EXERCISE: PREPARING FINANCIAL REPORTS USING THE GROUP CATEGORIZING TECHNIQUE Developments in Business Simulation & Experiential Learning, Volume 27, 2000 EXERCISE: PREPARING FINANCIAL REPORTS USING THE GROUP CATEGORIZING TECHNIQUE Marian W. Boscia, King’s College R. Bruce McAfee, Old Dominion University ABSTRACT Guided by this year's theme, ABSEL 2000: Learning in and for the Future, this paper describes an exercise that can be used to teach students the nature of financial statements. Working in groups, students sort and assemble financial information from a small business into basic financial reports. Although the example used in this paper is accounting-based, the technique discussed in this paper can be applied to most business disciplines where students need to develop the ability to organize and analyze a complex set of information. It can be adapted to many college courses to enhance the learning experience. INTRODUCTION With the expansion of technology, information can be amassed from a vast variety of sources. One of the challenges that will face students in the work place during the 21st century is learning how to handle information overload. Theoretical frameworks provide guidelines for determining the nature and treatment of information. Teachers must provide students with opportunities to develop skill in applying theory to practical situations. Increasingly, advocates for change in higher education such as the Change Commission of the American Institute of Certified Public Accountants have advocated not only a change in course content, but also a change in the methods that instructors use to teach course materials. “To become successful professionals, accounting graduates must possess communication skills, intellectual skills, and interpersonal skills. Communication skills include both receiving and transmitting information and concepts, including effective reading, listening, writing, and speaking. Intellectual skills include the ability to locate, obtain and organize information and the ability to identify and solve unstructured problems in unfamiliar settings, and to exercise judgment based on comprehension of an unfocused set of facts. Interpersonal skills include the ability to work effectively in groups and to provide leadership when appropriate.” (Source: Accounting Education Change Commission and American Accounting Association, http://206.170.119.32/pubs/position/position1.htm). Working in groups, using business simulation techniques is an instructional method that can encourage students to develop communication, intellectual, and interpersonal skill. THE EXERCISE Purpose and Objectives The objectives of this exercise are as follows: 1. To acquaint students with some of the information that goes into designing a set of financial statements. 2. To provide students with experience working with their colleagues on a team basis, as actually is done when working for most companies. 3. To build upon critical thinking skills by analyzing and evaluating accounting information. 4. To familiarize students with basic accounting concepts from accounting’s Conceptual Framework. 140 http://206.170.119.32/pubs/position/position1.htm Developments in Business Simulation & Experiential Learning, Volume 27, 2000 5. To provide students with an experience in applying the Conceptual Framework to a realistic situation encountered in practice. 6. To enhance writing skills by writing a cover letter to accompany the financial statements. (optional) Design and Procedures At the beginning of class students are divided into groups of two to four individuals and asked to complete an assignment which is due at the beginning of the next class period (or at the end of the current class if objective 6 is omitted). The assignment consists of four parts, two of which are optional. First (optional), the instructor asks groups to write down definitions for an asset, a liability, owners’ equity, revenues and expenses. Second (optional), the instructor asks students to list what sorts of accounts might exist in the chart of accounts for a company that produces redwood furniture. Third, the instructor distributes to each group one packet of “receipts” (cut up strips of paper containing one item of financial information- See Appendix B) and a set of instructions for completing the assignment. Students are then asked to sort and categorize the “receipts” in the packet into the following categories: Balance Sheet Items- Assets; Liabilities; Owner’s Equity Income Statement Items-Revenues; Cost of Goods Manufactured; Operating Expenses; Selling Expenses Fourth, students are asked to make several calculations: 1. Compute Cost of Good Manufactured assuming that there were no beginning inventories of any sort and that there was no work remaining in process at the end of the year. 2. Prepare a balance sheet and an income statement for Redwood Works. Compute Cheng Sun's equity in Redwood Works in order to complete the balance sheet. Debriefing the Exercise After teams have completed their computations, the exercise is debriefed by the instructor. The debriefing centers on developing answers to the questions posed earlier to the students: 1. What is the definition of an "asset," a "liability," "owners’ equity," "revenues" and "expenses." What strategies are most successful for identifying each of these? 2. What accounts were particularly hard to classify because they could easily fit into more than once category? Which accounts were easy to classify? 3. What are the firm’s Current assets? Long term assets? Liabilities? Owner’s equity? Revenues? Cost of goods manufactured? Operating expenses? Selling expenses? 4. What problems did you experience working as a team? Would you have been more successful in completing the exercise by working alone? Why? DISCUSSION This exercise and variations on it have been used successfully in several courses. More recently, this exercise was used in a sophomore/junior intermediate accounting class during the third week of class to review a chapter on financial statements. To be successful in completing this exercise, students need to have completed a beginning course in accounting principles that includes a segment on accounting for manufacturing. Completing this assignment does not, however, require that student have more than a basic knowledge of production costs. This exercise is designed to be completed within a 50 minute time period. Allotting forty minutes for groups to complete their calculations should be sufficient for most classes. The debriefing part of the exercise should be allocated the remaining class time. 141 Developments in Business Simulation & Experiential Learning, Volume 27, 2000 Students generally enjoy this hands-on exercise. During a recent session, most students participated with enthusiasm and were completely engaged in sharing their thoughts and taking part in finding a solution. Students discussed their process for categorizing the information and developed separate strategies for dealing with items that were easily identified as opposed to those that presented more difficulty. At the end of this session, several groups asked to be allowed to take the materials home with them for further work. The success of this exercise is based on how carefully students consider the issues involved in distinguishing between the various components of financial statements. Importantly, debriefing by the instructor reinforces the concepts that have been refined through application in the exercise. However, even if some of the teams are ineffective, the exercise can still be beneficial in helping them develop an appreciation for the complexity of organizing financial information. GROUP CATEGORIZING TECHNIQUE This exercise is representative of a technique that for lack of a better name we refer to as the "group categorizing technique." This name is used because the essential feature is give students unorganized bits of information and ask them to organize them into categories and to solve a specific problem or answer questions based on the categorized information. Any course that contains categories of information can make use of this approach, not just accounting and finance courses. For example, in organizational behavior courses, motivation theories are often grouped into two categories: process and content theories. Here, a professor could give student groups pieces of paper, each containing the name of one theory, and ask them to categorize them. Students could be asked to justify their choices. From an educational perspective, in order to categorize any piece of information, one must understand the precise nature of the category itself and all the items that fall within the category. Superficial knowledge won't suffice. To illustrate, an accounting student can't determine if "accounts receivable" are "current assets" or "liabilities" without knowledge of all of these. A student taking an Organizational Behavior course can't determine is Maslow's Hierarchy of Needs theory is a "content" or "process" theory without understanding both. Categorizing helps to develop a student's intellectual skills because they must obtain and organize the information and exercise judgement. To the extent that the exercise asks students to go beyond categorizing items by requiring that they solve a problem, as in the exercise described above where students needed to determine owner's equity by adding and subtracting numbers, students develop problem solving skills. Asking students to sort and categorize information specifically in groups helps them to develop better communication and interpersonal skills. They must read each item carefully, speak to others about it, listen to what others say, and reach a consensus. They need to focus on how their behavior is affecting others and when it is appropriate to assume group leadership. CONCLUSION The exercise described above and the group categorizing technique that it uses has several positive attributes which we believe should be noted: 1. It is highly flexible and can be adapted to many different courses, not just those that use financial information. 2. It is relatively easy to conduct. Most instructors can divide students into groups, give them a packet of disorganized information, and ask them to sort it and solve some problem. 3. It helps students to develop intellectual skills, communication skills and interpersonal skills. 142 Developments in Business Simulation & Experiential Learning, Volume 27, 2000 Appendix I Classification of Accounts Assignment The services provided to clients by the accounting profession have changed with the availability of low-cost general ledger and tax software. Accountants rarely do routine preparation of financial statements for clients who keep their accounting records in good order. However, there still remains the new client who needs a set of financial statements to get a line of credit at the bank and that will arrive at an accountant's office with a pile of receipts. This exercise simulates this sort of accounting engagement. Your group has received an envelope full of receipts from Cheng Sun, the owner of Redwood Works for January 1, 1999 through December 31, 1999. This is a small business that has two sources of revenues. First, The business designs custom furniture for corporate offices. Second, the company produces and sells a line of redwood tables and chairs. While Cheng Sun is a gifted furniture craftsman and designer, he has no background in accounting. He has grouped his bills into categories and computed a total for each category. He has no idea how to use these totals to produce financial statements. Cheng Sun has come to your group for advice. The first step in producing financial statements will be to decide how to classify the various items. In determining how to categorize items, remember the guidance provided by the Conceptual Framework of accounting. It includes definitions of assets, liabilities, expenses, and revenues. In addition, you must not forget the restrictions imposed by the cost- benefit rule and materiality limitation. All immaterial items should be expensed unless it is important to control them by including them in inventory. In this case, Cheng Sun has told you that he inventories all office supplies and sandpaper because of a theft problem he's experienced in the past. Instructions: 1. Sort and categorize the items in the packet into the following categories: Balance Sheet Items- Assets; Liabilities; Owner’s Equity Income Statement Items- Revenues; Cost of Goods Manufactured; Operating Expenses; Selling Expenses; Administrative Expenses 2. Make the following calculations: A. Compute Cost of Good Manufactured assuming that there were no beginning inventories of any sort and that there was no work remaining in process at the end of the year. B. Prepare a balance sheet and an income statement for Redwood Works. You will need to compute Cheng Sun's equity in Redwood Works in order to complete the balance sheet. 143 Developments in Business Simulation & Experiential Learning, Volume 27, 2000 Cash $1,300 Lathe Maintenance Costs $1,300 Accumulated Depreciation - Office Equipment $44,900 Samples For Trade Shows $700 Accounts Receivable $850 Lathe Operator Wages $1,300 Accounts Payable $800 Customer Order Forms $1,150 Redwood Tables $1,750 Carpenter Wages $1,300 Factory Wages Payable $2,150 Delivery Truck Leasing Costs $1,600 Sandpaper On Hand $1,450 Lathe Depreciation $700 Property Taxes Payable $2,300 Wage Expense - Delivery Truck Drivers $700 Office Supplies $1,600 Lathe Department Supervisor's Salary $850 Unearned Design Fees $1,150 Sales Commissions $1,600 Prepaid Office Building Rent $700 Screws For Assembly $1,250 Cheng Lee, Capital ? Office Utilities Expense $1,200 Prepaid Business Insurance $1,750 Glue For Assembly $1,600 Cheng Lee, Drawing $1,900 Office Supplies Expense $1,250 Factory Building $148,000 Factory Wages Expense $1,900 Redwood Table Sales $115,000 Office Equipment Rent Expense $1,200 Production Equipment $41,500 Plant Manager's Salary $700 Design Fees Earned $27,500 Miscellaneous Expense $600 Office Equipment $95,500 Depreciation Of Manufacturing Plant $1,450 Materials Handling $1,600 Business Insurance Expense $1000 Land $151,000 Redwood Used For Production $850 Janitorial Labor Expense - Factory $700 Advertising Expense $900 Accumulated Depreciation - Factory Building $65,500 Crating For Shipment $1,750 Coolants & Lubricants Used $1,750 Fee to Scientist Looking For Another Wood Source $1,150 Accumulated Depreciation - Production Equipment $9,400 Shipping Costs $1,150 144 Developments in Business Simulation & Experiential Learning, Volume 27, 2000 APPENDIX B One Possible Solution Redwood Works Balance Sheet As of December 31, 1999 Current Assets Cash $1,300 Accounts Receivable 850 Redwood Tables 1,750 Sandpaper On Hand 1,450 Office Supplies 1,600 Prepaid Office Building Rent 700 Prepaid Business Insurance 1,750 $9,400 Long-term Assets Land $151,000 Factory Building $148,000 Accumulated Depreciation - Factory Building (65,500) 82,500 Production Equipment $41,500 Accumulated Depreciation - Production Equipment (9,400) 32,100 Office Equipment $95,500 Accumulated Depreciation - Office Equipment (44,900) 50,600 316,200 $325,600 Liabilities Accounts Payable $800 Factory Wages Payable 2,150 Property Taxes Payable 2,300 Unearned Design Fees 1,150 $6,400 Owner's Equity Cheng Lee, Capital $321,100 Cheng Lee, Drawing (1,900) 319,200 $325,600 145 Developments in Business Simulation & Experiential Learning, Volume 27, 2000 Redwood Works Income Statement For the year ended December 31, 1999 Redwood Table Sales $115,000 Design Fees Earned 27,500 $142,500 Carpenter Wages $1,300 Coolants & Lubricants Used 1,750 Depreciation Of Manufacturing Plant 1,450 Factory Wages Expense 1,900 Glue For Assembly 1,600 Janitorial Labor Expense - Factory 700 Lathe Depreciation 700 Lathe Maintenance Costs 1,300 Lathe Operator Wages 1,300 Lathe Department Supervisor's Salary 850 Materials Handling 1,600 Plant Manager's Salary 700 Redwood Used For Production 850 Screws For Assembly 1,250 Cost of Goods Manufactured (17,250) Crating For Shipment $1,750 Customer Order Forms 1,150 Delivery Truck Leasing Costs 1,600 Sales Commissions 1,600 Samples For Trade Shows 700 Shipping Costs 1,150 Wage Expense - Delivery Truck Drivers 700 (8,650) Selling Expenses Advertising Expense $ 900 Business Insurance Expense 1,000 Miscellaneous Expense 600 Office Equipment Rent Expense 1,200 Office Supplies Expense 1,250 Office Utilities Expense 1,200 Salaries For Scientists Looking For Another Wood Source 1,150 (7,300) $109,300 146 Table of Contents Volume 27, 2000 Internet International: A Simulation Exercise for Understanding Technological Innovation and customer Service In a Rapidly Growing Internet Server Company Simulations and Learning: Dialog and Directions Endnote Activity: A Tool for Integration of Course Content and Communication Skill Practice Incorporating Video as a Teaching Strategy in Interpersonal Communication Vision Quest: An Alternative Approach to Industry Analysis for MBA Courses in Strategic Strategic Management: An Evaluation of the Use of Three Learning Methods Trainer, Mentor, Educator: What Role for the College Business Instructor in the Next Century? Using the Internet and Shareware to Facilitate Computer Simulation in Distance Learning Classes Visual Modeling of Business Simulations Teaching about Information with Management Games A Self-Evaluation Based on the Discussion and Decision in Experts' Business Gaming The Restaurant Game Using Journals to Enhance Computer Simulation Based Learning Exercises to Facilitate Better Student Writing in the Undergraduate Strategy Class Identifying, Resolving, and Managing Common Ethical Dilemmas in the Workplace: An Experiential Approach Integrating the Digital Revolution into the Classroom The Wheel of Learning: An Integrative Business Curriculum Experiment The Changing Nature of Simulation Research: A Brief ABSEL History Perspectives on Simulation & Gaming's Review Process Experiential Learning Across Disciplines: Mixing International Business and Accounting Simulating Governmental Effects on Economic Development Internationalizing the Introduction to Business Course Using an International Text and Domestic Simulation with a Twist Using Stock Value as the Performance Measure in a Business Simulation Game Introducing Cross-Elasticities in Demand Algorithms Validating a Model of Currency Valuation An Exercise for Exploring the Relationship between Jungian Psychological Types and Organizational Politics Exercise: Preparing Financial Reports Using the Group Categorizing Technique Effect of Trust and Cultural Beliefs on Negotiation Processes: Data from an Experiential Role Play Experiential Learning Gets Stamp of Approval From the Boyer Commission Talent Search 2000 - An Experiential Activity to Help Strengthen Skills in Employee Recruitment and Selection Clemson University's Collaborative Learning Environment Initial Data on a Test Bank Assessing Total Enterprise Simulation Learning Changing the Assessment Paradigm: Using Student Portfolios To Assess Learning from Simulations How We Learn and Why We Don't: The Cognitive Profile Model: A Workshop in Teaching to Reach Your Students Knowing Thyself: A Portfolio Approach to Student Self-Assessment Collaborative Learning and Web-Based Instruction in a Cognitive Apprenticeship Model Teamwork Attributes in a Classroom Simulation Virtual Teams: Meeting the Next Challenge for Experiential Education New Age Learning: Nuance or Nonsense Developing Charisma: An Experiential Exercise in Leadership Problems and Solutions in Going Web-based with an Agribusiness Simulation Creating a Comprehensive Web-Enhanced Classroom Your Class is in Session, Now What? The Challenges of Teaching On-line An Application of Process Control Charts for Attributes as a Form of Classroom Assessment for Experiential Learning Work Goals and Life Aspirations: Do You Have What it Takes to be an Entrepreneur An Exercise to Develop Initiative: Possible Dream? The Ball Point Pen Assembly Company Management Game Review System Development Total Enterprise Simulations and Optimizing the Decision Set: Assessing Student Learning Across Decision Periods Facilitating Learning in the New Millennium with the Complete Online Decision Entry, System (CODES) The Marketing Management Experience The Right Venue for Your Simulation One More Time: Overall Dominance in Total Enterprise Simulation Performance A Profile of ABSEL Conference Attendees Learning Readiness: An Underappreciated Yet Vital Dimension in Experiential Learning Active Learning in a Professional Undergraduate Curriculum The Problem Is - They Think Differently! Cultures Integration in Mergers and Acquisitions: Putting Managers Together in a Business Simulation The Global Business Game: A Strategic Management and International Business Simulation