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Supplements the (A) case, 104023.

The Securities and Exchange Commission and investors question PolyMedica Corp.'s practice of capitalizing rather than expensing of direct-response advertising.

Abstract to follow.

With companies' financial statements being scrutinized as never before, executives are under pressure to forecast the cost of major projects accurately. Earned-value management lets you do just that, alerting you if you're headed for an overrun.

This case provides students the opportunity to practice variance analysis for an annual operating plan using flexible budgeting skills. First, a static budget is flexed to account for changes in product volume. Then, actual results are compared to the flexed budget and analyzed for product price, efficiency, and other variances. In addition, the case allows for discussion as to how flexible budgets can be used for management decision making, and how various compensation structures can affect financial results.

This case exposes students to the process of creating an operating plan. In addition, it introduces the concept of flexible expense budgeting. It may be used as a stand-alone case on budgeting, or it may be paired with the B case (UV1704) in a module on budgeting and strategic-profitability analysis or flexible expense budgeting.

Just a few years ago, the U.S. stock market was the envy of the world. Thanks to new technology, friendly regulation, and the innovativeness of the financial services industries, it was open to anyone, anywhere, anytime. Americans poured into the market by the millions, and the more they invested, the more liquid, accessible, and attractive the markets became. The world is much less jealous today. Belatedly, investors have come to recognize that the vaunted business models of the new economy were more effective at consuming capital than generating it. The recent stock market and corporate governance failures, the authors argue, are rooted in regulatory and market changes introduced 20 years ago. These were intended to reduce the cost of financial information and increase liquidity--enhancements that the regulators believed would improve both investor access to the market and efficiency in pricing. The goal of liquidity was achieved, but the changes also triggered a race for the bottom in the auditing profession, destroyed the economics of investment analysis, and discouraged professional investors from relying on their own rational judgment. In this article, the authors explore what went wrong and outline their ideas for radical reform. They propose putting the country's stock exchanges in charge of the audit process; creating a new Investors Union modeled on the highly successful Consumers Union; and introducing a graduated tax on trading in pension savings.

Supplements the (A) case.

An investor is considering investing in Air Canada bonds after reading an article on the attractiveness of the bonds. Trading at US$0.80 on the dollar, the bonds are yielding approximately 14 per cent. The investor must conduct some financial analysis on her own to assess whether the company's financial position has improved or deteriorated since a bond rating downgrade eight months ago. She must also evaluate how off-balance sheet operating leases would affect the analysis. The case illustrates how financial statement users can use lease disclosures to restate financial statements to fully reflect liability arising from operating leases.

In the 1990s, funding pension obligations by investing in stocks looked smart. By 1999, the bull market had poured a collective $260 billion surplus into the pension coffers of the S&P 500, permitting the companies to record the year-to-year increases as additional income. But just two years later, the bear market had obliterated those gains, replacing them with a cavernous $240 billion deficit--which had to be offset by the unlucky firms' ongoing cash flows, wreaking havoc on their earnings, debt levels, and stock prices. Corporate executives may be blamed for this debacle. But they were only following the rules. Current accounting guidelines keep companies from recording pension liabilities and assets on their balance sheets, instead relegating them to the footnotes. That makes it hard to see the risk to which market drops expose companies. Board members and top executives need to look beyond distorted accounting numbers to the economic realities of pension plans. Once they do, they may be surprised to find that they would gain far greater value and flexibility by passively investing their pension funds entirely in bonds. A bond portfolio can be designed to meet precisely, and with virtual certainty, a company's pension obligation, thus eliminating the chance of a funding gap. The predictability of bond investments also stabilizes earnings and cash flow. The expanded corporate debt capacity that results can then be used to fuel growth or reduce the firm's overall cost of capital.

Spreadsheet Supplement for case 103080.

Describes how the lack of incentive alignment between retailers and their vendors can lead to stockouts. Also describes various means to reduce incentive misalignment and hence stockouts.

In late 2001 and in 2002, investors, securities regulators, the energy industry and the capital markets watched as the details of behind the collapse of Enron Corporation unfolded. Enron was the largest corporation to collapse in U.S. history, with the company's share price losing most of its value in the 10 months preceding its bankruptcy petition. A large shareholder, like virtually all of Enron's shareholders, was unhappy with his losses and he wanted to know how, despite all the checks and balances in the financial reporting system, this collapse happened suddenly and with so little warning. This shareholder wondered whether the system be relied upon to protect him and what he should do in the future if he continued to invest in capital markets.

Four firms in the airline industry illustrate the underlying differences in valuation multiples (price-earnings and price-to-book).

Accounting scandals have opened the door to international influence on U.S. financial reporting. Most important for U.S. companies, under emerging global standards, income statements will become a lot more revealing.

It was June 9, 1998, and Charles Elson, a law professor and Director on Sunbeam's Board, had just left a distressing board meeting. The board had met suddenly because, the previous day, Barron's had published an article suggesting that Al Dunlap, CEO of Sunbeam, had been manufacturing earnings since he joined the company in July 1996. This disturbing article came shortly after other bad news. Two months earlier, on April 3, Sunbeam had warned the market that it would report a surprise first quarter loss and, as a result, the stock dropped 25 percent to $34.38 from the previous day's close of $45.56. Sunbeam was now at about $20, 62 percent off its high of $52 achieved just three months earlier. Elson had been confident in Dunlap's ability as a turnaround specialist, especially after his success turning around Scott Paper. But between the recent earnings disappointment and the Barron's article, Elson was beginning to question his friend's actions. Elson needed to confirm for himself if the accusations detailed in the Barron's article were true or not. Was Sunbeam's first quarter earnings shortfall a one-time hiccup to be expected in a turnaround situation or an indication of the larger problems detailed in the Barron's article? He took home the most recent annual report to determine for himself.

It was June 9, 1998, and Charles Elson, a law professor and Director on Sunbeam's Board, had just left a distressing Elson and the other outside directors met with outside legal and public relations advisors on June 13, 1998. After discussion of the events, the outside directors voiced that they had lost faith in Dunlap. They contacted the other directors and then called Dunlap to tell him he was terminated. Because of his apparent failure in his duties, Dunlap was fired without a severance package.

Some public pension funds aggressively pursue their pro-labor or social-issue agendas by submitting proxy proposals on topics ranging from employment practices to environmental concerns. But research shows that the stock market reacts negatively to corporations that receive such proposals.

Should stock options be recorded as an expense on a company's income statement and balance sheet, or should they remain where they are, relegated to footnotes? The authors believe the case for expensing options is overwhelming. In this article, Nobel laureate Robert Merton, one of the inventors of the Black-Scholes option-pricing model; his co-author on the classic textbook Finance, Zvi Bodie; and Robert Kaplan, creator of the Balanced Scorecard, examine and dismiss the principal claims put forward by those who continue to oppose options expensing. They demonstrate that stock-option grants have real cash-flow implications that need to be reported and detail the distortions that relegating stock-option accounting to footnotes creates. The authors agree that options are a powerful incentive, and failing to record a transaction that creates such powerful effects is economically indefensible. Worse, it encourages companies to favor options over alternative incentive systems.

The concept of deferred tax accounting is introduced, along with examples to demonstrate the balance sheet perspective of FAS #109.