Academic journal article Journal of the International Academy for Case Studies

Getting Started in the Thoroughbred Horse Business: A Review of Some Basic Accounting principles.(Instructor's Note)

Academic journal article Journal of the International Academy for Case Studies

Getting Started in the Thoroughbred Horse Business: A Review of Some Basic Accounting principles.(Instructor's Note)

Article excerpt

CASE DESCRIPTION

This case, for beginning accounting students, reinforces some common accrual accounting concepts in an interesting setting. The body of the case is also available in CD version with a dramatized story and summaries of the data for students to refer to while answering the questions (to get a CD, contact the author directly). The key concepts include revenue and capital expenditures, product and period costs, profit and loss, cash flows, fixed assets and depreciation, inventory costing, indirect costs, cost allocation and cost of goods sold. Due to the concepts covered, it is appropriate to use during the second half of the course after students have been exposed to fixed assets, inventory, profit and loss and cash flow reporting. The case should take about 30 to 45 minutes of class time with about two hours of out-of-class preparation for each of the three sets of discussion questions.

CASE SYNOPSIS

The case centers on the breeding and racing operations of a small Thoroughbred horse business whose owner has little business or accounting knowledge. The business has two distinct operations, racing and breeding. Students discover that the Thoroughbred breeding industry is primarily a manufacturing business with the mares serving as production equipment and the foals serving as inventory. Racing operations are similar to many other businesses with fixed assets (racing stock) and operating costs (board, transportation, vets, race entry fees, jockey purses, etc.). In this case, the owner financed her operations with a large bank loan so the concept of cost allocation and indirect costs for interest are also introduced. Students are asked to identify the cash flows, list the product and period costs, recommend a depreciation policy for each operation and reconcile the cash flow to income.

Instructors are given sufficient background information on accounting and reporting issues in the Thoroughbred industry to allow adequate feedback and guidance to the students. Since most Thoroughbred horse business are not public companies, they primarily report on an income tax basis. Some basic, relevant tax issues are presented as background for instructors. Short summaries of the history of the Thoroughbred breed, naming foals and the Triple Crown of racing are provided for interest.

The case is also available on CD with a dramatized story line and appropriate data summaries for use by students (contact the author directly to obtain the CD from which copies can be made).

INSTRUCTORS' NOTES

Suggestions for using the case

The category I discussion questions by themselves cover most of the accounting concepts in the case related to fixed asset accounting. The category II questions introduce the concept of inventory accounting. Questions 1 and 2 of the category III questions (which rely on information from Questions II-1 and II-4) take a larger view and ask students to make a recommendation on which of the two operations the owner should concentrate in the future. This is a broader business issue than pure accounting but will make students consider the implications of the reported numbers and not just be content with doing the calculations. There is no "correct" answer to the category III questions which might lead to some good student interaction as they justify their choices.

Most of the tax-related information in the Teaching Notes is ancillary and is not needed for students to solve the case. It is provided primarily for instructor background and response to specific student questions.

An early review of the chronology of events with the students will prevent some misunderstandings later in the discussions. Gina and Carol are having their discussion in early 2005 as they review Gina's horse operations for the previous year, 2004.

Late 2003: Gina acquires Rockin' Robin and Lady Delight (in-foal mare)

January 2004: Gina gets a $500,000 loan pays cash for Robin and Lady Delight

January--April 2004: Rockin' Robin is in training

March 2004: Foal (Dan D Dancer) is born

April 2004: Lady Delight is bred to a stallion

May 2004: Rockin' Robin begins his racing career

July 2004: Dan D Dancer weaned away from Lady Delight

July 2005: Expected auction sale of Rockin' Robin

While all of the Thoroughbred and racing industry jargon used in the case is fully explained in the case text (or video), students will forget or ignore the explanations and misinterpret some facts and figures. …

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