By Ronald J. Huefner

As a longtime accounting professor, I have taught introductory accounting courses, at both the undergraduate and graduate levels, for over 30 years. Over time, I became increasingly dissatisfied with the structure of the first course in accounting. Especially at the MBA level, the first course did not meet the students’ needs for accounting knowledge and skill. In the fall of 1998, I began to formulate and test a major revision to the design and structure of the first course. This article describes the redesign and my experiences with it over the past three years.

Background

A 1989 white paper by the then–Big Eight partners emphasized that “the current textbook-based, rule-intensive, lecture/problem style should not survive as the primary means of presentation.” The Accounting Education Change Commission was founded and funded by the profession, though it has had little lasting effect beyond the grant schools. More recently, the Albrecht and Sack Report (2000) and the AICPA Taylor Study both gave pessimistic reports on the state of accounting education.

Students’ exposure to accounting in the first course is believed to impact the quantity and quality of individuals that choose accounting as a major. Quantity issues are well documented: The most recent AICPA study (2001) shows a five-year decline in the annual number of bachelor’s degrees in accounting of over 30%, from 53,360 in 1994/95 to 37,115 in 1999/2000. Many have also expressed quality concerns, especially that the conventional approach to the first course may give the wrong impression of the nature of accounting and hence attract the wrong individuals to the profession.

Recognizing the importance of the first course, both the AICPA and the Big Four are currently developing support materials that will accurately portray the profession. While these will be helpful, without a fundamental change in the structure of the first course, the profession is unlikely to see a major impact.

Audience for the First Course

In most programs, the first accounting course is taken by all business students (and by some nonbusiness students as well). Perhaps 10–25% of the students in the course will become accounting majors. Historically, the first course focused on the role of the accountant in analyzing transactions, organizing data, and presenting financial statements: a “preparer approach.” Believing that this did not serve the majority in the course (the nonaccounting business students), “user approaches” arose that minimized the accounting process and emphasized interpretation and analysis. This change was one of style, not of structure. An introductory accounting text’s table of contents will not reveal whether it employs a preparer or user approach. Though the change was subtle, user approaches shifted emphasis away from the role of accounting and may have played a part in the decline in accounting majors.

The challenge remains: How does one design a first course that both serves the needs of the majority (nonaccounting business majors) and has the potential to attract quality students to the accounting major?

What Is Accounting?

Most introductory accounting textbooks define accounting primarily as “that process that records transactions and summarizes them into financial statements” and, secondarily, as a collection of techniques that would be grouped under “managerial accounting.”

In contemplating a redesign of the introductory course, I found this implied definition deficient in capturing the essence of accounting and in conveying the knowledge and skills that both accounting and business students need.

I view the essence of accounting as financial measurement, and thus I define accounting as: measuring economic activity in financial terms, both before and after it happens.

The challenge of accounting is how to measure, whether our concern is analyzing a proposed equipment purchase, expressing next year’s budget, calculating the cost and profitability of a product, reporting last year’s income, reporting a company’s debt obligation, or any of various other economic events or activities that must be expressed in financial terms. Thus, in the first course, accounting should be presented as a financial measurement discipline.

Accounting encompasses many different measurement techniques, or models. Students should understand different measurement models and how to use them. The redesigned course is structured around the various accounting models.

The goals for the first course are as follows:

A brief description of each model, along with some comments on how the above goals are realized throughout the course, follows below. How much of this material is covered in a particular first course depends on the nature of the students, the length of the course, and other courses in the curriculum. The early parts of the sequence are critical; later topics are more flexible.

First Course Structured by Accounting Models

An accounting model is a particular set of definitions, assumptions, and measurement rules used to represent economic reality in a particular context. Clearly identifying the accounting models and explicitly differentiating their applications will reduce students’ confusion about them.

Cash flow model. The course begins with the cash flow model. This is the most basic representation of economic activity: the measurement of cash coming in and cash going out. It is simple and understandable; there are no measurement rules to learn. Accountants simply measure (count) cash in and out, and perhaps classify it into categories. Students understand cash flow in their daily life before they begin the course. The following are among the applications of the cash flow model that are taught:

Discounted cash flow model. Staying with cash flow measures, the course then adds multiple time periods by covering the discounted cash flow model. Though commonly considered a difficult topic, in my experience students have had no trouble handling this in the second or third week of the course. This topic begins with compounding (which students usually already understand) and then moves on to the reverse process of discounting. Excel functions are used to find present values, future values, periodic payments, rates, or number of time periods. After covering the basics, two applications are considered:

At this point, students are fairly well grounded in cash flow measures, and are ready to move on to income measures. A brief transition to discuss the importance of performance measurement—a major reason why accounting exists—can motivate interest in income measures.

Performance model 1: balanced scorecard. One class period introduces performance measurement, why it is important, and how it affects behavior. The balanced scorecard concept is introduced and illustrated with an AICPA case. Accounting tends to focus on the financial components of the balanced scorecard, but students recognize that other, nonfinancial measures are important too. This sets the stage for the introduction of income models.

Cash income model. While this model has limited application (taxation, small business reporting), it enables a transition from cash flow to the concepts of revenue and expense without all the complexity of accrual accounting. The reason for introducing it first is primarily pedagogical.

After defining the concept of income, revenues are distinguished from cash receipts, and expenses from cash payments. The operating-investing-financing distinction studied earlier proves useful here. Operating flows constitute revenues and expenses; investing and financing flows do not. Students are told that the accrual income model, to be studied next, will use the same concepts of revenue and expense but different measurement approaches.

The cash income model does use depreciation measures, so a full, standard coverage of depreciation is appropriate at this stage: capitalizing versus expensing, depreciation methods, and gains and losses from the sale of depreciable assets.

Finally, simple versions of the income statement and the balance sheet are introduced. The balance sheet for this model is quite brief: The only assets are cash, depreciable assets, and perhaps investments, and the only liabilities result from borrowing. Students play the well-known game Monopoly to experience recording transactions and produce financial statements in a cash-based environment.

Accrual income model. About five weeks into a one-semester MBA course is the time to introduce the accrual income model. Most first courses begin with this, but accrual accounting is relatively complex; good pedagogy suggests beginning with easier topics.

At this point, coverage of a fairly generic accrual model, reasonably independent of U.S. GAAP and representative of the accounting system in almost any country, requires three to four weeks. The following topics are covered:

Covering the U.S. public reporting model later reinforces accrual concepts by covering the topics in two different contexts.

Performance model 2: financial ratios. The use of data from accrual-based financial statements, in the form of common financial ratios, is briefly covered. This is another example of the use of accounting for performance measurement.

Working capital model. Accounting courses tended to stop teaching this topic once SFAS 95 was adopted, but working capital remains an important concept in finance. Days sales outstanding, days of payables, and days of inventory are combined into a “cash gap” measure: the duration from cash payments to suppliers to cash receipts from customers. In my experience, students like this material, especially the illustration of how a rapidly growing, profitable company can run out of cash if it has a long cash gap.

At this point, a shift to some “managerial” topics (without using that term) can pique interest in applications. Alternatively, one could continue with wealth models and the U.S. public reporting model.

Contribution models. Here, the relevant distinction is fixed versus variable; timing issues (cash versus accrual) disappear. When fixed and variable costs are combined with the concepts of total, average, and marginal, we have the contribution models. Applications include break-even and cost-volume-profit analysis, contribution margin analysis, and “relevant cost” decision problems. As follows, many excellent cases are available on these topics.

Disaggregated profitability models. These models are used to get income or cost measures for subparts of a company: organizational units, products, or customers. The focus shifts from fixed and variable to direct and indirect, with indirect costs requiring an allocation procedure. Traditional and activity-based approaches are covered.

Wealth models. Brief coverage is given to models that focus on measuring assets or liabilities. Specific models include current cost and current value (mark-to-market) approaches; price-level adjusted models could be covered as well.

U.S. public reporting model. This segment builds on the accrual income model covered earlier, but also draws on several other models, because U.S. public reporting is a mixed-measures model. Drawing heavily from actual financial statements, topics include the following:

Performance model 3: ROI and EVA. The final look at performance models based on financial statements includes a discussion of return on investment (ROI) and economic value added (EVA) calculations. The latter especially focuses on adjustments from GAAP-based amounts.

Other models. As time and circumstances permit, coverage could be given to various other models:

Assessment

At first glance, the approach described here may seem a more complex way of teaching introductory accounting. This author’s experience has indicated the opposite. By focusing on one measurement model at a time, and by clarifying the differences between one model and the next, students find the material easier to understand.

A few weeks into the course, I start to get informal feedback from students. At this point, we have covered budgeting, cash flow statements, debt analysis, capital investment analysis, and the like. Students see the usefulness of these topics to their business careers, and even to their daily life. They tend to comment, with some degree of surprise, that accounting is pretty useful, it’s not all that hard, and it certainly isn’t boring. My viewpoint at that stage is that they are getting comfortable working with financial data, they have already tackled some challenging topics, and they are developing their Excel skills. Most importantly, their attitude about the course is positive.

Our school periodically measures various dimensions of student satisfaction with the MBA program. The first year I implemented this approach, the core accounting course had the third-biggest increase in student satisfaction among the 60 items measured. The instructor and course evaluations have steadily climbed as I have introduced and refined this approach. By all available indicators, students have reacted very positively to the new design.

As we try to improve accounting education and attract more and better accounting majors, it is important to rethink our approaches to instruction. The approach described here represents one attempt, developed and refined over several years, that seems to offer a more appealing structure for the introductory accounting courses.

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