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Chapter Eight
Accounting: Decision Making by the Numbers
End of Chapter Material
Application Questions
1. You have recently graduated with an accounting degree. Use the Web to
investigate what exactly is involved in becoming a Certified Public Accountant
(CPA). Good places to start are Wikipedia's "Certified Public Accountant" entry
(http://en.wikipedia.org/wiki/
CPA) and the Department of Labor's Occupational Outlook Handbook entry on
accountants and auditors (http://www.bls.gov/oco/ocos001.htm). What
advantages and disadvantages do you see? Would you decide to take this step?
Why or why not?

• Requirements for CPAs vary among states, but in most states a CPA candidate
must have completed at least 150 hours of college coursework, which is 30 hours
more than is normally required for a bachelor’s degree. In addition, candidates in
all states must pass a rigorous four-part Uniform CPA Examination. This exam is
given over a two-day period, but the candidate does not have to pass all four
parts in the same period. More than half of all states also require candidates to
have some accounting experience. After earning certification, CPAs in virtually
all states must complete a certain number of hours of continuing education to
have their licenses renewed.
• The requirements that must be met to become a CPA are challenging, but
according to the Occupational Outlook Handbook, successful candidates do enjoy
substantial increases in job opportunities and earnings potential. In fact, the
 Handbook forecasts that accountants who earn the CPA should experience
excellent job prospects over the next several years.
2. The generally accepted accounting principles (GAAPs) developed by the
Financial Accounting Standards Board (FASB) try to make interpreting and
comparing a firm's financial performance easier for a variety of stakeholders.
Those stakeholders include companies, auditors, stockholders, creditors, and the
government. Yet the FASB is made up entirely of accountants and MBAs. Do you
think it's possible for such a board to address the needs of all stakeholders? Why
or why not?
• The FASB has been criticized for paying too much attention to the views of
management and auditors and not enough attention to the needs of other
stakeholders—especially investors who rely on the financial statements prepared
under GAAP. One of the problems in the past was that much of the funding for
the FASB has come from auditing firms. But SOX has changed the FASB’s
funding, basing it now on standard fees assessed on public accounting companies.
Another problem—the one emphasized in this question—has been that the board
itself has traditionally been made up almost entirely of individuals who were
auditors or business executives. Reformers have called for other stakeholders to
be appointed to the board to provide more diverse views. There has been
considerable pressure to appoint an investor to fill one of the next vacancies.
• A couple of articles that provide additional insights to these issues are
http://www.businessweek.com/magazine/content/06_47/b4010075.htm and
http://www.cfo.com/article.cfm/7852613/3/c_7873404?f=search

3. Suppose a firm’s managers are looking into outsourcing repair work on products
covered under its warranty instead of continuing to perform this function itself.
Describe how they might use incremental analysis to make their decision. Identify
specific factors that the analysis would take into account.
• Incremental analysis would begin by identifying the specific costs and revenues
that are truly incremental, meaning that they would be affected by the decision to
outsource repair work. The main cost the firm would incur would be the cost of
paying the subcontractor for the work. On the other hand, the firm would
eliminate the cost of direct labor and direct materials expenses for warranty
work, since the firm would no longer need to use its own labor for this work, nor
would it need to purchase the necessary parts and equipment for this work.
• When doing incremental analysis, it is important to realize that some costs aren’t
incremental. Sunk costs, which have already been incurred and must be paid
regardless of which alternative is chosen are not relevant. Also, the firm might
find that some of its overhead costs assigned to repair work would still have to be
paid even if the firm outsourced the work.
4. A public company is one whose shares are traded in a public market, such as a
stock exchange; in a private company, ownership is private. The Sarbanes-Oxley
Act does not apply to small, privately held companies. Do you think ethical
accounting practices are equally important for both public and private companies?
 Should the government be involved in enforcing ethical practices for private
companies?
• Ethics are always important. However, there are issues that suggest that
government enforcement of practices for private companies is less practical than
it is for large publicly traded companies. First, the owners of many private firms
are directly involved in management, thus removing one of the most serious
ethical dilemmas facing large, publicly traded corporations—namely the conflict
of interest resulting from separation of ownership and management. Second, the
time, effort and cost devoted to the paperwork and reporting requirements
imposed by government regulation might prove to be a serious burden to small,
privately owned companies. Finally, given the huge number of small private
companies, it is doubtful that government regulation would be effective without a
significant increase in the size (and cost) of the regulatory effort.
5. In a September 20, 2006, Business Week article, Paul White, a popular professor
at the University of Minnesota’s Carlson School of Management, puts his finger
on what he sees as the main problem with accountants today: they grind out
financial information without understanding what it all means in terms of business
decisions. Assuming Professor White is right, what steps can you take now during
your education that might help you avoid this pitfall?
• One of the best things students can do is make sure they take courses that expose
them to other areas of business, such as operations management, finance, and
marketing—as well as economics, business law, and ethics. In fact, taking an
introduction to business course is an excellent place to start! And, if well
designed, capstone courses which integrate the material covered in a variety of
courses are a good way to see the big picture.
• Participation in business-related extracurricular organizations and activities
(such as Phi Beta Lambda or Delta Sigma Pi) can also broaden perspectives by
encouraging accounting majors to network with students majoring in other
business-related fields.
• In addition, given the globalization of business, accounting students need to
broaden their perspectives by taking courses that expose them to foreign laws,
cultures and economic systems.