Issues in Accounting
ISSUES IN ACCOUNTING EDUCATION
Vol. 26, No. 4
2011
pp. 797–806
American Accounting Association
DOI: 10.2308/iace-50053
Home Heaters: A Holistic View of the
Financial Statements
M. Cathy Claiborne and Kirkland A. Wilcox
ABSTRACT: In this case, two start-up companies in the same industry have identical economic transactions. Although both companies follow generally accepted accounting principles (GAAP), each manager makes different choices and estimates when applying
GAAP. By preparing the financial statements, calculating ratios, and comparing and contrasting the two companies, students see how choices and estimates made by management affect the financial statements. They also see the challenge faced by users of financial information when trying to interpret the financial statements and compare companies. Students really experience an ‘‘aha!’’ moment while analyzing this case. The case refutes their commonly held assumptions that accounting always has a right answer and that financial statements represent the truth.
Keywords: accounting alternatives; accounting choices; accounting estimates; economic transactions; financial statements; financial ratios; financial statement analysis.
CASE
A
t the beginning of the year 20X1, two companies began operations to sell home heating units. Eads Heater, Inc. is located in Eads, Colorado, and Glenwood Heating, Inc. is in
Glenwood Springs, Colorado. The companies operate under similar economic conditions and have identical operations during the year. However, each manager makes different accounting choices and estimates when applying generally accepted accounting principles (GAAP) in preparing the company’s financial statements.
PART A
First-Year Transactions
Both companies have completed identical transactions during the first year of operations,
20X1. The transactions for each company are listed:
1. On January 2, each company issued 3,200 shares of capital stock for $160,000 and
commenced
Vol. 26, No. 4
2011
pp. 797–806
American Accounting Association
DOI: 10.2308/iace-50053
Home Heaters: A Holistic View of the
Financial Statements
M. Cathy Claiborne and Kirkland A. Wilcox
ABSTRACT: In this case, two start-up companies in the same industry have identical economic transactions. Although both companies follow generally accepted accounting principles (GAAP), each manager makes different choices and estimates when applying
GAAP. By preparing the financial statements, calculating ratios, and comparing and contrasting the two companies, students see how choices and estimates made by management affect the financial statements. They also see the challenge faced by users of financial information when trying to interpret the financial statements and compare companies. Students really experience an ‘‘aha!’’ moment while analyzing this case. The case refutes their commonly held assumptions that accounting always has a right answer and that financial statements represent the truth.
Keywords: accounting alternatives; accounting choices; accounting estimates; economic transactions; financial statements; financial ratios; financial statement analysis.
CASE
A
t the beginning of the year 20X1, two companies began operations to sell home heating units. Eads Heater, Inc. is located in Eads, Colorado, and Glenwood Heating, Inc. is in
Glenwood Springs, Colorado. The companies operate under similar economic conditions and have identical operations during the year. However, each manager makes different accounting choices and estimates when applying generally accepted accounting principles (GAAP) in preparing the company’s financial statements.
PART A
First-Year Transactions
Both companies have completed identical transactions during the first year of operations,
20X1. The transactions for each company are listed:
1. On January 2, each company issued 3,200 shares of capital stock for $160,000 and
commenced
References: Biggs, J., and C. Tang. 2007. Teaching for Quality Learning at University. 3rd edition. New York, NY: McGraw-Hill. Bloom, B., M. Englehart, E. Furst, W. Hill, and D. Krathwohl. 1956. Taxonomy of Educational Objectives: Cognitive Domain. New York, NY: David McKay. Issues in Accounting Education Volume 26, No. 4, 2011 Copyright of Issues in Accounting Education is the property of American Accounting Association and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder 's express written permission. However, users may print, download, or email articles for individual use.