Case Analysis 10-3 Kansas City Zephyrs Baseball Club, Inc.
Why does net income not equal cash flows?
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 ...view middle of the document...
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;
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.
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...