Liabilities, Cash Flows, and Stockholders’ Equity

Course Module in Financial Accounting

Course Modules help instructors select and sequence material for use as part of a course. Each module
represents the thinking of subject matter experts about the best materials to assign and how to organize
them to facilitate learning.

Each module recommends four to six items. Whenever possible at least one alternative item for each
main recommendation is included, as well as suggested supplemental readings that may provide a
broader conceptual context. Cases form the core of many modules but we also include readings from
Harvard Business Review, background notes, and other course materials.

1. Overview of suggested content (HBS case unless otherwise noted)

Title Author Product Publication Pages Teaching Note

Number Year
1. Introduction
Microsoft’s Financial Matsumoto & 100027 1999 12p 100068
Reporting Strategy Bowen
Alternative: Restating Kimbrough & 106009 2005 18p 106066
Revenues and Earnings at McFarlan
INVESTools, Inc. (A)
Supplement: Financial Palepu et al. 102029 2001 11p --
Reporting Environment
(HBS note)

2. Leases
Leasing Decision at Magnet Palepu & 111039 2010 16p 111089
Beauty Products, Inc. Serafeim
Alternative: Leasing Shanthikumar 108014 2007 10p 109054
Computers at Persistent
Learning
Supplement: Lease Hawkins 100003 1999 12p --
Accounting and Analysis
(HBS note)
3. Other Liabilities
Alternative: Accounting for Miller, 101072 2001 10p 102077
the Intel Pentium Chip Flaw Narayanan, &
Brem
Supplement: Liability Healy & 101016 2000 5p --
Reporting (HBS note) Choudhary
4. Statement of Cash Flows
Statement of Cash Flows: Bruns Jr. 193103 1993 8p 193173
Three Examples
Alternative: North Mountain Lynch UV0806 2007 4p UV0807
Nursery, Inc.: Statement of
Cash Flow (Darden case)
Supplement: Statement of Hawkins & 101107 2007 9p --
Cash Flows Cohen
5. Stockholders’ Equity
Jimmy Fu and Moog, Inc.: Chapman 4203 2010 6p 4204
Understanding Shareholder’s
Equity (HBP Brief case)
Alternative: DoubleClick, Inc. Fields & 103016 2003 11p --
Cohen
Supplement: Shareholders’ Hawkins 111055 2011 12p --
Equity: Accounting and
Analysis (HBS note)
6. Financial Statement Analysis
Dollar General Goes Private Katz 108015 2007 28p 108042

Alternative: DICOM Group Healy 106015 2005 12p 108026

plc and Captiva Software
Corp.
Supplement: Financial Hawkins 195177 1994 22p --
Statement Analysis
(HBS note)

II. Rationale for selection and sequencing the items in this module

Section 1 introduces the institutional and political contexts that affect the choice of a company’s
accounting policy. The main selection, the best-selling case Microsoft’s Financial Reporting Strategy,
examines not only the nuts and bolts of Microsoft’s conservative accounting treatment of software
capitalization and revenue recognition, but also the motivations of this orientation in earnings
management and expectations management. The alternative, Restating Revenues and Earnings at
INVESTools, Inc. (A), discusses the factors that influence the adequacy of accounting numbers, the
economic consequences of earnings restatements, and how a company can use its communication
strategy to influence the market’s reaction to restatements. The supplement, Financial Reporting
Environment, provides a framework for understanding the role of financial reporting and various
intermediaries as mechanisms for reducing both adverse selection and moral hazard problems in capital
markets.

Section 2 examines accounting treatments of leasing. In Leasing Decision at Magnet Beauty Products,
Inc, a retailer must choose between two different leasing options for its stores on the basis of how they
will affect its financial statements. In the alternative, Leasing Computers at Persistent Learning, an
education company needs to determine how the lease or purchase of computers will impact their financial
statements, and investor reactions. The supplement, Lease Accounting and Analysis, provides a
theoretical discussion of these issues.

Section 3 turns to a discussion of other liabilities. The main selection, Kim Park (B): Liabilities, comprises
three caselets, each focusing on the accounting treatment of a different liability: a zero coupon bond, a
frequent flyer program, and a recall of a flawed product. The alternative, Accounting for the Intel Pentium
Chip Flaw, is the source for that third caselet, for those who wish to concentrate on that topic alone. The
supplement, the background note Liability Reporting, provides the theoretical framework for the cases.

Section 4 is concerned with the statement of cash flows. The main selection, Statement of Cash Flows:
Three Examples, introduces the statement of cash flows through three examples of multi-year statements
of cash flows from three unidentified companies. The alternative, North Mountain Nursery, Inc.: Statement
of Cash Flow, asks students to construct a statement of cash flows. The supplement, Statement of Cash
Flows, discusses the components of the statement of cash flow and its direct and indirect format of
presentation.

In Section 5, the main selection, Jimmy Fu and Moog, Inc.: Understanding Shareholder’s Equity,
introduces students to the different components of the shareholder’s equity section of the balance sheet,
along with employee stock options, stock-splits and buybacks, multiple share classes, and the basics of
equity investment and diversification. The alternative, DoubleClick, Inc., examines the company’s capital
structure, including common stocks, stock splits, sale and repurchase of convertible debt, and the
repurchase of common stock. The supplement, Shareholders’ Equity: Accounting and Analysis, covers a
number of these same topics in a more theoretical manner.

Section 6 closes the module with financial statement analysis. The main selection, Dollar General Going
Private, asks students to use financial statement analysis to decide whether KKR’s bid for Dollar General
Corporation is “grossly inadequate.” In the alternative, DICOM Group plc and Captiva Software Corp.,
students analyze and compare the performance of two companies in the information-capture software
industry, deciding whether to recommend one or both stocks to their fund manager. The supplement, the
Financial Statement Analysis, teaches some of the relevant techniques.