A FINANCIAL STATEMENT ANALYSIS PROJECT FOR …

1 Global Perspectives on Accounting EducationVolume 6, 2009, 83-96A FINANCIAL STATEMENT ANALYSISPROJECT FOR INTRODUCTORYFINANCIAL ACCOUNTINGM arilyn B. MischBusiness Administration DivisionPepperdine UniversityMalibu, CaliforniaUSAC arolyn A. GalantineBusiness Administration DivisionPepperdine UniversityMalibu, CaliforniaUSAABSTRACTThis paper describes a FINANCIAL STATEMENT ANALYSIS PROJECT useful in both preparer-based and user-based introductory courses in FINANCIAL accounting. The projectrequires students to analyze trends in corporate performance, to evaluate corporatefinancial decisions, to discuss non- FINANCIAL STATEMENT issues that would be importantto potential investors, to compare two companies within an industry, and to makeinvestment recommendations.

2 The PROJECT s requirements are completely detailed ona single page, and the PROJECT is applicable to companies in any industry. The projectrequires only limited introduction in the classroom, is easily adaptable to reflectinstructor preferences, and may be used as either an individual or a group paper includes the complete PROJECT requirement sheet, a grading rubric, a teamevaluation form, examples of items that students might be expected to address inanswering the questions posed, comments on the results of employing the PROJECT ,and additional suggestions for words: FINANCIAL STATEMENT ANALYSIS , FINANCIAL decision making, introductory accountingproject, accounting case8384 Misch and GalantineINTRODUCTIONThis paper presents a FINANCIAL STATEMENT ANALYSIS PROJECT that has been used for more than adecade in a university s introductory FINANCIAL accounting courses.

3 The primary goal of theproject is to develop students technical, analytical, critical thinking and communication skillsby requiring students to: analyze key aspects of a company s FINANCIAL disclosures; evaluate acompany s FINANCIAL decisions; discuss non- FINANCIAL items that affect a company s ability to besuccessful; compare one company to another in the same industry; and make and defend investmentrecommendations. In addition, when used as a group assignment, the PROJECT also develops students understanding of group dynamics by requiring students to reflect on the group processes followedin completing the university in which the PROJECT has been employed is a small, private, liberal artsuniversity, which has approximately 750 accounting, business, and international business majors,all of whom are required to take the introductory course in FINANCIAL accounting.

4 The course is moststudents first or second course in business and generally is taken during students freshman orsophomore years. Approximately 250 students are enrolled in the course each year, in sections of 25to 30 students. The PROJECT is currently employed to strengthen the investor-orientation (user)dimension of courses that are primarily preparer-based, but the PROJECT does not require knowledgeof journal entries and easily could be incorporated into user-based principles of accounting coursesas with emphasizing the importance of accounting disclosures in decision-making, theproject meets the calls from both academics and practitioners in various business fields forundergraduate programs to develop students communication skills and students abilities tounderstand, analyze, and evaluate FINANCIAL disclosures (Demong et al.)

5 , 1979; American AccountingAssociation, 1986; Geary and Rooney, 1993; Collier and Wilson, 1994; Albrecht and Sack, 2000;Baker and Phillips, 2000). Many commercially-available FINANCIAL STATEMENT ANALYSIS projects arein books exceeding 100 pages, and primarily require students to obtain descriptive facts aboutcompanies and industries (many of which will not apply to a particular company being analyzed) andto calculate ratios. Such projects are open to the common criticisms faced by accounting and financeprograms of focusing too much attention on rule application and highly-structured problem solving,and failing to develop what Bloom s Taxonomy (1956) refers to as the higher-order skills ofanalysis, synthesis, and evaluation (Accounting Education Change Commission, 1990; Geary andRooney, 1993; McWilliams and Pantalene, 1994: Albrecht and Sack, 2000).

6 The PROJECT in thispaper, on the other hand, is much more in keeping with the recommendations of authors such asKimmel (1995), who call for using cases which do not have unique solutions and which requirestudents to formulate recommendations on the basis of incomplete information. The PROJECT includedhere has only six requirements, which are completely detailed on a single page. Yet, while therequirements provide a systematic framework for completion, they also are open-ended, inducingstudents to create analyses tailored to the particular circumstances encountered by the specificcompanies and specific industries being analyzed at a particular point in FINANCIAL STATEMENT ANALYSIS PROJECT for Introductory FINANCIAL Accounting85 PROJECT OVERVIEWP roject RequirementsAs may be seen in the assignment sheet included in Appendix 1, the PROJECT requires studentsto obtain annual reports for two companies in a given industry-one to serve as the base company and one to serve as the comparison company.

7 Then, students are required to analyze key trendsin the base company s income STATEMENT and balance sheet accounts, to discuss the base company smajor sources and uses of funding, to discuss non- FINANCIAL STATEMENT items that would be importantto consider before investing in a company in the industry, to compare the base company to anothercompany in the same industry, and to make an investment recommendation. Thus, the projectdevelops students business knowledge by requiring the students to understand the drivers of successin a particular industry and to evaluate a particular company s performance with regard to key PROJECT develops students technical knowledge by requiring that students accurately report thechanges that have taken place in a particular company s FINANCIAL accounts, understand theunderlying causes of the changes, and understand the relationships among FINANCIAL statementaccounts.

8 The PROJECT develops students critical reasoning skills by requiring that students identifyissues which would be particularly important to investors in the industry, assess companyperformance in regard to those areas, and make and defend investment recommendations. Inaddition, the PROJECT develops students communication skills by requiring students to prepareconcise written reports and to make oral presentations detailing and defending their analyses andconclusions. Finally, when used as a group assignment, the PROJECT also develops students understanding of group dynamics by requiring students to reflect on the group processes followedin completing the Implementation ApproachesCurrently, this PROJECT is being used by two professors in a preparer-based financialaccounting course environment.

9 Both professors introduce the PROJECT during the sixth week of a 16-week semester (shortly after the first examination), so that students are familiar with the basicfinancial accounting process at the time the PROJECT is introduced. As a first step, the professorsorganize students into groups of four to five people, balancing the groups based on both academicmajor and performance in the class to date (including performance on homework and the first exam),as well as to achieve diversity. The group format is used to encourage students to learn from eachother, to motivate students to consider alternative viewpoints, to develop students understandingof group dynamics, and to limit the amount of time required of the PROJECT for both students and thefaculty who must grade professor uses a different approach in selecting the industry and companies for professor takes industry suggestions from the class (with the restriction that there be sufficientcompanies so that no more than two groups will have to analyze the same pair of companies), writesthe suggestions on the board, and asks students to vote for their top two choices.

10 Then, a second voteis taken from among the top two original suggestions, with a majority vote determining the industryto be analyzed. Finally, groups have one week to send the professor an email proposing twocompanies to analyze, with first responders being given preference, so that no more than two groupsanalyze the same and GalantineThe other professor announces group assignments near the end of a class session, then allowsgroups ten minutes to discuss their industry preferences and to write their preferences on an indexcard. The professor then selects the industry from among those requested (based on suitability) ande-mails students a list of allowable companies. Groups then e-mail their choices to the instructor,with each group being assigned a unique company, and first responders being given preference.