The identification of variation in students’ understandings of disciplinary concepts: the application of the SOLO taxonomy within introductory accounting

Abstract

Insights into students’ understandings of disciplinary concepts are fundamental to effective curriculum development. This paper argues that a rounded picture of students’ understandings is required to support such development. It is argued that one element of this picture may be provided through the use of the Structure of Observed Learning Outcomes (SOLO) taxonomy which provides a normative structure for the identification of variation in students’ understandings. The paper describes a process whereby the de-contextualised SOLO descriptors can be contextualised within a discipline, illustrating this through the analysis of two key concepts within introductory accounting. The substantive findings indicate that the majority of students did not meet with lecturer expectations, i.e. they did not engage with the abstract nature of accounting and the formal reasoning required to support explanations. Moreover students’ responses include a variety of “misconceptions” that appear to arise from everyday/intuitive understandings of accounting and rote usage or mimicry of accounting terms. The paper concludes with a discussion of the pedagogic implications of both the theoretical framework and substantive findings, and identifies areas for future research.

Appendices

Appendix 1 Cash/profit and depreciation exercises and instructions for both exercises

The students answered the question in their tutorial. Three tutorial groups completed the exercise—they were all taught by the same tutor. Students were not given any advance notification or time to study. It was presented as a surprise ‘revision question’ in class and they were given 5–10 minutes to complete it. There were no marks/grades attached to the exercise.

The cash/profit exercise

Students had just completed 2 weeks of cash flow statements (CFS) in lectures and were working on CFS in tutorials. 57 students completed the exercise.

Instructions given by the tutor to the students:

• I would like you to work on one short ‘revision’ question in class today which I will collect

• It should only take you 5–10 minutes to complete

• There will not be any marks allocated—it is for you to see how you are progressing (and for me to understand where this class needs my assistance)

• I will return your answers and a suggested solution in the tutorial next week

• Please put your name on it so I can return it to you next week

The task

Lesley is a sole trader retailing sports equipment. The business started up on 1st January 2003. Lesley has just received the accounts for the year ended 31st December 2003 and has asked ‘My cash has reduced by $25,000 but there is a profit of $15,000’. Can you explain why this might be?

Write out your explanation below… Explain it as clearly as you can, using simple language, examples, and in the context of the business and financial statements as a whole.

The depreciation exercise

Students had just completed their reading on fixed assets and depreciation which included working through examples and questions. 41 students completed the exercise.

The following instructions given by the tutor to the students:

• I would like you to work on one short ‘revision’ question in class today

• It should only take you 5–10 minutes to complete

• There will not be any marks allocated—it is for you to see how you are progressing (and for me to understand where this class you needs my assistance)

• The exercise was completed by providing the students with a suggested explanation, allowing them to compare their responses with that explanation. A class discussion of differences in responses then followed.

The task

How would you explain what deprecation is to a new business owner?

Write out your explanation below… Explain it as clearly as you can, using simple language, examples, and in the context of the business and financial statements as a whole.

Appendix 2 A comprehensive explanation for the relationship between cash and profit

Cash and profit—a basic issue or problem?

In the long run, if we assume that a business has a finite life, a profitable business will increase its supply of cash. However, in the meantime, a business requires interim reports on performance.

Ways of resolving/responding to this basic issue leads us to a consideration of fundamental principles…

Periodicity leads to recognition/realisation (accounting for revenue and expenses)

This means that a business has to prepare information for periodic reports (principle of periodicity). The arbitrary capture of performance data at a certain point in time, requires us to think about how we account for economic events that are still ‘in process’ e.g. a sale where the goods have been dispatched but where no cash has been received. This leads to the principles of recognition and realisation, i.e. we have to decide when to ‘account for’ an economic event. So accountants assume that revenue accrues when goods are dispatched rather than when cash is received. This leads to an obvious timing difference between the inclusion of revenue (leading to profit) and the resultant increase in cash.

Matching (examples include depreciation, provision for bad and doubtful debts, prepayments, accruals, stock) arises from timing differences

Once we have established what revenue should be accounted for within a period, the matching concept requires that costs are matched against the income that they help to generate. In some cases this results in the recognition of costs that have not been received/paid in the form of cash. Annual charges for depreciation and amortisation, for example, are set against profits, but these charges do not involve any movement in cash. Another example is a provision for bad and doubtful debts. In other cases, cash will be paid, but possibly in an earlier or later accounting period. For example, rent may have been paid in advance of the accounting period and comprise a prepayment in the preceding accounting period or electricity charges may have been accrued within one accounting period but the cash may be paid out in the following accounting period. Finally, goods may have been purchased in one accounting period but remain unsold at the end of the period. These will be represented by a stock balance, and will be converted (hopefully) into cash in the following accounting period.

A distinction between operating and non-operating (financing and investing) events

Cash can be depleted or increased by transactions (financing and investing) that do not affect the profit and loss account; for example:

• the purchase of fixed assets (investing)

• the introduction/withdrawal of proprietor’s capital (financing)

• the receipt of a loan (financing)

(If we take a limited company as an example here, then we would include payment of tax and dividends).

Relevance/practical implication: the importance of cash within ‘working capital’

Conceptually, there are clear linkages between certain assets and liabilities in a business. Cash, debtors/prepayments, stock and creditors/accruals are termed working capital because constant flux and change is in the nature of running a business, as cash is used to purchase goods, which become stock, which is converted into sales, which are converted into debtors which are converted into cash and so on…. However, within this, cash achieves its importance from being the currency of exchange which is ultimately required to keep this conversion process in operation. A failure of sufficient resources of cash to support this conversion process may lead to the collapse of the business, e.g. well known collapses of companies OneTel etc. Hence, the use of a cash flow statement to indicate how a business is performing, as well as the profit and loss account.

Appendix 3 A comprehensive explanation for depreciation

Depreciation—a basic issue or problem?

Some assets such as machinery, motor vehicles and buildings are held and used by a business for a period longer than a year. They are assumed to provide economic benefits to the business whilst they are held but is also recognised that they normally have a finite economic life. A business requires interim reports on performance and thus we have to consider how to “account” for the use of those assets whilst they are still in use.

Ways of resolving/responding to this basic issue leads us to a consideration of some fundamental principles

Periodicity leads to recognition/realisation (accounting for revenue and expenses)

A business has to prepare information for periodic reports (principle of periodicity). The arbitrary capture of performance data at a certain point in time requires us to think about how we account for economic events that are still ‘in process’, e.g. an asset is to be used over several accounting periods to generate revenues. This leads to the principles of recognition and realisation, i.e. we have to decide when to ‘account for’ an economic event. This involves a recognition of the decline in the economic life of an asset and of how much of the asset has been “consumed” during the period.

Prudence

Assessing the current and future economic value of an asset involves uncertainty. The principle of prudence states that caution should be exercised to ensure that we do not overstate income or assets or understate expenses or liabilities. This means that we tend to choose figures that err towards understatement, rather than overstatement, of income or assets. Thus, in accounting for the “consumption” of an asset in a period, we will err on the side of caution.

Historical cost and matching

This follows on from the prudence principle. Since assessing the current and future economic value of an asset involves uncertainty, we shall exercise caution. Thus we measure the “consumption” of an asset in a period by reference to its historical cost, a sum about which there is certainty. Following on from the realization principle, the matching concept requires that costs are matched against the revenue that they help to generate. Depreciation is calculated by allocating the net cost of the asset (cost less residual value) over the economic life of the asset. Thus depreciation is the allocation of cost rather than a process of valuation.

Reasonable approximation—the calculation of depreciation

There is no “correct” method of allocating cost to an accounting period. Any method involves estimates and judgments about the economic life of the asset and the likely residual value. A general principle followed is that the cost of an asset should be allocated as equitably as possible to the periods in which it is “consumed”. Several methods can be used to determine depreciation, e.g. straight-line (where economic benefits are assumed to be even over the asset’s life); reducing balance (where the asset provides the greatest economic benefits at the beginning of its life) and units of production method (where the depreciation expense is calculated based on the number of units produced or machine hours expended). None of these methods are perfect but they are accepted as providing reasonable approximations depending on the circumstances of the company.

Reporting the financial information (treatment in the financial statements)

The expense of depreciation is shown in the statement of financial performance. Within the balance sheet the fixed asset will be shown at net book value (cost less accumulated depreciation to date).

Relevance/practical implication: the value/role of this financial information

The calculation of depreciation provides an opportunity for an owner to consider capital expenditure policies: when do assets need to be replaced and how is this to be financed? Providing for depreciation ensures that the cost of using an asset is recognised in the statement of financial performance but it does not ensure that there will be cash available for the purchase of new items. Therefore an owner must take account of replacement policies when producing cash flow budgets.