Accounting Education in Films

Because of major financial crises that have occurred in the past, many film producers choose to re-enact these events through movie productions. These producers were forced to incorporate technical accounting and financial principles to correctly portray the events leading to a financial crisis. "Other People's Money," a film released in 1991, by Norman Jewison, starred Danny Devito as Lawrence Garfield. Garfield's success has come as a result of purchasing companies and liquidating their assets, which required accounting and financial theories. The accounting that is discussed during the movie directly relates to course material commonly studied in an intermediate level accounting class.

Garfield identifies an appealing company called New England Wire and Cable. He is aware that the company has a higher liquation value per share than market price per share. In addition, he is particularlyimpressed by this company because it has no debts, no legal liabilities, no environmental or contingent liabilities, and a fully funded pension. Garfield makes every effort to influence the owner to sell the company and illustrates to him how his assets are worth more after liquidation.

This movie incorporates many theories and topics presented at an intermediate accounting level. Topics such as Generally Accepted Accounting Principles (GAAP), liquidation, market value, historical costing, financial statements, and fair market value are frequently mentioned throughout the plot. A particular scene in the movie displays Lawrence Garfield explaining a very basic valuation analysis to the owner of New England Wire and Cable that simplifies the concept of "market value or price per share." This calculation includes the addition of equipment at salvage value, land at fair market value, value of other operations, and working capital, totaled and divided by the number of shares issued and outstanding.

The equation is begun by explaining that equipment, purchased at 120 million dollars, has a salvage value of 30 million dollars. The concept of depreciation, which includes salvage value, or value of an asset at the end of its useful life, is an intermediate level accounting topic that is frequently referenced. Garfield continues by adding the fair market value of the land, as grazing land. When learning fair market value (FMV) in accounting education, it is commonly associated with impairments, a topic learned in intermediate accounting. New England Wire and Cable also conducts operations of plumbing electrical and adhesive, with added other revenues to Garfield's calculation. Finally, working capital is added to this part of the equation. Working capital, particularly as a ratio, is constantly used in accounting and finance to show liquidity of a business by comparing current assets to current liabilities. In intermediate accounting courses, current liabilities are further discussed relating to gain and loss contingences.

To begin the second part of the calculation, Garfield decided to reduce the total by 25 million dollars because the wire and cable division of the company is not producing a profit and is being supported by the other divisions. He does this to be conservative. Conservatism has remained a large part of intermediate level accounting, specifically in acquisition and valuation of plant, property, and equipment. Following this new conservative total, Garfield calculates the value per share of 25 dollars by dividing by the number of shares issued and outstanding. The current owner of New England Wire and Cable mentioned that the initial market price was 10 dollars per share and Garfield refers to this as a "sale" since its liquidation value per share is 25 dollars.

The market price per share of stock is a current measure, not based on historical values. All of the variables needed to calculate the market price per share is given within a company's financial statements. The difference been these two values is that the initial market value is what the stock is actually selling for per share while the liquidation value is what each share would be sold for if the company should go out of business and sell all assets. Typically, the market price per share should be higher than liquidation value. In addition to the actual calculation of a valuation analysis, students of intermediate accounting are continually educated on the preparation of financial statements, in compliance with the Generally Accepted Accounting Principles, otherwise known as GAAP.