Manajemen | Fakultas Ekonomi Universitas Maritim Raja Ali Haji 08832320109601299
Journal of Education for Business
ISSN: 0883-2323 (Print) 1940-3356 (Online) Journal homepage: http://www.tandfonline.com/loi/vjeb20
Using an Investment Project to Develop
Professional Competencies in Introduction to
Financial Accounting
Lola Woodard Dudley , Henry H. Davis & David G. McGrady
To cite this article: Lola Woodard Dudley , Henry H. Davis & David G. McGrady (2001)
Using an Investment Project to Develop Professional Competencies in Introduction
to Financial Accounting, Journal of Education for Business, 76:3, 125-131, DOI:
10.1080/08832320109601299
To link to this article: http://dx.doi.org/10.1080/08832320109601299
Published online: 31 Mar 2010.
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Using an nvestment Project to
Develop Pro ‘essional Competencies
in Introduction to Financial
Accounting
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LOLA WOODARD DUDLEY
HENRY H. DAVIS
DAVID G. MCGRADY
Eastern Illinois University
Charleston, Illinois
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ntroductory Financial Accounting
may be viewed as either students’first
accounting course or their last accounting course. The difference between the
objectives and emphasis of these two
views is profound. Introductory Financial Accounting has traditionally been
viewed as the first accounting course, so
faculty have stressed preparing entries
and financial statements to lay a foundation for continued study in accounting. By using the preparer approach, the
course has emphasized bookkeeping
and neglected the use of accounting as a
decisionmaking tool.
On the other hand, if Introductory
Financial Accounting is viewed as the
last accounting course a student will
complete, its emphasis must be on using
accounting to support economic decisionmaking. The Accounting Education
Change Commission emphasized this
point in its position statement on the
course:
ABSTRACT. This article describes
an investment project used to stimulate student interest in and understanding of business, economics, finance,
and the uses and limitations of
accounting information. Student
groups invest in a portfolio of stocks
after completing an analysis of financial information. Project success is
evaluated through assessment of economic decisionmaking skills, financial
statement analysis, understanding of
underlying accounting concepts and
procedures, portfolio outcome, portfolio goals, effectiveness of cornmunication, and oral presentations. In completing the project, students develop
competencies needed for success in
business careers.
ing are not accounting majors, the
course should be viewed as the last
accounting course and, therefore, have a
user emphasis. In fact, accounting
majors also would be served better by
this approach. Success in the accounting
profession requires skill sets different
from those needed by bookkeepers,
which suggests that accounting students
should experience situations faced by
accountants-rather than the problems
facing bookkeepers.
A user-focused course concentrates
on building competencies that graduates
need to be successful in a business
career (Gordon & Howell, 1959; Muse,
1983; Pierson, 1959; Porter & McKibbin, 1988). Accounting professionals
have provided inventories of the capabilities needed for success in an
accounting career in the Bedford Committee Report (1986), the Big Eight
White Paper (Perspectives on Education, 1989), and the AECC’s Position
Statement No. One ( 1 990).
In the most ambitious and promising
effort to date, a task force associated
with the American Institute of Certified
Public Accountants (AICPA) developed
the AICPA Core Competency Framework for Entry Into the Accounting Profession (AICPA, 1999), which identifies
core functional, personal, and broad
business competencies needed by entrylevel accountants. Though focused on
students majoring in accounting, many
of these competencies are equally
applicable to all business graduates. In
fact, one section deals with “broad business perspective competencies.”
To develop these competencies, students must be active learners. Active
learning experiences dramatically influence student perceptions of business
(Baldwin & Ingram, 1991), enhance the
acquisition and retention of accounting
information (Costin, 1972; Eble, 1983;
McKeachie & Kulik, 1975), increase
student “buy-in” (internalization) and
commitment to course assignments, and
develop students’ higher cognitive abilities (NIE, 1984).
In this article, we describe an active
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The primary objective . . . is for students
to learn about accounting as an information development and communication
function that supports economic decisionmaking. The knowledge and skills provided by the first course in accounting
should facilitate subsequent learning even
if the student takes no additional academic work in accounting or directly related
disciplines. (AECC, 1992)
Because the vast majority of students
taking Introductory Financial Account-
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learning project that develops the
research, computer, communication,
and decisionmaking skills of students.
Students develop research skills while
obtaining information via the World
Wide Web (WWW) and the library. (In
Appendix A, we provide a list of potential WWW class exercises relevant to
particular phases of the project.) Students’ computer skills are enhanced
through the use of spreadsheet and word
processing software and e-mail to communicate the results of their inquiries or
maintain contact with group members
and the instructor. Decisionmaking
skills are developed because students
“self-discover” the usefulness and limitations of accounting information in an
investment scenario.
This project, therefore, mimics realworld uses of accounting information.
Actively engaged students must evaluate the usefulness and limitations of
accounting information in completing
each task. Students learn and understand accounting principles and procedures as a by-product of task completion rather than as an objective itself.
The Investment Project is used to
stimulate student interest in business,
economics, finance, and the uses and
limitations of accounting information.
Each student group invests a given lump
sum in a portfolio of stocks. Project success is evaluated on the basis of economic decisionmaking skills, financial
statement analysis, understanding of
underlying accounting concepts and
procedures, portfolio outcome, portfolio
goals, effectiveness of communication,
and oral presentations.
By integrating the analysis of financial information contained in annual
reports with the selection of a stock
portfolio, students get timely feedback
from the financial markets on the wisdom of their analysis. This not only
sharpens their skills in financial statement analysis, but also develops their
confidence in their ability to construct a
stock portfolio matching their threshold
for investment risk.
Project Implementation
On the first day of class, the instructor poses the following questions:
What is accounting?
Who uses accounting information?
How is accounting information
used?
The questions underscore for students
the view that accounting information is
used for decisionmaking, which is the
fundamental premise underlying this
project. This concept is reinforced
throughout the semester. Understanding
the uses of accounting information is
critical even for accounting majors. To
provide useful information, accountants
must understand the decisions that users
are making and how accounting information fits into the decisionmaking process.
Phase 1-Company
Selection
As the initial project assignment, students must select a company and obtain
its annual report for the most recent
year. They are encouraged to pick a
company that interests them. If a student has received stock as a gift, she or
he often will choose that company for
evaluation. Students’ and their families’
present and past employers are also
good candidates. Alternatively, they
may select a firm from annual reports
available from the Wall Street Journal
Annual Reports Service. No duplication
is allowed; as soon as a firm is selected,
the student must announce it on the
class e-mail account.
One by-product of this assignment is
a discussion of service, merchandising,
and manufacturing firms. Many students are more comfortable with service
and merchandising concerns because
financial accounting textbooks generally focus on them. Knowledge of the
complexities of manufacturing account-
ing, however, is not a prerequisite for
analysis of manufacturers’ financial
statements.
Inclusion of manufacturers makes
interfirm comparisons more diverse and
interesting. Selection of foreign-based
companies is discouraged, however,
because their complexities can frustrate
students in their first financial accounting course. If foreign company annual
reports can be obtained, however, they
offer many opportunities to internationalize the course (Ramaglia, 1998).
Phase 2-Preliminary
Analysis
During coverage of the accounting
cycle or upon its completion, students
are introduced to financial statement
analysis. This introduction includes measures of liquidity, profitability, and solvency. Each student then performs a preliminary analysis on her or his company.
In addition to analyzing the financial
statements, students obtain current
information regarding their company
from the World Wide Web, including
the 52-week high and low prices for the
company’s stock, projected current
year’s earnings per share, price-earnings
ratio, stock analysts‘ recommendations,
and the stock’s beta. This information is
obtained by entering the company’s
ticker symbol at or
a similar Web site. During this information-gathering stage, students complete
in-class exercises designed to develop
research skills required to evaluate the
quality of data.
It is important to spend time helping
students understand the information they
have gathered that is not covered in their
textbook. For example, once students
understand how a stock’s beta measures
its volatility, they can make more
informed decisions when constructing
either an aggressive or a conservative
portfolio. Also, students need to understand the role of stock analysts’ recommendations and earnings-per-share projections on stock price changes.
We generally spend a great deal of
time discussing the role of analysts and
ethical considerations (such as analysts’
“tweaking” of financial statements and
“whispering” of EPS estimates). Students gradually recognize the focus of
the stock market and of decisionmakers
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Investment Project
Introductory accounting students are
fascinated with the stock market, investments, and their potential for producing
126
vast wealth (with little overt effort).
This project uses such student “hot buttons” to introduce them to the uses and
preparation of accounting information.
The project work is completed outside
of class, after the underlying concepts
have been covered. In Table 1, we present an outline of the project and the
competencies it develops.
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TABLE 1. Skills Required to Complete Investment Project and Competencies Developed
Project phase
Skills required for task completion
Competencies developed
Select
company
Use The Wall Street Journal
UseWWW
Research
Preliminary
analysis
Use The Wall Street Journal
UseWWW
Understand role of financial analyst
Use information in annual report
Financial statement analysis
Timeliness of information
Research
Decisionmaking
Use technology
Communication
Strategic/critical thinking
Peer review
and portfolio
formation
Perform financial analysis
Understand role of financial analyst
Use WWW
..-Use library resources
Research
Decision modeling/making
Use of technology
Communication
Interaction
Strategic/critical thinking
Investment
evaluation
Interpret information from financial analysts
Use of earnings per share
Analyze and prioritize data
Apply accounting concepts
Analyze factors affecting the quality of earnings, including depreciation and
inventory methods
Synthesize information from disparate sources
Evaluate investment opportunities
Decision modeling/making
Use of technology
Communication
Interaction
Strategic/critical thinking
Peer
investment
evaluation
Communicate effectively
Provide useful feedback
Analyze and prioritize data
Apply accounting concepts
Synthesize information from disparate sources
Decision modeling/making
Use of technology
Communication
Interaction
Strategic/critical thinking
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Continuous
process
improvement
Evaluate process
Communicate effectively
Provide useful feedback
on future events. Many questions are
raised about the usefulness of financial
statements’ historical information in
decisionmaking for future events.
Phase 3-Portfolio
Formation
After the first exam, when class
enrollment is stabilized, students are
assigned to heterogeneous teams based
on first test grade, selected companies,
and other grouping factors. For some
factors, we try to increase diversity (e.g.,
major), and for others to minimize diversity (e.g., industry). Teams are not finalized until after the first exam, to minimize wholesale reconfiguring due to
student drops andor student inactivity.
After the groups have been formed by
the instructor, each student exchanges
annual reports with a classmate who is
Communication
Strategic/critical thinking
not a member of his or her group. The
purpose of this exchange is twofold.
First, early in the project students will
see the wide variety of information that
they will encounter when looking at
ratios of two different companies. Second, each company is analyzed by
members of two different groups, so
both groups have the opportunity to
invest in that stock. Later in the semester, this exchange diminishes complaints that one group was blessed with
a “hot stock” that no other group had the
opportunity to purchase.
Each group then compiles the information contained in its preliminary
analysis for the 8-10 stocks that group
members have evaluated. The groups
spend a class day discussing the investment attributes of their stocks and then
allocate the hypothetical $100,000 that
each group has available to invest. The
parameters for their investment allocation are relatively simple. They can
invest the $100,000 in any fashion they
desire, but they must invest the entire
$100,000. They cannot place a portion
of their funds in “cash.” They can invest
any amount they desire in a particular
stock, from nothing to the entire
$100,000. Each stock can be selected by
two groups, not just one.
In some semesters, the instructor has
entered the groups’ stock portfolio
information into a Web page established
at . The
portfolios are recorded when the market
is closed to ensure that each portfolio
begins with a $100,000 balance. Because the instructor was responsible for
entering selections of students, no trading was allowed. Students “lived or
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class. Many students track the value of
their portfolio independently and come
to class with a smile on their face when
they know their stocks are up $3,000
that morning. Because the portfolios are
generally selected 1 month into the
semester, the students have roughly 2
months to monitor the performance of
their selections. Groups tend to gel as
members unite behind their success, or
lack of it, with their portfolio. These
groups function more effectively on
group assignments throughout the
remainder of the semester.
died” with their original analysis and
stock selection(s). Lacking an option to
trade, students had to make decision(s)
without the possibility of revision. The
remainder of the semester focused on
the rationale for their decisions and
evaluation of alternative information
sources and how students used them.
In other semesters, the class participated in the Final Bell investment game
found at . Student groups were allowed to trade securities according to
the Final Bell rules. Weekly, each student group submitted a memo to the
instructor describing the value of the
group portfolio, explaining changes in
its value and reasons for any trades.
Each group was required to include a
“linked” spreadsheet graph showing the
value of the student portfolio for each
week. In Table 2, we identify “portfolio” sites recently available on the Web.
Because information available on the
Web changes frequently, the portfolio
sites included may vary. The site
provides a directory
of investing games.
In both the trading and nontrading
approaches, the daily gyrations of each
group’s portfolio become a great source
of pride and frustration as the group
members see their portfolios rise and
sink in relation to those of their peers.
When no trading is allowed, the instructor distributes information about the
value of all portfolios at the start of
Phase 4 -Investment Evaluation
Each student prepares a comprehensive analysis of her or his company (see
Table 3 for evaluation form). The analysis includes qualitative as well as quantitative information from the company’s
annual report. For example, students
summarize prospects for the coming
year as discussed in the letter to shareholders, the sources of increased revenue during the current period as
explained in management’s discussion,
articles from the financial press about
the company, and the composition of the
corporate board in terms of inside and
outside directors.
The analysis also includes an evaluation of the quality of the earnings andor
earnings per share reported by the company. By the end of the semester, most
students understand the implications of
accounting choices-such as accelerat-
ed depreciation and the LIFO inventory
method on earnings per share-because
they have been the basis of discussions
and exercises. Knapp (1998) includes
excellent coverage of the process of
assessing earnings quality in his financial accounting text.
The students also include their recommendations regarding the investment
potential of that stock. Because by this
time they have reviewed the company’s
financial statements, gathered information on expected future earnings, and
followed the performance of the stock
throughout the semester, most students
will feel capable of making such
informed decisions on investment.
Phase 5-Peer Evaluation of
Individual Company Analysis
The comprehensive analysis, annual
reports, and supporting materials are
exchanged during the last week of class.
Each student reviews another student’s
report and independently verifies the
quantitative content and the qualitative
assessments of the report. The peer
evaluation requires the students to apply
critical thinking skills when assessing
the work of their peers and provides
additional exposure to the writing and
analysis skills of others. In addition, the
quantitative analysis serves as a review
for components of the final exam.
Student projects are evaluated
through the instrument shown in Table
3. In completing this evaluation, stu-
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TABLE 2. Www Portfolio Sites
URL
Can set up class account
www.ichallenge.net
library.advanced.org/10326/market-simulation/index.html
www.smartstocks.com/
www.stocktrak.com/
game.etrade.com
library.advanced.org/30
www.fantasystockmarket.com
www.sandbox.net/finalbell/pub-dochome.
html
investorsleague.com/
www.mainxchange.com
www.nordby.com/challenges/thegame/
Yes
Yes
Yes
Yes
No
No
No
No
No
No
No
No
No
No
Name
Investment Challenge
Investsmart Market Simulation
Smart Stocks
Stock Trak
E*Trade
Edustock
Fantasy stock market
Final Bell
League of American Investors
Mainxchange
Nordby Stock Contest
Virtual Stock Exchange
Vstock
Yahoo Investment Challenge
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www.virtualstockexchange.com/
www.vstock.com/cgi-bin/w3-msql/user.htm
contest.finance.yahoo.com/t1?u
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dents use skills ranging from rote recall
to analysis and synthesis. Instructor
evaluation of the Investment Project is
limited to written materials. This
reduces the time required for grading
and also helps students understand the
necessity of effective communication.
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Phase &Continuous Process
Improvement
The peer evaluation and comprehensive analysis components require suggestions for changes to improve the
project and a summary of what the stu-
dent learned. Past suggestions have
included (a) inclusion of industry
ratios in the project and (b) permitting
students to trade stocks. (Because
industry ratios are now readily available on the World Wide Web at sites
such as , this
TABLE 3. Sample Financial Analysis Project Evaluation Form
Financial Statement Project Evaluation Form
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Name:
Company:
Row:
Due: Friday, November 20th
(75 points total)
Letter to the stockholders (4 points)
1-.
2.-
How was the company’s current period performance described?
How did management describe the future prospects for the company?
Financial Hiphlights (6points)
3.4.-
Over the past 5 years, what was the percentage increase in the company’s revenue (sales)? Show your calculations.
Over the past 5 years, what was the percentage increase in the company’s net income? Show your calculations.
Management’s Discussion and Analvsis (5 points)
5.6.-
Why did revenue increase (decrease) for the company in the current period?
Why did selling, general, and administrative expenses increase (decrease) for the company in the current period?
Financial Statements (23 points)
7.8.9.10.-
11.12.13.14.15.-
16.17.18.-
When does the company’s fiscal year end?
What was the company’s profit margin percentage during the current period? Show your calculations.
What was the company’s profit margin percentage during the prior fiscal year? Show your calculations.
What was the company’s working capital at the end of the current period? Show your calculations.
What was the company’s current ratio at the end of the current period? Show your calculations.
What was the company’s return on assets during the current period? Show your calculations.
What was the company’s debt-to-total-assets ratio at the end of the current period? Show your calculations.
What was the company’s debt-to-total-assets ratio at the end of the prior fiscal year? Show your calculations.
What was the company’s return on common stockholders’ equity during the current period? Show your calculations.
What was the net cash provided by operating activities during the current period?
Based on the average number of shares outstanding during the current period, what was the net cash provided by operating
activities per share? Show your calculations.
What was net income per share for the current period?
Notes to Consolidated Financial Statements (5 points]
19.What method does the company use to value its inventory?
20.21 -.
Report of Certified Public Accountants (2 points)
22.Who are the company’s independent auditors?
Other Stockholder Information (8 points)
23.24.25.26.27.-
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Would this method tend to increase or
decrease net income?
Increase
__ Decrease
What depreciation method does the company use for property, plant, and equipment?
What was the company’s effective tax rate?
What was the highest price for the company’s stock for the past 2 years shown in the annual report?
What was the lowest price for the company’s stock for the past 2 years shown in the annual report?
If you had invested $10,000 in the company’s stock when it was at its lowest price during these 2 years, how much money
would you have made if you had sold the stock at the highest price during the 2-year period? Show your calculations.
outside directors for a total of directors.
The company’s board of directors has -inside
directors and For three outside directors, list the position they hold and where they work
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(Table comiimues)
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TABLE 3 (Conf/nued)
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Information from World Wide Web (12 points)
28. Go to the following address: http://yahoo.com.
29. Click on stock quotes. (Presently located toward the top, right hand side of Yahoo’s Web page.)
30. Enter the stock symbol in the Get Quotes box and click the down arrow to the right of the Get Quotes box to change the Basic
quote to Detailed quote.
31. Below the chart, click max to display the chart of the stock’s price during this decade.
32.Print and attach the Web page containing the chart.
33.Based on the chart, what has the price of the company’s stock done during this decade?
34. Click on Profile above the chart.
35.Print and attach the Profile Web page.
36.Based on the Profile, what is the recent price of the stock?
37.Based on the Profile, what is the Market Capitalization of this company? (This is what it would cost you to buy all the stock
of the company.)
38. Click Back on your Web browser and then click on Research, which is to the right of Profile.
39.Print and attach the Research Web page.
40.Based on the Research report, what is the consensus estimate of earnings per share next year?
41.What percentage increase or decrease is this from the amount of earnings per share for the current period in the annual
report? Show your calculations.
Summary (10 Doints): Attach a tvDed Daee to this document answering auestions 42-44.
42.Based on your work, explain whether or not you feel this stock is a good investment at this time. Your explanation, which
should be two to three paragraphs in length, must refer to the above data to support your conclusion.
43.What did you learn from this project?
44.What changes would you make to improve this project? (No limit on the length of this answer.)
45.Place this document with your Web pages and summary attached in a folder with your annual report.
suggestion will be implemented this
semester.)
Allowing students to buy and sell
stocks adds administrative complexity to
the project. When students have been
permitted to do this, they tend to abandon
their “losers” quickly and buy the “hot”
stock of the week for no other reason
than its sharp rise. Although this sometimes may be a very successful method
of selecting stocks, students may find
that a red-hot stock can become ice cold
quickly. On occasion, these plunges have
been caused by the exposure of accounting irregularities, which has resulted in
some lively class discussion. However,
this type of speculation is not consistent
with the type of thoughtful financial
statement analysis that students should
develop in the accounting course. Therefore, some instructors may choose to
prohibit trading.
Other Considerations
At our school-a regional, AACSBaccredited, comprehensive state university-introductory accounting students
have taken (or are concurrently taking)
an introductory economics course. This
course provides students with a rudimentary understanding of the impact of
130
change in interest rates on the economy
and some familiarity with the concept of
supply and demand. Technical skills
required for this project are ratio computation and analysis covered in the
textbook. Students compute these ratios
and make investment decisions using
their analysis. Instructors can adapt
requirements to the specific capabilities
of their students by varying the depth of
analysis involved. We believe that,
although the analysis is not very deep in
introductory accounting, students learn
an important lesson through it: Always
look below the surface.
Although some Web sites factor in
trading lags, students may try to achieve
superior returns by using real-time quote
sources (such as E-Trade). Because
investment success or failure is not an
important factor in assessing student performance on this project (see grading
sheet), there is little incentive for students to engage in such “real-time cheating.” In addition, opportunities for this
behavior are limited because students
can only invest in stocks of companies
that they or a classmate are evaluating. If
“real-time cheating” should occur, it
would provide a great opportunity to discuss ethical behavior, perhaps leading to
a discussion of insider trading.
At first glance, this project appears to
require a great deal of faculty time.
However the peer evaluation component
substantially reduces the time required
for grading because the peer evaluator
has verified the quantitative content of
the report and reviewed the qualitative
assessments. Therefore, the instructor
can concentrate most of the grading
time on the student’s summary.
Neither does the project consume
much class time. Besides the day devoted to portfolio formation, students work
on the project outside of class. Covering
the concepts related to making investment decisions requires no additional
class time because they are covered in
class anyway, with or without the project. However, students’ understanding
of the concepts is enhanced by the project, because they see how these concepts affect “their” firms.
Conclusion
In this article, we have presented an
active learning project that develops the
strategic and critical thinking, research,
technology, interaction, communication, and decisionmaking competencies
of students. The investment project
brings financial statement analysis to
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life and gives students a chance to compare their conclusions about a company
with the judgment that the stock market
makes about that company each day.
Although the project may be time consuming and challenging for students,
few of them leave the course wondering
“Why do I need to know this stuff?”
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Accounting Education Change Commission
(AECC). (1990). Position Statement No. One:
Objectives of education for accountants. New
York: American Accounting Association.
Accounting Education Change Commission
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The first course in accounting. New York:
American Accounting Association.
American Institute of Certified Public Accountants (AICPA). (1999). AICPA core competency
framework for entry into the accounting profession. New York: AICPA.
Baldwin, B. A,, & Ingram, R. W. (1991). Rethinking the objectives and content of elementary
accounting. Journal of Accounting Education,
9, 1-14.
Bedford Committee. (1986). American Accounting Association Committee on the Future Structure, Content and Scope of Accounting Education. Future accounting education: Preparing
for the expanding profession. Issues in
Accounting Education, Spring, 168-195.
Costin, F. (1972). Lecturing versus other methods
of teaching: A review of research. British Journal of Educational Technology, 3, 4-30.
Eble, K. (1983). The aims of college teaching. San
Francisco: Jossey-Bass.
Gordon, R. A,, & Howell, J. E. (1959). Higher
education for business. New York: Columbia
University Press.
Knapp, M. C. (1998). Financial accounting: A
focus on decision making (2nded.). Cincinnati:
South-Westem College Publishing.
McKeachie, W. J., & Kulik, J. (1975). Effective
college teaching. In F. Kerlinger (Ed.), Review
of Research in Education. Itasca, IL:Peacock.
Muse, W. V. (1982 p. 2). If all the business schools
in the country were eliminated. . . Would anyone
notice. Collegiate News & views, Spring, 1-5.
National Institute of Education (NIE). (1984).
Study group on the conditions of excellence in
American higher education. Involvement in
learning: Realizing the potential of American
hinher education. Washington, DC: ME.
Pierson, F. C. (1959). The eiucation ofAmerican
businessmen: A study of university-college programs in business administration. New York:
McGraw-Hill.
Porter, L. W., & McKibbin, L. E. (1988). Management education and development. New
York McGraw-Hill.
Perspectives on education: Capabilities for success in the accounting profession (The White
Paper). (1989). New York, NY Arthur Andersen & Co., Arthur Young, Coopers & Lybrand,
Deloitte Haskins & Sells, Emst & Whinney,
Peat Manvick Main & Co., Price Waterhouse,
& Touche Ross.
Ramaglia, J. (1998, November). How to integrate
international accounting into your course. Presentation at The Colloquium on Change in
Accounting Education, Scottsdale, Arizon;.
APPENDIX. WWW Class Exercises to Assign During Investment Project
Phases
Phase I-Company Selection
Search and identify WWW sites to obtain annual reports.
Phase 2--Preliminary Analysis
* Search and identify Web sites to obtain firm-specific information.
Search Web to obtain examples of companies with conflicting recommendations
from analysts.
Phase &Investment Evaluation
* Search and identify WWW sites to obtain examples of good and poor management discussion and analysis (MD&A).
Evaluate firms’ boards by comparing the composition of boards within their
group.
Search and identify WWW sites to compare and contrast management discussion
& analysis with analysts’ evaluations.
Identify current examples of “earnings management” or “accounting irregularities.”
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January/February 2001
131
ISSN: 0883-2323 (Print) 1940-3356 (Online) Journal homepage: http://www.tandfonline.com/loi/vjeb20
Using an Investment Project to Develop
Professional Competencies in Introduction to
Financial Accounting
Lola Woodard Dudley , Henry H. Davis & David G. McGrady
To cite this article: Lola Woodard Dudley , Henry H. Davis & David G. McGrady (2001)
Using an Investment Project to Develop Professional Competencies in Introduction
to Financial Accounting, Journal of Education for Business, 76:3, 125-131, DOI:
10.1080/08832320109601299
To link to this article: http://dx.doi.org/10.1080/08832320109601299
Published online: 31 Mar 2010.
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Using an nvestment Project to
Develop Pro ‘essional Competencies
in Introduction to Financial
Accounting
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LOLA WOODARD DUDLEY
HENRY H. DAVIS
DAVID G. MCGRADY
Eastern Illinois University
Charleston, Illinois
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ntroductory Financial Accounting
may be viewed as either students’first
accounting course or their last accounting course. The difference between the
objectives and emphasis of these two
views is profound. Introductory Financial Accounting has traditionally been
viewed as the first accounting course, so
faculty have stressed preparing entries
and financial statements to lay a foundation for continued study in accounting. By using the preparer approach, the
course has emphasized bookkeeping
and neglected the use of accounting as a
decisionmaking tool.
On the other hand, if Introductory
Financial Accounting is viewed as the
last accounting course a student will
complete, its emphasis must be on using
accounting to support economic decisionmaking. The Accounting Education
Change Commission emphasized this
point in its position statement on the
course:
ABSTRACT. This article describes
an investment project used to stimulate student interest in and understanding of business, economics, finance,
and the uses and limitations of
accounting information. Student
groups invest in a portfolio of stocks
after completing an analysis of financial information. Project success is
evaluated through assessment of economic decisionmaking skills, financial
statement analysis, understanding of
underlying accounting concepts and
procedures, portfolio outcome, portfolio goals, effectiveness of cornmunication, and oral presentations. In completing the project, students develop
competencies needed for success in
business careers.
ing are not accounting majors, the
course should be viewed as the last
accounting course and, therefore, have a
user emphasis. In fact, accounting
majors also would be served better by
this approach. Success in the accounting
profession requires skill sets different
from those needed by bookkeepers,
which suggests that accounting students
should experience situations faced by
accountants-rather than the problems
facing bookkeepers.
A user-focused course concentrates
on building competencies that graduates
need to be successful in a business
career (Gordon & Howell, 1959; Muse,
1983; Pierson, 1959; Porter & McKibbin, 1988). Accounting professionals
have provided inventories of the capabilities needed for success in an
accounting career in the Bedford Committee Report (1986), the Big Eight
White Paper (Perspectives on Education, 1989), and the AECC’s Position
Statement No. One ( 1 990).
In the most ambitious and promising
effort to date, a task force associated
with the American Institute of Certified
Public Accountants (AICPA) developed
the AICPA Core Competency Framework for Entry Into the Accounting Profession (AICPA, 1999), which identifies
core functional, personal, and broad
business competencies needed by entrylevel accountants. Though focused on
students majoring in accounting, many
of these competencies are equally
applicable to all business graduates. In
fact, one section deals with “broad business perspective competencies.”
To develop these competencies, students must be active learners. Active
learning experiences dramatically influence student perceptions of business
(Baldwin & Ingram, 1991), enhance the
acquisition and retention of accounting
information (Costin, 1972; Eble, 1983;
McKeachie & Kulik, 1975), increase
student “buy-in” (internalization) and
commitment to course assignments, and
develop students’ higher cognitive abilities (NIE, 1984).
In this article, we describe an active
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The primary objective . . . is for students
to learn about accounting as an information development and communication
function that supports economic decisionmaking. The knowledge and skills provided by the first course in accounting
should facilitate subsequent learning even
if the student takes no additional academic work in accounting or directly related
disciplines. (AECC, 1992)
Because the vast majority of students
taking Introductory Financial Account-
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learning project that develops the
research, computer, communication,
and decisionmaking skills of students.
Students develop research skills while
obtaining information via the World
Wide Web (WWW) and the library. (In
Appendix A, we provide a list of potential WWW class exercises relevant to
particular phases of the project.) Students’ computer skills are enhanced
through the use of spreadsheet and word
processing software and e-mail to communicate the results of their inquiries or
maintain contact with group members
and the instructor. Decisionmaking
skills are developed because students
“self-discover” the usefulness and limitations of accounting information in an
investment scenario.
This project, therefore, mimics realworld uses of accounting information.
Actively engaged students must evaluate the usefulness and limitations of
accounting information in completing
each task. Students learn and understand accounting principles and procedures as a by-product of task completion rather than as an objective itself.
The Investment Project is used to
stimulate student interest in business,
economics, finance, and the uses and
limitations of accounting information.
Each student group invests a given lump
sum in a portfolio of stocks. Project success is evaluated on the basis of economic decisionmaking skills, financial
statement analysis, understanding of
underlying accounting concepts and
procedures, portfolio outcome, portfolio
goals, effectiveness of communication,
and oral presentations.
By integrating the analysis of financial information contained in annual
reports with the selection of a stock
portfolio, students get timely feedback
from the financial markets on the wisdom of their analysis. This not only
sharpens their skills in financial statement analysis, but also develops their
confidence in their ability to construct a
stock portfolio matching their threshold
for investment risk.
Project Implementation
On the first day of class, the instructor poses the following questions:
What is accounting?
Who uses accounting information?
How is accounting information
used?
The questions underscore for students
the view that accounting information is
used for decisionmaking, which is the
fundamental premise underlying this
project. This concept is reinforced
throughout the semester. Understanding
the uses of accounting information is
critical even for accounting majors. To
provide useful information, accountants
must understand the decisions that users
are making and how accounting information fits into the decisionmaking process.
Phase 1-Company
Selection
As the initial project assignment, students must select a company and obtain
its annual report for the most recent
year. They are encouraged to pick a
company that interests them. If a student has received stock as a gift, she or
he often will choose that company for
evaluation. Students’ and their families’
present and past employers are also
good candidates. Alternatively, they
may select a firm from annual reports
available from the Wall Street Journal
Annual Reports Service. No duplication
is allowed; as soon as a firm is selected,
the student must announce it on the
class e-mail account.
One by-product of this assignment is
a discussion of service, merchandising,
and manufacturing firms. Many students are more comfortable with service
and merchandising concerns because
financial accounting textbooks generally focus on them. Knowledge of the
complexities of manufacturing account-
ing, however, is not a prerequisite for
analysis of manufacturers’ financial
statements.
Inclusion of manufacturers makes
interfirm comparisons more diverse and
interesting. Selection of foreign-based
companies is discouraged, however,
because their complexities can frustrate
students in their first financial accounting course. If foreign company annual
reports can be obtained, however, they
offer many opportunities to internationalize the course (Ramaglia, 1998).
Phase 2-Preliminary
Analysis
During coverage of the accounting
cycle or upon its completion, students
are introduced to financial statement
analysis. This introduction includes measures of liquidity, profitability, and solvency. Each student then performs a preliminary analysis on her or his company.
In addition to analyzing the financial
statements, students obtain current
information regarding their company
from the World Wide Web, including
the 52-week high and low prices for the
company’s stock, projected current
year’s earnings per share, price-earnings
ratio, stock analysts‘ recommendations,
and the stock’s beta. This information is
obtained by entering the company’s
ticker symbol at or
a similar Web site. During this information-gathering stage, students complete
in-class exercises designed to develop
research skills required to evaluate the
quality of data.
It is important to spend time helping
students understand the information they
have gathered that is not covered in their
textbook. For example, once students
understand how a stock’s beta measures
its volatility, they can make more
informed decisions when constructing
either an aggressive or a conservative
portfolio. Also, students need to understand the role of stock analysts’ recommendations and earnings-per-share projections on stock price changes.
We generally spend a great deal of
time discussing the role of analysts and
ethical considerations (such as analysts’
“tweaking” of financial statements and
“whispering” of EPS estimates). Students gradually recognize the focus of
the stock market and of decisionmakers
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Investment Project
Introductory accounting students are
fascinated with the stock market, investments, and their potential for producing
126
vast wealth (with little overt effort).
This project uses such student “hot buttons” to introduce them to the uses and
preparation of accounting information.
The project work is completed outside
of class, after the underlying concepts
have been covered. In Table 1, we present an outline of the project and the
competencies it develops.
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TABLE 1. Skills Required to Complete Investment Project and Competencies Developed
Project phase
Skills required for task completion
Competencies developed
Select
company
Use The Wall Street Journal
UseWWW
Research
Preliminary
analysis
Use The Wall Street Journal
UseWWW
Understand role of financial analyst
Use information in annual report
Financial statement analysis
Timeliness of information
Research
Decisionmaking
Use technology
Communication
Strategic/critical thinking
Peer review
and portfolio
formation
Perform financial analysis
Understand role of financial analyst
Use WWW
..-Use library resources
Research
Decision modeling/making
Use of technology
Communication
Interaction
Strategic/critical thinking
Investment
evaluation
Interpret information from financial analysts
Use of earnings per share
Analyze and prioritize data
Apply accounting concepts
Analyze factors affecting the quality of earnings, including depreciation and
inventory methods
Synthesize information from disparate sources
Evaluate investment opportunities
Decision modeling/making
Use of technology
Communication
Interaction
Strategic/critical thinking
Peer
investment
evaluation
Communicate effectively
Provide useful feedback
Analyze and prioritize data
Apply accounting concepts
Synthesize information from disparate sources
Decision modeling/making
Use of technology
Communication
Interaction
Strategic/critical thinking
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Continuous
process
improvement
Evaluate process
Communicate effectively
Provide useful feedback
on future events. Many questions are
raised about the usefulness of financial
statements’ historical information in
decisionmaking for future events.
Phase 3-Portfolio
Formation
After the first exam, when class
enrollment is stabilized, students are
assigned to heterogeneous teams based
on first test grade, selected companies,
and other grouping factors. For some
factors, we try to increase diversity (e.g.,
major), and for others to minimize diversity (e.g., industry). Teams are not finalized until after the first exam, to minimize wholesale reconfiguring due to
student drops andor student inactivity.
After the groups have been formed by
the instructor, each student exchanges
annual reports with a classmate who is
Communication
Strategic/critical thinking
not a member of his or her group. The
purpose of this exchange is twofold.
First, early in the project students will
see the wide variety of information that
they will encounter when looking at
ratios of two different companies. Second, each company is analyzed by
members of two different groups, so
both groups have the opportunity to
invest in that stock. Later in the semester, this exchange diminishes complaints that one group was blessed with
a “hot stock” that no other group had the
opportunity to purchase.
Each group then compiles the information contained in its preliminary
analysis for the 8-10 stocks that group
members have evaluated. The groups
spend a class day discussing the investment attributes of their stocks and then
allocate the hypothetical $100,000 that
each group has available to invest. The
parameters for their investment allocation are relatively simple. They can
invest the $100,000 in any fashion they
desire, but they must invest the entire
$100,000. They cannot place a portion
of their funds in “cash.” They can invest
any amount they desire in a particular
stock, from nothing to the entire
$100,000. Each stock can be selected by
two groups, not just one.
In some semesters, the instructor has
entered the groups’ stock portfolio
information into a Web page established
at . The
portfolios are recorded when the market
is closed to ensure that each portfolio
begins with a $100,000 balance. Because the instructor was responsible for
entering selections of students, no trading was allowed. Students “lived or
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class. Many students track the value of
their portfolio independently and come
to class with a smile on their face when
they know their stocks are up $3,000
that morning. Because the portfolios are
generally selected 1 month into the
semester, the students have roughly 2
months to monitor the performance of
their selections. Groups tend to gel as
members unite behind their success, or
lack of it, with their portfolio. These
groups function more effectively on
group assignments throughout the
remainder of the semester.
died” with their original analysis and
stock selection(s). Lacking an option to
trade, students had to make decision(s)
without the possibility of revision. The
remainder of the semester focused on
the rationale for their decisions and
evaluation of alternative information
sources and how students used them.
In other semesters, the class participated in the Final Bell investment game
found at . Student groups were allowed to trade securities according to
the Final Bell rules. Weekly, each student group submitted a memo to the
instructor describing the value of the
group portfolio, explaining changes in
its value and reasons for any trades.
Each group was required to include a
“linked” spreadsheet graph showing the
value of the student portfolio for each
week. In Table 2, we identify “portfolio” sites recently available on the Web.
Because information available on the
Web changes frequently, the portfolio
sites included may vary. The site
provides a directory
of investing games.
In both the trading and nontrading
approaches, the daily gyrations of each
group’s portfolio become a great source
of pride and frustration as the group
members see their portfolios rise and
sink in relation to those of their peers.
When no trading is allowed, the instructor distributes information about the
value of all portfolios at the start of
Phase 4 -Investment Evaluation
Each student prepares a comprehensive analysis of her or his company (see
Table 3 for evaluation form). The analysis includes qualitative as well as quantitative information from the company’s
annual report. For example, students
summarize prospects for the coming
year as discussed in the letter to shareholders, the sources of increased revenue during the current period as
explained in management’s discussion,
articles from the financial press about
the company, and the composition of the
corporate board in terms of inside and
outside directors.
The analysis also includes an evaluation of the quality of the earnings andor
earnings per share reported by the company. By the end of the semester, most
students understand the implications of
accounting choices-such as accelerat-
ed depreciation and the LIFO inventory
method on earnings per share-because
they have been the basis of discussions
and exercises. Knapp (1998) includes
excellent coverage of the process of
assessing earnings quality in his financial accounting text.
The students also include their recommendations regarding the investment
potential of that stock. Because by this
time they have reviewed the company’s
financial statements, gathered information on expected future earnings, and
followed the performance of the stock
throughout the semester, most students
will feel capable of making such
informed decisions on investment.
Phase 5-Peer Evaluation of
Individual Company Analysis
The comprehensive analysis, annual
reports, and supporting materials are
exchanged during the last week of class.
Each student reviews another student’s
report and independently verifies the
quantitative content and the qualitative
assessments of the report. The peer
evaluation requires the students to apply
critical thinking skills when assessing
the work of their peers and provides
additional exposure to the writing and
analysis skills of others. In addition, the
quantitative analysis serves as a review
for components of the final exam.
Student projects are evaluated
through the instrument shown in Table
3. In completing this evaluation, stu-
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TABLE 2. Www Portfolio Sites
URL
Can set up class account
www.ichallenge.net
library.advanced.org/10326/market-simulation/index.html
www.smartstocks.com/
www.stocktrak.com/
game.etrade.com
library.advanced.org/30
www.fantasystockmarket.com
www.sandbox.net/finalbell/pub-dochome.
html
investorsleague.com/
www.mainxchange.com
www.nordby.com/challenges/thegame/
Yes
Yes
Yes
Yes
No
No
No
No
No
No
No
No
No
No
Name
Investment Challenge
Investsmart Market Simulation
Smart Stocks
Stock Trak
E*Trade
Edustock
Fantasy stock market
Final Bell
League of American Investors
Mainxchange
Nordby Stock Contest
Virtual Stock Exchange
Vstock
Yahoo Investment Challenge
128
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www.virtualstockexchange.com/
www.vstock.com/cgi-bin/w3-msql/user.htm
contest.finance.yahoo.com/t1?u
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dents use skills ranging from rote recall
to analysis and synthesis. Instructor
evaluation of the Investment Project is
limited to written materials. This
reduces the time required for grading
and also helps students understand the
necessity of effective communication.
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Phase &Continuous Process
Improvement
The peer evaluation and comprehensive analysis components require suggestions for changes to improve the
project and a summary of what the stu-
dent learned. Past suggestions have
included (a) inclusion of industry
ratios in the project and (b) permitting
students to trade stocks. (Because
industry ratios are now readily available on the World Wide Web at sites
such as , this
TABLE 3. Sample Financial Analysis Project Evaluation Form
Financial Statement Project Evaluation Form
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Name:
Company:
Row:
Due: Friday, November 20th
(75 points total)
Letter to the stockholders (4 points)
1-.
2.-
How was the company’s current period performance described?
How did management describe the future prospects for the company?
Financial Hiphlights (6points)
3.4.-
Over the past 5 years, what was the percentage increase in the company’s revenue (sales)? Show your calculations.
Over the past 5 years, what was the percentage increase in the company’s net income? Show your calculations.
Management’s Discussion and Analvsis (5 points)
5.6.-
Why did revenue increase (decrease) for the company in the current period?
Why did selling, general, and administrative expenses increase (decrease) for the company in the current period?
Financial Statements (23 points)
7.8.9.10.-
11.12.13.14.15.-
16.17.18.-
When does the company’s fiscal year end?
What was the company’s profit margin percentage during the current period? Show your calculations.
What was the company’s profit margin percentage during the prior fiscal year? Show your calculations.
What was the company’s working capital at the end of the current period? Show your calculations.
What was the company’s current ratio at the end of the current period? Show your calculations.
What was the company’s return on assets during the current period? Show your calculations.
What was the company’s debt-to-total-assets ratio at the end of the current period? Show your calculations.
What was the company’s debt-to-total-assets ratio at the end of the prior fiscal year? Show your calculations.
What was the company’s return on common stockholders’ equity during the current period? Show your calculations.
What was the net cash provided by operating activities during the current period?
Based on the average number of shares outstanding during the current period, what was the net cash provided by operating
activities per share? Show your calculations.
What was net income per share for the current period?
Notes to Consolidated Financial Statements (5 points]
19.What method does the company use to value its inventory?
20.21 -.
Report of Certified Public Accountants (2 points)
22.Who are the company’s independent auditors?
Other Stockholder Information (8 points)
23.24.25.26.27.-
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Would this method tend to increase or
decrease net income?
Increase
__ Decrease
What depreciation method does the company use for property, plant, and equipment?
What was the company’s effective tax rate?
What was the highest price for the company’s stock for the past 2 years shown in the annual report?
What was the lowest price for the company’s stock for the past 2 years shown in the annual report?
If you had invested $10,000 in the company’s stock when it was at its lowest price during these 2 years, how much money
would you have made if you had sold the stock at the highest price during the 2-year period? Show your calculations.
outside directors for a total of directors.
The company’s board of directors has -inside
directors and For three outside directors, list the position they hold and where they work
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(Table comiimues)
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TABLE 3 (Conf/nued)
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Information from World Wide Web (12 points)
28. Go to the following address: http://yahoo.com.
29. Click on stock quotes. (Presently located toward the top, right hand side of Yahoo’s Web page.)
30. Enter the stock symbol in the Get Quotes box and click the down arrow to the right of the Get Quotes box to change the Basic
quote to Detailed quote.
31. Below the chart, click max to display the chart of the stock’s price during this decade.
32.Print and attach the Web page containing the chart.
33.Based on the chart, what has the price of the company’s stock done during this decade?
34. Click on Profile above the chart.
35.Print and attach the Profile Web page.
36.Based on the Profile, what is the recent price of the stock?
37.Based on the Profile, what is the Market Capitalization of this company? (This is what it would cost you to buy all the stock
of the company.)
38. Click Back on your Web browser and then click on Research, which is to the right of Profile.
39.Print and attach the Research Web page.
40.Based on the Research report, what is the consensus estimate of earnings per share next year?
41.What percentage increase or decrease is this from the amount of earnings per share for the current period in the annual
report? Show your calculations.
Summary (10 Doints): Attach a tvDed Daee to this document answering auestions 42-44.
42.Based on your work, explain whether or not you feel this stock is a good investment at this time. Your explanation, which
should be two to three paragraphs in length, must refer to the above data to support your conclusion.
43.What did you learn from this project?
44.What changes would you make to improve this project? (No limit on the length of this answer.)
45.Place this document with your Web pages and summary attached in a folder with your annual report.
suggestion will be implemented this
semester.)
Allowing students to buy and sell
stocks adds administrative complexity to
the project. When students have been
permitted to do this, they tend to abandon
their “losers” quickly and buy the “hot”
stock of the week for no other reason
than its sharp rise. Although this sometimes may be a very successful method
of selecting stocks, students may find
that a red-hot stock can become ice cold
quickly. On occasion, these plunges have
been caused by the exposure of accounting irregularities, which has resulted in
some lively class discussion. However,
this type of speculation is not consistent
with the type of thoughtful financial
statement analysis that students should
develop in the accounting course. Therefore, some instructors may choose to
prohibit trading.
Other Considerations
At our school-a regional, AACSBaccredited, comprehensive state university-introductory accounting students
have taken (or are concurrently taking)
an introductory economics course. This
course provides students with a rudimentary understanding of the impact of
130
change in interest rates on the economy
and some familiarity with the concept of
supply and demand. Technical skills
required for this project are ratio computation and analysis covered in the
textbook. Students compute these ratios
and make investment decisions using
their analysis. Instructors can adapt
requirements to the specific capabilities
of their students by varying the depth of
analysis involved. We believe that,
although the analysis is not very deep in
introductory accounting, students learn
an important lesson through it: Always
look below the surface.
Although some Web sites factor in
trading lags, students may try to achieve
superior returns by using real-time quote
sources (such as E-Trade). Because
investment success or failure is not an
important factor in assessing student performance on this project (see grading
sheet), there is little incentive for students to engage in such “real-time cheating.” In addition, opportunities for this
behavior are limited because students
can only invest in stocks of companies
that they or a classmate are evaluating. If
“real-time cheating” should occur, it
would provide a great opportunity to discuss ethical behavior, perhaps leading to
a discussion of insider trading.
At first glance, this project appears to
require a great deal of faculty time.
However the peer evaluation component
substantially reduces the time required
for grading because the peer evaluator
has verified the quantitative content of
the report and reviewed the qualitative
assessments. Therefore, the instructor
can concentrate most of the grading
time on the student’s summary.
Neither does the project consume
much class time. Besides the day devoted to portfolio formation, students work
on the project outside of class. Covering
the concepts related to making investment decisions requires no additional
class time because they are covered in
class anyway, with or without the project. However, students’ understanding
of the concepts is enhanced by the project, because they see how these concepts affect “their” firms.
Conclusion
In this article, we have presented an
active learning project that develops the
strategic and critical thinking, research,
technology, interaction, communication, and decisionmaking competencies
of students. The investment project
brings financial statement analysis to
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life and gives students a chance to compare their conclusions about a company
with the judgment that the stock market
makes about that company each day.
Although the project may be time consuming and challenging for students,
few of them leave the course wondering
“Why do I need to know this stuff?”
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APPENDIX. WWW Class Exercises to Assign During Investment Project
Phases
Phase I-Company Selection
Search and identify WWW sites to obtain annual reports.
Phase 2--Preliminary Analysis
* Search and identify Web sites to obtain firm-specific information.
Search Web to obtain examples of companies with conflicting recommendations
from analysts.
Phase &Investment Evaluation
* Search and identify WWW sites to obtain examples of good and poor management discussion and analysis (MD&A).
Evaluate firms’ boards by comparing the composition of boards within their
group.
Search and identify WWW sites to compare and contrast management discussion
& analysis with analysts’ evaluations.
Identify current examples of “earnings management” or “accounting irregularities.”
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