Chapter 1, Introductory Cases Dublin Small Animal Clinic, Inc. 1 page; introductory
pages (A); 9 pages (B); intermediate to advanced
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8 pages (A); 9 pages (B); intermediate to advancedRevenue recognitionAccrualsPrinciples versus rule based accounting standardsThe (A) case includes revenue recognition notes for seven companies. The (B) case includes revenue recognition notes for six companies. The cases cover a relatively wide range of revenue recognition issues. I sometimes cover one case in class and give one as an exam, where students get the case in advance, but do not know the questions. Because there are six or seven notes, with several revenue recognition issues in each note, students spend a great deal of time understanding the issues prior to the exam. I have used this case twice as an exam and it worked very well both times. Either case takes 60-90 minutes to prepare for class. They each take at least 4-6 hours to prepare for an exam because there are so many issues. However, students seem to like that exam format. Best uses:Undergraduate intermediate accounting First-year MBA/Executive MBA financial accounting Financial reporting Financial statement analysis Executive education
Use with:Brief Excel Case: Revenue Recognition (A) or (B) (Chapter 8) 17.Revenue Recognition (B) 9 pages; intermediate to advancedRevenue recognitionAccrualsPrinciples versus rule based accounting standardsSee Revenue Recognition (A). Best uses:Undergraduate intermediate accounting First-year MBA/Executive MBA financial accounting Financial reporting Financial statement analysis Executive education
Use with:Brief Excel Case: Revenue Recognition (A) or (B) (Chapter 8) 18.New Century Financial Corporation 16 pages; advanced to very advancedSecuritizationSub-prime loansBankruptcyRetained InterestsAccounting rules for off-balance sheet financingThis case covers securitization by one of the first firms to go bankrupt because of sub-prime and Alt A lending. The case gives an overview of an out-of-control mortgage securitization industry with virtually no oversight. It also is interesting because New Century classified some of its securitized mortgages as investments, so instead of including only its retained interest in mortgage securitization trusts (pools) on its balance sheet, New Century included the entire value of the pool’s assets (mortgages) and the entire value of the pool’s liabilities (issued notes). Many FASB off-balance sheet financing rules are designed to prevent firms from improperly omitting liabilities from their balance sheets. Suppose a firm transfers $1 billion of mortgages to a securitization trust, the trust issues $950 million of notes to investors, and the trust then pays the $950 million to the mortgage originator. Should the mortgage originator only record a $50 million retained interest as an asset, or record $1 billion of mortgages as assets, and the $950 million of notes as liabilities? Most FASB securitization rules are designed to prevent firms from improperly reporting only the $50 million of retained interest. However, firms must provide relatively detailed disclosures about how they value retained interests. New Century seemed to purposely record the entire amount of mortgages in its securitization pools as assets, and the entire amount of notes issued by those pools as liabilities, so as to avoid disclosing information about its retained interests. Legally, when New Century transferred mortgages to securitization pools, it no longer had an obligation to note holders; its only asset was a retained interest in the pools. However, New Century retained an option to reacquire the mortgages. Under FASB rules, New Century “controlled” the mortgages, so it was required to record both the mortgages and notes on its balance sheets. New Century clearly disclosed that rule and clearly also stated that although it could have disclosed its retained interest in the pools, it chose not to do so. That let New Century avoid disclosing the size of its retained interests, which were probably very high. It also let New Century avoid disclosing how it computed its retained interests. The case is difficult but it does provide a good example of how detailed accounting rules have become and how firms can circumvent those rules. Best uses:Undergraduate intermediate accounting First-year MBA/Executive MBA financial accounting Financial reporting Financial statement analysis Corporate finance Valuation Use with:Brief Excel Case: Securitization (Chapter 8) 19.Sirius XM Radio, Inc. Faces Bankruptcy 18 pages; advancedBondsCapital structure and leverageBusiness combinations and goodwillIndustry analysis and corporate strategyCash flowsBankruptcyInability to refinance short-term debtThis case covers the Sirius Radio’s 2008 acquisition of XM Radio and the combined firm’s near bankruptcy in early 2009. Sirius Radio and XM Radio entered the satellite radio market within months of each other, were of about the same size, had about the same capital structure, and had about equal operating losses. The market was simply too small for such high-cost operations. XM radio had an early lead and seemed destined to control the market with its long-term contracts to broadcast nearly all major professional sporting events. However, Sirius Radio hired Howard Stern to a five-year, $500 million contract. That saved Sirius Radio from immediate bankruptcy but also ensured that both firms would remain unprofitable until one or both declared bankruptcy, or merged. The case can be used to cover three issues: (a) an unusual business combination that resulted in an immediate $4.8 billion impairment charge; (b) an unusual loan that gave the lender 40% of the firm’s equity, and; (c) the value of Howard Stern to the firm. The firms agreed to merge on February 19, 2007, but were unable to complete the merger until July 28, 2008, because the firms needed approval from both the Justice Department and the FCC. Because of accounting rules, XM Radio recorded $6.6 billion of goodwill based on the February 19, 2007, Sirius Radio share price, but immediately wrote off $4.8 billion of that goodwill because the market had declined in the 17 months between the agreement and acquisition dates. By January 2009, the combined firm was about to declare bankruptcy when it was unable to refinance its debt due to the collapse of the lending market. However, the firm obtained a $500 million loan that also gave the lender preferred stock worth 40% of the company’s total equity. Those terms were highly attractive to the lender if the economy improved, but the lender could easily have lost the entire investment. The economy did improve and the investment is now worth about $2 billion. Howard Stern’s contract expires in January 2011. There is sufficient information in the case to estimate how much Howard Stern is worth to Sirius XM radio. Best uses:Undergraduate intermediate accounting First-year MBA/Executive MBA financial accounting Financial reporting Financial statement analysis Corporate finance Valuation 20.Dell, Inc.: Financial Restatements Directory: resource uploads -> downloads downloads -> Chapter 19 Chapter Outline downloads -> Chapter 1 Practice Quiz Introducing the Economic Way of Thinking downloads -> Bltc-8e Case Problem with Sample Answer Chapter 30: Partnerships 20. 5 Case Problem with Sample Answer downloads -> Cross-7e: Case Problem with Sample Answer downloads -> Atmospheric circulation downloads -> September 3, 2007 downloads -> August 30 2009 Website Update downloads -> Chapter 3 exercises downloads -> Review Sheet: Chapt. 1: The Moral Point of View Moral concerns are unavoidable in life. Ethics downloads -> Chapter 17 Chapter Outline Download 123.35 Kb. Share with your friends:
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