Why do we need accrual accounting? (Why do not we fire all accountants and just publish summary bank statements) Why do the differences between owners’, players’, GAAP and truth number exist? (Can accounting numbers be neutral representations of what happened? What happens if a retired non-roster player (e. g.
Joe Portocararo) returns to the active roster while continuing to earn the same money promised him in his guaranteed contract?Of what importance are the periodic net income numbers if the clubs can always be sold for huge profits? How should Bill Ahern resolve the accounting conflict between the owners and players? How much did the Kansas City Zephyrs Baseball Club earn in 1983 and 1984? Facts This case shows that how different accounting methods can lead a company to different positions. That is what Bill Ahern was selected on April 9 to focus on reviewing the finances of the Kansas City Zephyrs Baseball Club, Inc. which was bought on November 1, 1982 by five shareholders for $24 million, because both the representatives of the owner of the 26 major league baseball teams and the professional players association agreed that Kansas City Zephyrs Baseball Club’s operations were representative, and the baseball club entity was not owned by another corporation, and it did not own the stadium where they play. So Bill Ahern was reviewing their finances on April 17, 1985.
He had to make a difficult judgement in next two days. He spent Tuesday reviewing the history of major league baseball and the relationship between the various entities.On following day, Wednesday, he met with the twi Zephyrs owners’ representatives, and On the following Monday, Bill Ahern met with the representatives from Professional Baseball Players Association and their lawyer. The problem that was needed to be resolved was weather the major baseball league was profitable or not.
The players thought that they should share the teams’ profit. Because there was a rumor about the owners were hiding profits with some accounting tricks. The burden was heavy on Ahern’s shoulders because his decision would effect the ongoing contracts and negotiations.Major league is consisted of 26 baseball teams.
Most of the teams’ annual revenue were between $20 million and $30 million. According to their meeting, these points had been made; Player compensation Roster depreciation Transfer pricing of related operation (stadium costs) One fact that some part of players’ compensation is not paid immediately in cash. For the highest-paid players, the team agreed to defer their salaries for 10 years. Therefore, it helped them to save taxes and income.
Some part of players’ compensation came in signing bonuses to be expensed as incurred.The other issue was that the retired players. They were not on the current roster however they were being paid according to the contract. Owners decided to expense the whole amount in 1984 because they were not active players and not serving to bring in their current revenues.
Additionally, because of the tax rules, 50% of the purchased price, which is $12 million, was designed as the value of the player roster then. This value was capitalized and depreciated over six years. Besides all these, the stadium rents were set to understate the profits of the club and to move some profits to the stadium corporation.The rest of their accounting is very straightforward.
Most of their revenues and expenses resulted from a cash inflow o outflow. Analyzes 1. Why does net income not equal cash flows? Cash flow measures cash in and cash out, while net income includes several non-cash variables. It is why they do not equal to each other because there are expenses like depreciation and amortization that are not cash expenses.
Moreover, once they pay the players’ salary, these expenses were on the previous month’s income statement, and the cash flow would not be affected.So, it is obvious that two of them will not be equal. a. Why do we need accrual accounting? (Why do not we fire all accountants and just publish summary bank statements) Accountants help to ensure that firms are run efficiently, public records kept accurately, and taxes paid properly and on time by the rules of Generally Accepted Accounting Principles (GAAP).
We need accountants because they are trained to handle tough financial situations. They know what investments are wise, what we can afford, and how we can increase our wealth.Why do the differences between owners’, players’, GAAP and truth number exist? (Can accounting numbers be neutral representations of what happened? ) The differences between the owners, players, exist because they are both calculate the in various ways at a time under the rules by GAAP. The owner’s financials are also accounted because it is a corporation as well.
Depreciation, amortization of players might be an issue if the players are in the non-roster list or call off injury. However, whatever ever happens, has to be followed the GAAP rules.What happens if a retired non-roster player (e. g.
Joe Portocararo) returns to the active roster while continuing to earn the same money promised him in his guaranteed contract? In total they owed $1,050. 0 to Joe Portocararo by the end of 1986. However, they already expensed the whole amount to Joe. If he gets back to the team, there will be no longer need to owe money to Joe, and paying another pitcher at the same time.
Of what importance are the periodic net income numbers if the clubs can always be sold for huge profits? Knowing the periodic net income of a company is quite important.Because the net income is used to determine how the net income was earned and what a company’s truth is. It is important because it will show how profitable a company is over extended periods of time, and how well its business is growing each year. If the club is always making a good profits then the profitability of that club will increase.
How should Bill Ahern resolve the accounting conflict between the owners and players? To answer this question, we need to understand the relationship among the owner’s position, players’ position, the economic truth, and the generally accepted accounting principles(GAAP).The team owners established most of the regulations that governed the industry. They were attached the Major League Rules. These rules decided what the clubs agreed on, including the rules for signing, trading, and dealing with players.
Owners are required to elect a commissioner who is a spokesperson for the industry, resolved disputes, and enforced the rules. The other role of the club is to keep track of the financial statements, players’ salary, and bonuses, and to make the right decisions for the sake of the club, and transfer pricing of related operation such as stadium costs.Players’ position is clear here. They play their sports and get paid.
Player compensations had been deferred for 10 years. It caused some problems when the issue came to the retired players. Since they were not in the active roster, the club still kept paying them. Players thought that the owners made some accounting ticks and hid the profits.
Because what the players believe was to share the profits. Even though they signed bonuses, players felt that it was a part of the compensation package, and that for accounting purposes.However, the players got paid bonuses in cash, and there were no guarantee that they would complete their contracts. Some players got hurt because of inability to complete their contracts.
The economic truth for the player rosters is to appreciate and depreciate over time, that are good trades, and coaching increase the roster value. Conversely, injuries and retirements decrease it. The roaster should have not be depreciated. It is known that the GAAP The common set of accounting principles, standards and methods that companies use to compile their financial statements.
GAAP cover; revenue recognition, balance sheet item classification and outstanding share measurements. Companies are expected to follow GAAP rules when reporting their financial data by financial statements. According to all these information, Bill Ahern should resolve the case by setting up a reserve which is equal to the expected loss from non-roster guaranteed contract expense. The deferred compensations are to be expensed when earned.
Besides salaries, bonuses need to be capitalized and amortized over the lives of the contracts since the players are expected to provide benefits over the lives of their contracts. . How much did the Kansas City Zephyrs Baseball Club earn in 1983 and 1984? As Ahern studied the financial statements, he found that the profit as of 1983 is $2. 9 million before tax, and as of 1984 is $3.
0 million before tax, compare to the losses of $2,373. 6 million as of 1983 and $2,602. 7 million as of 1984. Conclusion and/or Recommendations As it is said before, this case is about how different kinds of accounting methods under certain rules such as GAAP, can result differently.
Bill Ahern was elected to resolve the problem and came up with the conclusion of Exhibit 6. It indicates the differences between Owners’ and Player financial statements. Players accused the owners of hiding the profits and not paying them what they deserve. However, all the accounting records are made according to the GAAP, those accusations was not true.
One of their problem was deferring the players’ salaries after 10 years. However once they faced with the fact that the non-roster players needed to be paid, they decided to make all the owed payments as a whole.I guess, that was not a good method to pay players, they should have consider non-roster-to-be players. If a player returns to team under the same contract, then that player would be an assets for them, so it is an advantage at some point.
However, if the owners would like to raise the player’s salary, then all these financial statements has to be revised. The stadium is another issue for them. Because they do not own it. They should be the owner of the stadium, not to pay rent every month.
I believe owning the stadium will cost less if we make all the calculations.