Economic consequences of accounting
"It's not the economy anymore, stupid. It's the accounting."
- See complete article, Browning, E.S. and Jonathan Weil. "Burden of Dobut: Stocks Take
a Beating As Accounting Wories Spread Beyond Enron." The Wall Street Journal,
January 30, 2002, pp. A1.
Acknowledgement is hereby given to Professor G. Peter Wilson for his authorship
of the following works incorporated into this slideshow:
The Five Challenges (slides 4-5)
"What Do Intel and Accountants Have in Common?"(slides 9-16) 15.514 Summer 2003
A Conceptual Framework for Financial Accounting (slide 17) Session 1
The reaction of Concord EFS stock to its announcement of lower expected
earnings
Date Opening Price High Low Closing Price Volume
Sept. 6, 2002 14.64 14.95 14.20 14.49 29,941,300
Sept. 5, 2002 12.90 15.00 12.60 14.30 91,129,100
Sept. 4, 2002 18.85 19.48 18.10 18.88 20,473,400
Sept. 3, 2002 19.80 20.18 19.00 19.56 10,267,600
Aug. 30, 2002 20.71 21.20 20.31 20.41 5,457,800
Data Source: Yahoo! Finance
What is our course objective?
To become intelligent users of accounting information
Learn the language and techniques
Go beyond bookkeeping and computation
Use a common framework to conceptualize issues
What is not our objective
to train you to be an accountant or bookkeeper
15.514 Summer 2003
Session 1
The five challenges
Record keeping and reporting
As a preparer, having determined the numbers you want to
record for an economic event, how do you record them? How
does it affect accounting reports?
As a user, given the reported numbers, do I know how they
were computed?
Computation
As a preparer, having chosen the accounting method to
measure an event, how do I compute the number reported in 1?
As a user, knowing the procedures used by management, and
the information necessary to execute them, how would you
compute them yourself?
15.514 Summer 2003
Session 1
The five challenges
Judgement
As a preparer, how do I choose an accounting procedure and exercise
my judgement concerning measurement, recognition, and disclosure?
As a user, how do I judge the usefulness of the reported numbers?
Usage
As a preparer, how do I learn about the decisions that will be
influenced by the reported numbers?
As a user, how can the reported numbers help me make a more
informed decision?
Search
Where do you locate the information needed for 1-4.
15.514 Summer 2003
Session 1
What is our strategy to meet this objetive?
Cases and class discussion
Judgment challenge
Application of other challenges
Learning to communicate ideas
Learning from each other
Learning through discovery
15.514 Summer 2003
Session 1
What is our startegy to meet this objective?
Incentives
Learning useful skills
Graded assignments
Graded class participation
Warm and cold calling
15.514 Summer 2003
Session 1
What is good participation?
Quality, not quantity.
Analyzing and discussing course material.
Questioning the analysis of others.
Seeking clarification.
Contrasting issues within other settings, courses, and /
or other countries.
Changing the direction of discussion.
Summarizing / synthesizing.
Adherence to guidelines for professional conduct.
15.514 Summer 2003
Session 1
What do Intel and accountants have in common?
Intel produces microprocessors, chipsets and other
semiconductor components to meet the diverse needs of
their customers.
What do accountants produce and who are their
customers?
15.514 Summer 2003
Session 1
What do Intel and accountants have in common?
Intels customers use microprocessors as the brain of
their computers.
What do accountants customers do with accounting
information?
15.514 Summer 2003
Session 1
What do Intel and accountants have in common?
Intels operating inputs include materials, technology
and capital.
What are the inputs to the accounting process?
15.514 Summer 2003
Session 1
What do Intel and accountants have in common?
Intels product designs depend on its customers needs,
competition, availability of inputs and technological
constraints.
What factors influence the design of accountants
products?
15.514 Summer 2003
Session 1
What do Intel and accountants have in common?
Intels customers would prefer microprocessors that:
Execute 1 teraflop per second
Run on ambient solar energy
Can be worn discretely as jewelry
Are completely bug-free
Support all software and operating systems
Are given away to anyone who wants them
Why dont they get all of these?
15.514 Summer 2003
Session 1
What do Intel and accountants have in common?
What kind of information would accountants customers
like?
Why dont they get it?
15.514 Summer 2003
Session 1
What do Intel and accountants have in common?
The quality of Intels products is based on some of the
following factors:
Reliability and dependability (CPU must know how
to multiply)
Compatibility with existing software
What factors can be used to determine the quality of the
products accountants produce?
15.514 Summer 2003
Session 1
What do Intel and accountants have in common?
Intels customers assess quality based on:
Intels reputation
Independent ratings
Software and hardware engineers opinions
Customers own judgment
How do accountants customers assess the quality of
accounting information?
15.514 Summer 2003
Session 1
A conceptual framework for financial accounting
Economic Activity Users
Economic Consequences Decisions
Economic Outcomes
Accounting
Performance
Quality
Assessment
Accounting Decisions Reported Numbers Assessment
Preparers Domain Users Domain
Inside reporting entity Outside reporting entity
15.514 Summer 2003
Session 1
