I need help with the following case. Questions 4 and 5 specifically

ISSUES IN ACCOUNTING EDUCATION Vol. 20, No. 2 May 2005 pp. 195-212 Reporting Earnings at Summer Technology A Capstone Case Involving Intermediate Accounting Topics Mark Kohlbeck ABSTRACT: Summer Technology, Inc. (the Company) is a fast-growing high-technology firm and is facing many pressures, including those related to financial reporting. Financial analysts, however, are optimistic about the future of the Company. The firm is about to report its first annual profit, and the preliminary unreported results are just short of the analysts' consensus annual earnings forecast. This case requires financial analysis to evaluate a number of judgments involved in preparing financial statements and to prepare a recommendation to management with respect to reported earnings per share. The case's learning objectives are: (1) to increase understanding and exposure to the integration of financial reporting decisions with financial statement analysis, (2) to help students understand how business decisions impact reporting, (3) to demonstrate how decisions may be influenced by pressures to manage earnings and produce desirable financial results, and (4) to raise ethical issues in an accounting setting. INTRODUCTION ou were hired as the assistant controller for Summer Technology, Inc. (the Company) this past summer.The fiscal year ended last week, and you are involved in the year-end closing and preparation of the financial statements. The CFO, Mr. John Hilary, is holding a year-end closing meeting later this week to finalize annual results and to prepare a press release to announce earnings per share for the recently concluded year. You are excited about your new job, and you want to impress your superiors at the upcoming meeting. In preparation for the meeting, you have prepared the preliminary financial statements and summarized selected accounting policies (Exhibits 1 and 2). In addition, you have gathered investment, pension, lease, and tax analyses (Exhibits 3 through 6) from other accounting personnel. You are responsible for reviewing the various assumptions and judgments made in the financial statements and the resulting estimates/accounting entries. Mr. Hilary expects you to report on their reasonableness at the upcoming year-end closing meeting and on any changes that are necessary before the final earnings number is determined. The following sections summarize background information on the Company, major transactions during the past year, and current economic conditions. Y Mark Kohlbeck is an Assistant Professor at the University of Wisconsin-Madison. I thank the editor (Sue Ravenscroft), the associate editor (Fred Phillips), two anonymous reviewers, Terry Warfield, and Lisa Bryant for comments and suggestions on earlier versions of this case and students at the Universities of Oregon and Wisconsin-Madison for providing valuable feedback. Editor's note: This paper was accepted by Sue Ravenscroft, Editor. 195 196 Kohlbeck Company Background A group of M.B.A. students formed Summer Technology, Inc. (the Company) after graduation in 1989. The Company designs and manufactures home technology applications. Although the Company has not been profitable in the past, this year it has reached a turning point as the profits from past R&D expenditures are being realized in product innovations and in increased sales. To further ensure its success, the Company has embarked on a focused effort to control costs. As the result of these efforts, the Company expects to recognize its first profit in 2003. However, the Company's ultimate success depends on whether it will continue to be profitable over the next few years. The Company's strength is its management, research and development, and production employees. The average employee is 35 years old, educated, and dedicated. Starting salaries are above average (although salary increases are close to average), morale is strong, and the Company has experienced little turnover. In addition to good salaries and healthcare benefits, all employees are covered by a defined benefit pension plan. The pension plan provides retirement benefits based on the employees' preretirement salary levels and years of service with the firm. The Company amortizes any unrecognized prior service costs and gains/losses using the straight-line method over the average remaining service life. The future outlook for the Company has improved, but it is still uncertain. Analysts are bullish on the Company and have rated its common stock a buy. The current market price of the Company's common stock is $4.25 per share and the 2003 average price was $3.65 per share. The Company has also discussed a major borrowing package from a consortium of banks. These banks are considering a $100 million long-term package bearing interest at 5.8 percent. Continued support from the financial markets will allow the Company to enter a growth stage as additional products are introduced to the consumer markets. At the beginning of the current year, the Company had accumulated substantial net operating loss carry-forwards totaling $35 million that will begin to expire in five years. In the past, management provided a valuation allowance at 100 percent of the deferred tax asset from the net operating loss based on the Company's uncertain future. In 2003, management reevaluated the need and the amount of the deferred tax asset valuation allowance because of the current profitability and improved outlook for the Company. Management now believes there is only a 10 percent probability that all of the net operating loss carry-forwards will be used and a more likely scenario is that the Company will report annual pretax profits over the next five years between 0.5 and 1 percent of total assets. Based on the Company's analysis, management determined that it was \"more likely than not\" that 80 percent of the deferred tax assets would not be realized. Major Transactions during the Past Year During the past year, the Company was party to a number of major transactions that impacted the financial statements. These transactions are discussed in the following paragraphs. Litigation In 2003, the Company was named as a defendant in a patent infringement lawsuit. The plaintiff is seeking over $100 million in economic, noneconomic and liquidated damages, plus punitive damages. The Company's counsel reviewed the preliminary court rulings and believes that some payment will probably be required, although an amount cannot be determined. In December, after extensive discussion with the Company's counsel, management offered the plaintiffs $1 million to settle the claim. As of today, the offer has not been accepted or rejected. The Company does not know what it will do if the offer is rejected, but it has accrued $1 million as a minimum loss contingency for this claim. Issues in Accounting Education, May 2005 Reporting Earnings at Summer TechnologyA Capstone Case Involving Intermediate Accounting Topics 197 In the ordinary course of its business, the Company is also a party to a number of other lawsuits. Management believes, however, that the outcome of any other such litigation would not have a material adverse effect on its financial statements. Investment in Airtime In 2002, the Company invested $25 million in bonds (par value of $25 million) issued by Airtime Inc. Airtime is a publicly held company that produces highly specialized home area networks that the Company uses in its home technology packages. The investment is classified as available-for-sale. On January 1, 2003, the Company purchased an 18 percent interest in the common stock of Airtime for $20 million and became Airtime's largest shareholder. At this point, no other firm or individual other than the Company owns more than 10 percent. Additionally, the Company names one member of Airtime's board of directors. Because the ownership percentage of common stock is less than 20 percent, the Company is following SFAS No. 115 for passive investments and has classified the equity investment as available for sale. Lease The Company entered into a lease agreement for the use of a $12 million high-speed assembly line at its main production facility with General Capital. The five-year lease (January 1, 2003 to December 31, 2007) requires annual payments of $2.52 million beginning on January 1, 2003. Moreover, the lease does not contain a bargain purchase option or transfer at the end of the lease term. Due to the assembly line's reliance on current technology, the Company estimated the useful life of the assembly line to be six years. The Company is unaware of General Capital's implicit interest rate and used an 8 percent interest rate in its lease analysis. Amortization of the capitalized lease asset for financial statement and tax purposes, however, is the same. Economic Conditions A synopsis of key economic factors, including overall economy, interest rates, unemployment, and inflation, that describe the conditions that the Company faces follows. Overall Economy The Conference Board's index of leading economic indicators continues to post small gains. The overall figure, however, is based on increases in just four of the ten components in the index. Over the past six months, the positive trend looks more solid. The index rose 2.1 percent, with seven of the ten components showing improvement. The S&P 500 Index continues to increase, although the average annual returns are only 6.2 percent. Interest Rates The Federal Reserve Board's Open Market Committee left its target for the federal funds rate unchanged at a 25-year low of 1.5 percent. The federal funds rate, which is the interest rate that banks charge each other for overnight loans needed to meet reserve requirements, has a strong influence on other short-term rates. In the committee's judgment, the risk of deflation still exceeds that of a rise in inflation. The Open Market Committee also said that because of weakening in the labor market, there probably would be no increase in the target rate for a considerable period. The yield of the ten-year U.S. Treasury note fell 10 basis points to 4.16 percent last week and has ranged from 4.16 to 4.65 percent during 2003. Yields on investment grade bonds are slightly higher at 5.5 percent. Unemployment Overall, unemployment remains at 6.2 percent. However, the labor market in the Company's region is slightly stronger with 5.8 percent unemployment. Issues in Accounting Education, May 2005 198 Kohlbeck Inflation Over the past 12 months, the CPI rose just 1.3 percent, the lowest full-year rate recorded since January 1966. Much of the increase was due to a large jump in energy prices, which in turn resulted from a 6.0 percent rise in gasoline prices. The core CPI figure, which excludes volatile food and energy prices to better gauge the breadth and sustainability of any inflationary pressures, rose just 0.1 percent. Requirements 1. Read one of the following speeches as indicated by your instructor to obtain an understanding of the SEC's view of earnings management practices. \"The Numbers Game,\" remarks by Chairman Arthur Levitt, Securities and Exchange Commission, presented at the New York University Center of Law and Business, New York, NY, September 28, 1998, available at http://www.sec.govews/speech/speecharchive/1998/ spch220.txt. \"Obstacles to Good Financial Reporting,\" speech by Commissioner Cynthia Glassman, Securities and Exchange Commission, presented at the American Enterprise Institute, Washington, D.C., September 3, 2003, available at http://www.sec.govews/speech/speech/ spch090303cag.htm. 2. Review the preliminary financial statements and supporting data. To assist you in becoming familiar with the financial statements, prepare the journal entries that are reflected in the preliminary financial statements for the following transactions: a. Changes in the investments' fair values b. Annual pension expense c. Lease inception and lease activity during the year d. Tax expense 3. Identify the major assumptions and the estimates the Company made in preparing the preliminary financial statements. Using the information provided in this case, evaluate the appropriateness of each assumption and each estimate. The appropriateness of the assumptions and the related estimates should be based on: (1) the weight of the evidence supporting the assumptions both in terms of the quality and the source of the evidence and (2) the appropriateness of assumptions such that reported results properly capture the underlying economics. If you identify any assumptions or estimates that should be changed, provide the basis for your evaluation, determine the impact on earnings per share, consider the effect, if any, on interim financial statements issued during 2003, and discuss any required disclosures of the proposed changes. 4. After you completed your analysis, John Hilary, the Chief Financial Officer, stopped by your office to discuss the earnings release. Preliminary and unreported basic earnings per share are $0.19 per share for 2003. However, Mr. Hilary indicated that the consensus analyst forecast for annual basic earnings per share is $0.20 per share. He emphasized how important it is for a growth company with a history of losses such as the Company to meet or beat the consensus forecast. If the Company were to miss the consensus forecast, the share price would likely suffer and may inhibit future expansion plans of the Company. In addition, it is likely that annual bonuses will be reduced or eliminated. Mr. Hilary implied that your review of the preliminary financial statements should focus on ways to increase basic earnings per share. Identify and evaluate at least four alternatives for the Company to meet or beat the consensus estimate for annual basic earnings per share of $0.20. Your analysis should consider the following for each alternative: a. Acceptability based upon the financial accounting standards that apply b. Appropriateness of the underlying assumptions that must be made Issues in Accounting Education, May 2005 Reporting Earnings at Summer TechnologyA Capstone Case Involving Intermediate Accounting Topics 199 c. d. e. The specific numerical effect of the alternative on earnings per share Financial statement disclosure implications (i.e., the transparency of the alternative) Characterization (change in accounting method, change in estimate, etc.), required disclosures and accounting related to any proposed change to a decision made by management earlier in the year (effect on interim reporting) 5. Following your discussion with Mr. Hilary, you felt that his request might have been inappropriate. Assess the ethical dilemma that you face in completing your review and recommendation. Prepare a memorandum to the chairperson of the Company's audit committee that relays any concerns that you may have with respect to the ethical environment at the Company. 6. Using an outline format, prepare a memorandum that summarizes your review and recommendations (based on your analysis in requirements 3 and 4) for the year-end closing meeting with Mr. Hilary. Issues in Accounting Education, May 2005 200 Kohlbeck EXHIBIT 1 Preliminary Financial Statements Summer Technology, Inc. Balance Sheets ($ in 000s, except per share amounts) December 31, Current Assets: Cash and Cash Equivalents Accounts Recevievable, net of Allowance Inventory, net Deferred Tax Assets, net of Valuation Allowance Other Current Assets Total Current Assets Property Plant and Equipment, net Investments - Available-for-sale Deferred Tax Assets, net of Valuation Allowance Goodwill and Other Assets Total Assets Current Liabilities: Current Maturities of Capital Lease Obligation Accounts Payable Accrued Liabilities Total Current Liabilities Capital Lease Obligation Deferred Tax Liabilities Stockholders' Equity Preferred Stock (10% convertible, noncumulative, 100,000 shares issued and outstanding) Common Stock (100,000,000 shares authorized, 48,967,585 and 43,967,585 shares issued and outstanding, respectively, $1 par value) Additional Paid-in Capital Security Fair Value Adjustment, Net of Taxes Retained Earnings Total Liabilities and Stockholders' Equity 2003 2002 $ 8,829 18,063 14,563 70 3,150 $ 55,937 9,379 6,109 0 3,506 44,675 74,931 18,592 120,500 1,960 73,375 8,166 47,424 0 73,970 $ 259,102 $ 204,491 $ 1,852 13,920 25,889 $0 4,576 6,389 41,661 10,965 6,495 1,607 0 191 7,280 7,280 48,968 43,968 214,841 1,999 (63,749) 214,841 0 (72,754) 209,339 193,335 $ 259,102 $ 204,491 (continued on next page) Issues in Accounting Education, May 2005 Reporting Earnings at Summer TechnologyA Capstone Case Involving Intermediate Accounting Topics 201 EXHIBIT 1 (continued) Summer Technology, Inc. Balance Sheets ($ in 000s, except per share amounts) Year Ended December 31 2003 2002 Net sales Cost of Goods Sold $ 135,684 66,891 $ 92,377 46,543 68,793 35,645 24,301 3,441 45,834 43,265 19,679 2,912 Income from Operations Other Income (Expense) 5,406 2,094 (20,022) 2,048 Income before Taxes Income Tax (Benefit) Expense 7,500 (1,505) (17,974) 792 Gross Profit Research and Development Selling, General, and Administrative Depreciation and Amortization Net Income (Loss) $ 9,005 $ (18,766) Earnings (Loss) per Share1 Basic and Diluted $ 0.19 $ (0.43) Weighted Average Shares1, 2 Basic Diluted 46,468 48,055 43,968 43,968 1 Dilutive securities consist of the 10 percent convertible, noncumulative preferred stock, and stock options. Each share of convertible preferred stock is convertible into five shares of common stock and no preferred dividends were declared in 2002 or 2003. Stock options consist of the following: Number 1,000,000 800,000 1,000,000 1,500,000 1,500,000 Exercise Price 1.00 2.00 5.00 10.00 20.00 In 2002, both the convertible preferred stock and the stock options were anti-dilutive. 2 On July 31, 2003, 500,000 stock options were exercised at an exercise price of $1 per share. Issues in Accounting Education, May 2005 202 Kohlbeck EXHIBIT 2 Summary of Selected Accounting Policies Judgments and EstimatesSignificant judgments and estimates are made in the preparation of the financial statements. These judgments and estimates include those related to asset valuation, accrued expenses, expected interest rates, and employee service lives, among others. Some of the more critical judgments and estimates are discussed in the following accounting policies. InvestmentsPassive investments are classified upon acquisition as held-to-maturity, available-for-sale, or trading. The Company makes fair value adjustments as required and reviews initial classifications based on available information. InventoriesInventories consist of finished goods, work-in-process, and raw materials, and are stated at the lower of cost (first-in, first-out) or market. Property, Plant, and Equipment - Property, plant, and equipment are stated at cost and are depreciated over their estimated useful lives using the straight-line method of depreciation. Capital leases are amortized over the lease term using the straight-line method. GoodwillEffective January 1, 2003, goodwill is no longer amortized for financial statement purposes. ImpairmentsThe Company reviews its noncurrent assets and goodwill and performs annual impairment tests. No impairment losses were identified in 2003. TaxesDeferred taxes are provided for temporary differences between financial and tax reporting. The Company has accumulated substantial net operating loss carry-forwards in previous years and utilizes the maximum net operating loss carry-forwards in the current year as allowed by law. The Company also records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. Should the Company determine that it would (not) be able to realize more (less) of the deferred tax assets in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination is made. Issues in Accounting Education, May 2005 Reporting Earnings at Summer TechnologyA Capstone Case Involving Intermediate Accounting Topics 203 EXHIBIT 3 Investments Analysis Available-for-Sale (AFS) Investment Portfolio (000s) December 31, 2003 U.S. Treasury Bills GM Common Stock General Electric 4.5% Bonds Airtime 7.5% Bonds Airtime Common Stock Total Unrealized Gain (Loss)AFS December 31, 2002 Book Value Fair Value 25,000 22,424 25,000 25,000 20,000 25,000 26,500 23,000 24,500 21,500 117,424 120,500 3,076 Book Value Fair Value 22,424 22,424 25,000 25,000 47,424 47,424 0 2003 Airtime Financial Information (000s except per share amounts) Condensed Balance Sheet Cash Accounts Receivable Equipment, net Intangible Assets 15,000 81,000 48,000 56,000 200,000 Accounts Payable and Accruals Bonds Payable Common Stock Retained Earnings 82,000 100,000 64,500 (46,500) 200,000 Condensed Income Statement Sales Cost of Goods Sold SG&A Interest Expense Net Income Earnings per Share 363,000 (88,425) (265,800) (3,750) 5,025 0.39 Ratios Dividends/Net Income Leverage LTD/TA Operating CF/NI Receivable Turnover Sales Growth 0.00 0.91 0.50 0.80 4.50 0.15 Issues in Accounting Education, May 2005 204 Kohlbeck EXHIBIT 4 Pension Analysis Pension Worksheet (000s) Items Balancebeginning Service cost Interest cost 1 Asset return 1,2 Contributions Benefits Unrecognized loss amortization 1 Journal entry Annual Pension Expense 4 Cash 2,019 350 1,535 (1,190) 2 3 4 PBO (15,350) (350) (1,535) (350) 280 250 945 Memo Entries Unrecognized Plan Net (Gain) Assets Loss 14,869 2,500 450 350 (280) 740 (250) (350) Balanceending 3 1 Prepaid/ (Accrued) Cost 4 (595) 1,424 (16,955) 15,389 2,990 In preparation of the pension analysis, management made the following assumptions: 2002 2003 Interest (settlement) rate 10% 10% Estimated return on plan assets 8% 8% Average remaining service life 11 10 The plan's assets are invested in a balanced portfolio of approximately 60 percent equity and 40 percent investment grade corporate bonds. An additional minimum liability is not required as the fair value of plan assets exceed the accumulated benefit obligation of $12.5 million. Prepaid pension cost is included in Goodwill and Other Assets and annual pension expense is included in Selling, General, and Administrative Expenses in the accompanying financial statements (Exhibit 1). Issues in Accounting Education, May 2005 Reporting Earnings at Summer TechnologyA Capstone Case Involving Intermediate Accounting Topics 205 EXHIBIT 5 Lease Analysis Lease Terms Term in years Estimated useful life Fair value of asset (000s) Unguaranteed residual value (000s) Incremental borrowing rate Annual payment amount (000s) 5 6 12,000 1,000 8.0% 2,520 Capitalized Lease Obligation (000s) Payment Date Cash Interest Expense Principal Amortization Balance 1/1/2003 1/1/2003 1/1/2004 1/1/2005 1/1/2006 1/1/2007 2,520 2,520 2,520 2,520 2,520 0 668 519 359 187 2,520 1,852 2,001 2,161 2,333 10,867 8,347 6,495 4,494 2,333 0 Capitalized Asset (000s) Year 1/1/2003 12/31/2003 12/31/2004 12/31/2005 12/31/2006 12/31/2007 Capitalized Asset Amortization Net Book Value 10,867 10,867 10,867 10,867 10,867 10,867 2,173 2,174 2,173 2,173 2,174 10,867 8,694 6,520 4,347 2,174 0 Issues in Accounting Education, May 2005 206 Kohlbeck EXHIBIT 6 Tax Analysis Tax Provision (000s) Pretax financial income 7,500 Temporary differences Litigation accrual Book depreciation and lease amortization Tax depreciation and lease amortization 1,000 1,268 (2,236) Utilization of net operating loss carry-forward (7,000) Taxable income 532 Taxes currently payable Change in deferred taxes, net of valuation reserve 35% Tax (benefit) expense 186 (1,691) (1,505) Deferred Tax Analysis (000s) Future Taxable (Deductible) Amounts Balance at beginning 2003 Deferred tax assets Net operating losses Litigation accrual Deferred tax liabilities Unrealized gains (loss) Available-for-sale Depreciation and amortization Net Balance at end of 2003 Deferred tax assets Net operating losses Litigation accrual Deferred tax liabilities Unrealized gains (loss) Available-for-sale Depreciation and amortization Deferred Taxes (35,000) 0 35% 35% 0 546 35% 35% 12,250 0 Valuation Reserve 100% 12,250 0 (191) 35% 35% 9,800 350 3,076 1,514 35% 35% (1,077) (530) 0 0 (191) 12,059 (28,000) (1,000) Net Deferred Taxes 12,250 80% 80% 7,840 280 (191) 1,960 70 (1,077) (530) Net 8,543 8,120 423 2003 change in deferred taxes Included in Income Comprehensive income 3,516 (4,130) (614) (1,691) 1,077 (614) Issues in Accounting Education, May 2005 Reporting Earnings at Summer TechnologyA Capstone Case Involving Intermediate Accounting Topics 207 CASE LEARNING OBJECTIVES AND IMPLEMENTATION GUIDANCE Overview of Case The Summer Technology case provides a comprehensive review of financial reporting topics in a realistic business setting for use in the latter part of the Intermediate Accounting sequence. The case requires students to challenge financial statement assumptions and make accounting judgments related to litigation, investments, pensions, leases, and taxes that have differing impacts on earnings per share. In addition, the analyst forecast setting allows the consideration of ethical issues in the year-end preparation of financial statements and the reporting of financial results. Case Learning Objectives The case was written with four learning objectives: (1) to integrate financial reporting decisions with financial statement analysis, (2) to assist students in understanding how business decisions impact both current and future financial reporting decisions, (3) to demonstrate how decisions may be influenced by pressures to manage earnings and produce desirable financial results, and (4) to discuss ethical issues in an accounting setting to raise awareness and to encourage students to do the \"right thing.\" This comprehensive case provides a realistic setting to address these objectives. The latter part of the Intermediate Accounting sequence introduces students to various accounting issues that require a number of judgments. The case can, therefore, be utilized as a wrap-up where students perform a review of previous material, which gives the instructor an opportunity to bring the topics together in order to provide a more cohesive summary of the material. Implementation Guidance Both the author and another professor used an earlier version of the case near the end of the second undergraduate Intermediate Accounting course in a two-semester sequence. The students, working in groups, were given approximately two weeks to prepare written responses as to potential alternatives to meet or beat the consensus estimate for earnings per share (requirements 4 and 6). Students then prepared individual responses with respect to ethical issues (requirement 5). The first three requirements were included with the case but were not explicitly required. Students were encouraged to complete the first three requirements as they prepared their responses for requirements 4 through 6. Students indicated that they spent approximately ten hours completing the assignment. The case was then discussed on the final day of the semester in a 75-minute class. The case represented a capstone to the course and served as a review in advance of the final exam.1 Another professor at a second, large public university used an abbreviated version of the case in two sections in the second term of a two-quarter undergraduate Intermediate Accounting sequence. The investments exhibit and requirements 1 and 5 regarding ethics were excluded. Students, working in groups, were asked to respond to requirements 2 through 4. On average, students appeared to spend approximately 3 to 4 hours on the requirements preparing for class. The student responses and ethical issues were then discussed in a 50-minute class. Subsequently, one of the professors adapted the case for a graduate-level accounting class in a five-year accounting program. In this situation, the case provided a setting for a role-playing activity where students assumed the roles of management, auditor, and audit committee members to debate the accounting alternatives. 1 The author also used the current version of the case in a subsequent semester. Issues in Accounting Education, May 2005 208 Kohlbeck Analysis of Faculty Feedback Faculty responses to the case study were positive; they recommended the case to other instructors. The professors were impressed with the classroom discussions, the enthusiasm of the students, and the opportunity to bring ethics into the classroom. Specifically, the faculty appreciated the case's flexibility and its comprehensive nature both in topics covered and the integration of the topics. They found that the case provided in-depth discussions on interim reporting, on changes in accounting, and on required disclosures. Suggested revisions and corrections were incorporated in the current version of the case. All three professors plan to use all or part of the case in future courses. Analysis of Student Feedback Student responses were obtained through the use of a survey instrument included in the Appendix that is based on Phillips et al. (2000). Following the in-class discussion, students were asked to anonymously complete the survey; 106 completed surveys were received (representing approximately 80 percent of the students in the four sections).2 Almost all of the students were either accounting majors or a double major that included accounting. In comparison to faculty feedback, the student feedback was also very positive. The students appreciated the discussion of ethics and the multifaceted challenges they faced in considering the various alternatives. Responses indicated that students completing the case believed that they had improved their understanding of accounting judgments (mean of 7.5 on a ten-point Likert scale), and of possible conflicts of interests (mean of 8.2). Students also found the case engaging (mean of 7.3). Over 85 percent of student responses indicated that each of the four objectives was achieved. Only two students responded that other faculty should not use the case. Finally, only 43 percent (27 percent) of the students had previously been exposed to cases of this style in a prior accounting (nonaccounting) course. This case represents an innovative approach for many accounting students. In contrast to the positive comments, several students claimed the case was either unclear or unrealistic. These comments were also considered in the current version of the case. Case Assignment Each of the professors piloting the case used the case as a group assignment. In general, this decision was based on the complexity of the case and the desire to further hone team-learning skills. Students in their survey responses echoed this sentiment that working in groups aided substantially in understanding the complex nature of the alternatives and the ethical dilemmas involved. The flexibility of the case allows instructors to adapt it to their goals and purposes. Any of Exhibits 3 through 6 can be omitted to provide a shorter case or to vary content. Likewise, requirements 2 and 3 can be used on a stand-alone basis to provide a fairly detailed assignment or a comprehensive review. In addition, requirement 2 may be required for students to complete or may be merely suggested to guide students. The ethics requirement (requirement 5) can also be used as a stand-alone assignment, as a separate assignment following the analysis of the judgments, or as a source of classroom discussion. Requirement 1 addresses ethics. This reading requirement may be omitted or another article may be substituted by the instructor. In regard to the case's flexibility, one professor modified the case to correspond with her course content in the quarter-based class. The investments exhibit was excluded because this topic was not covered in her course. She also eliminated the explicit ethics requirement and, instead, incorporated the ethical issues in the classroom discussion. 2 For three sections, students completed the survey in class. The response rate, based on registered students, was approximately 95 percent. For the other section (representing 28 percent of the students), the instructor was not able to have the students complete the survey during class, so the students were asked to complete the survey on their own time and return it at the next class meeting. The response rate was substantially lower for this section (31 percent). However, review of the responses across sections and expected grade levels did not differ substantially. Nonresponse bias is, therefore, not considered to be a problem. Issues in Accounting Education, May 2005 Reporting Earnings at Summer TechnologyA Capstone Case Involving Intermediate Accounting Topics 209 Classroom Discussion First, students learned from hearing the analysis of their peers. The author started the class by listing the major assumptions, the estimates, and the possible changes. All of the alternatives students identified to increase earnings per share were then listed and discussed in turn. For students, analyzing the issues collaboratively improves the learning process. In this format, feedback is more immediate, and students are better able to determine the appropriateness of their responses. Second, students hear various perspectives, which help them better identify and understand many of the ethical implications. Since this area is generally not covered adequately in most Intermediate Accounting texts, students have little concrete knowledge to fully respond in writing to the ethical issues. The classroom discussion provides students with an opportunity to learn more about ethics as they share insights. The following framework represents one possible approach to discuss the ethical issues and is expanded upon in the Teaching Notes.3 Identify the ethical dilemma involving the assistant controller Identify and understand the positions of various stakeholders Determine the responsibilities of the assistant controller Analyze information to determine alternatives Resolve the ethical dilemma Finally, the classroom discussion of the case provides a unique opportunity for student interaction to provide insights that are not readily obtainable from traditional lecture and that could make a positive difference in students' professional careers. TEACHING NOTES Teaching Notes are available through the American Accounting Association's new electronic publications systems at http://aaahq.org/ic/browse.htm. Full members can use their personalized usernames and passwords for entry into the systems where the Teaching Notes can be reviewed and printed. If you are a full member of AAA and have any trouble accessing this material, please contact the AAA headquarters office at office@aaahq.org or (941)921-7747. 3 This framework for ethical decision making is derived from discussions in Kieso et al. (2004), Mintz (1997), and PwC White Paper (2003). Issues in Accounting Education, May 2005 210 Kohlbeck APPENDIX STUDENT SURVEY INSTRUMENT The purpose of this survey is to accumulate your reactions to the Summer Technology case. Your feedback will be used to revise this case so it can be submitted for publication in an accounting journal. Your comments below are anonymous (i.e., the survey does not include any method to identify you). However, your comments may be quoted in the teaching notes that accompany the case. Background Information 1. How many years of university-level education have you completed? 2. What is your declared or expected major? 3. What grade do you expect in this class? Preparation 4. Did you complete the written assignment for the case? 5. Did you work individually or in a group? 6. Which technical and discussion questions did you attempt to answer before coming to class? Your Opinion 7. Answer each of the following questions by circling the number that best corresponds to how you feel about the case. a. How much did the Summer Technology case help you to understand the judgments involved in financial statement preparation? 1 2 3 4 5 6 7 8 9 10 Unhelpful Helpful b. How much did the Summer Technology case help you to understand the year-end accounting process? 1 2 3 4 5 6 7 8 9 10 Unhelpful Helpful c. How much did the Summer Technology case help you to understand the possible conflicts of interest faced by management? 1 2 3 4 5 6 7 8 9 10 Unhelpful Helpful d. How much did the Summer Technology case help you to prepare for the final exam? 1 2 3 4 5 6 7 8 9 10 Unhelpful Helpful e. How interesting did you find the Summer Technology case? 1 2 3 4 5 6 7 Boring Issues in Accounting Education, May 2005 8 9 10 Interesting Reporting Earnings at Summer TechnologyA Capstone Case Involving Intermediate Accounting Topics 211 8. The case was written with several objectives in mind. Rate how well these objectives were achieved by checking the column that indicates your level of agreement for each of the following statements. Neither Strongly Agree nor Strongly Disagree Disagree Disagree Agree Agree a. The case integrated financialreporting decisions with financial statement analysis. b. The case helped me understand how business decisions impact both current and future financial statements. c. The case demonstrated how earnings can be \"managed\" to produce desirable financial results. d. The case raised ethical issues in financial reporting and business decision making. 9. Did you find anything in the case unclear or unrealistic? If so, what specific part(s) of the case were unclear or unrealistic? ____________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ 10. Would you recommend that instructors at other universities use this case? Why or why not? __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ 11. How many cases of this style have you used previously in this accounting class? __________________________________________________________________________ 12. How many cases of this style have you used in other nonaccounting classes? __________________________________________________________________________ 13. In the space below, please provide any other comments you have regarding the case? __________________________________________________________________________ __________________________________________________________________________ Issues in Accounting Education, May 2005 212 Kohlbeck REFERENCES Kieso D., J. Weygandt, and T. Warfield. 2004. Intermediate Accounting. New York, NY: John Wiley & Sons. Mintz, S. 1997. Cases in Accounting Ethics and Professionalism. New York, NY: McGraw-Hill. Phillips, F., K. Morris, and K. Zvinakis. 2000. Baywatch International: A case linking financial reporting, business, and user decisions. Issues in Accounting Education 15 (November): 605-633. PricewaterhouseCooper. 2003. Stand and Be Counted Teaching Notes (PwC White Paper) New York, NY: PricewaterhouseCooper. Issues in Accounting Education, May 2005