1. Framing Accounting Learnings
The Big Accounting Picture
CRW:
Today, we want to help you frame your accounting learnings and provide a bigger accounting picture as a foundation for an “accounting mindset”.

2. Framing Accounting Learnings Succeeding in a Knowledge Economy
CRW:
Undoubtedly, you’ve learned a great deal of accounting at BC and perhaps elsewhere.
As your time at BC fades away, this was merely the start of the learning curve as you enter the rapidly evolving knowledge economy at the firms or in other endeavors throughout your career.
This learning curve will be especially steep if you decide to brand yourself as suggested by Diana Scott and Greg Jonas, and we hope you do so.
To help you on your journey, our overarching goal for this session is to provide a foundation for the “accounting mindset” you will need to succeed in a knowledge economy.
Our agenda will discuss the foundation for the “accounting mindset” as we:
(1) Present a unified framework featuring broad concepts that connect what you’ve learned, and will continue to learn, about financial accounting, managerial accounting, auditing, financial statement analysis, and information systems.
(2) Drill deeper into parts of this framework that are specific to financial reporting and auditing.
So, what is the unified framework and how did it come about?
Agenda
Present a unified framework for all accounting
Drill deeper into financial accounting

3. Unified Framework Pathways Commission GPW
A significant part of the unified framework we will present is based on a Vision Model for Accounting Education, which was created recently by the Pathways Commission Vision for Accounting Education Committee.
This committee, which we were honored to serve on, was appointed by the Pathways Commission.
The Vision Model embraces a broad range of perspectives that reflect the Vision Committee’s diverse experiences.
The committee included a former chief operating officer and chief financial officer at Boston Scientific, a director at Citicorp who was previously at J.P. Morgan and McKinsey, two senior representatives from the Big Four, a best selling author of visual thinking books, and five academics, including the two of us.
We began the visioning process by brainstorming the current perception of accounting. The bottom line: the public perception is narrow.
Note:
The unified framework is based on the Pathways Vision Model, created as part of a broader Pathways Commission initiative: a joint undertaking by the American Accounting Association and the American Institute of CPAs (AICPA) aimed at charting a national strategy for the next generation of accountants.
Even though the focus is on America, there were international representatives on the Commission, and, as you will see, the framework broadly applies to all accounting – without country boundaries.

4. Pubic Perception of Accounting
Unified Framework
Pubic Perception of Accounting
CRW: The committee believes this image captures the public's perception of what accountants do: “crunch the numbers” using mechanical, black & white rules that result in black and white accounting reports.
The key take-away from this image is that this limited perception has negative consequences, especially for public policies related to accounting, as we shall see.
This image became the committee’s baseline for change.
Next, we brainstormed words that captured the reality of roles accounting plays from the depth and breadth of the diverse backgrounds of the committee members. The result reflected a much broader perception and lead us to develop the Pathways Vision Model.

5. Unified Framework Reality of Accounting Pathways Vision Model
GPW: The Pathways Vision Model has three overarching features:
First, its elements are interdependent, second, its simple, yet deep, and third, its very inclusive.
The arrows connecting the elements illustrate their interdependencies and, in particular, how they affect and are affected by each other. There is a circular flow of cause and effect, starting with economic activity affecting accounting judgments, which affect the usefulness of information, which affect users’ decisions, which have consequences back on economic activity. This is the way most of us were taught accounting. But, this interdependence means all of the arrows can be reversed: Everything affects everything. As drawn, the model emphasizes the supply of information from preparers to users. Reversing the arrows emphasizes the demand for information, starting at the top with users seeking information about economic activity to facilitate decisions. This demand and supply feature is one of many concepts from information economics that are lurking in the background and give the model a sturdy conceptual foundation.
This is one of the ways the model’s simplicity masks its depth, but this doesn’t mean this depth is appropriate for an introductory course. Rather, the elements and their interdependencies can be introduced at the big-picture level in introductory courses and increasingly penetrated deeper and deeper in more advanced courses, including on-the-job training courses.
The model is inclusive in two ways: First, the scope of the economic activity and related decisions ranges from small entities such as project development teams or individual contributors to companies, not-for profits and governments. Second, it applies to all of the areas we teach, including financial, managerial, tax, auditing, systems, and not-for-profit accounting.
The model’s depth and inclusiveness accommodate a broad range of perspectives reflective of our diverse experiences. In this regard, the model embraces many accounting pathways.
So how does this connect to the public perception….

6. Perception Versus Reality
Unified Framework
Perception Versus Reality
Often it is said that …
Accounting is the language of business.
CRW:
Its often said that accounting is the language of business… This simple phase can go deeper to reflect the full reality…
Several years ago, a former MBA student, who had an undergraduate degree in English and spoke several languages, best described the model’s interdependencies at the end of an introductory financial course as part of a reflection exercise we do the last day. He started by saying, “ Accounting is the language of business…

7. Perception Versus Reality
Unified Framework
Perception Versus Reality
However, the public’s perception is narrow.
The public’s view of accounting following “black and white” rules, while essential, is only the grammar.
The public’s view of accounting following “black and white” rules, while essential, is only the grammar.
CRW:
“However, the public’s perception of accounting, is narrow…

8. Perception Versus Reality
Unified Framework
Perception Versus Reality
Rather…
A subtle aspect of accounting, like nuances in other languages, is that it both affects and is affected by the business reality and culture.
CRW:
“Rather, A subtle aspect of accounting, like nuances in other languages, is that it both affects and is affected by the business reality and culture.”
So this former student understood the interdependences of the vision.
So when you hear (or say) that “Accounting is the language of business”, consider the deeper meaning that it both affects and is affected by its context.
This is the foundation of the “accounting mindset”.
Next we would like to highlight a few elements of the model… 8

9. Unified Framework Reality of Accounting Critical Thinking
GPW: The model emphasizes critical thinking by all decision makers.
This includes business decisions related to the underlying economic activity, accounting judgments, users’ assessments of the usefulness of reported information, and users’ decisions.
Among other things, critical thinking includes:
Solving complex problems.
Developing creative solutions.
Identifying problems.
Gathering, analyzing, synthesizing, evaluating and credibly communicating information.
Identifying and counteracting bias, deception, and distortion.
Being skeptical, but not cynical.
Because of the model’s interdependencies, each of these decision makers must know how to think critically about the others’ decisions and environment. For example, accountants must understand how to think critically about the underlying economic activity and users’ decisions. Similarly, marketing managers must understand accounting.
More than any other element of the model, there’s an increasing sense of urgency to embrace more critical thinking across the curriculum. Human capital based solely on the “black and white”, mechanical aspects of accounting is becoming commoditized. Low-cost providers ultimately win in commodity markets, often by achieving economies of scale. Those who fail to move up the vision model risk being flipped out of their jobs. Having their jobs outsourced to technology or other countries. 9

10. Consequences of Users’ Decisions
Unified Framework
Reality of Accounting
Consequences of Users’ Decisions
GPW: The consequences of users’ decisions connects the Model’s elements.
Understanding accounting, the underlying economic activity and related user decisions helps preparers and users understand the anticipated consequences of user decisions:
Insiders are often rewarded for achieving targets based on reported numbers. For example, sales and marketing staff are frequently rewarded for meeting sales targets and division managers for meeting earnings or cash flow targets. Here the users’ decisions are internal performance reviews. Insiders also receive share-based compensation. In this case, they benefit from stock price increases associated investors’ decisions that are influenced by reported measures.
Anticipating these positive consequences of users’ decisions gives insiders incentives to work more efficiently and effectively. Thus, economic activity in the reporting entity is enhanced by the anticipation of rewards that will be influenced by measures of this activity.
The positive consequences of users’ decisions are not limited to the economic activity of the reporting entity. There are also positive social consequences associated with the efficient allocation of capital and the ripple effects of wealth generation.
In addition to affecting economic activity, the anticipated consequences of users’ decisions, including the decisions of auditors, regulators, and tax authorities, can affect accounting judgments that permit leeway for better or worse. To ensure they are rewarded for their performance, insiders have incentives to report ethically when they meet internal targets or shareholders’ expectations. However, they also have an incentive to misrepresent their performance when they fall short of their targets.
The consequences of users’ decisions closes the loop, which means each of the elements in the model affects and is affected by the other elements. This means accountants need to have a solid understanding of the underlying economic activity and users’ decisions and their consequences for the reporting entity and other stakeholders.
Next, we consider how accounting contributes to a prosperous society. 10

11. Unified Framework Reality of Accounting Prosperous Society
CRW: Accounting promotes economic activity that leads to a prosperous society.
Above all, accountants have a responsibility to serve the public interests. We do so by striving to enhance all elements of the Pathways Vision Model and thus promote economic activity that leads to a more prosperous society.
In this regard, we do three things that benefit society.
First, accountants create metrics that are essential for capitalism: Incentives are the “engine” of capitalism and accounting measures are the “fuel” for this engine.
However, unbridled incentives can result in greed, which leads to the second way accountants benefit society: We provide controls to curb socially undesirable behavior.
So, not only do we provide the fuel, we also provide the “brakes”.
Third, accountants provide decision support that spans all the elements of the Vision Model.
Thus, accounting is the interconnected language of business that facilitates a healthy tension between the competitive forces associated with capitalism and the cooperative forces associated with society while providing decision support so that we and others can make more informed decisions. The result is a more prosperous society.
But for these benefits to be fully realized, the decisions throughout the Model and, in particular the accounting judgments, must be understood by all decision makers, which we consider next. 11

12. Unified Framework Reality of Accounting Accounting Judgments CRW:
Accounting judgments take place in a hierarchy that stretches from the highest seats of government to the lowest levels within companies.
Let’s look at this hierarchy and how the public’s perception of accounting affects public policy, which in turn, affects accounting judgments. 12

13. Decision Making Hierarchy
Unified Framework
Decision Making Hierarchy
Outside companies
Education
Voting public
Special
interests
Congress
Other
Media
SEC
FASB
PCAOB
GAAP
GAAS
Inside companies
CRW:
This hierarchy depicts the players who make accounting judgments outside and inside companies.
In the US, the pinnacle of the hierarchy is Congress, which determines the laws. The SEC passes regulations consistent with these laws, and the FASB passes standards that become GAAP consistent with the regulations and laws.
Inside companies, the top of the organization is the board of directors that determine company policies consistent with higher level decisions within the hierarchy — the standards, regulations, and laws. Often the policies then become more refined and restricted as they cascade down the hierarchy by the chief financial officer, division controllers, and others down the organization until ultimately, there is an individual record keeper who has very little judgment leeway.
There are numerous “Other” government agencies that affect companies’ decisions. For example, Congress passes laws that restrict regulations set by the U.S. Treasury, which restricts the IRS.
Thus, decisions at the higher levels in these hierarchies guide or restrict those at the lower levels.
In some situations, the higher level laws, standards, and policies are so strict that decision makers at lower levels have almost no leeway: decisions are “black and white”. In other situations, these are more lax and considerable judgment is required: there are many “shades of gray”.
Even if decisions at the higher levels allow a fair amount of judgment, policies set within a company may allow very little leeway, so decisions appear “black and white” at the lower levels.
GPW:
The judgments in this hierarchy are reflected in the reports provided by companies, which are assessed by auditors.
Auditors’ judgments also fit into the hierarchy. They influence or restrict companies’ accounting judgments and they are restricted by PCAOB standards and monitoring, which are restricted by the SEC etc.
To understand how the Vision Model relates to this hierarchy, we will focus on three parties that significantly influence the judgments made outside companies: special interest groups, the voting public, and the media.
Special interests groups advocate for their self-interests and aim to educate and lobby for their causes. When their interests are aligned with the public’s interests, lobbying contributes to a prosperous society. When lobbyists self interest conflict with the public’s interest, the voting public and media can provide a countervailing force or more generally influence law makers and regulators in ways that promote a prosperous society.
But for these forces to be effective, Congress and the media must understand the reality of accounting. Indeed, we believe these forces have been counterproductive in the past often because the media and voting public have not understood accounting, especially the critical role of accounting judgments.
The key take-away is education is critical. Shifting the perception towards the Vision Model through education can enhance public policy and thus promote a prosperous society.
Next, we will start to drill down deeper into financial accounting …
Auditors
Board
CFO
Controllers
Record keepers
Reports
Users
© NavAcc LLC, G. Peter & Carolyn R. Wilson

14. Digging Deeper into Financial Accounting
Connecting User Decisions to Economic Activity
Analysis
Ratio effects
Financial-statement effects
Entries
Computations
Accounting judgments
CRW: This slide previews skills you need to acquire to apply to the Vision Model to financial accounting.
Starting at the bottom of the model, you already know you need to understand the underlying economic activity before you can learn the related accounting. But, this is your first opportunity to distinguish yourself by digging deeply into the underlying economics.
This is not required to master many of the skills you will use on the job. In particular, as an insider you will only need to have a big picture understanding of the underlying events and circumstances to compute related measures, record entries, determine their financial-statement and effects.
And this is all you need to understand about the business and accounting issues if you use ratios to conduct analyses where you take the reported numbers at face value.
However, if you wish to assess the usefulness of reported numbers and in particular the extent to which they faithfully reflect the underlying economic activity, you need to understand the related accounting judgments. To this end, you need a sophisticated understanding of the related accounting issues and how they are affected by the underlying risks and incentives. This is something we did throughout the course.
Next, we’re going to go over a few concept maps related to these skills.
Note: all of these maps are available at NavigatingAccounting.com. See the right side bar under “Maps”.
Analyze economic activity
Events
Risks & incentives

15. Digging Deeper into Financial Accounting
Connecting User Decisions to Economic Activity
Conceptual primacy
of assets and liabilities
Owners’ Equity Change Map
GPW: The Owners’ Equity Change Map explains how balance sheet changes, income statements and statements of changes in owners’ equity are connected.
The OEC Map also illustrates how all of the elements reported on income statements are defined in terms of changes in assets and liabilities.
In doing so it underscores the conceptual primacy of assets and liabilities found in the FASB’s and IASB’s Conceptual Frameworks.
This conceptual primacy has subtle implications.
You already know owners’ equity is a residual claim, meaning the owners’ get what’s left after liability claims are settled. This means owners’ equity is defined quantitatively as assets minus liabilities or more precisely as the amount recognized as total assets less the amount recognized as total liabilities.
By contrast, assets and liabilities are defined qualitatively and are quantified separately by measurement and recognition decisions.
The OEC Map underscores that comprehensive income and all of its elements, including revenues, expenses, gains and losses are also defined quantitatively in terms of changes in owners’ equity.
This means revenue and expense measurement and recognition decisions all depend on asset and liability recognition decisions.
A subtle implication is concepts such as the matching principle and conservatism are not needed to justify expense recognition, although no harm is done by using them. For example, applying the matching principle always involves either: (i) derecognizing an asset because a related benefit has been realized during the current period or (ii) recognizing a liability because an obligation has been incurred during the current period, often for a service rendered.
Similarly, concepts such as realizable and earned are not needed for revenue recognition. For example, a company should only recognize a receivable if it is realizable and a company should recognize a performance obligation if it has yet to earn revenue.

16. Digging Deeper into Financial Accounting
Connecting User Decisions to Economic Activity
GPW:
The OEC Map also provides a way to record any entry by answering four questions and applying the Map.
The four questions emphasize the conceptual primacy of assets and liabilities:
Should an asset be recognized (and if so, for how much)?
Should an asset be de-recognized?
Should a liability be recognized?
Should a liability be de-recognized?
If net assets and thus owners’ equity changed, you can use the map to identify the affected owners’ equity accounts.
The next map illustrates how entries are stored in accounts and flow into financial statements…

17. Digging Deeper into Financial Accounting
Connecting User Decisions to Economic Activity
Record Keeping and Reporting Map
CRW: The R&R Map can help you understand as an insider how entries are recorded and flow into financials and understand as an outsider the entries behind reported numbers.
We didn’t discuss this map much in the IFRS course because you learned the related concepts and skills in earlier courses.
We’ve included it here for two reasons.
Frist, we wanted to re-emphasize the importance of understanding entries and their financial-statement and ratio effects when auditing financial statements. You need to know how entries flow into performance metrics such ROE when assessing preparers’ reporting incentives.
Second, we wanted to introduce the R&R Map before embedding it in a bigger map on the next slide.

18. Digging Deeper into Financial Accounting Connecting User Decisions to Economic Activity
Accounting Decisions Map
CRW: The Accounting Decisions Map, or AD Map for short, embeds the R&R Map in a larger robust conceptual framework suitable for analyzing accounting decisions and their consequences.
From the perspective of an insider, preparing reports begins at the bottom by analyzing the underlying events, circumstances and risks. For example, when planning a depreciation schedule for recently acquired PP&E, a preparer needs to understand the related capital budgeting decision and, in particular, the estimated holding period, pattern of cash flows and residual value. This informs the “shades of gray” within accounting measurement judgments, which center on the useful life, pattern of usage, and residual value.
Once the measurement judgments are made, depreciation schedules can be computed: the accounting becomes “black and white” at this point.
Similarly, once the judgments are made for the inputs to other measurement methods such as the Black-Scholes Option pricing model or discounted cash flow model, measures can be computed. This is an important distinction. Experts can reasonably disagree on the input judgments, but the output computations conditional on these judgments are precise: there is a correct answer. As a consequence, the entries and their financial-statement effects are also precise, conditional on the earlier judgments.
GPW The yellow spine of the Accounting Decisions Map ignores several other factors shown here in gray that affect accounting judgments. The relative importance of these factors depends on the reporting context.
The next map illustrates how to drill into the “good decisions” Vision Model element when analyzing financial statements….

19. Analysis Consideration Map
Digging Deeper into Financial Accounting Connecting User Decisions to Economic Activity
Analysis Consideration Map
GPW: This slide shows the Analysis Consideration Map and how it relates to the Vision Model.
The AC Map can help you gain a qualitative big-picture understanding of the factors that drive firm value and in the process lay the groundwork for applying a widely used valuation model.
The map has two inputs: (1) qualitative information about past and expected future business activities and (2) quantitative information from financial disclosures and related ratios.
There are three outputs: qualitative forecasts of ROEs, risks, and growth.
By qualitative forecasts, we mean students’ analyses end with qualitative assessments such as Company A’s ROES are expected to improve and to be superior to Company B’s ROEs.
These are the factors that must be forecasted quantitatively when using the residual income valuation model, which you may have studied in financial statement analysis.
Next, we complete the drill down into financial reporting by combine the AC and AD Maps.

20. Toulmin Model of Argumentation
Digging Deeper into Financial Accounting Connecting User Decisions to Economic Activity
The Big
Accounting
Picture
CRW: The AD Map and AC Map identify factors you should consider either as an outsider trying to connect economic activities to performance assessments or as an insider trying to assess the consequences of users’ decisions on related economic activities.
The Toulmin Model of Argumentation helps you distil all of this information into claims with supporting arguments, counterarguments, rebuttals, and qualifiers.
So, what is the Big Accounting picture? The Pathways Vision Model. This is the foundation of the “accounting mindset.”
It presents a unified framework to help you organize what you’ve learned about accounting in all of the courses you’ve taken and what you will continue to learn in the future.
As you dig deeper, the AD and AC Maps and Toulmin Model of Argumentation -- you used in your written reports to present your arguments and counterarguments -- are tools to help you connect economic activities to performance assessments or to assess the consequences of users’ decisions on related economic activities.
So what are our hopes for you and your career?
Toulmin Model of Argumentation

21. Framing Accounting Learnings Succeeding in a Knowledge Economy
GPW:
Hopefully, we’ve helped you start to develop the robust accounting mindset you will need to capitalize on opportunities that come your way throughout your career.
To succeed in the knowledge economy you are about to enter, you need to continue to develop this mindset and more generally your human capital by maintaining your commitment to learning.
But you’ve learned from observing Diana, Greg, and our PWC guests that you also need to know how to help others learn; you need to become a great teacher. …
In this session, we’ve focused on one aspect of the human capital you will need to succeed: a robust accounting mindset that will help you deal with accounting issues you encounter. During the final session, we will briefly discuss other aspects of human capital you will need to succeed.