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
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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
308 McWilliams and Peters
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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)
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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)
310 McWilliams and Peters
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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)
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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.
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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.
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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
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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)
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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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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
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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