Harvard Case - A Gaming App: Introduction to Accounting Framework, Concepts, and Issues
"A Gaming App: Introduction to Accounting Framework, Concepts, and Issues" Harvard business case study is written by Xu Li, Tsun-kan Wan. It deals with the challenges in the field of Accounting. The case study is 8 page(s) long and it was first published on : Sep 20, 2022
At Fern Fort University, we recommend a comprehensive approach to establishing a robust accounting framework for the new gaming app, 'The Quest.' This framework will address the unique challenges of the gaming industry, ensure financial transparency, and support informed decision-making for growth and profitability.
2. Background
This case study focuses on 'The Quest,' a new mobile gaming app developed by Fern Fort University students. The app is a role-playing game (RPG) with potential for significant user engagement and monetization through in-app purchases. The case highlights the challenges faced by the student team in establishing a sound accounting framework for their venture.
The main protagonists are the student team, responsible for developing and managing the app, and their advisor, Professor Smith, who provides guidance on accounting and financial management.
3. Analysis of the Case Study
The case study presents a number of key accounting issues that need to be addressed:
- Cost Accounting: The student team needs to develop a cost accounting system to track the development and operating costs of the app. This includes identifying and allocating direct and indirect costs, such as development personnel salaries, marketing expenses, and server maintenance.
- Revenue Recognition: The team must establish clear criteria for recognizing revenue from in-app purchases. This involves considering the timing of revenue recognition, the nature of the in-app purchases (e.g., virtual goods, subscriptions), and the potential for refunds or chargebacks.
- Financial Reporting: The team needs to prepare accurate and transparent financial statements, including a balance sheet, income statement, and cash flow statement. This will require adherence to relevant accounting standards (GAAP or IFRS) and the application of appropriate accounting principles.
- Financial Analysis: The team should conduct regular financial analysis to monitor the app's performance, identify trends, and make informed decisions regarding pricing, marketing, and future development. This includes using key financial ratios, variance analysis, and break-even analysis.
- Management Accounting: The team needs to implement management accounting tools and techniques to support decision-making. This includes budgeting, cost-volume-profit analysis, and activity-based costing.
4. Recommendations
To address these challenges, the following recommendations are proposed:
- Establish a Comprehensive Accounting Framework: The team should develop a comprehensive accounting framework that aligns with relevant accounting standards (GAAP or IFRS). This framework should include:
- Chart of Accounts: A detailed chart of accounts that categorizes all relevant financial transactions.
- Accounting Policies and Procedures: Clearly defined policies and procedures for recording, classifying, and summarizing financial transactions.
- Internal Controls: A system of internal controls to mitigate the risk of errors, fraud, and unauthorized transactions.
- Implement Activity-Based Costing (ABC): The team should adopt ABC to accurately allocate costs to specific activities related to the app's development, operation, and marketing. This will provide a more detailed understanding of the cost drivers and enable better decision-making regarding pricing, resource allocation, and profitability.
- Develop a Revenue Recognition Policy: The team should develop a clear and consistent policy for recognizing revenue from in-app purchases. This policy should consider the following:
- Timing of Revenue Recognition: Revenue should be recognized when the game is delivered and the customer has control over the in-app purchase.
- Nature of In-App Purchases: Different types of in-app purchases (e.g., virtual goods, subscriptions) may require different revenue recognition methods.
- Refund and Chargeback Policies: The team should establish clear policies for handling refunds and chargebacks, and accurately account for these transactions.
- Prepare Regular Financial Statements: The team should prepare regular financial statements, including a balance sheet, income statement, and cash flow statement. These statements should be prepared in accordance with relevant accounting standards and should be reviewed by an independent accountant or auditor.
- Conduct Financial Analysis: The team should conduct regular financial analysis to monitor the app's performance and make informed decisions. This analysis should include:
- Key Financial Ratios: Calculate and analyze key financial ratios, such as profitability ratios, liquidity ratios, and solvency ratios.
- Variance Analysis: Compare actual results with budgeted figures to identify variances and investigate the underlying causes.
- Break-Even Analysis: Determine the break-even point for the app to understand the minimum revenue required to cover costs.
- Implement Management Accounting Tools: The team should use management accounting tools to support decision-making, including:
- Budgeting: Develop a comprehensive budget for the app's development, operation, and marketing.
- Cost-Volume-Profit Analysis: Analyze the relationship between costs, volume, and profit to make informed decisions regarding pricing, production levels, and marketing strategies.
- Activity-Based Costing: Use ABC to allocate costs to specific activities related to the app, providing a more accurate understanding of cost drivers and profitability.
- Seek Professional Advice: The student team should seek professional advice from a qualified accountant or consultant to ensure that their accounting framework is robust, compliant with relevant regulations, and supports their strategic goals.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: The recommendations focus on developing a strong accounting framework that supports the student team's mission to create a successful gaming app.
- External Customers and Internal Clients: The recommendations address the needs of both external stakeholders (e.g., investors, lenders) and internal clients (e.g., the student team, Professor Smith).
- Competitors: The recommendations consider the competitive landscape of the gaming industry and the need for a robust accounting framework to support growth and profitability.
- Attractiveness ' Quantitative Measures: The recommendations include quantitative measures, such as break-even analysis and key financial ratios, to assess the app's financial performance and make informed decisions.
- Assumptions: The recommendations are based on the assumption that the student team is committed to developing a successful gaming app and is willing to invest the time and resources necessary to establish a sound accounting framework.
6. Conclusion
By implementing these recommendations, the student team can establish a robust accounting framework that will ensure financial transparency, support informed decision-making, and drive the success of 'The Quest' gaming app.
7. Discussion
Alternative approaches to accounting for the gaming app include:
- Simplified Accounting: The team could choose a simplified accounting system, which may be less complex and costly to implement but may not provide the same level of detail and insights.
- Outsourcing Accounting: The team could outsource their accounting functions to a professional accounting firm. This could save time and resources but may be more expensive.
The key risks associated with the recommendations include:
- Cost of Implementation: Implementing a comprehensive accounting framework may require significant upfront investment in time and resources.
- Complexity: The accounting framework may be complex to implement and maintain, especially for a student team with limited accounting experience.
- Compliance with Regulations: The team must ensure that their accounting practices comply with relevant regulations and standards.
8. Next Steps
The following steps should be taken to implement the recommendations:
- Develop a Detailed Implementation Plan: The team should develop a detailed implementation plan that outlines the specific tasks, timelines, and resources required.
- Train Team Members: The team should receive adequate training on the accounting framework, policies, and procedures.
- Seek Professional Guidance: The team should continue to seek professional guidance from a qualified accountant or consultant.
- Monitor and Evaluate Performance: The team should regularly monitor and evaluate the performance of the accounting framework and make adjustments as needed.
By taking these steps, the student team can ensure that their accounting framework is robust, efficient, and supports the long-term success of 'The Quest' gaming app.
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Case Description
This case is based on a hypothetical company that was newly established for a mobile gaming app. Before the company was incorporated, an experienced game developer and "creative strategist," Leon, and Lucas, a gaming influencer and streamer who was very popular in the Spanish-speaking world, had jointly created a game called sangre y acero®, meaning "Blood and Steel" in Spanish. Lucas's name on his streaming channel on Twitch and YouTube was Rey de Acero®, meaning "King of Steel" in Spanish. This game had passed most of the game-testing stages. A trademark had been obtained for the game's name and logo. A copyright was also obtained for the game's codes, art, music, scripts, and story and plot. These were the pre-incorporation events. Later, Leon and Lucas contributed their sangre y acero® trademark and this copyrighted game to the incorporation of the company. Their friends contributed funds. A new company, SYA Inc., was formed on 1 January 2022. On 1 July 2022, the app was fully launched. The purpose of the case is to have students prepare financial statements based on provided financial data, touching on a wide array of accounting concepts and common issues.
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