Developments in Business Simulation & Experiential Learning, Volume 27, 2000

EXERCISE: PREPARING FINANCIAL REPORTS USING THE GROUP

CATEGORIZING TECHNIQUE

Marian W. Boscia, King’s College

R. Bruce McAfee, Old Dominion University

ABSTRACT transmitting information and concepts, including

effective reading, listening, writing, and speaking.
Guided by this year's theme, ABSEL 2000: Intellectual skills include the ability to locate,
Learning in and for the Future, this paper describes obtain and organize information and the ability to
an exercise that can be used to teach students the identify and solve unstructured problems in
nature of financial statements. Working in groups, unfamiliar settings, and to exercise judgment based
students sort and assemble financial information on comprehension of an unfocused set of facts.
from a small business into basic financial reports. Interpersonal skills include the ability to work
Although the example used in this paper is effectively in groups and to provide leadership
accounting-based, the technique discussed in this when appropriate.” (Source: Accounting Education
paper can be applied to most business disciplines Change Commission and American Accounting
where students need to develop the ability to Association,
organize and analyze a complex set of information. http://206.170.119.32/pubs/position/position1.htm).
It can be adapted to many college courses to
enhance the learning experience. Working in groups, using business simulation
techniques is an instructional method that can
INTRODUCTION encourage students to develop communication,
intellectual, and interpersonal skill.
With the expansion of technology, information can
be amassed from a vast variety of sources. One of THE EXERCISE
the challenges that will face students in the work
place during the 21st century is learning how to Purpose and Objectives
handle information overload. Theoretical
frameworks provide guidelines for determining the The objectives of this exercise are as follows:
nature and treatment of information. Teachers must
provide students with opportunities to develop skill 1. To acquaint students with some of the
in applying theory to practical situations. information that goes into designing a set of
financial statements.
Increasingly, advocates for change in higher
education such as the Change Commission of the 2. To provide students with experience working
American Institute of Certified Public Accountants with their colleagues on a team basis, as actually is
have advocated not only a change in course content, done when working for most companies.
but also a change in the methods that instructors use
to teach course materials. 3. To build upon critical thinking skills by
analyzing and evaluating accounting information.
“To become successful professionals, accounting
graduates must possess communication skills, 4. To familiarize students with basic accounting
intellectual skills, and interpersonal skills. concepts from accounting’s Conceptual
Communication skills include both receiving and Framework.

140
 Developments in Business Simulation & Experiential Learning, Volume 27, 2000
5. To provide students with an experience in
applying the Conceptual Framework to a realistic Debriefing the Exercise
situation encountered in practice.
After teams have completed their computations, the
6. To enhance writing skills by writing a cover letter exercise is debriefed by the instructor. The
to accompany the financial statements. (optional) debriefing centers on developing answers to the
questions posed earlier to the students:
Design and Procedures
1. What is the definition of an "asset," a "liability,"
At the beginning of class students are divided into "owners’ equity," "revenues" and "expenses."
groups of two to four individuals and asked to What strategies are most successful for identifying
complete an assignment which is due at the each of these?
beginning of the next class period (or at the end of
the current class if objective 6 is omitted). The 2. What accounts were particularly hard to classify
assignment consists of four parts, two of which are because they could easily fit into more than once
optional. First (optional), the instructor asks groups category? Which accounts were easy to classify?
to write down definitions for an asset, a liability,
owners’ equity, revenues and expenses. Second 3. What are the firm’s Current assets? Long term
(optional), the instructor asks students to list what assets? Liabilities? Owner’s equity? Revenues?
sorts of accounts might exist in the chart of Cost of goods manufactured? Operating expenses?
accounts for a company that produces redwood Selling expenses?
furniture. Third, the instructor distributes to each
group one packet of “receipts” (cut up strips of 4. What problems did you experience working as a
paper containing one item of financial information- team? Would you have been more successful in
See Appendix B) and a set of instructions for completing the exercise by working alone? Why?
completing the assignment. Students are then asked
to sort and categorize the “receipts” in the packet DISCUSSION
into the following categories:
This exercise and variations on it have been used
Balance Sheet Items- Assets; Liabilities; successfully in several courses. More recently, this
Owner’s Equity exercise was used in a sophomore/junior
intermediate accounting class during the third week
Income Statement Items-Revenues; Cost of Goods of class to review a chapter on financial statements.
Manufactured; Operating Expenses; Selling To be successful in completing this exercise,
Expenses students need to have completed a beginning course
in accounting principles that includes a segment on
Fourth, students are asked to make several accounting for manufacturing. Completing this
calculations: assignment does not, however, require that student
1. Compute Cost of Good Manufactured assuming have more than a basic knowledge of production
that there were no beginning inventories of any sort costs.
and that there was no work remaining in process at
the end of the year. This exercise is designed to be completed within a
50 minute time period. Allotting forty minutes for
2. Prepare a balance sheet and an income statement groups to complete their calculations should be
for Redwood Works. Compute Cheng Sun's equity sufficient for most classes. The debriefing part of
in Redwood Works in order to complete the balance the exercise should be allocated the remaining class
sheet. time.

141
 Developments in Business Simulation & Experiential Learning, Volume 27, 2000
understand the precise nature of the category itself
Students generally enjoy this hands-on exercise. and all the items that fall within the category.
During a recent session, most students participated Superficial knowledge won't suffice. To illustrate,
with enthusiasm and were completely engaged in an accounting student can't determine if "accounts
sharing their thoughts and taking part in finding a receivable" are "current assets" or "liabilities"
solution. Students discussed their process for without knowledge of all of these. A student taking
categorizing the information and developed separate an Organizational Behavior course can't determine
strategies for dealing with items that were easily is Maslow's Hierarchy of Needs theory is a
identified as opposed to those that presented more "content" or "process" theory without understanding
difficulty. At the end of this session, several groups both.
asked to be allowed to take the materials home with
them for further work. Categorizing helps to develop a student's
intellectual skills because they must obtain and
The success of this exercise is based on how organize the information and exercise judgement.
carefully students consider the issues involved in To the extent that the exercise asks students to go
distinguishing between the various components of beyond categorizing items by requiring that they
financial statements. Importantly, debriefing by the solve a problem, as in the exercise described above
instructor reinforces the concepts that have been where students needed to determine owner's equity
refined through application in the exercise. by adding and subtracting numbers, students
However, even if some of the teams are ineffective, develop problem solving skills.
the exercise can still be beneficial in helping them
develop an appreciation for the complexity of Asking students to sort and categorize information
organizing financial information. specifically in groups helps them to develop better
communication and interpersonal skills. They must
GROUP CATEGORIZING TECHNIQUE read each item carefully, speak to others about it,
listen to what others say, and reach a consensus.
This exercise is representative of a technique that They need to focus on how their behavior is
for lack of a better name we refer to as the "group affecting others and when it is appropriate to
categorizing technique." This name is used because assume group leadership.
the essential feature is give students unorganized
bits of information and ask them to organize them CONCLUSION
into categories and to solve a specific problem or
answer questions based on the categorized The exercise described above and the group
information. categorizing technique that it uses has several
positive attributes which we believe should be
Any course that contains categories of information noted:
can make use of this approach, not just accounting
and finance courses. For example, in organizational 1. It is highly flexible and can be adapted to many
behavior courses, motivation theories are often different courses, not just those that use financial
grouped into two categories: process and content information.
theories. Here, a professor could give student 2. It is relatively easy to conduct. Most instructors
groups pieces of paper, each containing the name of can divide students into groups, give them a packet
one theory, and ask them to categorize them. of disorganized information, and ask them to sort it
Students could be asked to justify their choices. and solve some problem.

From an educational perspective, in order to 3. It helps students to develop intellectual skills,

categorize any piece of information, one must communication skills and interpersonal skills.

142
 Developments in Business Simulation & Experiential Learning, Volume 27, 2000
Instructions:
Appendix I
1. Sort and categorize the items in the packet into
Classification of Accounts Assignment the following categories:

The services provided to clients by the accounting Balance Sheet Items- Assets; Liabilities; Owner’s
profession have changed with the availability of Equity
low-cost general ledger and tax software.
Accountants rarely do routine preparation of Income Statement Items- Revenues; Cost of Goods
financial statements for clients who keep their Manufactured; Operating
accounting records in good order. However, there Expenses; Selling Expenses; Administrative
still remains the new client who needs a set of Expenses
financial statements to get a line of credit at the
bank and that will arrive at an accountant's office 2. Make the following calculations:
with a pile of receipts. This exercise simulates this
sort of accounting engagement. A. Compute Cost of Good Manufactured assuming
that there were no beginning inventories of any sort
Your group has received an envelope full of receipts and that there was no work remaining in process at
from Cheng Sun, the owner of Redwood Works for the end of the year.
January 1, 1999 through December 31, 1999. This
is a small business that has two sources of revenues. B. Prepare a balance sheet and an income statement
First, The business designs custom furniture for for Redwood Works. You will need to compute
corporate offices. Second, the company produces Cheng Sun's equity in Redwood Works in order to
and sells a line of redwood tables and chairs. While complete the balance sheet.
Cheng Sun is a gifted furniture craftsman and
designer, he has no background in accounting. He
has grouped his bills into categories and computed a
total for each category. He has no idea how to use
these totals to produce financial statements. Cheng
Sun has come to your group for advice.

The first step in producing financial statements will

be to decide how to classify the various items. In
determining how to categorize items, remember the
guidance provided by the Conceptual Framework of
accounting. It includes definitions of assets,
liabilities, expenses, and revenues. In addition, you
must not forget the restrictions imposed by the cost-
benefit rule and materiality limitation. All
immaterial items should be expensed unless it is
important to control them by including them in
inventory. In this case, Cheng Sun has told you that
he inventories all office supplies and sandpaper
because of a theft problem he's experienced in the
past.

143
Developments in Business Simulation & Experiential Learning, Volume 27, 2000
Accumulated Depreciation -
Cash Lathe Maintenance Office Equipment Samples For Trade Shows
$1,300 Costs $1,300 $44,900 $700

Accounts Receivable Lathe Operator Wages Accounts Payable Customer Order Forms
$850 $1,300 $800 $1,150

Delivery Truck
Redwood Tables Carpenter Wages Factory Wages Payable Leasing Costs
$1,750 $1,300 $2,150 $1,600

Wage Expense - Delivery

Sandpaper On Hand Lathe Depreciation Property Taxes Payable Truck Drivers
$1,450 $700 $2,300 $700

Lathe Department
Office Supplies Supervisor's Salary Unearned Design Fees Sales Commissions
$1,600 $850 $1,150 $1,600

Prepaid Office Building Screws For Assembly Cheng Lee, Capital Office Utilities Expense
Rent $700 $1,250 ? $1,200

Prepaid Business
Insurance Glue For Assembly Cheng Lee, Drawing Office Supplies Expense
$1,750 $1,600 $1,900 $1,250

Office Equipment
Factory Building Factory Wages Redwood Table Sales Rent Expense
$148,000 Expense $1,900 $115,000 $1,200

Plant Manager's
Production Equipment Salary Design Fees Earned
$41,500 $700 $27,500 Miscellaneous Expense $600

Depreciation Of Business Insurance

Office Equipment Manufacturing Plant Materials Handling Expense
$95,500 $1,450 $1,600 $1000

Redwood Used For Janitorial Labor Expense -

Land Production Factory Advertising Expense
$151,000 $850 $700 $900

Accumulated Depreciation Fee to Scientist Looking For

- Factory Building Crating For Shipment Coolants & Lubricants Used Another Wood Source
$65,500 $1,750 $1,750 $1,150

Accumulated Depreciation
- Production Equipment Shipping Costs
$9,400 $1,150

144
 Developments in Business Simulation & Experiential Learning, Volume 27, 2000
APPENDIX B

One Possible Solution

Redwood Works
Balance Sheet As of December 31, 1999

Current Assets
Cash $1,300
Accounts Receivable 850
Redwood Tables 1,750
Sandpaper On Hand 1,450
Office Supplies 1,600
Prepaid Office Building Rent 700
Prepaid Business Insurance 1,750 $9,400

Long-term Assets
Land $151,000
Factory Building $148,000
Accumulated Depreciation - Factory Building (65,500) 82,500

Production Equipment $41,500

Accumulated Depreciation - Production Equipment (9,400) 32,100

Office Equipment $95,500

Accumulated Depreciation - Office Equipment (44,900) 50,600 316,200
$325,600
Liabilities
Accounts Payable $800
Factory Wages Payable 2,150
Property Taxes Payable 2,300
Unearned Design Fees 1,150 $6,400

Owner's Equity
Cheng Lee, Capital $321,100
Cheng Lee, Drawing (1,900) 319,200
$325,600

145
 Developments in Business Simulation & Experiential Learning, Volume 27, 2000
Redwood Works
Income Statement
For the year ended December 31, 1999

Redwood Table Sales $115,000

Design Fees Earned 27,500
$142,500
Carpenter Wages $1,300
Coolants & Lubricants Used 1,750
Depreciation Of Manufacturing Plant 1,450
Factory Wages Expense 1,900
Glue For Assembly 1,600
Janitorial Labor Expense - Factory 700
Lathe Depreciation 700
Lathe Maintenance Costs 1,300
Lathe Operator Wages 1,300
Lathe Department Supervisor's Salary 850
Materials Handling 1,600
Plant Manager's Salary 700
Redwood Used For Production 850
Screws For Assembly 1,250
Cost of Goods Manufactured (17,250)
Crating For Shipment $1,750
Customer Order Forms 1,150
Delivery Truck Leasing Costs 1,600
Sales Commissions 1,600
Samples For Trade Shows 700
Shipping Costs 1,150
Wage Expense - Delivery Truck Drivers 700 (8,650)
Selling Expenses
Advertising Expense $ 900
Business Insurance Expense 1,000
Miscellaneous Expense 600
Office Equipment Rent Expense 1,200
Office Supplies Expense 1,250
Office Utilities Expense 1,200
Salaries For Scientists Looking For Another Wood Source 1,150
(7,300)
$109,300

146