Aol Case Study - 3

Chapter 2 America Online, Inc. Teaching Note Introduction The America Online (AOL) case is a comprehensive financial-statement analysis case. It enables students to do strategic analysis, accounting analysis, financial analysis a: and prospective analysis in a rich context. It can he used either as the first case in a course. on financial; statement analysis to set up the course framework or towards the end of the course as a comprehensive case. If it is used at the beginning, the instructor should be prepared for a discussion that raises more questions than answers. However, it can he an excellent way to motivate the students to learn the course tools. If the case is used at the end, the instructor should challenge the students to do an in-depth analysis and come to concrete conclusions. The base can also be used to focus on the relationship between a firm 's business strategy and its accounting policy choices. Finally, the case has also been used very successfully in the auditing context. Here, the focus would be to evaluate the risks faced by the auditor given the changing business conditions and their accounting implications. Questions for students The following questions will guide students through the material: 1. Prior to 1995, why was AOL so successful in the commercial online industry relative to its competitors CompuServe and Prodigy? 2. As of 1995, what are the key changes taking place in the commercial online industry? How are they likely to affect AOL 's future prospects? 3. Was AOL 's policy to capitalize subscriber acquisition costs jut stifled prior to 1995? 4. Given the changes discussed in question 2, do you think AOL should change its accounting policy as of 1995? Is the company 's response consistent with your view? 5. What would be the affect on AOL 's 1995 balance sheet if all the capitalized subscriber acquisition costs were written off? If AOL. expensed all the subscriber acquisition costs incurred in fiscal 1995 during the same year, what