearly?Takentoolate?Considermateriality,relevance,andtimelinessinyourresponse.
5. 8.Consider Lynn Turners comments on the issue of inventory impairment. In light of the issues he raises, what aspects might be relevant for evaluating Ciscos charge?

ISSUES IN ACCOUNTING EDUCATION Vol. 30, No. 4 2015 pp. 329-352 American Accounting Association DOI: 10.2308/iace-51174 Cisco Systems, Inc.: Minding the GAAP? Cynthia G. Jeffrey and Jon D. Perkins ABSTRACT: Cisco Systems, Inc. manufactures and sells networking and communications products and provides services associated with that equipment and its use. In April 2001, Cisco announced a charge of $2.249 billion against earnings for obsolete inventory. The financial press gave extensive coverage to the write-off, including claims that Cisco was writing off inventory in an effort to set up future windfall profits. Students are required to examine and integrate information from multiple sources, including the relevant U.S. authoritative literature, SEC commentary relevant to Cisco's decision, and Cisco's disclosures, to critically evaluate reactions from the financial press and examine the potential for biased reporting in both Cisco's disclosures and the reactions of the financial press. This case is appropriate for an undergraduate intermediate accounting course or for graduate courses in financial statement analysis or accounting theory. Keywords: inventory impairment; critical thinking; earnings management; disclosure; nancial reporting quality. CASE Company Profile C isco Systems, Inc. (CSCO, NASDAQ) manufactures and sells networking and communications products and provides services associated with that equipment and its use. Its customer base includes large and small corporations and public institutions. The telecommunications industry has been one of its larger customers. Cisco sells scalable, standards-based networking products that cover a wide range of networking needs. Its products and services help customers build their own network infrastructure, while also providing tools to allow them to communicate electronically with their own customers, prospects, business partners, suppliers, and employees. Products are used individually or in combinations to develop networks that connect computing devices; networks may connect computers located within a building, across a campus, or, as with the Internet, around the world. Cynthia G. Jeffrey is an Associate Professor and Jon D. Perkins is an Assistant Professor, both at Iowa State University. We thank Jan Duffy and Diane Whittle for their assistance in testing this case. We also thank the reviewers and editors of Issues in Accounting Education for their helpful comments on prior versions of this case. Supplemental materials can be accessed by clicking the links in Appendix A. Published Online: June 2015 329 330 Jeffrey and Perkins The Issue In April 2001, Cisco announced that it was taking a charge of $2.5 billion against earnings in the current quarter for obsolete inventory. It provided further details of this impairment charge in its earnings announcement and press release on May 8, 2001; this press release is included in the 8-K filed with the SEC (SEC 2001a). Cisco's press release with the discussion of this impairment charge is presented in Exhibit 1.1 Cisco CFO Larry Carter indicated in the subsequent earnings conference call on May 8, 2001, that the company would ''scrap and destroy'' the majority of the inventory because most of it could not be sold because it was custom-built for Cisco (Cisco Systems, Inc. 2001). He went on to say that parts that were not destroyed would be sold to recycling companies that salvage metal components. Carter stated: ''We don't anticipate that any of the inventory will be used based on our current forecast. We will be very open about our treatment of this inventory and disclose its status in future conference calls.'' Background Stock Market Environment of the 1990s Massive development of new technologies prompted radical changes in business models and fueled significant growth in the 1990s, inducing rapidly increasing stock prices, particularly for companies that were actively part of the tech revolution. The ''dot-com'' bubble refers to the time period from approximately 1997-2000 during which stock markets in industrialized nations saw their stock market valuations rise dramatically, largely driven by advances in technology stocks referred to as ''dot-coms,'' followed by a dramatic drop in stock prices. In the U.S., the NASDAQ peaked at 5,132 on March 10, 2000; two months later, on May 10, 2000, the NASDAQ had lost approximately 31 percent of its value and had sunk to 3,525. In the aftermath of the market crash, many of these technology firms failed completely. Others lost a large portion of their market capitalization, but maintained stable operations. When the NASDAQ peaked in March 2000, Cisco had a market capitalization of $555.4 billion, the largest of any company in the world. In spite of the drop in market capitalization for technology stocks, Cisco continued to report strong performance during 2000, and while the stock price dropped from $69 on March 10 to $58 by May 10, Cisco was still trading at $52 in early December. In August 2000, Cisco reported earnings that exceeded analyst expectations, with total revenue rising 61 percent to $5.72 billion, up from $3.56 billion for the same period the previous year. Growth of the Networking Industry The growth of technologies and the related expansion of electronic communication created a rapidly increasing market for the networking industry, which responded to higher order patterns with higher build rates and substantial inventory accumulation. Cisco's response to rapidly increasing demand through the end of 2000 was to place large orders for communications chips, optical lasers, and subassembly boards from its suppliers. Concerns about Earnings Management During this period, there was also rising concern that companies may have been deliberately manipulating earnings in order to artificially improve their performance reports, and earnings 1 Under Regulation Fair Disclosure (FD), promulgated by the SEC and effective for disclosures as of October 23, 2000, material information released by the company must be made available to all investors at the same time (SEC 2000). Compliance with this regulation may be met by filing a Form 8-K (SEC 2000). Issues in Accounting Education Volume 30, No. 4, 2015 Cisco Systems, Inc.: Minding the GAAP? 331 EXHIBIT 1 Cisco Press Release Detailing the Inventory Impairment and its Quarterly Financial Results (from the 8-K filed with the SEC) (continued on next page) Issues in Accounting Education Volume 30, No. 4, 2015 Jeffrey and Perkins 332 EXHIBIT 1 (continued) management was a key concern of Arthur Levitt, chair of the Securities and Exchange Commission. He detailed some of his concerns in a speech he made at the New York Center for Law and Business on September 28, 1998, entitled ''The Numbers Game'' (Levitt 1998). In this speech, Levitt stated: ''Increasingly, I have become concerned that the motivation to meet Wall Street earnings expectations may be overriding common sense business practices. Too many corporate Issues in Accounting Education Volume 30, No. 4, 2015 Cisco Systems, Inc.: Minding the GAAP? 333 managers, auditors, and analysts are participants in a game of nods and winks. In the zeal to satisfy consensus earnings estimates and project a smooth earnings path, wishful thinking may be winning the day over faithful representation.'' The potential for earnings management generated significant coverage by the press. However, accounting researchers (Miller 2006; Core, Guay, and Larcker 2008) note that the ultimate objective of the press is to maximize subscription and advertising revenues, which is accomplished by covering widely held firms and more ''newsworthy events.'' The Write-Off and Reaction At the time of the write-off, Cisco was widely followed by analysts and was a key holding for many investors. Many analysts immediately expressed concern about both the impairment charge and its relative size.2 Chuck Hill, research director with Thomson Financial/First Call, called the $2.5 billion charge ''staggering'' (Pender 2001). Some analysts questioned the legitimacy of the impairment charge, suggesting that Cisco was managing earnings to improve future performance. Relevant financial information from Cisco's 10-Q filing on May 25, 2001 (SEC 2001b) is presented in Exhibit 2. An article in The Washington Post on April 21, 2001 (Hilzenrath 2001), detailed many of these charges and is presented in Exhibit 3.3 Shortly after Cisco announced the impairment charge, Lynn Turner, the chief accountant at the U.S. Securities and Exchange Commission (SEC), discussed the general nature of inventory impairments in a speech delivered at the University of Southern California on May 31, 2001 (Turner 2001). While he did not address the particulars of the Cisco write-off, he did note that there had been several high-profile impairment charges taken, and suggested questions that both the SEC and investors might consider when evaluating such charges. These remarks are presented in Exhibit 4. Relevant Accounting Requirements When evaluating an accounting charge, it is important to know the relevant accounting standards and requirements. According to Generally Accepted Accounting Principles (GAAP), inventory must be valued at the lower of cost or market. The definition of this term is found in Accounting Standards Codification (ASC) 330-10-20 (FASB 2010). Guidelines for the implementation of lower-of-cost-or-market accounting are found in ASC 330-10-35. The text of this material is presented in Exhibit 5. In addition to the exhibits, you may wish to access Cisco Systems' quarterly report for the quarter ended April 2001 (SEC 2001b), the quarter in which the impairment charge was taken. As Cisco is a real company and this was a very high-profile event, there is a great deal of other information available about the write-off that you may choose to search for; however, it is possible to respond to the questions in this case based on the information provided. 2 3 Other companies were taking inventory impairment charges in the same time frame, including Lucent Technologies, Inc. ($563 million), Conexant Systems, Inc. ($149 million), Extreme Networks ($40.3 million), Copper Mountain Networks ($35 million), Xilinx, Inc. ($32 million), New Focus ($28.5 million), Redback Networks ($24 million), and Avanex Corp. ($21.6 million). Cisco's write-off was by far the largest. The Washington Post has a reputation for excellence and is generally regarded as one of the leading daily American newspapers. The newspaper has won 47 Pulitzer Prizes, including six awarded in 2008. Post journalists have received 18 Nieman Fellowships and 368 White House News Photographers Association awards. Issues in Accounting Education Volume 30, No. 4, 2015 Jeffrey and Perkins 334 EXHIBIT 2 Cisco Systems, Inc. a The complete set of consolidated balance sheets can be found at: http://www.sec.gov/Archives/edgar/data/858877/ 000089161801500994/f73006e10-q.txt b We recorded a provision for inventory, including purchase commitments, totaling $2.36 billion in the third quarter of fiscal 2001, of which $2.25 billion related to an additional excess inventory charge. Inventory purchases and commitments are based on future sales forecasts. To mitigate the component supply constraints that have existed in the past, we built inventory levels for certain components with long lead times and entered into certain longer-term commitments for certain components. Due to the sudden and significant decrease in demand for our products, inventory levels exceeded our requirements based on current 12-month sales forecasts. This additional excess inventory charge was calculated based on the inventory levels in excess of 12-month demand for each specific product. We do not currently anticipate that the excess inventory subject to this provision will be used at a later date based on our current 12-month demand forecast. Issues in Accounting Education Volume 30, No. 4, 2015 Cisco Systems, Inc.: Minding the GAAP? 335 EXHIBIT 3 The Washington Post Article Detailing Analyst Reactions to the Cisco Impairment Charge (continued on next page) Issues in Accounting Education Volume 30, No. 4, 2015 Jeffrey and Perkins 336 EXHIBIT 3 (continued) Issues in Accounting Education Volume 30, No. 4, 2015 Cisco Systems, Inc.: Minding the GAAP? 337 EXHIBIT 4 Portion of a Speech by Lynn Turner, Chief Accountant at the SEC, Discussing Inventory Impairment Charges a As of 2009, relevant GAAP was reformulated into the FASB Accounting Standards Codification. The relevant GAAP as referenced by Mr. Turner is incorporated in the authoritative pronouncements presented in Exhibit 5. Issues in Accounting Education Volume 30, No. 4, 2015 Jeffrey and Perkins 338 EXHIBIT 5 Authoritative Pronouncements on Inventory Impairments (continued on next page) Issues in Accounting Education Volume 30, No. 4, 2015 Cisco Systems, Inc.: Minding the GAAP? EXHIBIT 5 (continued) Source: FASB (2010). Issues in Accounting Education Volume 30, No. 4, 2015 339 Jeffrey and Perkins 340 Required An impairment charge involves the use of accounting estimates and, as such, requires sound professional judgment from all parties. Your task is to evaluate Cisco's impairment charge and the press's reaction to the disclosure of the charge by responding to the following questions: 1. What does U.S. GAAP say should be done? What are the key issues to examine to determine whether an impairment charge is necessary and whether the size of the charge is appropriate? Why is it important to write-down inventory? What signals do inventory writedowns provide to the market? 2. How did Cisco determine the amount of the impairment charge? Does this seem like a reasonable process? 3. How does the impairment charge compare to cost of goods sold? How much inventory does Cisco still have listed as an asset after the impairment charge? Does it appear that the impairment charge was too large? Too small? Taken too early? Taken too late? Consider materiality, relevance, and timeliness in your response. 4. What did some analysts mean when they suggested that Cisco might be setting up for future windfall profits? 5. One analyst said that the write-off was ''ridiculous'' because the inventory had only been acquired in the previous six months. What is the tone of this statement? At whom is it directed? Comment on this allegation; consider materiality and timeliness in your answer. 6. Cisco did not destroy the excess inventory. Some commentators claimed that this action was inappropriate. What do you think? Relate your response to the concept of full disclosure in both the current and future periods. 7. Were there any notable industry trends at the time of the impairment charge? 8. Consider Lynn Turner's comments on the issue of inventory impairment. In light of the issues he raises, what aspects might be relevant for evaluating Cisco's charge? 9. Do you think Cisco should have done something ''different?'' If so, what? REFERENCES Cisco Systems, Inc. (Cisco). 2001. Earnings Conference Call on May 8. San Jose, CA: Cisco Systems, Inc. Core, J. E., W. Guay, and D. F. Larcker. 2008. The power of the pen and executive compensation. Journal of Financial Economics 88 (1): 1-25. Financial Accounting Standards Board (FASB). 2010. Accounting Standards Codification 330-Inventory. Norwalk, CT: FASB. Levitt, A. 1998. The numbers game. Speech delivered at New York University, Center for Law and Business, September 28. Available at: http://www.sec.govews/speech/speecharchive/1998/ spch220.txt Miller, G. S. 2006. The press as a watchdog for accounting fraud. Journal of Accounting Research 44 (5): 1011-1033. Pender, K. 2001. Write-offs remove excess inventory from booksNot shelves. Accounting move can often distort firms' financial data. SFGATE (May 8). Securities and Exchange Commission (SEC). 2000. Regulation Fair Disclosure. 17 CFR 243.100-243.103. Washington, DC: Government Printing Office. Securities and Exchange Commission (SEC). 2001a. Cisco Systems, Inc. Form 8-K filed May 11, 2001. Available at: http://www.sec.gov/Archives/edgar/data/858877/000089161801500638/000089161801-500638.txt Securities and Exchange Commission (SEC). 2001b. Cisco Systems, Inc. Form 10-Q filed May 25, 2001. Available at: http://www.sec.gov/archives/edgar/data/858877/000089161801500994/f73006e10-q. txt Issues in Accounting Education Volume 30, No. 4, 2015 Cisco Systems, Inc.: Minding the GAAP? 341 Turner, L. 2001. A Menu of Soup Du Jour Topics. Remarks made at the 20th Annual SEC and Financial Reporting Institute Conference at the Leventhal School of Accounting, Marshall School of Business Administration, University of Southern California, Pasadena, California on May 31. Available at: http://www.sec.govews/speech/spch498.htm Issues in Accounting Education Volume 30, No. 4, 2015 Jeffrey and Perkins 342 CASE LEARNING OBJECTIVES AND IMPLEMENTATION GUIDANCE Overview of the Case Cisco Systems, Inc., an American multi-national corporation, is headquartered in San Jose, California. Cisco is included in the Dow Jones Industrial Average, the S&P 500 Index, the Russell 1000 Index, the NASDAQ 100 Index, and the Russell 1000 Growth Stock Index. Cisco designs, manufactures, and sells networking equipment. In April 2001, Cisco announced a $2.5 billion dollar charge against quarterly earnings for impaired inventory. Reactions to this charge were immediate and negative, generating comments such as that by Fred Hickey, editor of a technology newsletter, who said, ''This is unheard of. This is the greatest write-off I've seen in my 20 years in the business. It's unprecedented'' (Raynovich and Reardon 2001). The financial press gave extensive coverage to the write-off, including claims that Cisco was writing off inventory in an effort to set up future windfall profits. Because the case is based on a real company's controversial disclosures, students have the opportunity to (1) interpret and apply the relevant U.S. authoritative literature as they examine the quality of Cisco's disclosures to assess whether Cisco's charge was justifiable given the conditions at the time, (2) critically evaluate reactions from the financial press relevant to Cisco's decision, (3) consider the potential for biased reporting in both Cisco's disclosures and the reactions of the financial press, and (4) become aware of the role of the SEC and the importance of SEC commentary. Learning Objectives The main learning objectives for this case are for students to be able to: 1. Interpret and apply the relevant U.S. authoritative accounting literature using the FASB Accounting Standards Codification and any other relevant sources in a realistic context; 2. Understand the issues raised by the business press and critically evaluate external reactions to the Cisco action; 3. Critically evaluate and understand the implications both for Cisco and for accounting practice as suggested by the external press; 4. Reinforce the determinants of and limitations on accounting choices and management discretion with respect to impairment charges, including the requirements of lower-of-costor-market accounting; 5. Critically evaluate the suggestion that Cisco was engaging in inappropriate earnings management; 6. Understand the reaction of the SEC to the issue of impairment charges and the potential for SEC intervention in the reporting process; and 7. Develop and justify an evaluation of the Cisco charge-off in light of what can be determined about the company's inventory-valuation process, relevant GAAP, and the Conceptual Framework, specifically considering the constructs of timeliness, materiality, relevance, reliability, and full disclosure. Table 1 maps the case learning objectives to the AICPA Core Competency Framework (AICPA 2005), and notes specific questions that relate to these objectives. Purpose and Context of the Case The case requires students to examine and integrate information from multiple sources, including the relevant U.S. authoritative literature, SEC commentary relevant to Cisco's decision, and Cisco's disclosures, to critically evaluate reactions from the financial press and to examine the potential for biased reporting in both Cisco's disclosures and the reactions of the financial press. The Issues in Accounting Education Volume 30, No. 4, 2015 Cisco Systems, Inc.: Minding the GAAP? 343 TABLE 1 Case Alignment to AICPA Core Competency Frameworka Panel A: Functional Competencies (continued on next page) Issues in Accounting Education Volume 30, No. 4, 2015 Jeffrey and Perkins 344 TABLE 1 (continued) Panel B: Personal Competencies Panel C: Broad Business Perspective Competencies a AICPA (2005). Issues in Accounting Education Volume 30, No. 4, 2015 Cisco Systems, Inc.: Minding the GAAP? 345 case has three main features: (1) the use of a real company and event that incorporates multiple information sources, (2) an examination of how this event was reported by the financial press, and (3) an examination of the impairment as reported in the financial statements that considers the related accounting standards and the Conceptual Framework. The use of a complex, real-world case that incorporates multiple information sources addresses issues raised by the Pathways Commission, which criticized contemporary accounting education for being slow to respond to the demands of the profession in the 21st century (Behn et al. 2012). The Pathways Commission states: ''All too frequently, students in accounting classes are exposed to technical material in a vocation-focused way that is disembodied from the complex, real-world settings to which the students are bound; the Commission recommends the purposeful integration of accounting practice into the curriculum'' (Behn et al. 2012, 597). Demski (2007, 153) claims that our ''instruction has become first-job vocational. Accounting majors are treated to a litany of rules and even tutoring in how to look up additional and newer rules.'' The AICPA suggests that accounting education emphasizes the production of accounting data, and not strategic and other uses of accounting information, which potentially imperils accountants' competitive edge in the marketplace (AICPA 2011). Rankine and Stice (1994) suggest that a tool for addressing these concerns is the use of readings from the popular press, and state that the effectiveness of this technique is enhanced by the use of questions to help students learn to do a systematic and critical analysis. They also note that the ''flamboyant'' tone of articles in the popular press is likely to stimulate classroom discussion and motivate students to learn; Rankine and Stice (1994, 143) further suggest that the use of popular press articles will ''highlight the place of accounting in society, illustrate accounting's relevance in the economy, and allow students to see the 'rough-and-tumble' side of accounting that is typically left out of textbooks.'' M. Bamber and L. Bamber (2006) note that the accounting profession and business community have called for educators to present accounting in more realistic business contexts (Behn et al. 2012; PricewaterhouseCoopers [PwC] 2003). The Accounting Education Change Commission (1990, 309) states that ''courses should focus on both basic concepts and the application of these concepts in real-world environments . . . students should identify and solve unstructured problems that require use of multiple information sources.'' Johnstone and Biggs (1998, 411-413) argue that it is necessary to integrate basic technical knowledge with experiencebased knowledge and suggest that students can acquire such knowledge by analyzing realistic cases. This case accomplishes these goals through the use of a real-world case that asks students to analyze a company's disclosures and its business operations in light of the relevant authoritative literature, SEC commentary, and the viewpoint of the financial press. An important aspect of the case is the critical evaluation of information provided by the business press. Bushee, Core, Guay, and Hamm (2010) note that the business press is perhaps the broadest and most widely disseminated of all potential information intermediaries and that broad dissemination of information by the press has a bigger impact on information asymmetry than either the quantity or quality of information provided by the press. Further, previous research (Miller 2006; Core, Guay, and Larcker 2008) notes that the ultimate objective of the press is to maximize subscription and advertising revenues, which is accomplished by covering widely held firms and by covering more ''newsworthy events.'' Jensen (1979) suggests that the mass media is best understood as producers of entertainment, not information, and also suggests that individuals' intolerance of ambiguity causes them to demand answers to questions, including those that are unanswerable. Given the potential influence of articles published in the business press, it is important for students to learn to critically evaluate the information provided. As future business professionals and accounting experts, their influence reaches beyond their interactions with clients to evaluating a wide range of business and accounting issues such as are reported in the press on a daily basis. When asked about these issues, they need to be able to critically evaluate the reliability and credibility of information sources as well as the information provided. Their commentaries not only have the potential to influence public opinion, but also they will have the opportunity to influence practice through such activities as writing letters to standard setters or contributing to firm-wide white papers. Issues in Accounting Education Volume 30, No. 4, 2015 346 Jeffrey and Perkins The case adds to the extant literature by requiring students to critically evaluate multiple information sources. Because it is a real case, students may be asked, at the instructor's discretion, to explore information sources beyond those suggested by, or provided in, the case materials, such as additional newspaper articles, later Cisco filings that include subsequent performance results, or research into Cisco's supply chain. Implementation Guidance The case is appropriate for both graduate and undergraduate courses. At the graduate level, the case is appropriate for a Financial Statement Analysis course as it requires critical thinking about the quality of financial reporting and the financial statement impact of management decisions with respect to financial reporting. The case is also appropriate for a Financial Accounting Theory course as the case considers the rationale for management decision making and how such decisions should be guided by both GAAP and the Conceptual Framework. At the undergraduate level, the case is appropriate for Intermediate Accounting as a component of a module on either accounting for inventory or accounting for impairments. Students in Intermediate Accounting should have completed a module on the Conceptual Framework prior to preparing this case. Major elements of the case include appropriate accounting for inventory, appropriate accounting for impairments, the conceptual basis for judgment and decision making, the propensity for managing earnings, management decision making practices, the reliability of articles in the financial press, and/or the role of the SEC in monitoring financial reporting. At either the graduate or the undergraduate level, the case can also serve as an introduction to searching the FASB Accounting Standards Codification. The appropriate accounting for inventory impairments under the lower-of-cost-ormarket rule is the key technical standard for evaluating the write-off. While the case materials do include the relevant information from the Codification, an alternative would be to require students to search for this information independently. The case also makes clear that determining the appropriate parameters needed to apply the lower-of-cost-or-market rule requires professional judgment and different judgments can lead to differences in inventory valuation. The use of a real company and event, the first key feature of the case, offers the opportunity for students to go beyond the material presented in the case. Because this is a real-world case, students have the opportunity to read additional source documents issued by Cisco and to evaluate subsequent quarterly and annual financial reports, to research industry trends and events at the time, or to search for additional articles in the financial press. Further, the instructor may ask students to examine industry trends and the company's supply chain management practices.4 Such extended activities would be particularly relevant for graduate students. The issues in the case include topics that are relevant for accounting students but are not normally covered in classes. A second key feature of the case is the inclusion of an article from The Washington Post, a highly reputable newspaper, which is particularly critical of Cisco's accounting. Reading and analyzing the article in the context of the case helps students learn to critically evaluate the opinions of others rather than assuming that something printed in a reputable source is an accurate portrayal of a technical accounting issue. Students are preparing 4 For example, external sources noted weaknesses in the supply chain that Cisco either failed to detect or ignored. Berinato (2001) notes that other networking companies started downgrading their forecasts and cutting down on inventory prior to the Cisco write-down, but Cisco did not. Further, other industry experts questioned the efficacy of Cisco's much-touted internal software and forecasting system. Berinato (2001) cites Fred Hickey, editor of High-Tech Strategist, who called the power of Cisco's systems ''bogus,'' and Frank Dzubeck, president of Communications Network Architects, who has worked with Cisco, who said Cisco's infrastructure was ''overrated and incomplete. There was a lot that wasn't real with [Cisco's] supply chain, with inventory management.'' These experts suggest that the systems Cisco developed did not model what would happen if the assumption of growth was removed from its forecasts. One retired executive, Selby Wellman, is quoted by Berinato (2001) as saying: ''Our forecasts were still dramatically high. We wanted to make sure our growth was strong, so we ordered up big time.'' Issues in Accounting Education Volume 30, No. 4, 2015 Cisco Systems, Inc.: Minding the GAAP? 347 for a career in which they need to develop the expertise and critical-thinking skills to evaluate and question what they read rather than simply assuming that because it is published, it is a fair presentation. The third key feature of the case is that students evaluate the impairment as reported in the financial statements in light of the related accounting standards and the Conceptual Framework. The Conceptual Framework is an important aspect of evaluating the case; application of the framework to specific accounting situations is something students with little real-world experience often find challenging. The case provides concrete examples of key aspects of the framework. Materiality can be evaluated with respect to the absolute size and the relative size of the charge-off. Timeliness is a criterion for evaluating the timing of the charge-off, and can also be related to the definition of an asset and the likelihood of future cash flows being generated by the inventory. Conservatism, while no longer a component of the framework, was a criterion in 2001, and remains a pervasive consideration in financial disclosure (see, e.g., Watts [2003a, 2003b] for a review). Relevance is the key qualitative characteristic of useful information, and to be relevant, information must be reliable. The case addresses the use of estimates and the reliability of past and future estimates. Both the nature of estimates and the issue of opportunity costs in decision making are components in evaluating when the impaired inventory is subject to disposal. Full disclosure requires the company to provide all information that would affect a reader's understanding of the financial statements in the notes to those statements, in supplementary schedules, or in other appropriate filings such as an 8-K. Subsequent sale of the inventory if properly disclosed in one of these formats would comply with financial reporting standards. The various components of the case require evaluating reporting requirements as specified by the FASB Accounting Standards Codification, documents from the EDGAR database, and examining industry practices as described by the Cisco earnings announcement. Developing an opinion about the charge-off and how the press interpreted it requires critical thinking, in-depth understanding of the ramifications of different accounting choices, and application of the Conceptual Framework with regard to the financial reporting and the purpose of financial statements. The use of a real-world case adds to both the richness of the setting and to the relevance of the items discussed. Model for Question Development Rankine and Stice (1994, 143) suggest that questions that direct student attention to the critical aspects of the case are important, and state that these questions will lead students to both a firm understanding of the technical issues involved and a consideration of more complex issues such as differential incentives of the various parties. The framework they suggest is designed for use in evaluating an article in the press, but it can be expanded to the issues in the current case. The model they suggest to guide the development of questions that maximize student learning is comprised of five steps: 1. 2. 3. 4. 5. Basic understanding of the accounting. Alternative accounting treatments. Why does anyone care? Critical evaluation. Post-article (post-event) developments. The questions posed by the case are developed to be consistent with this model. Questions 1 and 2 are designed to require students to develop an understanding of the accounting issue, specifically lower-of-cost-or-market accounting for inventory as defined in the Codification. Issues in Accounting Education Volume 30, No. 4, 2015 348 Jeffrey and Perkins Question 3 asks students to consider alternative accounting options, including the size and timing of the recognition of the loss. Questions 4 and 5 address the issue of why people care, with particular emphasis on analysts, who will be making recommendations to their clients as to the desirability of owning the stock. Question 6 asks students to critically evaluate Cisco's disposition of the inventory, which also requires students to begin considering the fifth element of the Rankine and Stice (1994) model, post-event developments, in that information is provided about how much inventory was subsequently sold. Post-event (and pre-event) actions are also the focus of Question 7, which requires consideration of industry trends, and Question 8, which focuses on comments Lynn Turner made on inventory impairments shortly after the Cisco impairment was announced. Finally, Question 9 requires students to analyze and integrate all of this information in developing a final judgment about Cisco's action. Managing Student Time Requirements The time and effort this case takes students outside of class will vary depending on how the instructor chooses to present the case. Students can be asked to search for materials such as the 10Q or the appropriate Codification literature, and the amount of time it takes will vary with students. Alternatively, all of the materials included with the case may be provided to students. If the instructor includes the relevant information, rather than expecting students to search external sources including the FASB Accounting Standards Codification and the EDGAR database, and chooses to not require additional research on industry trends other than what is presented by Cisco in their 8-K filing, then the case can be completed in class in approximately 60 minutes. Students may work in teams or individually in preparing answers to the questions. When students have responded to the case questions prior to the class discussion, the discussion normally takes one class period of approximately 45-60 minutes. Preparation of the case prior to the class period does not significantly reduce the class time we generally allow for the case; we find that students are more likely to participate in a meaningful discussion if they have read the case and attempted to respond to the questions. After using this case in the classroom for more than a decade, we consistently find that students have a very different opinion of the issues in the case after the class discussion than when they responded to the questions; this process of changing opinions often leads to lively discussions. Classroom Management When the case is used as an in-class exercise, the discussion should focus on each question, what information is needed to answer the question, and a discussion of potential answers that leads to responses similar to those provided in the Teaching Notes. If the instructor prefers to use the case as a team exercise, then different questions may be assigned to each team, who would then share their response with the class; this response is the basis for the resulting discussion. Alternatively, teams can work together to prepare responses to all of the questions. The time it takes to prepare answers to all of the questions significantly reduces the time for discussion; in this case, providing a solution to the case subsequent to the team exercise is appropriate. When responses to the case materials are prepared outside of class, the instructor may grade the responses for content. Alternatively, because the class discussion generally leads students to different decisions than their initial responses, we normally evaluate the case in an honest attempt to answer the questions rather than expecting students to formulate the optimal answers. The class discussion is intended to help them find the weaknesses in their analysis of the material, to encourage them to continuously challenge the statements of others (management or reporters), and Issues in Accounting Education Volume 30, No. 4, 2015 Cisco Systems, Inc.: Minding the GAAP? 349 to hold the evaluations of others up to their understanding of both the purpose of accounting and the techniques that are used to accomplish that purpose.5 Student Feedback In order to gain insight from students who completed the case, we administered a questionnaire to students in three sections of an undergraduate financial accounting course and to students in three sections of a graduate financial accounting theory course.6 Student responses to the 16 scaled items included in the questionnaire are summarized in Table 2. Student feedback from both the undergraduate and graduate sections was positive. As shown in Table 2, students' quantitative ratings varied somewhat by statement and by course. An 11-point Likert-type scale was used where 0 ''strongly disagree'' and 10 ''strongly agree.'' The average level of agreement on each statement for all participants varied from 6.94 for ''The case helped me better understand the role of the SEC in financial reporting'' to 8.68 for ''The case helped me understand that in 'real-world' situations, 'correct' answers are not always available.'' Graduate students generally gave a slightly higher level of agreement than did undergraduates. Finally, the average level of agreement for the statement, ''I would recommend that this case be used as a part of this course in the future'' of 8.49 and the average level of agreement for the statement, ''Overall I thought the case was useful'' of 8.66 indicates that the case was generally well received by students. In the qualitative section of the post-project questionnaire, students were asked to provide comments about the case. Representative student comments include the following: \u0002 \u0002 \u0002 \u0002 5 6 ''I feel like I jumped to conclusions when first responding to this case because I agreed that it seemed like they were trying to improve future profits or take windfall profits by managing earnings inappropriately. However, after the discussion, it became clearer . . . that the article actually made a very strong accusation which wasn't necessarily true.'' ''I like the logic of how the case is set up from obvious information to context, then to GAAP, and finally to the conceptual framework. Before the discussion, I totally misunderstood Lynn Turner's speech. I thought he was blaming Cisco as the journalist did in The Washington Post. The case taught me how important it is to understand the macroeconomic environment for the particular industry . . . this case also reminds me of the importance of intermediate accounting . . . a solid basis will facilitate the solution of advanced problems.'' ''I think this case really points out that even though an action such as this impairment charge may look questionable from an outsider perspective, you really need to understand the business and what they are going through at the time in order to fully understand the meaning of their action.'' ''There were many situations and critical components that I did not think about during my first review of the case. This case taught me the importance of knowing the source I am A potential alternative use of this case is to ask students to evaluate the restructuring charge that Cisco announced concurrently with the inventory impairment. In his 1998 speech on earnings management techniques, Arthur Levitt highlighted ''Big Bath Restructuring Charges'' (Levitt 1998). A ''big bath'' is an earnings management technique whereby a one-time charge is taken against income in order to reduce assets, resulting in lower expenses in the future. In addition to the inventory impairment charge, Cisco announced a $1.17 billion restructuring charge. This concurrent charge may be discussed as further evidence of a downturn in Cisco's business, and could therefore be viewed as additional evidence that supports the inventory impairment charge. The skills necessary to evaluate whether the restructuring charge is potentially a ''big bath'' are significantly more complex than the evaluation of an inventory charge, and may be more appropriate for a graduate class. The three sections of the undergraduate financial accounting course were taught by two faculty members who were not co-authors on this case. Issues in Accounting Education Volume 30, No. 4, 2015 Jeffrey and Perkins 350 TABLE 2 Summary of Quantitative Student Feedbacka,b Undergraduate Graduate All Students Students Students The case improved my ability to analyze and critically evaluate the issues and other information in a case. The case reinforced my knowledge of GAAP as it applies to inventory valuation. The case helped me appreciate the importance of industry trends when evaluating case information. The case helped me appreciate the importance of the general economic environment when evaluating case information. The case helped me appreciate the importance of source reliability when evaluating case information. The case helped me appreciate the difficulty of applying GAAP in a real-world scenario. The case helped me appreciate the potential influence of different types of information sources. The case helped me appreciate the need for professional judgment. The case helped me appreciate the importance of footnotes and other disclosures in financial reports. The case helped me better understand the role of the SEC in financial reporting. The case helped me better understand the need to search for information beyond a specific transaction. The case helped me better understand the role of conservatism in financial reporting. The case required critical-thinking and problem-solving skills. The case helped me understand that in real-world situations, ''correct'' answers are not always available. Overall, I thought the case was useful. I would recommend that this case be used as part of the course in the future. Number of sections Number of instructors Number of students a b 7.33 8.40 7.76 7.49 7.88 7.65 7.71 8.44 8.00 7.81 8.38 8.04 8.02 7.95 7.99 8.25 8.85 8.49 7.77 8.69 8.13 8.18 8.82 8.43 7.72 8.16 7.89 7.00 6.84 6.94 7.96 8.82 8.30 7.51 7.50 7.51 8.34 8.35 9.00 9.17 8.61 8.68 8.31 7.94 9.20 9.33 8.66 8.49 3 2 77 3 2 51 6 4 128 Student responses were measured on a Likert-type scale with endpoints of 0 (Strongly Disagree) and 10 (Strongly Agree). All students who participated in the case responded to all of the items in the questionnaire. \u0002 reading from and even if it is a fairly reliable one, I need to research further before I make my opinion. This case really changed the way I will evaluate news in the future about an accounting issue.'' ''Discussing the Cisco case was very informative. You have to look at a situation from a different perspective when you are analyzing a decision made by others. When you are Issues in Accounting Education Volume 30, No. 4, 2015 Cisco Systems, Inc.: Minding the GAAP? \u0002 351 making judgments yourself, you need to isolate yourself from the bias that will most definitely be present and focus on the economic substance of what you are trying to capture.'' ''I did not realize that there was so much behind the impairment than just the accounting standards. I did not consider the operating environment, supply chain challenges, or management accountability. This case taught me to critically analyze information provided to me and that professional judgment is crucial in the accounting profession.'' TEACHING NOTES AND STUDENT VERSION OF THE CASE Teaching Notes and the Student Version of the Case are available only to non-student-member subscribers to Issues in Accounting Education through the American Accounting Association's electronic publications system at http://www.aaapubs.org/. Non-student-member subscribers should use their usernames and passwords for entry into the system where the Teaching Notes can be reviewed and printed. The ''Student Version of the Case'' is available as a supplemental file that is posted with the Teaching Notes. Please do not make the Teaching Notes available to students or post them on websites. If you are a non-student-member of AAA with a subscription to Issues in Accounting Education and have any trouble accessing this material, please contact the AAA headquarters office at info@aaahq.org or (941) 921-7747. REFERENCES Accounting Education Change Commission (AECC). 1990. Objectives of education for accountants: Position Statement Number One. Issues in Accounting Education 5 (2): 307-312. American Institute of Certified Public Accountants (AICPA). 2005. AICPA Core Competency Framework for Entry into the Accounting Profession. Available at: http://www.aicpa.org/interestareas/ accountingeducation/resources/pages/corecompetency.aspx American Institute of Certified Public Accountants (AICPA). 2011. CPA Horizons 2025 Final Report. Available at: http://www.aicpa.org/Research/CPAHorizons2025/DownloadableDocuments/cpahorizons-report-web.pdf Bamber, E. M., and L. S. Bamber. 2006. Using 10-K reports brings management accounting to life. Issues in Accounting Education 21 (3): 267-290. Behn, B., W. F. Ezzel, L. A. Murphy, J. D. Rayburn, M. T. Stith, Jr., and R. Strawser. 2012. The Pathways Commission on Accounting Higher Education: Charting a national strategy for the next generation of accountants. Issues in Accounting Education 27 (3): 595-600. Berinato, S. 2001. What went wrong at Cisco in 2001. CIO (August 1). Available at: http://www.cio.com/ article/2441400/it-organization/what-went-wrong-at-cisco-in-2001.html Bushee, B. J., J. E. Core, W. Guay, and S. J. W. Hamm. 2010. The role of the business press as an information intermediary. Journal of Accounting Research 48 (1): 1-19. Core, J. E., W. Guay, and D. F. Larcker. 2008. The power of the pen and executive compensation. Journal of Financial Economics 88 (1): 1-25. Demski, J. 2007. Is accounting an academic discipline? Accounting Horizons 21 (2): 153-157. Jensen, M. C. 1979. Toward a theory of the press. In Economics and Social Institutions: Insights from the Conferences on Analysis and Ideology (Rochester Studies in Economics and Policy Issues), (1), edited by K. Brunner, 267-287. Boston, MA: Martinus Nijhoff Publishing Company. Johnstone, K., and S. Biggs. 1998. Problem-based learning: Introduction, analysis, and accounting curricula implications. Journal of Accounting Education 16 (3-4): 407-427. Levitt, A. 1998. The numbers game. Speech delivered at New York University, Center for Law and Business, September 28. Available at: http://www.sec.govews/speech/speecharchive/1998/ spch220.txt Issues in Accounting Education Volume 30, No. 4, 2015 Jeffrey and Perkins 352 Miller, G. S. 2006. The press as a watchdog for accounting fraud. Journal of Accounting Research 44 (5): 1011-1033. PricewaterhouseCoopers (PwC). 2003. Educating for the Public Trust: The PricewaterhouseCoopers Position on Accounting Education. New York, NY: PricewaterhouseCoopers. Rankine, G., and E. K. Stice. 1994. Using articles from the popular press in the introductory accounting course. Issues in Accounting Education 9 (1): 142-150. Raynovich, R. S., and M. Reardon. 2001. Ripples spread from Cisco write-off. Light Reading (April 19). Available at: http://www.lightreading.com/ethernet-ip/ripples-spread-from-cisco-write-off/d/d-id/ 573568 Watts, R. L. 2003a. Conservatism in accounting, Part I: Explanations and implications. Accounting Horizons 17 (3): 207-222. Watts, R. L. 2003b. Conservatism in accounting, Part II: Evidence and research opportunities. Accounting Horizons 17 (4): 287-302. APPENDIX A Exhibits_1-5: http://dx.doi.org/10.2308/iace-51174.s1 Table_1: http://dx.doi.org/10.2308/iace-51174.s2 Issues in Accounting Education Volume 30, No. 4, 2015