Economic Consequences of Accounting: 15.514 Summer 2003 Session 1

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
Intels customers use microprocessors as the brain of

their computers.
What do accountants customers do with accounting

information?
15.514 Summer 2003
Session 1
Intels operating inputs include materials, technology

and capital.
What are the inputs to the accounting process?
15.514 Summer 2003
Session 1
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
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 kind of information would accountants customers

like?
Why dont they get it?
15.514 Summer 2003
Session 1
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
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

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Economic consequences of accounting

"It's not the economy anymore, stupid. It's the accounting."

Acknowledgement is hereby given to Professor G. Peter Wilson for his authorship

The Five Challenges (slides 4-5)

A Conceptual Framework for Financial Accounting (slide 17) Session 1

The reaction of Concord EFS stock to its announcement of lower expected

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

What is not our objective

15.514 Summer 2003

Record keeping and reporting

As a user, given the reported numbers, do I know how they

As a user, knowing the procedures used by management, and

As a user, how do I judge the usefulness of the reported numbers?

As a user, how can the reported numbers help me make a more

15.514 Summer 2003

Cases and class discussion

Application of other challenges

Learning to communicate ideas

Learning from each other

Learning through discovery

15.514 Summer 2003

Learning useful skills

Graded class participation

Warm and cold calling

15.514 Summer 2003

Quality, not quantity.

Analyzing and discussing course material.

Questioning the analysis of others.

Contrasting issues within other settings, courses, and /

Changing the direction of discussion.

15.514 Summer 2003

Intel produces microprocessors, chipsets and other

What do accountants produce and who are their

15.514 Summer 2003

Intels customers use microprocessors as the brain of

What do accountants customers do with accounting

15.514 Summer 2003

What do Intel and accountants have in common?

Intels operating inputs include materials, technology

What are the inputs to the accounting process?

15.514 Summer 2003

What do Intel and accountants have in common?

Intels product designs depend on its customers needs,

What factors influence the design of accountants

15.514 Summer 2003

Intels customers would prefer microprocessors that:

Why dont they get all of these?

15.514 Summer 2003