The accountancy department at the Gies College of Business encourages professors to offer extra credit for students who participate in accountancy research. The policy is to award up to 1% extra credit for participation. Each study is worth 0.5%, and students may participate in up to two studies per course. My courses are worth up to 1,000 points which translates into five points per study. Student can therefore earn up to ten points. I do not engage in research as part of my work at the University of Illinois. However, I am happy to do what I can to support the research efforts of my colleagues.
For the past two semesters I have analyzed the accountancy research participation of students in my ACCY 301 courses. My goal is to provide relevant statistics to students so that they can make a more-informed decision about whether to participate in these studies. Here are some statistics I generated from Fall 2022 and Spring 2023.
Fall 2022 analysis
At the end of the fall semester in 2022, I ran my first analysis for accountancy research participation for all students in my courses (n=63). I discovered the following:
25% participated in research
19% would have leveled-up their letter grades had they participated in one or both studies (12 students). Of those, nine students needed to participate in one study (five points). The remaining three needed to participate in both studies (ten points).
I thought that 19% was a significant number and so included the following language in my syllabus in the spring of 2023 in the section for extra credit:
Last semester, after all the final letter grades were calculated, I ran an analysis and determined that 19% of my students would have leveled-up their letter grade had they participated in one or both research studies. For example, if they received a B+ as their final letter grade, they would have received an A- if they had participated in one or both studies. About three-quarters of that 19% only needed to participate in one study to level-up. Most studies require an hour or less of your time. Keep this in mind as you consider whether to participate in them.
I reviewed this section with my students at the beginning of the semester, and made the entire syllabus required reading.
Spring 2023 analysis
I just completed my second analysis (n=112). Here are the results:
41% participated in research
20% would have leveled-up their letter grades had they participated in one or both studies. Of those, 8 needed to participate in one study (five points). The remaining 14 needed to participate in both studies (ten points).
As you can see, this semester there was a 16% increase in participation over last semester. Did the language in my syllabus contribute to it? I don’t have enough information to say. Here are some other variables I considered:
Did the accountancy research lab change their outreach efforts over last semester? I contacted them to ask.
Were there other, new university-wide initiatives to encourage students to participate in research?
Did other professors encourage participation more than in the fall?
Was the participation in the fall lacking in some way? Was it abnormally low while spring was normal?
Perhaps there is some other seasonal effect that impacts fall participation more or less than it does spring participation.
Even if the language in my syllabus did not contribute in a significant way, it can’t hurt to include it. I will continue to do so, and will continue making the analysis in future semesters. Perhaps a pattern will emerge or other information will become evident to explain increases or decreases in participation.
One of the things I do not like about teaching financial accounting at the intermediate level is that there is a tremendous emphasis on finding the single, correct answer. There is no room for nuance or alternative explanations or answers.
Because of this, it often feels as if I am teaching students what to think, not how to think.
This really bothers me.
I do not want to teach students what to think. I want to teach them how to think.
I often consider how to present topics in ways that look at them from a bigger perspective, a top-down perspective, if you will. I like to do this first, then to fill in the details after looking at the big picture. I liken it to taking students up in an airplane and looking at the landscape from 30,000 feet first, and then going back down to earth examine the details of that landscape.
Maybe it’s just me and the way I think, the way I operate, the way life works for me. I am not sure but it works for me.
With this in mind, I’d like to show you the capitalized interest flow chart I created. It corresponds to Chapter 10 of the Intermediate Accounting textbook we use.
Studying how to capitalize interest for self-constructed assets seems really confusing and complicated at first. In case it’s not clear what I mean by “self-constructed asset,” a firm might construct a building for itself. It does not plan to sell the building, and it is not creating the building for another entity. It will occupy the building once the project is finished. The costs for the project are added to an asset account called Construction in progress (often abbreviated CIP). The capitalized interest is also added to the CIP account, raising the asset’s value on the balance sheet.
There are a lot of steps to the process of calculating capitalized interest, especially when the project continues into subsequent years. We have to calculate the average accumulated expenditures (AAE), the weighted average interest of other debt held, the fully capitalized cost of the asset, the interest expense, etc. The various calculations can seem intimidating, especially for the AAE, since accounting problems will always incorporate time periods of less than 12 months for some portion of the project just to force students to read the details carefully. Often the denominator is 12 when calculating the AAE, but sometimes it is not!
These details, and more that I have not included here, can seem overwhelming at first since they are not presented in a clear, visual context. We’re just hacking through the brush without really understanding where we are or where we are going. I created this flow chart to provide a visual orientation for the process… to take us in an airplane so we can survey the landscape first before we start hacking. I believe this makes the process less intimidating.
Yes, this southern California girl likes winters here. Still not tired of them, not at all. Here’s some video footage of me doing battle ropes in the snow. It is way better to train when it is cold outside than when it is hot and humid! Can’t overheat this way. Can train longer too.
Bye-bye winter. I will miss you. See you next year.
“Learn the rules like a pro, so you can break them like an artist.” Pablo Picasso
There are five main financial statements in financial accounting:
Balance sheet
Income statement
Statement of cash flows
Statement of stockholder’s equity
Statement of comprehensive income
The first three have a special emphasis in the intermediate accounting textbook that we use. The latter two, not so much.
For the last one, when it is mentioned, I make a point to tell students that I call it the OCI statement… the other comprehensive income statement.
This isn’t quite correct though, and I admit to my students that this is NOT the official name of the statement. I reiterate what the official name is, and that there is no statement called the OCI statement.
The “OCI statement” is analogous to the income statement
I have found great benefit to separating the OCI portion of CI and treating it as a discreet statement. It permits me to compare OCI with the income statement. In most ways it does behave like one:
OCI accounts are temporary accounts, just the same way that income statement accounts are temporary
OCI amounts close to Accumulated other comprehensive income (AOCI) just the same way that the income statement amounts close to retained earnings
Once somebody understands how the income statement closes to retained earnings at the end of the period, it becomes a lot easier to understand how OCI amounts close to AOCI in just the same way. This permits me to build on what students already know. I’d rather do that, since there is a very good chance they’ll remember it.
… but there is one difference
Based on my reading of the intermediate accounting textbook we use, so far I have discerned one difference in the way the statements behave. Once an income statement is closed for a period, we never post reversals, corrections, or adjustments from that period into a new income statement. These are always posted to retained earnings. This pattern does not hold for AFS debt securities:
Fair value adjustments (unrealized holding gains or losses) are posted to OCI (same pattern)
OCI closes to AOCI at the end of the period – it opens a new period with a zero balance (still the same pattern)
When the security is sold in a new period, previous fair value adjustments are reversed, not from AOCI where they are located after being closed from OCI at the end of the period, but from the current period’s OCI. This is where the pattern breaks, because if it followed the same pattern, the reversal would happen from AOCI. We would not be touching OCI for an amount related to a prior period.
I am wading into an area where I have zero professional experience – I have not worked with OCI or AOCI in a professional setting. So maybe there is some benefit to posting the reversal to the current period’s OCI of which I am not aware.
Even if there is no benefit, someone might reply that it doesn’t matter since the effect is the same after closing the period. However, if it truly doesn’t matter, then perhaps it would be better to retain the pattern. This would make it even more analogous to the income statement, making it easier for accounting students to learn and remember.
This exception doesn’t change the way I teach it. For me, teaching OCI as a discreet statement permits me to teach it as largely analogous to the income statement. It makes it easier to teach and, I hope, easier to learn. As much as I can, I piggy-back off of prior knowledge, since doing so will reduce the cognitive load required from students.
I’m sure it’s debatable whether I’m really a pro (or an artist) about such things. But I like to think that I know the rules well enough to know that it’s OK to bend them a little bit at times like this, to help with learning.
I created the following worksheet to help students learn how to proportionally allocate the purchase price of a group of assets. It works for concepts in the Intermediate Accounting textbook we use by David Spiceland, et al:
In Chapter 6, we learn about the five steps of revenue recognition. We must find or calculate the stand-alone selling prices (SASPs) for the performance obligations. Step 4 is when we “allocate the transaction price to the performance obligations.”
In Chapter 10, we learn about lump sum PPE and intangible asset acquisitions. When the fair values of the acquired assets are higher than the acquisition price, we have to allocate the acquisition price to each asset acquired.
The vocabulary differs, but the allocation process is the same in both instances.
I like this worksheet because I can reinforce a single process from two chapters. Plus, at the bottom of the page I included a professional tip describing why it is important to cultivate the skill of carefully following written instructions.
Here are some numbers to use while considering the prior post about sales returns. For the current ratio, assume that current liabilities are $3M, that the following entries were the only entries made, and that the beginning current ratio is 1.
To understand sales returns and the unique accounts that are used for them (Refund liability and Inventory estimated returns), let’s start by reviewing the journal entry for the sale of goods. It raises gross profit (in green) by taking this form:
A/R (or cash) $Retail
Sales revenue $Retail
COGS $Cost
Inventory $Cost
Now let’s look at actual returns of goods that were sold in the same period. They reduce gross profit (in purple) by taking this form:
Sales returns $Retail
A/R (or cash) $Retail
Inventory $Cost
COGS $Cost
The second entry is almost exactly the reverse of the first. This makes sense: we have the goods in-hand again, so we’re restoring the financial statements to what they were as if the original sale had not occurred. It is essentially a reversing entry.
Now let’s look at an entry for estimated returns. It reduces gross profit (in purple). Notice how it has a similar structure to the one prior:
Sales returns $Retail
Refund liability $Retail
Inventory estimated returns $Cost
COGS $Cost
Both the actual returns and estimated returns reduce gross profit exactly the same way: lowering revenue and raising COGS.
Notice the accounts in blue. The way these are used reminds me of how wash (or clearing) accounts are used. Wash accounts are used to hold money temporarily because the regular account associated with the money can’t be used yet for some reason. For Refund liability, the regular account that can’t be used yet is A/R or cash (depending on how the refund is given to the customer). For Inventory estimated returns, the regular account that can’t be used yet is Inventory. In both cases, we can’t use A/R (or cash) or Inventory because this is an estimate for returns we think we will get back in a future period, and since it’s an estimate we don’t have the goods in hand yet. But we still must reduce gross profit in the current period since we sold these goods in this period.
What happens when we receive goods from a customer, where the goods were purchased in the prior period? That’s where we use our Wash-type accounts of Refund liability and Inventory estimated returns. We put some money in those accounts with the prior entry because we couldn’t put it with A/R (or cash) or Inventory at that time. Now it’s time to do that. Notice the accounts in blue below. See how they are the reverse of the blue ones above? How we are moving the money from Refund liability to A/R to give back to the customer? How we have recorded the return of goods by lowering Inventory estimated returns and raising Inventory?
Refund liability $Retail
A/R (or cash) $Retail
Inventory $Cost
Inventory estimated returns $Cost
Notice too how gross profit is not reduced in this entry. It was reduced in the entry above for estimated returns (purple and blue).
New and innovative business models often interest me. When I sold my condo in 2017 I used an agent from Redfin because of how that business was disrupting real estate brokerage by harnessing the power of the internet to market and sell homes. This is something that was new at the time. As it turns out, my condo went into escrow four days after it went on the market at a price slightly above the asking price. Escrow closed in 30 days. I was very happy with this outcome.
Now I am in the market for clear aligners. My dentist recommended Invisalign (ALGN), so I did some googling about them. I discovered that there are other clear aligner brands available, one of which is called SmileDirectClub (SDC).
Invisalign works with the patient’s local dentist, but SmileDirectClub markets itself in a different way. They market directly to the patient rather than to the dental professional. I found this on the SDC website in the FAQ:
“Our telehealth platform eliminates the office overhead that makes traditional orthodontics costly. That’s how we’re able to provide doctor-directed teeth straightening for 60% less than braces or Invisalign with no hidden costs or fees guaranteed for life. We took out the markup that happens along the way by shipping our aligners directly to you, and passing the savings on to you. Doing this has allowed us to help over 1.5 million people get a smile they love.”
They thus are able to eliminate the markup that the local dentist takes, lowering the price for the end-user. Once I discovered this, I was immediately intrigued. I love the idea of saving money, and I also love the idea of supporting new and innovative businesses. I am not an expert in this industry, but bypassing the local dental professional by marketing dental services directly to the patient certainly seems novel to me.
Because I am an accountant and also an investor, I wondered if SDC was public, and if it would be worth investing in. So I found the current stock price. As of this writing, it is about $1.42. I drilled into the history and discovered that it has been on a steady decline since it’s high in January 2021 of about $13.
SDC’s model of bypassing the local professional reminds me of what Intuit tried to do with QuickBooks starting in the late 1990s. Intuit marketed QuickBooks directly to small business owners, which was perceived by small business accountants as an attempt to bypass the need for them. One of QuickBooks’ tag lines was, “If you can write a check, you can use QuickBooks.” The implication was that a small business owner did not need to acquire any new skills in order to perform all of the accounting tasks for the businesses. I sold these kinds of services to small businesses, and I remember feeling resentful about this. I know others felt the same way. Here is a commercial for QuickBooks from 1998 and you can see how Intuit is marketing the new business model.
You may have noticed that I said Intuit tried and attempted to bypass the local professional. Was this a conscious effort on Intuit’s part? I don’t know. But that was the perception in the small business accounting community at the time. Happily and to my surprise, and perhaps for others as well, our fears about QuickBooks were unfounded. The reason? It is double-entry bookkeeping. Yes, Intuit managed to get away from a lot of accounting-lingo, and it managed to make most bookkeeping functions look like paper-based business transactions instead of traditional debit and credit journal entries (ie, a screen that looks like an invoice is used to create accounts receivable transactions). But double-entry is double-entry. As we all know, it is not intuitive at first, and some people never really understand it at all.
This means that the untrained user could, and often did, create problems with the data that they did not know how to solve. You would not believe some of the disasterous-looking financial statements I’ve seen that were created with data that was inputted by such people. So imagine this: these well-intentioned business owners spend time inputting information into QuickBooks. Then they run their financial statements in QuickBooks. They can see that there is something wrong, but even after spending hours trying, they can’t figure out what is wrong or how to fix it. So who do they call? The local accounting professional. And a new revenue stream was born for these professionals: financial statement clean-up services.
Not only that, but many of these small business owners no longer wanted to do their own accounting in QuickBooks. They realized through trial and error that it was a lot harder than the advertisements made it sound like. So the local accounting professional was able to generate revenue in two ways: through clean-up work, and regular recurring monthly (or annual) work. QuickBooks proved to be a pipeline of new clients for accounting professionals who embraced it.
Back to SmileDirectClub and it’s plummeting stock price. Given that their business models seemed to be similar (ie, bypassing the local professional), I wondered if Intuit’s stock price (INTU) during the 1990s and early 2000s went through a similar decline as what SDC is experiencing now. It did not. It has it’s ups and downs but I didn’t see anything like what is happening with SDC.
Then I looked at SDC’s most recent 10-K. The firm’s marketing and G&A expenses absolutely overwhelm its gross profit. Regarding cash, they brought in $1.2B in cash during their IPO in 2019, but operating cash flow remains negative, and total cash has declined for the last two years. Let’s compare to Invisalign. I looked at the most recent 10-K and saw the following for 2021 and 2020:
Positive operating cash flow
Healthy gross profit
I calculated the per unit revenue for clear aligners as follows:
2,547,700 units were shipped (“Clear Aligner case volume,” page 45)
$3247.1 billion in revenue from these units
This means that Invisalign’s per unit revenue for clear aligners is $1275. Per SDC’s website, its per unit revenue is $2050. That’s a big difference, it seems to me. What might explain it (besides me calculating something about it incorrectly lol)? My guess is that SDC has included some orthodontic consulting into its number–the “doctor-directed teeth straightening” mentioned above. Since Invisalign uses local dental professionals, they don’t need to account for those services since the the local professionals provide them. Regardless, SDC is getting more per unit than Invisalign, yet is performing significantly worse on some important financial metrics. Having said that, I must point out that Invisalign was the first in this market, and its been in business for over 20 years which is about three times as long as SDC. It is more entrenched and has name recognition that other brands don’t have.
Look, I’m not a financial advisor and this is not financial advice. My background and training is in accounting, which means compliance. I have very little formal training in investments and finance, and no professional experience in either. But these basic numbers lead me to believe that SDC is in trouble. For me, it doesn’t make sense to buy at this time. Likewise, I don’t feel comfortable betting for a business to fail, so I won’t be taking a short position or buying puts.
I sincerely hope they manage a turnaround. I hate to see an innovative model that seems to have potential to do well fail. Maybe they need to partner with local professionals the way Invisalign has. They might be able to reduce their marketing expenses while selling more units. I bet it will make local dental professionals happy, perhaps the way I felt when I realized that QuickBooks was helping my business, not hurting it.
Below is a table I made to summarize what happens to the numerator and denominator for EPS calculations for each kind of relevant transaction. I can see this being helpful for CPA exam preparation, as well as for students of Intermediate Accounting. I include information regarding:
Net income
Preferred stock dividends: cumulative and noncumulative, convertible and nonconvertible
Common shares
Treasury shares
Share dividends
Convertible preferred stock
Incentive stock options
Convertible bonds
Whether the effect is dilutive or not (PCS = potential common shares)
I also included footnotes for elaboration on three of the more complex points.
This is a summary. It does not explain every calculation needed for EPS. It also does not explain how or when to calculate weighted averages for the shares in the denominator.
The words “debits” and “credits” can be used in many different parts of speech. Here is a table I created with examples using “debit.”
Part of Speech
Example
Noun (subject)
The debit raised the balance in the cash account.
Noun (object)
The liability account needs more debits.
Noun (object of preposition)
The reconciliation is off because of a problem with the debits.
Verb (infinitive)
To debit the cash account is to raise its balance.
Verb (transitive)
The accounting software debited the checking account $200.
Adjective
Asset accounts normally have debit balances.
What about as an intransitive verb? Here is what it might look like:
The accountant debited happily.
LOL I laughed when I wrote that. Is it correct usage? I think so. And it could be true, right? After all, we could debit happily when we make journal entries (and credit, of course).
I am not a grammar expert, but I wonder if other words can be used in so many different parts of speech as we see here.
Now I am in the market for clear aligners. My dentist recommended Invisalign (ALGN), so I did some googling about them. I discovered that there are other clear aligner brands available, one of which is called SmileDirectClub (SDC).
