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This case raises a number of issues related to the relationship between financial metrics and a company's business model and strategy. Specifically, the case requires students to match a company with a financial profile that consists of a common-size balance sheet and additional selected ratios. Students are forced to consider the many different ways a company's business model and strategy impact the financial statements, including effects on gross margin, net margin, inventories, R & D expenditures, and working capital ratios. The case is excellent when used as a capstone exercise after a discussion of financial statement ratios and their use in financial statement analysis. The case has been used in both the first year Financial Reporting course and the Financial Statement Analysis elective in the Babson MBA program. In addition, the case has been used in many different executive education programs that include sessions on financial analysis.

This case raises a number of issues related to the exercise of managerial judgment in financial reporting. Specifically, the case requires students to estimate the warranty expense for a start-up company and requires the explicit consideration of the ethical issues that arise in the estimation process. Students are forced to consider the trade-offs that occur when estimating warranty expense: the impact on accounting earnings, materiality, income vs. cash flows, earnings management, ethical decision-making, and entrepreneurship. This case is excellent when used to introduce and discuss accrual accounting and the logic for estimating expenses. The case is used in the first year Financial Reporting course in the Babson MBA program after students have taken an on-line module in ethical decision-making. With the appendix, it is also used in the Babson undergraduate first-year course, Introduction to Financial Accounting. While an ethics-learning unit is not necessarily a pre-requisite for the case, students will need to have been exposed to the three philosophies of ethical thought referred to in the case (Duty, Consequences, and Character) and included as an appendix to the case.

David Farina, an analyst for William Blair and Co., has just completed a draft of a research report on Sierra On-Line, a fast growing software developer. Sierra is a tough company to analyze, and David is pondering whether to modify this draft or submit it for publication. Because Sierra's stock price has doubled in the past two weeks, time is of the essence.

Presents the insiders' perspective using an interview format. Ken and Roberta Williams, Sierra's founders, discuss issues raised in the (A) and (B) cases and present their vision to become the world leader in educational software. Teaching Purpose: Analysts typically visit a firm to gain a fuller understanding of the business and to evaluate management's character and business acumen. Presents sufficient information for students to evaluate management.

Sierra On-Line, a fast growing software developer, is criticized by a Forbes journalist for excessively capitalizing software development costs. In contrast to most other software developers that typically capitalize about 20% of R&D costs, Sierra capitalizes 80%. Questions investors must address in valuing Sierra include: Does Sierra's account reflect economic reality? Is their accounting too aggressive or are their competitors too conservative? Is Sierra's business sufficiently different from its competitors to invalidate the comparison?

Describes the purpose, preparation, and uses of the statement of cash flows. Intended as an introduction to the statement. Illustrates and explains the differences and similarities between direct cash flow statements, indirect cash flow statements, and funds flow statements.

Parker Co., a U.S. based agricultural chemical company with $4 billion in sales, has agreed to a joint venture with Spencer, Inc., a smaller U.S. based company, to develop and market a new herbicide for corn. The two companies must consider marketing, tax, and liability issues to decide whether the new entity will be a corporation or a partnership. Demonstrates how various tax and non-tax factors affect the legal form of joint venture.

Spreadsheet Supplement for case 192155

Whelan Pharmaceuticals, a U.S. company with $3 billion in sales, must decide where to manufacture its newest product. In considering possible sites, both foreign and U.S., the firm must identify and make trade-offs between tax, marketing, and manufacturing factors.