Custom fabric ventures: An instructional resource in job costing for the introductory managerial accounting course

Job costing is a core foundational concept in the introductory managerial accounting course. The purpose of this instructional resource (IR) is to provide a thorough hands-on, active learning resource that will allow introductory students to experience a full set of accounting and management activities necessary to produce a job and assign production costs to it. For example, the IR requires students to analyze overhead costs, determine the optimal job size, schedule production, calculate the amount of materials to purchase, complete material requisitions, update raw materials records, analyze labor time records, complete a job cost record and address critical thinking questions. The IR was developed for use in a “flipped classroom” in which students work under the guidance of the instructor, but could alternatively be assigned as an unsupervised out-of-class assignment or on-line project. Since the IR was specifically developed as a learning tool for novice introductory managerial accounting students, adequate guidance is provided throughout the activity. However, to add realism and challenge students to think beyond the confines of simple mechanics, management and accounting issues are seeded throughout. Student feedback indicates that the IR not only helps students learn how a job costing system operates, but also helps students become aware of management decisions and accounting issues that impact the costs assigned to a job.     

Bank Runs and the Accounting for Illiquid Assets in Financial Institutions

Abstract

Financial services are an increasingly important sector in modern economies, yet many accounting and auditing texts focus on manufacturing and retailing. This teaching note describes the role of financial institutions in transforming long-term, difficult-to-sell assets into short-term bank accounts. This is referred to as liquidity transformation. The social benefits and risks of liquidity transformation are described. The social benefit occurs due to the increased liquidity provided by the bank to depositors. The risk comes in the form of a bank run, wherein difficult-to-sell assets cannot be redeemed in time to cover the rapid and unexpected withdrawals of depositors. The financial statements of a financial institution are presented and the issue of valuation is discussed. Finally, practical relevance for accounting students is enhanced by including discussions of historical precedents and of implications for financial reporting and auditing.     

Credibility Using Copulas

Abstract

Credibility is a form of insurance pricing that is widely used, particularly in North America. The theory of credibility has been called a “cornerstone” in the field of actuarial science. Students of the North American actuarial bodies also study loss distributions, the process of statistical inference of relating a set of data to a theoretical (loss) distribution. In this work, we develop a direct link between credibility and loss distributions through the notion of a copula, a tool for understanding relationships among multivariate outcomes.

This paper develops credibility using a longitudinal data framework. In a longitudinal data framework, one might encounter data from a cross section of risk classes (towns) with a history of insurance claims available for each risk class. For the marginal claims distributions, we use generalized linear models, an extension of linear regression that also encompasses Weibull and Gamma regressions. Copulas are used to model the dependencies over time; specifically, this paper is the first to propose using a t-copula in the context of generalized linear models. The t-copula is the copula associated with the multivariate t-distribution; like the univariate tdistributions, it seems especially suitable for empirical work. Moreover, we show that the t-copula gives rise to easily computable predictive distributions that we use to generate credibility predictors. Like Bayesian methods, our copula credibility prediction methods allow us to provide an entire distribution of predicted claims, not just a point prediction.

We present an illustrative example of Massachusetts automobile claims, and compare our new credibility estimates with those currently existing in the literature.     

Bounds on the estimation error in the chain ladder method

Buchwalder et al. (2006) have illustrated that there are different approaches for the derivation of an estimate for the parameter estimation error in the distribution-free chain ladder reserving method. In this paper, we demonstrate that these approaches provide estimates that are close to each other for typical parameters. This is carried out by proving upper and lower bounds.     

Creative Accounting and Investment Analyst Response

This paper investigates the impact of window dressing on stockbroker analyst evaluation of a company's annual accounting numbers. A new methodological approach is used involving a laboratory experiment in which a large sample of experienced investment analysts drawn from five of the top London houses processes real company accounts. The research was conducted in the first half of 1990 at the end of a long bull market. The participating analysts were not overly concerned about the quality of published accounting information and creative accounting was not then viewed as a serious problem. Contrary to our prior expectations we found little evidence of window dressing adjustments being made by the subjects in general. However, those subjects who did correct were significantly more experienced. Possible explanations for our results and potential implications for capital market behaviour and information processing are discussed.     

The effect of a potential borrower's reporting reputation and financial condition on commercial loan officers' estimates of forecast bias and subsequent loan recommendations

This paper investigates whether a potential borrower's reporting reputation and financial condition affect commercial loan officers' loan judgments and recommendations after receiving an earnings forecast that predicts improved financial performance. The results suggest that the earnings forecast is perceived as more credible in the presence of (1) a reputation for objective reporting, and (2) strong financial condition. Also, a reputation for objective reporting allowed the borrower to more credibly convey the expected improvement in performance when financial condition was weak. However, while financial condition predictably affects loan recommendations (likelihood of granting the loan, interest rate), reporting reputation does not. While we find that commercial loan officers discount forecasts under similar circumstances as stock analysts, results suggest that the consequences of developing a reputation for aggressive reporting (e.g., aggressive selection of accounting methods and estimates within GAAP) may be greater in a stock valuation setting (prior research documents lower stock prices) than in a loan setting.     

Dividend valuation,trading and transactions costs: the 1997 partial abolition of dividend tax credit repayments

Although UK resident tax-exempt shareholders lost the right to repayment of tax credits on dividends paid by UK resident companies in July 1997, they could continue to receive tax credit repayments in respect of dividends received from Irish resident companies until December 1998. In July 1997 the rate of tax credit on Irish companies' dividends was 21%, and this was reduced to 11% in December 1997. We obtain insights into the incentives and behaviour of UK tax-exempt investors in response to these changes in the relative ‘tax attractiveness’ of investments in Irish resident companies. We find that only at its highest rate, 21%, was the level of dividend tax credit on Irish companies' dividends sufficient to induce changes in UK tax-exempt shareholders' investment strategies; and that the propensity for dividend capture by tax-exempt investors is heightened when the dividend tax credit yield is of the order of 0.8 or more and dividend yield is of the order of 2.6% or more.