AN EXCEL APPLICATION USING MSN MONEYCENTRAL INVESTOR STOCK QUOTES BRINGS ACCOUNTING TO LIFE

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1 AN EXCEL APPLICATION USING MSN MONEYCENTRAL INVESTOR STOCK QUOTES BRINGS ACCOUNTING TO LIFE Laurence R. Paquette, School of Business, Francis Marion University, Florence, SC 29501, (843) , ABSTRACT Most of us are aware of the wealth of tools available within Excel as well as the fact that it is the software package most widely used by accountants. This spreadsheet application demonstrates the ability of this package to query and import financial information from an external database. It also reinforces the importance of adequate records and documentation, as well as the tax consequences of investing decisions. INTRODUCTION Today professional investors, financial planners, as well as individual investors actively use their computers as part of the investment decision making process as well as tracking the performance of ones investment holdings. The goal of this paper is to describe a particularly useful application of Excel. This application evolved from a requirement in my Financial Accounting course that students work on a project that involves assessing the financial health of a company of interest to them. The objective of the project is twofold. The first is to have them use the tools that they were exposed to in their software application course and secondly to have them work with financial information found on the web that hopefully will bring life to the accounting material being discussed in class. As part of this project, I require them to look at a number of financial sites such as Hoovers, Mergent Online, Forbes, company annual report, and the firms 10K found at the SEC site. Recently I began to have them also use MSN MoneyCentral Investor Stock Quotes. I required them to download information from that site for their company as well as for peer companies (similar SIC codes etc.) The approach for retrieving information from this site is quite different from the others in that information is retrieved from this external database while operating within the Excel environment. Once I became aware of how easy it was to tap into market information for stocks from within Excel I decided to develop the following portfolio valuation application. OVERVIEW OF THE APPLICATION This application will involve developing a workbook called Portfolio. The workbook will consist of three sheets titled PortfolioInventory, MSNMoneyQuotes, and PortfolioValue. The primary purpose of the sheet titled PortfolioInventory is to document the investment holdings within the portfolio. This record keeping process is absolutely essential as one develops a portfolio in order to track the performance of the holdings as well as to provide needed information when a holding is sold. A hypothetical portfolio is shown in Figure 1. You will note that this portfolio is limited to investments in common stock. One could also include mutual funds, real estate, and bonds in the portfolio as well. In addition to the type, ticker symbol, and description of each investment the worksheet contains the number of shares purchased, the cost per share, trading fees, and the dates the investments were made ( the purchase date will be needed for tax purposes as will be seen later).

2 Figure 1 PortfolioInventory Worksheet The information found in columns G and H will serve as the source for columns D and H found in the PortfolioValue worksheet (Figure 3). These columns will be needed to establish the cost basis of the investment as well as to determine if the gain is a short or long term gain. The sheet titled MSNMoneyQuotes shown in Figure 2 contains information that is accessed from an external database. The purpose of this sheet is to provide the user with a current share price for each stock holding. Please note that even though the data will be accessed directly from within Excel you must be online in order to retrieve the information successfully. The descriptive information in rows 3 and 4 of the sheet shown in Figure 2 is entered by the user. The date and time stamp in cell A4 is provided by the function =NOW(). This will associate a date and time for the information one is about to retrieve. Figure2 MSNMoneyQuotes Woksheet The rest of the information shown in the worksheet is obtained by using the Data pull down menu in Excel. Select Import External Data and then choose Import Data. Next choose MSN Money Central Investor stock Quotes and indicate that you would like the data to appear in cell A9 in the existing worksheet. One is then prompted for parameter values and the ticker symbols HD, LOW, GE, IBM, MSFT, and CVS are entered and accounting and financial information for the specified companies will appear as shown in Figure 2. In addition to the information shown above 52 week highs and lows, market capitalization, EPS, P/E ratio, and number of shares

3 outstanding are included for each company. Note that there are also hyperlinks for charting and news for each company in columns B and C. The prices shown in column D titled Last will be the source for column E found in the PortfolioValue worksheet (Figure 3). The sheet titled PortfolioValue shown in Figure 3 values the portfolio and establishes gains or losses that have occurred in our hypothetical portfolio. It should be pointed out that these gains or losses are unrealized. A separate workbook can be used to track holdings that have been sold and the associated realized gains and losses. Figure 3 PortfolioValue Worksheet The market value for each holding is simply the product of column C and column E, and the gain or loss is simply the result of subtracting column D from column F. IT S A TAXING DECISION If one is going to invest, whether it is in stocks, mutual funds, real estate or other investment vehicles it is essential that one has a basic understanding of capital gains. The tax rate associated with a capital gain or loss depends on ones income from other sources, how long the asset is held, and what type of asset it is. In our case here the type of asset is limited to common stock. You may have noticed that figure 3 included columns titled days held and a categorization of long or short. The number of days a stock has been held is calculated by subtracting the purchase date for each stock from the date time stamp that appears in cell B2. This date stamp, like before, is provided by the =NOW function and not only provides valuable documentation but is also used for the days held calculation. The column titled DaysHeld is important in that if a capital gain is categorized as long term it is eligible for favorable tax treatment. A gain or loss is categorized as long term if it is held for longer than one year. The categorization in the last column of the worksheet is determined using an IF statement and comparing the number of days held to 365. Short term gains are taxed at an individuals ordinary income rate, which ranges from 10% to 35%. Contrary to popular opinion, not all long term rates are taxed at 15%. For investment securities the long term rate can be 0%

4 and 5% for individuals in the 10% and 15% federal income tax brackets. For individuals in the 25% federal income tax bracket or higher capital gains are taxed at 15%. So the distinction of a gain being categorized as long term can have an enormous impact on the amount of tax the individual is liable for. There are a host of considerations when one is deciding to sell a stock but clearly, one should consider what the tax liability is based on the long/short distinction. An approach to single out which purchases qualify for the favorable treatment extended to long term gains is to use the auto filter command found in the Data drop down menu in Excel. Use of this feature results in each column heading having a drop down arrow. Using the pull down arrow in column J and selecting the criteria Long results in a list that filters out all gains/losses categorized as Short as seen in Figure 4. Figure 4 Long Term Gains/Losses STILL ANOTHER CONSIDERATION- CHOICE OF A COST BASIS Another key to a smart sale is understanding the cost basis or price paid for a stock purchase. This is simply column D in Figure 4. Figure 4 discloses that there are two holdings of CVS that qualify as a long term gain. There is also one holding that is categorized as a short term gain. Just as there are various ways to cost merchandise inventory in accounting systems there are similar costing systems used in determining the cost basis of shares of stock that are sold. Clearly if one was in the 25% tax bracket it would be to their advantage to sell those shares that could be characterized as long term gains. However, if one does not specify prior to the sale which shares are to be sold, the first-in first-out (FIFO) method is required by the IRS to be used to account for which shares are sold. For example, if 100 shares of CVS stock are sold without specification, then it is assumed that the shares purchased on 11/1/2003 are those sold. As you can see there is a larger gain associated with these shares than those purchased at the later date 1/3/2005 and consequently a greater tax liability. This is not surprising in that many stocks appreciate over time and the use of the FIFO method leads to paying more taxes sooner. There is an alternative approach to determine the cost basis of the shares being sold and that method is referred to as the specific identification method. The IRS allows one to select or identify the shares that are being sold. To comply with the tax laws one must identify the shares being sold either by the purchase date or cost basis before the sale. It would reduce the tax liability if one specified that the shares of CVS being sold are those purchased on 1/3/2005. If the investment holdings include mutual funds there is still a third alternative for determining the cost basis using a method referred to as the average cost method for calculating the taxable profit or loss when selling a portion of ones holdings. Most individuals use this method in part because it

5 is the simplest method when selling mutual fund shares, however this method is not necessarily optimal for reducing ones tax burden. CONCLUSION It is always a challenge to motivate the students in an introductory accounting course and I am always looking for a way to personalize the material and at the same time provide them with skills that they can readily see an immediate application for. Hopefully this application serves to demonstrate that concepts such as unrealized gains, cost-basis methods used in accounting, and tax consequences of decisions are not topics limited to students majoring in accounting. Another objective of this application is to reinforce and extend those skills learned in the software applications course and apply them in an accounting context.