Case 10-3

Kansas City Zephyrs Baseball Club, Inc.

Prepared by

Quanyi Liu

For

Professor C.E. Reese

in partial fulfillment of the requirements for

ACC 770 Managerial Accounting

School of Business/ Graduate Studies

St. Thomas University

Miami Gardens, Fla.

Term A7/Fall, 2015

October 29, 2015

 Table of Contents

Issues…………………………………………………………………......……………

1Facts…………………………………………………………………......……………

Analysis …………………………………………………………………………….. 7

Conclusions …………………………………………………………………………14

References…………………………………………………………………………...16

Appendices…………………………………………………………………………. 17
 Issues

1. A. Why does net income not equal cash flows?

B. Why do we need accrual accounting?

C. Why don’t we fire all accountants and just publish summary bank statements.

2. A. Why do the differences between owners’, players’ GAAP and truth number

exist?

B. This is the “positive accounting” question. Can accounting numbers: be neutral

representations of what happened?

3. Of what importance are the periodic net income numbers if the clubs can always

be sold for huge profits?

4. A. How should bill Ahern resolve the accounting conflict between the owners and

players?

B. How much did the Kansas City Zephyrs Baseball Club earn in 1983 and

1984?

5. The case describes three areas in which the accounting is being disputed:

a) Player compensation

b) Roster depreciation.

c) Transfer pricing of related party operations (stadium costs).

Figure 1 Matrix Contrast Accounting Differences

Measurement Issues

Measurement Roster Player Stadium expense

Positions Depreciation Compensation

1. Owners’

Accounting
2. Players’

Accounting
3. GAAP

Accounting

Facts

This case about Owner-Player Committee (OPC) and the Professional Baseball

Players Association (PBPA) two parties dispute of financial statements. OPC is

composed by the owners of 26 major league baseball teams. PBPA is the players'

union.

U.S. Major League Baseball is large collection of the agreements and contracts

relationship, signing players per team operating independently and arranges stadium

and develops profitable projects. Major League Agreement (MLA) to be signed by all

the clubs. The owners according to the focus to elect a seven-year term as a

spokesperson baseball commissioner, he wants to implement the rules and resolve the

dispute between the clubs. The Commissioner primary management union central

fund, about half of the fund's income is approximately equal shares. Most of the

team's activities are limited in the big leagues. They have their own courts or minor

league teams. Most teams organizations as partners or privately held companies. For

most people the annual revenues were $ 200,000 and $300,000. Each team keep

active roster of 24 players, plus 16 options for minor league players. This total of 40

players services for each team.

 Major League Baseball is 26 teams are divided into two leagues respective

management. American League has 14 teams; the National League has 12 teams, one

of which is Kansas City Zephyrs Baseball Club. Each league has its own franchise.

Instead of granting franchises, as well as the league game development, contracting

judge schedule and perform other management tasks. In addition major league teams,

the United States about 150 minor league baseball team. Little League team have a

dual function: in their training field training major league players. Major league teams

agreed to pay affiliated minor league teams operating expenses and player salaries.

On April 17, 1985; Bill Ahern needs to solve this problem. On April 19, he must

make a decision. His decisions affect contract negotiations, and team players pension

funds and salaries. Two parties for their own benefit hold different views. The players

think the owners hiding profits does not reflect the economic reality in financial

statements. The owners think most teams are actually losing money. On April 9,

Ahern meet two parties’ representatives, and they were choosing the Kansas City

Zephyrs Baseball Club Inc and explained the financial. Because this company is

relatively clean and simple, it is a public company and no private financial data.

At first, Bill studied major league baseball history. Then he met with the owners'

representatives. A brief introduction to the Bill on behalf of the owners of their teams:

the company's current owners are mainly five shareholders, in the November 1, 1982

to buy the team for $ 24 million. And Kansas City Zephyrs Baseball Club does not

have own stadium and the minor league team, but the Kansas City Zephyrs Baseball

Club owners of the two shareholders’ private company has their own baseball field.
Afterwards, the owner offer Bill two tables are income statement and balance sheet of

year 1983 and 1984, including the two-year operating income and operating expenses

of the detail, and assets and liabilities.

Bill study financial statements for a short time, so he met with the owners of

lawyer Keith • Strong and talk about this several controversial elements.

1. Player's salary expenditure items：Keith gave him a table of year 1984

player salary details, the table shows our total expenses in 1984 amount is $

10,097,000, which represents cash outflows. The only exception is the last

column in the table; we put off payment of a portion of their 10-year wage

for our paid player in their consent. This helps to save their taxes, and

provide to them some income after retirement.

2. The cost of nonroster guaranteed contract: Keith said this is the players'

salaries expense, but we changed the active players on the roster are not

paid salaries. We have released a long-term guarantee contracts totaling

$ 750,000, we also owe two players to 1984. End of last year, we signed a

four-year guaranteed contract with one of the veteran pitcher Joe

Portocararo, but he suffered a serious injury before the season, we jointly

decided to let him retire. We are also owed to contract players partial

amount. But we decided to use the full amount of costs in 1984, which they

are not active players and do not bring us current income. Keith said the

team purchase price of 50% (about 1.2 billion U.S. dollars) in 1982. It is

specified as the value of the player roster, this amount amortized over six
 years. The Internal Revenue Code allows a maximum percentage of buy a

sports team.

3. Keith thinks their statements are very simple, there are a direct result of the

financial statements of income and expenses from cash inflows or outflows,

and he does not think there is controversy. People seem to think we have a

huge profit, because we are the relative monopoly. But the club's rules and

regulations alliances are created as a single entity, and with various clubs

have pricing policies. Cooperation Agreement is not intended to constraint

the economic competition between them, instead to create the league as a

joint venture. Without such rules of conduct, the league would not exist.

After meet owners, Bill already knows the owners accounting method, and then he

met again on behalf of the players and theirs lawyer Paul • Hanrahan. They gave Bill

different income statements in 1983 and 1984. Bill study their financial statements

that found for year 1983 pre-tax profit of $ 2,900,000 and $ 3,000,000 compared to $

2,400,000 and the owners $ 2.6 million in year 1984 be different. Bill and Paul on

three different issues were discussed.

1. Roster depreciation：Paul said we feel it gives the roster depreciation figures

are meaningless. When a team depreciation charges arising on disposal. Because most

of the players are in improving their skills and experience, there should be an increase

in the value of the register over time, rather than less depreciation.

2. Overstated player salary expense：Paul thinks the owner has overestimated the

cost of the players in several ways. One of this year’s signing bonus. Bonuses should
be distributed in the player's contract deadline. He also provided the last four bonuses

fact sheet to Bill. They adjusted the income statement from the owner's expense to

remove the current salary bonuses, increases an "amortization of bonus." For

example, the 1984 adjusted revenue of $ 373,000. Some players were injured, unable

to compete effectively. But the players do not complete the contract situation is very

small. The second adjustment the player's salary deferred portion of the total

compensation. The higher incomes players only have 80% of their wages, and the rest

to be received in 10 years. This adjustment increased the income of Kansas City

Zephyrs Baseball Club in 1984 of $ 1,521,000. The third adjustment is the players’

wages. We think we should recognize the salaries of the players not on the roster.

3. Related-party transactions：Owners have their own stadium, which the owners

do not need to receive 80% of operating costs. It can be seen through contract the five

shareholders to earn team's stadium costs. Owners are also no reports of local

broadcast revenues. Their personal loss incorporated into the whole big leagues, so

the overall loss has been exaggerated. We've got Kansas City Zephyrs Baseball Club

of the income statement adjustments, change in 1984 from $ 1.7 million to $ 1.4

million for loss of profits. They are just using accounting methods to hide their

profits.

On April 17, Bill made a table to clarify areas of disagreement, but still without

result. Because this case it involves the accounting unit, depreciation, amortization of

intangible assets, as well as related party transactions. On April 19 is the final

deadline; how Bill would decide Kansas City Zephyrs Baseball Club’s financial is a
mystery.

Analysis

1. A. Net income is total income minus operating costs, depreciation, interest, taxes

and other expenses remaining the balance of the proceeds or income. It is the

company's total earnings. The cash flow is an enterprise in a certain accounting period

in accordance with the cash basis, through a certain economic activities include

operating activities, investing activities, financing activities and non-recurring items

generated cash inflows, cash outflows and the total amount in general, which is the

enterprise in a certain period of cash and cash equivalents amount of inflows and

outflows. It can be seen, net income is profitable results, and cash flow is the cash

flow of the process.

Net income excluding the operational costs, depreciation, interest, taxes and other

expenses, but cash flows of these items is included. It also means that the cash flows

have a wider range and include net income. Net income plus non-cash expenses such

as depreciation of fixed assets minus non-cash income such as bank deposits is equal

to the cash flow. Therefore, net income is different with cash flows and they are not

equal.

B. Accrual accounting is an enterprise should be in accordance obtains the rights

of income and responsibilities to bear the costs to recognized vesting period of the

revenues and expenses. In simple terms: in the current period have achieved revenue

and the costs of occurred or burden to be shouldered, regardless of whether the

amounts payment, should be treat as current income and expenses. Do not belong to
the current income and expenses, even if the amount has been payment in the current,

nor should be treated as the current income and expenses.

Accrual account can accurately reflect the each accounting period to achieve

revenue and expense should bear, thereby all of the income and related expenses, the

cost to match each period is determined by comparing the proceeds. Accounting work

for each business is recorded on an accrual account, in accordance with the books and

records adjustments accounts for in the period end. Accrual account can able to

properly reflect a specific accounting period operating results. In accrual account, the

profit is the main stage performance indicators. In accounting profits, the result of

economic transactions as expected rather than actual cash receipts and payments for

recording. Providing products or services expected cash receipts are recorded as

income, income-related cash expenditures expected to be recorded as expenses. Thus,

most of the enterprises are based on this to accounting.

C. Accountant engaged in the role of the accounting profession is accounting and

accounting supervision. If the company fire all accountant, just publish summary bank

statement is not feasible. No one management books will lead to financial system will

be particularly confusing, costs and expenses will be mess without someone keeping

records and bills, assets can not be identified and the business is difficult to going on,

does not take long the company have to close down. Similarly, not all accounts will

be reflected in the bank statement, such as depreciation of fixed assets and accounts

payable. These will need to be calculated by accountant. The various tables of

accounting, such as balance sheets, income statements, etc. are needed strict
calculation and review. It is not a bank statement will be able to reflect all of the

accounting issues. Accounting events is a wide range, bank statements only the basis

of a certificate for accounting.

Accountant help provide decision-useful information to improve corporate

transparency and standardize enterprise behavior. Accountant help enterprises to

strengthen management improve economic efficiency and promote sustainable

development. Accountant help assess the economic responsibility of corporate

management fulfillment. Therefore, the company must have accountant that is a

quality safeguards.

2. A. Owners’ and players’ are dispute for profit distribution. Owners’ think their

company in year 1983 and 1984 are loss, but the players’’ disagree with them.

Players’ list income statements are profitable; they think that the owners hide profits

in three aspects are player compensation, roster depreciation and transfer pricing of

related party operations (stadium costs). In players’ opinion, the owners’ is profitable

and prize money should give them. However, the owners’ offer different income

statements, and they think the team purchase price of 50% (about 1.2 billion U.S.

dollars) in 1982; this amount amortized over six years. So they think the company

loss and prize money should give them. Through analysis, actually they are using a

different accounting methods and principles.

GAAP is the abbreviation for generally accepted accounting principles. Generally

accepted accounting principles are applicable to all enterprises of different industries,

ranging from the basic concepts of accounting, basic assumptions and other basic
principles to specific accounting measurement and preparation of financial statements

in procedures and methods requirements (Campbell, 2012). A country's accounting

system usually refers to general-purpose accounting. Believe that the two parties are

following GAAP to do the income statements, but according to the actual situation

that makes the income statement in different ways. This is the reason why the two

sides quarrel.

B. Objective reflects the economic reality of the basic principles of accounting,

referring to the corporate accounting records and financial statements must be truthful

and objectively reflect the economic activities of enterprises. Accounting of corporate

to be based on actual economic activities as the basis, truthfully reflect the financial

condition and operating results. However, authenticity is not equal accuracy,

accounting is impossible to provide accurate information, because there are many

uncertain factors of economic activity. This determines the accounting process can not

be completely affect accounting officer's subjective judgment. To achieve the

objectivity of accounting requires accountant making estimates need to obtain realistic

and objective data. So that financial statements are also accurate.

This would see that accounting calculated by the premise of accurate data, which

ensures data objective reflect the facts. The accounting numbers will be neutral

representations.

3. Net income is the company's total earnings by total income minus operating costs,

depreciation, interest, taxes and other charges. From the definition can see net income

reflect the company‘s profitability. At the same, through the net income statements
can watch the company which projects make profitable. If a business is always

thought to be sold a better price, the buyers will check the company's net income

statements in the first. The net income is higher that description favorable economic

conditions of the company with development prospects, so more and more people

want to buy and making the industry in demand increasingly, net income increased

gradually form a loop. Therefore, the periodic net income numbers for the club can

always be sold to make huge profits are very important.

4. A. In the case of Kansas City Zephyrs Baseball Club, Bill Ahern as an arbitrator to

make decide between about OPC (owners) and PBPA (players) dispute of profit

distribution. The two parties dispute mainly around three aspects: 1) player

compensation, exaggerated the player's salary expenses that mainly signing bonus,

roster salary, amortization and nonroster guaranteed contract expenses 2) roster

depreciation, 3) transfer pricing of related party operations (stadium costs). In order to

make a decision as soon as possible, Bill not only specifically studied accounting-

related knowledge, but also to meet with representatives of both parties and lawyers

on their income statements are discussed. Ending the meeting, he is collation a table

on profit difference of both sides. Here is the description of his decision.

1). Player compensation

Player compensation refer exaggerated the player's salary expenses that mainly

signing bonus, roster salary, amortization and non-roster guaranteed contract

expenses. About singing bonus, the owners paid to players each year, which has a lot

of uncertainty. Because the players do not know time of owners paid the bonuses and
they can get bonus how many. If the owner is a loss in revenue this year, they will not

be rewarded. Owners think they are losses in year 1983 and 1984 that on the abolition

of the players bonus. At the same time, the owners make the bonus credited to current

expenses. This is unfair to the players. The contract did not require owners to cancel

the bonus. Players within the period of the contract that the owners have to pay

bonuses for them, and then only after payment of bonuses as incurred.

Another problem is the wage paid for the players only get 80% of their annual

salary, the rest of the salary will be paid within ten years. Owners thought this is to

save taxes for players, and the players still have salary guarantee after retirement.

Players also agreed to sign a contract. It is misleading in fact. Owners have deferred

payment of player salaries seemingly unchanged, but current expenses reducing.

Because the other 20% is not included in the current costs, while the owners were

included entire cost of wages in the current expenses to increase expenditure. The

result is profitability reducing. However, the players are still services for the owners

within the period of the contract and their value is increasing year by year, but wages

do not match. It is obvious that the owners still profitable.

The owner did not pay the nonroster players current salaries. Instead be paid

when they leave. Doing benefits to owners is that they can unlimited use nonroster

players in the contract, these players equivalent free of charge in effect for the owner.

However, nonroster player is potential revenue that they should be paid. In summary,

the owners really exaggerate the players' wages and hidden profits.

2). Roster depreciation

 In 1982, the owners’ purchase the team price of 50% (about 1.2 billion U.S.

dollars); this amount amortized over six years. Because the Internal Revenue Code

allows a maximum percentage of buy a sports team. The situation players also know

that. This means in year 1983 to 1984 this part of the expense is still amortization.

Many times players because of injury or retire not to continue the contract. The

owners think this part of the amortization expense is make profits loss. But players

disagree with the opinion that when the team was sold the depreciation charge has

generated. In addition, as time goes, the athlete is constantly training and competition

that increasing their experience and value. But can not participate in the competition

due to injury is still a minority and most of the players are not depreciated. Therefore,

this part of the expense is on the increase.

Through the meeting of both sides and together with Bill learning accounting in

this time, he thought the players’ reasons are more abundant. Indeed, when a team was

bought arising subsequently depreciation, and with the increase of the year the

players’ value of the team tends to increase benefit, thereby the income of the owner

increasing. Wherefore, Bill agreed to the player's point of view.

3). Transfer pricing of related party operations (stadium costs)

Kansas City Zephyrs Baseball Club there are five shareholders of two have their

own private stadium, this means that Kansas City Zephyrs Baseball Club rent the

stadium for training is not spend too much. However, the rent stadium cost in the

income statements provided by the owner is not reduced. Players agree that the

owners increased rental costs lead to loss of profitable and two shareholders through
stadium pricing agreements to earn a good income. The most important point is that

the owners are not too many investments in the stadium, which can be seen the

owners really exaggerated the stadium rental fee thus reducing profits.

B. As can be seen by Table 1, Kansas City Zephyrs Baseball club in year 1983 and

1984 earn $1,335.400 and in $1365.800.

5. Table 2

Conclusions

1. A. Net income plus non-cash expenses minus non-cash income are equal to the

cash flow. Therefore, the net income is different with cash flows and they are not equal.

B. Accrual account can accurately reflect the each accounting period to achieve

revenue and expense should bear, thereby all of the income and related expenses, the

cost to match each period is determined by comparing the proceeds. Accrual account

can able to properly reflect a specific accounting period operating results

C. Accountant help enterprises to strengthen management improve economic

efficiency and promote sustainable development. Accountant help assess the

economic responsibility of corporate management fulfillment. Therefore, the

company must have accountant that is a quality safeguards.

2. A. Owners’ and players’ are dispute for profit distribution. Owners’ think their

company in year 1983 and 1984 are loss, but the players’’ disagree with them.

Actually they are using a different accounting methods and principles. GAAP is the

abbreviation for generally accepted accounting principles

B. Accounting of corporate to be based on actual economic activities as the basis,

truthfully reflect the financial condition and operating results. Accounting calculated
by the premise of accurate data, which ensures data objective reflect the facts. The

accounting numbers will be neutral representations.

3. If a business is always thought to be sold a better price, the buyers will check the

company's net income statements in the first. The net income is higher that description

favorable economic conditions of the company with development prospects, so more

and more people want to buy and making the industry in demand increasingly, net

income increased gradually form a loop.

4. A. The two parties dispute mainly around three aspects: 1) Player compensation.

That included exaggerated the player's salary expenses that mainly signing bonus,

roster salary, amortization and non-roster guaranteed contract expenses. In fact, the

owners really exaggerate the players' wages and hidden profits.2) Roster depreciation,

when a team was bought arising subsequently depreciation, and with the increase of

the year the players’ value of the team tends to increase benefit, thereby the income of

the owner increasing. 3) Transfer pricing of related party operations (stadium costs).

The most important point is that the owners are not too many investments in the

stadium, which can be seen the owners really exaggerated the stadium rental fee thus

reducing profits.

B. As can be seen by Table 1, Kansas City Zephyrs Baseball club in year 1983 and

1984 earn $1,335.400 and in $1365.800.

References

Campbell, R. H. (2012). GAAP. Retrieved from http://financial-

dictionary.thefreedictionary.com/GAAP
 Appendices

Table 1

Income Statement Revised Figures(000s omitted)

Year Ending October 31

1983 1984
Operating Revenues
Game Receipts 16,526.0 18,620.0
National Television 2,360.8 2,830.8
Local Broadcasting 3,147.9 3,475.1
Concessions 2,886.3 3,294.3
Parking 525.1 562.0
Other 786.9 843.9
Total Revenues $26,233.0 $29,626.1
Operating Expenses:
Spring Training 545.0 594.0
Team Operating Expenses:
Players’ Salaries:
Current Roster 5,897.4 7,256.5
Nonroster Guaranteed Contract

Expense 0.0 500.0

Amortization of Bonuses 716.0 947.0
Coaches’ Salaries 756.9 825.7
Other Salaries 239.0 260.8
Miscellaneous 2,655.9 2,897.3
Player Development 2,996.0 3,269.0
Team Replacement
Scouting 627.8 734.0
Stadium Operations 3,300.0 3,500.0
Ticketing and Marketing 1,907.0 2,080.0
General and Administrative 3,541.0 3,663.0
Total Operating Expenses $23,227.0 $26,527.3
Income from Operation 3,006.0 3,098.8
Other Income (Expense) (96.0) (101.0)
Income before Taxes 2,910.0 2,997.8
Provision for Federal Income Taxes 1,338.6 1,379.0
City and State Taxes 236.0 253.0
Net Income $1,335.4 $1,365.8
 Table 2

Figure 1 Matrix Contrast Accounting Differences

Measurement Issues

Measurement Roster Player Compensation Stadium expense

Positions Depreciation
1. Owners’ Reflected in the Signing bonus paid in Normal rental number

Accounting income once by cash. Income in income statements.

statements. statements have total of

all the players’ salary in

one year. Owners do not

amortize for bonuses.

The nonroster have

guaranteed contract with

owners. Although they

do not need too much

training, but there are

still many spend. The

nonroster guaranteed

contract expense is large.

2. Players’ Does not reflect Signing bonus actually By discount rental

Accounting in the income the owners only paid number in income

statements. player 80% salary. They statements.

 exaggerated the number.

So players increased

amortization of bonuses

in income statements.

The nonroster was only

in fulfilling the contract

to pay salary. So the

nonroster guaranteed

contract expense is small.

3. GAAP Reflected in the Signing bonus in the Look at the situation,

Accounting income income statements for in this case need to do

statements. actual situation. the market research to

Amortization of bonuses calculate the

is unnecessary. The proportion of normal

nonroster guaranteed rent prices.

contract expense in the

income statements for

actual situation.