Strategic Accounting:Strategic Accounting:Using Pro Forma Evaluations Using Pro Forma Evaluations for Student Learning Gainsfor Student Learning Gains

Facilitators:Facilitators:

James BagwellJames BagwellJames BogertJames Bogert

Gregory KordeckiGregory KordeckiClayton College & State UniversityClayton College & State University

Georgia Association of Accounting EducatorsGeorgia Association of Accounting Educators2001 Annual Meeting2001 Annual Meeting

North Georgia College & State UniversityNorth Georgia College & State University

Why teach Strategic Why teach Strategic Accounting?Accounting?

AICPA Vision StatementIMA cites knowledge, skills, and abilities as

what Corporate America wantsShift toward attention-directing, critical

thinking, and opportunity-finding attributes of business decision making

Create pathways for business growth

Why don’t we teach Strategic Why don’t we teach Strategic Accounting?Accounting?

Pro forma analysis for decision-making has only limited coverage in our textbooks and e-texts

There is not enough time to add any new material It is probably covered sufficiently in Corporate

Financial Management and Strategic Management Limited exposure on the CPA Exam Students may think it is too difficult It is a part of the MBA Curriculum It is comfortable to analyze the past with certainty

Mandate for ChangeMandate for Change

The votes have been counted! Only 1 percent of high school students nationally are

considering a career in accounting Only 2 percent of college students nationally are

selecting accounting as their undergraduate major, representing a 50% decline since 1990

We are losing many prospective accounting majors to Finance and Information Technology, because these disciplines are viewed as being Cool and Exciting!

High salaries can be earned with a 4-year degree

The New CPA VisionThe New CPA Vision

CPAs are the trusted professionals who enable people and organizations to shape their future. Combining insight with integrity, CPAs deliver value by:

- Communicating the total picture with clarity and objectivity

- Translating complex information into critical knowledge

- Anticipating and creating opportunities - Designing pathways that transform vision into

reality

New CPA Core CompetenciesNew CPA Core Competencies

Communication and leadership skillsStrategic and critical thinking skillsFocus on the customer, client, and marketInterpretation of converging informationTechnologically adept

New Opportunities for CPAs New Opportunities for CPAs

Expanded CPA role in strategic management

Need to apply a broader range of knowledge and skills

Greater opportunities to add value in business decision-making

Enhanced image for the profession

What about the other business What about the other business majors?majors?

Most students who take Principles of Accounting classes don’t major in Accounting

Management, Marketing, Finance, and Information Technology majors focus on future goal attainment, rather than on historical data

All business majors, including accounting majors, need to be focused on the future vision when taking accounting classes

All business entities are asking: “How can we improve our results for the better in the future?”

Our Link to the FutureOur Link to the Future

Strategic Accounting is our link to the future We are not diminishing the importance of GAAP,

GAAS, or the IRC We are focusing on using this information for

future-oriented strategic decision-making We are using technology based models to obtain

information and knowledge for strategic purposes We are focusing on adding value for business

through the creation of expanded opportunities

Our Short - Run GoalOur Short - Run Goal

To implement an Excel-based model whereby students could– In a single course– Over one semester

Develop several business opportunity scenarios leading to future cash flows and ultimate market valuation that reflects various business decisions

Our Long - Run GoalOur Long - Run Goal

Expand the Strategic Accounting project to include:– Several course sites in the curriculum– Over several semesters

We believe our students will benefit from both a cross-functional and longitudinal exposure– Will foster interdisciplinary knowledge creation

and analysis– Over learning is better than no learning

The Strategic Accounting The Strategic Accounting ModelModel

Currently fully operational in the required BBA capstone course in Strategy & Policy

We would like to extend and download into several other points in the curriculum, both in the junior business core, as well as in upper level accounting courses (AIS in Spring 2001)

We would like to introduce some basics in the required freshman Introduction to Business course and in the sophomore Accounting Principles courses

The EnvironmentThe Environment

Innovative facultyIntegrated curriculumComparative advantage in computer

technologyStudents on the forefront of change

Notebook Computer InitiativeNotebook Computer Initiative

All students have a notebook computerEnhances opportunities for both classroom

and homework applicationsPrepares students for the workplace in the

current business environmentEncourages the students to embrace

flexibility and future change in business

Strategic Accounting Model Strategic Accounting Model Introductory ProceduresIntroductory Procedures

Professor emails Excel template and preliminary instructions to students for advance study

Each student comes to class with their laptop to one of the University’s model classrooms

Professor demonstrates one or more data sets, emphasizing how the Pro Formas will change with revised assumptions

Professor demonstrates financial statement linkages

Strategic Accounting Model Strategic Accounting Model Application GoalsApplication Goals

Students will individually download real world corporate data

Students will perform sensitivity analysis by varying some of the assumptions (e.g., percent changes, annual increase in revenue)

Students will use Excel features and prepare the pro forma financials

Students will generate pro forma cash flows, apply net present values, find reasonable “market” valuation

Students will encounter ultimate decision-making

Applications for the Strategy Applications for the Strategy and Policy Courseand Policy Course

The Strategic Accounting Model is used to perform a comprehensive business analysis

Before using the model in the main strategy project, the professor actually tests individual students in the class in an on-line setting

Students may elect from a pool of real companies or massaged data, over which there is no advance notice

Students have the full class period to enter values, manipulate formulas, determine NPV, find intrinsic market valuation, and draw conclusions

Applications for the Applications for the Accounting Information Accounting Information

Systems CourseSystems Course On its initial run, the Strategic Accounting project

will be scaled-down relative to other information technology course components

Students will be introduced to the project in Spring 2000

Students will work in small teams and will submit findings for a grade, but no in-class testing

Why use AIS as a Site?Why use AIS as a Site?Our AIS course is a required course in the

accounting coreThe course emphasizes flowcharting,

controls, and cycles The course design is integrative in nature,

making use of accounting projects related to other accounting courses

The Strategic Accounting project is consistent with the blend of both managerial and financial concerns

Challenge for the AcademyChallenge for the Academy

Be responsive to the needs of the business market Strategic Accounting is a natural way to transition Preparation for professional exams will not be

diminished Student experience with financial models is a

value added enhancement for their future careers They depend on us to teach them what they need

to know in the future!

Applying the Strategic Applying the Strategic Accounting ModelAccounting Model

1. Perform model start-up procedures2. Research historical financial statements3. Establish trend assumptions and

financial statement line item changes4. Project the Income Statement5. Project the Cash Flow statement6. Project the Balance Sheet

Applying the Strategic Applying the Strategic Accounting ModelAccounting Model

7. Forecast results of future years8. Calculate intrinsic value stock price9. Determine market value worth10. Evaluate a Takeover Offer11. Perform Merger Analysis12. Perform Acquisition Analysis

1. Start-up - Prepare the 1. Start-up - Prepare the Integrated Financial Integrated Financial

StatementsStatements Students receive Strategic Accounting Model in

advance and review for class discussion Excel spreadsheet formulas are included, but

students are required to enter some formulas and designate necessary cell references by revising assumptions and data sets

Model highlights items with point breakdown, which is helpful to mark milestones in progress and to determine points to be received in grading

2. Research Historical 2. Research Historical Financial StatementsFinancial Statements

Indirect method is assumed for the operating activities section of the cash flow statement, as well as sufficient detail on investing and financing activities

3 or 4 years of account balances are better than 2 for identifying account relationships and for identifying trends

Historic balances are entered under heading labeled “Actual,” and projected amounts under heading labeled “Projected”

3. Establish Assumptions on 3. Establish Assumptions on TrendsTrends

Set assumptions on sales growth, cost of goods sold as a percent of sales, working capital changes, equipment acquisitions and dispositions, and account relationships

Use those assumptions so the providers are committed to achieving the results indicated by the forecast; i.e., develop the corporate budget as a forecast to which all key players are committed

Enter assumptions that may change from year to year across the top, and those that are fixed on the appropriate row in the model

4. Project the Income 4. Project the Income StatementStatement

If the income statement line item values have been computed in the assumptions, copy the values to the income statement, by entering = cell reference

Be sure that the assumptions are programmed in Excel so that revenues appear as positive values and expenses are negative, so that cash flows then carry the correct sign

Helps is available alongside financial statement items

5. Project the Cash Flow 5. Project the Cash Flow StatementStatement

If the change assumptions were computed at the top, copy the values associated with asset changes and depreciation to the cash flow statement, but be sure to change the sign of each value

Copy the values associated with payables and equity accounts to the cash flow statement, and be sure to maintain the same sign of each value

In the appropriate statement cell, enter “=cell reference”, changing the sign if necessary

6. Project the Balance Sheet 6. Project the Balance Sheet AccountsAccounts

Most balance sheet account projection is equal to the previous column balance sheet amount plus the current column assumption change amount

The retained earnings projection is equal to the previous column balance sheet amount plus the current column net income and dividends paid

7. Project the Future Years7. Project the Future Years

Once appropriate formulas have been applied to make a 1-year projection (so that assets = liabilities + owner equity), you can copy the entire projection column to the right to project the future years

8. Calculate Intrinsic Value 8. Calculate Intrinsic Value Stock PriceStock Price

If you add the cash flow from operations to the cash flow from investing activities subtotals, you have a cash flow stream that you can discount to compute the cumulative net present value of the firm, given its strategy defined by the strategic assumptions

The cumulative net present value of the firm is its intrinsic market value

8. Calculate Intrinsic Value 8. Calculate Intrinsic Value Stock Price (continued)Stock Price (continued)

Theoretically, this is what the total shares outstanding are worth

Divide the cumulative net present value of the firm by the number of shares outstanding to get the intrinsic value of a share of stock

If the intrinsic value exceeds the market value of the stock, the stock is undervalued and it may be a good candidate to buy and hold until it is fairly priced

9. Determine Market Value 9. Determine Market Value WorthWorth

Use market value as its cost in Time 0, and use the sum of the cash flows from operations and investing activities for future periods

Total the cash flows for the periods you will consider

Discount the cash flow stream (cash flows for Time t = 0, 1, 2, 3, 4, etc) by dividing each period cash flow by (1 + discount rate) ^ t.

10. Evaluating a Takeover 10. Evaluating a Takeover OfferOffer

Record the offer as a negative value (buyer’s perspective) in the Time 0 column before the first forecast column

Compute the Cumulative Net Present Value If the Cumulative Net Present Value is positive,

the investment is wealth-enhancing, given the assumptions

To compute the internal rate of return, substitute different values in the rate formula until the cumulative net present value approximates 0

11. Perform Merger Analysis11. Perform Merger Analysis

Compare the Cumulative NPVs of two possible merger candidates

Decide upon synergies (increased revenues from more complete product lines and reduced overhead from redundancy) that increase cash flows

The result usually indicates that a stock swap combination of related firms will have a larger positive cash flow than the firms operated separately

The ratios must be beneficial to both parties

12. Perform Acquisition 12. Perform Acquisition Analysis Analysis

If one firm plans to acquire the other for cash, the cost of the target is important

The larger firm may be able to offer more to the target’s shareholders for their stock than the stock market will pay for the target’s existing cash flow stream

As long as the acquiring firm pays the target shareholders less than the full amount of the expected increase in value of the combined firm, the acquiring firm’s shareholders will also theoretically enjoy increases in stock value

Behavioral ImplicationsBehavioral Implications

Stock options motivate corporate managers to complete value-enhancing mergers

Individuals should position themselves working in line jobs or in working for successful acquiring firms

Students should be position themselves to maximize success in their career strategies

Students depend on accounting educators to teach them what they need to know, not only to survive, but to thrive on success presented by changing future opportunities!

We Enjoyed Our Time with We Enjoyed Our Time with You!You!

Would you please help us out on the next leg of our research and complete the brief survey?

We would be pleased to follow up with you on any matter – we can be reached by phone through our general number 770-961-3410 or through individual emails:– JamesBagwell@mail.clayton.edu– JamesBogert@mail.clayton.edu– GregKordecki@mail.clayton.edu