Cash Flow Statement Spreadsheet Modeling Case Using a Prototype System Development Process.

U.S. GAAP and IFRS standards both require a cash flow statement that presents operating, investing and financing net cash flows (FASB, FAS 95; 1987; IASB, IAS 7, 1992). Although students are exposed to the cash flow statement in beginning accounting courses and then study the cash flow statement in more depth in intermediate accounting classes, they still have difficulty preparing the cash flow statement. Spreadsheet modeling is a skill that employers believe is a necessity for students to develop for their accounting careers since spreadsheets are used so extensively in the accounting and business world. This case helps students cement their understanding of the cash flow statement preparation and spreadsheet modeling skills. Using a prototype development process, students build a spreadsheet model that efficiently, consistently, and accurately utilizes proper spreadsheet modeling and validation techniques to process inputs of accrual accounting financial statements and other necessary input data into a proper cash flow statement output. The goal is to have a user friendly, robust cash flow statement spreadsheet model that can be generalized to most companies’ financial data. A few accounting professionals who are former students who actually completed the assignment provided feedback for the case. The response was that the case was a valuable learning exercise to help them prepare for the profession and should be continued. One of these former students who is now an audit manager in a large local firm stated, “The project was useful and relevant. It was one of the most real life projects I worked on in school. ” Jefferson T. Davis Cash Flow Statement Spreadsheet Modeling Case Using a Prototype System Development Process 114 Journal of Learning in Higher Education 115 Spring 2015 (Volume 11 Issue 1) to the task should help accelerate the acquisition of expertise and provide increased efficiency and effectiveness in the cash flow statement preparation process. One of the comments of the professionals, a senior staff in a big four firm, stated about the case: “The cash flow statement is complex. It is critical that students who pursue an accounting career, especially those seeking a CPA certification, fully obtain a strong understanding of the cash flow statement. The case does a great job breaking down both methods of the cash flow statement as well as the key components to the statements. Further, students must have the ability to apply the understanding to modern software programs. The case requires the student to think critically about the details of the case and apply the knowledge by creating an Excel template. ” The rest of the article explains where the cash flow statement spreadsheet model case is placed in the accounting curriculum and what preparation materials are given to students before completing the case. Then the case instructions and data are briefly explained. A grading rubric is provided along with error messages that instructors can use to provide feedback to students. The results of the questions posed to the professionals who completed the case as students are discussed and their comments about the case are presented in the summary, limitations, and variations section. PLACEMENT OF CASH FLOW STATEMENT SPREADSHEET MODEL CASE IN THE ACCOUNTING CURRICULUM This cash flow statement spreadsheet model case is an assignment included in an undergraduate accounting information systems course. Before completing the assignment students complete Microsoft ExcelTM training and test evaluation for beginning and intermediate features for Excel. In addition students are presented cash flow statement principles in Microsoft PowerpointTM slides and an mp4 video, even though students already studied cash flow statements twice, once in beginning accounting and once in intermediate accounting. Further, students have been introduced to the system development life cycle (SDLC) and discussed a prototype approach to computer application development using a Powerpoint presentation. The preliminary design and specification report is tied to the systems preliminary design step. At the same time students are completing the cash flow statement assignment, they are also completing the Systems Understanding Aid (Arens, 2012) which has an Excel workbook with a statement of cash flows, income statement, and balance sheet that are produced from values in the ten column year end worksheet. This case and spreadsheet model could also be included in the intermediate accounting course when studying the cash flow statement. CASE INSTRUCTIONS AND DATA The case instructions are presented in Appendix 1. The instructions explain that there are three company data sets which are included in Appendix 2. Students prepare the spreadsheet model using a prototype approach (Harrison, 1985). A prototype development approach is appropriate for development of smaller applications. A prototype approach starts with the process of developing the first iteration (first try) of the model. After completing the first model iteration, the model is evaluated with test data. The developer then finds errors or ways that the model is not complete or working as needed with the test data. An improved model of the first iteration is then developed and tested again. The testing includes the first test data and often includes another set of data so that the model can be tested for the ability of the model to handle a variety of situational data. This development and test process may be repeated many times until the desired model is achieved. The prototype approach for this cash flow model includes an iterative process to use formulas for different company situations and help increase accuracy of the model as well as make it more generic and applicable to different company data sets. The students use at least one company situation with the correct cash flow statement so they can have correct feedback for their spreadsheet model for at least one data set. The three company data sets for the iterative prototype models (O’Keefe, Inc. and High Tech Resources) as well as the final company data set to be handed in as the final cash flow statement spreadsheet model (Instaprint Corporation), are given to the students in a PDF file. The last data set (Instaprint Corporation) is to be handed in as a demonstration of the final model and is to be graded for cash flow numbers, as well as for the system requirement listed in the case instructions. In addition to preparing a cash flow statement spreadsheet model, students are required to write a short preliminary design or specification report. Students are prepared for this report by a class presentation and discussion of the systems development life cycle (SDLC). The design and specification report helps students justify and then specify the business and computer benefits of the template, as well as the inputs, processes and outputs. This design and specification report helps students understand that the inputs required are an income statement, the beginning and ending balance sheet, and some other necessary transaction and accrual details. Students are also required to develop a model that uses an input section. Any cells, other than labels, outside the input section cannot use typed in values. The sections outside the input section must use a formula, cell reference, lookup, calculation, etc. that changes automatically based on changes in data inputs. Also, the sections outside the input section must have proper protection applied so that the formulas, cell references, lookup, calculations, etc., remain valid for different company situations. Students are also required to present a graph (they can choose any type and any data from the spreadsheet), and provide built in check figures usually using “if statements” to ensure that direct and indirect methods are equal and that overall net cash flows equal the balance sheet change in cash and cash equivalents from the beginning of the year to the end of the year. Students can choose the basic layout such as single versus multiple worksheets, formula versus account/ transaction change analysis. Use of a spreadsheet modeling approach is not limited to teaching cash flow statement principles. The basic concept of modeling whether, in excel or some other way, could be presented as a model itself for applying the technique to other assignments--including assignments outside of accounting courses. Textbooks use assignments at the end of chapters to enhance levels of learning past knowledge and comprehension, to application and analysis as described in Bloom’s taxonomy (see Bloom, 1956). A spreadsheet model can be used to take learning not only to the application and analysis levels as would a textbook cash flow statement assignment, but provides students an opportunity to take learning to the synthesis and evaluation levels. Developing a spreadsheet helps students design, create, modify, and combine their knowledge and comprehension of cash flow statement principles into a useful model for future use. Using a prototype development process and requiring students to use particular excel tools to create a model to solve a complex problem such as a cash flow statement, enables students to reach Bloom’s highest level of learning by evaluating whether the model has internal validity (accuracy) and external validity (generalizability to other situations.) GRADING RUBRIC AND FEEDBACK TO STUDENTS The grading rubric with error messages for student feedback is included in Appendix 3. This grading rubric applies to the Instaprint Corporation. Students hand in the Instaprint Corporation cash flow statement spreadsheet model as their final iteration of the prototype development process. The Instaprint Corporation cash flow statement values are graded for accuracy. Their preliminary design report is also graded. A large part of the grade is related to model validity, usefulness, user friendliness an