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 Financial and Managerial Accounting - Summer 2003  posted by  duggu   on 12/30/2007  Add Courseware to favorites Add To Favorites  
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Plesko, George, 15.514 Financial and Managerial Accounting, Summer 2003. (Massachusetts Institute of Technology: MIT OpenCourseWare),  (Accessed 11 Jul, 2010). License: Creative Commons BY-NC-SA

A conceptual framework for financial accounting.

A conceptual framework for financial accounting. (Diagram by Prof. George Plesko.)

Course Highlights

Helping students achieve the five course challenges is a thorough set of lecture notes, complemented by class overviews and necessary handouts. A complete quiz and midterm exam are also available, with solutions.

Course Description

15.514 is an intensive introduction to the preparation and interpretation of financial information for investors (external users) and managers (internal users) and to the use of financial instruments to support system and project creation. The course adopts a decision-maker perspective on accounting and finance with the goal of helping students develop a framework for understanding financial, managerial, and tax reports. 15.514 is restricted to System Design and Management students.

*Some translations represent previous versions of courses.


Course Materials

Text: Pratt, J. Financial Accounting in an Economic Context. 5th ed. John Wiley & Sons, Inc. (hereafter cited as Pratt).

Supplement Material: Intel Corporation 2002 Annual Report and SEC Form 10-K (download). The PDF file is 102 pages long, feel free to keep it on your computer and print out only key sections as they are needed.

Case Pack: Includes supplemental readings and cases (hereafter cited to as CP).

Grading Procedure

Your grade will be based on the following weights:

Contributions to Class Discussion 10
Written Homework 30
Midterm Examination 30
Final Project 30

T. A. Sessions

The T. A.s are important members of the teaching team and are committed to helping you reach the course objective. The T. A.s are also responsible for the help sessions and for grading most of the written assignments and exams. Time with the T. A.s will be scheduled to follow each class.

Instant Messaging Account

During class we will use instant messaging to facilitate discussion and questions from those of you who are offsite. Please set up an account before the first day of class.

Introduction to the Course

My goal is to help you develop a framework for understanding financial, managerial, and tax reports. Many at the forefront of accounting education have goals generally consistent with this course objective. For example, Dr. Jean Wyer, a former accounting professor who refers to herself as "Dean" of Cooper & Lybrand's educational programs, told soon-to-be professors at an Accounting Doctoral Consortium to abandon debits and credits. To paraphrase Dr. Wyer:

You should not be teaching debits and credits; they are a holdover from the past that were needed to balance entries and accounts before we had computers. Modern electronic information systems do not have T-accounts or journal entries, and students need only understand a lesson taught the first day of an algebra course to master bookkeeping concepts: Assets = Liabilities + Owners' Equity.

Because 15.514 is likely quite different than you might expect, the next few pages provides an overview of our objectives, how we plan to get there, and additional details about how each class will be structured.

The essential elements of our strategy to help you reach the course goal is outlined in the course challenges. In addition, the structure of each day's class and related assignments are designed complement the challenges.

Course Challenges

The course goal is divided into five subordinate challenges that can help you organize the way you learn accounting. For example, they can help you distinguish situations where there is a correct answer from those where judgment is required. You can view the challenges as a series of questions you will ask yourself later in your career as either a preparer or user of accounting information. To reach the course goal, you must meet all five challenges and understand how they relate to each other.

1. The record keeping and reporting challenge
As a preparer of accounting reports (accountant, chief financial officer, controller, or other responsible party), having determined the numbers you want to record for an economic event and having made related accounting or tax policy choices (e.g., having decided to recognize revenues, capitalize expenditures, or claim investment tax credits), how do you record this event, how does it affect accounting reports, and how do you subsequently aggregate information from this event and others to create these reports? As a user of accounting reports (investor, creditor, employee, or other stakeholder), given the accounting numbers management reported for an economic event and their accounting choices, you will want to know how the numbers were recorded and how they affect accounting reports (financial statements, managerial reports, and tax reports). For example, as a user, given that depreciation expense is $10, you will want to know how it was recorded and how this entry impacts financial statements.

2. The computation challenge
As a preparer, having chosen the accounting method you will use to measure an economic event from the acceptable alternatives and having made all of the assumptions about the related business activity that are needed to apply this method, how do you compute the number reported in challenge 1? As a user, knowing the accounting procedures management used to produce the numbers recorded in challenge 1 and the information that was needed to execute them, such as management's assumptions about the related business activity, how would you compute them yourself? For example, as a preparer or user, knowing that a zero-coupon bond matures in 10 years, how do you use the implicit interest rate to compute the periodic interest expense?

3. The judgment challenge
As a preparer, given your knowledge about the underlying business activity, your choices of acceptable accounting procedures, and your own incentives, how do you choose an accounting procedure and exercise related judgment concerning measurement, recognition, and disclosure? As a user, who has access to less information than preparers about this business activity and about preparers' personal incentives to report or misrepresent it, how do you judge the usefulness of numbers reported in challenge 2 to your decision? For example, as a user, how do you evaluate the assumptions management made when they computed depreciation, including the useful life, residual value, and pattern of future expenses? Do you have access to enough information? Ideally, what other related information would you like to have to address your decision?

4. The usage challenge
As a preparer, to exercise the judgment in challenge 3, how do you first learn as much as possible about the decisions that will be influenced by the reported numbers and the consequences of these decisions on yourself, your reporting entity, and users? As a user, how can the reported numbers help you make a more informed decision? For example, how can you use them to assess the reporting entity's performance and how can you benchmark these performance measures against their historical counterparts, competitors' comparables, and strategic targets? As a user, to meet challenge 3, you will also need to know as much as possible about how others use these numbers and the consequences of their decisions (and your own) on management's reporting and business decisions.

5. The search challenge
As either a user or a preparer, how do you locate the information needed to meet challenges 1-4?

The first two challenges relate to procedural activities that generally have a right answer and are most often associated with accounting (e.g., bookkeeping, tax compliance, and producing managerial reports). Traditionally, introductory financial, managerial, and tax accounting courses have focused almost exclusively on these challenges. The judgment challenge is the most difficult to master because it is contextual - you learn judgment by analyzing actual business decisions. The richer the description of the business context in the practice problems you study and the more you know about the reporting managers' character and incentives and reporting alternatives, the more you will be preparing yourself to deal with complex judgments. The search challenge is a prerequisite for the other four challenges. For example, users of financial reports must first know where companies report their accounting policies to judge the quality of the related numbers (meet the judgment challenge) and they must know where to find the appropriate formulas to meet the computation challenge. Some of the other challenges are also interdependent. For example, users must understand how the numbers were computed to judge their usefulness.


Professional conduct is built upon the idea of mutual respect. Such conduct entails (but is not necessarily limited to):

  • Attending the class. Each class benefits from the attendance and participation of all students.
  • Arriving on time. Late arrivals are disruptive to both lectures and class discussion, and show disrespect to those who are on time.
  • Minimizing disruptions. Cell phones and pagers should be turned off during class. You should not leave and re-enter the class. You should avoid engaging in side conversations after class has begun.
  • Focusing on the class. While you may take notes on laptops, do not use laptop computers or hand-held devices for other tasks while in class. Activities such as net surfing, day trading, and answering email are very impolite and disruptive both to neighbors and the class.
  • Being prepared for class. You should be ready to discuss any assigned readings and to answer any assigned questions for each day's class, including being ready to open a case assigned for that day.
  • Respect. You should act respectfully toward all class participants. Class participation grading reflects student adherence to these principles; students gain credit for contributing valuable insights and students lose credit if they fail to adhere to any of the above guidelines.




    This overview of 15.514 shows the topics covered and the assignment due dates.

    1 Overview  
    2 Principles of Accrual Accounting  
    3 Elements of an Annual Report and Financial Ratios PSet 1
    4 Revenue Recognition  
    5 Revenue Recognition PSet 2
    6 Inventory / Cost of Goods Sold  
    7 Long-Term Assets / Depreciation  
    8 Matching Principle for PP&E PSet 3
    9 Statement of Cash Flow  
    10 Additional Discussion of Topics  
    11 Accounting for Taxes  
    12 Marketable Securities  
    13 Current Liabilities / Long-Term Debt PSet 4
    14 Long-Term Debt  
    15 Leases and Off-Balance Sheet Financing  
    16 Introduction to Cost Concepts  
    17 Activity-Based Costing  
    18 Moving Beyond ABC  
    19 Managerial Accounting and Financial Reporting  
    20 Wrap-up   Tell A Friend