How you report revenues on the income statement makes a big difference to how profitable a company
Project 2
Income Statements
SUPPLEMENTAL CASE:
WHEN THE INCOME STATEMENT DECEIVES
How you report revenues on the income
statement makes a big difference to how profitable a company looks. The problem
is that stockholders are often fooled into investing in a firm that is not
nearly as profitable as they think. A good example is that of Thousand Trails
of Seattle. It sold campground memberships for owners of recreation vehicles.
It used the usual expensive promotions to get potential buyers to come to the campgrounds.
Once a potential customer was at the site, there was much pressure to buy now,
and the campgrounds were quite attractive. Once a customer got home and
reconsidered the investment, though, some backed out of the commitment, and
that is where Thousand Trails got into difficulty.The company recorded the full
price of a membership (about $7,500) as revenue, even though members paid only
40 percent down on average. Marketing expenses were running higher than
payments, so more cash flowed out than flowed in. To get cash, Thousand Trails
sold its receivables.
In one year, Thousand Trails used $52
million more cash than it produced, a definite cash flow problem. Nevertheless,
it reported record earnings of $19.1 million, and the stock price went up to over
$29.
Two years later, the stock had fallen to
less than $5, reflecting a 90 percent drop in earnings reported (from 19
million dollars to less than 2 million dollars). What happened was that a lot
of campground members dropped out before paying in full. So Thousand Trails had
to write off $11 million in paper revenues. Marketing expenses were two times
greater than down payments. Debt reached a horrendous 244 percent of
stockholder’s equity.
Meanwhile, stockholders were left wondering
what happened to the company that was growing so fast and making such good
profits (at least on the income statement).
DISCUSSION QUESTIONS FOR SUPPLEMENTAL CASE: answer each
question with at least two paragraphs well detailed
Question 1.
Thousand Trails did nothing illegal in its reporting of revenues and profits. What does that tell
you about the need to carefully read and analyze income statements before you
invest?
Question 2.
Can you see how cash flow problems can grow
to unbelievable proportions in just a short time, even when profits look good?
PART 2
Answer each question with two
paragraphs
Question 1
Are some people unsuited to handle
the stresses of the fluctuations of the stock market? Should such people stay
out of the stock market? If so, what are their investment alternatives?.
Explain your answer in detail.
Question 2
Financial control is used in conjunction
with the firm’s budgetary process to ensure the organization is meeting its
commitments and goals. Why is it important for the CFO to maintain financial
control? Explain your answer in detail.
Question 3
Carr, D. (2013, Oct. 11). It’s not just the
political districts–our news is gerrymandered, too. New York Times.
Retrieved from .nytimes.com/2013/10/12/business/media/when-our-news-is-gerrymandered-too.html?_r=0″>http://www.nytimes.com/2013/10/12/business/media/when-our-news-is-gerrymandered-too.html?_r=0
so which is it? Do audiences tend to choose (and
therefore are to blame for) success of obviously biased news sources or
did cable and other news programs/sources ‘create’ an audience for
re-enforced bias?
are you prone to watch view or read a more limited or growing
number of news sources? Be honest.
Question 4
Vendantam, S.
(2014, Nov. 27). Search for political common ground is difficult,
research shows. Morning Edition: NPR. Retrieved from .npr.org/2014/11/27/366956600/search-for-political-common-ground-is-difficult-research-shows”>http://www.npr.org/2014/11/27/366956600/search-for-political-common-ground-is-difficult-research-shows
SIGH–was there
ever a time when families (or friends at social gatherings) could in fact
discuss issues without getting into fights, as this NPR piece suggests?
How about your family–are there off limit topics and is that list
growing?
Question 5
Moyers, Bill
(host). How do conservatives and liberals see the world? Moyers and
Company. Retrieved from .com/episode/how-do-conservatives-and-liberals-see-the-world/”>http://billmoyers.com/episode/how-do-conservatives-and-liberals-see-the-world/
this is an hour long program so you may want to dip in and out
of it or skim the transcript–cite one or two insights by Haidt, the
social psychologist, on what explains the seemingly unrelenting
conservative/liberal divide. Do you for instance take comfort or
despair in his assertion that –maybe we’re just born (or are nurtured and
grow up) that way.
