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 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;
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,...