1. Applied Research in Financial Reporting: Text and Cases
Chapter 3
The Case Research Approach

2. Chapter Issues Definition of a Case Study Case Based Research:
Case Development Research
Sources for case development
Case Analysis Research
Differences with problem/exercise approach
Simple vs. complex cases

3. Case Study Definition
A case study is a documentation of a real world situation
It focuses on problem situations in need of research and resolution
Can be very detailed covering various functional areas (e.g., accounting, marketing)
Can be short covering only one functional area (e.g., accounting)

4. Case Development Research
Requires field work
Researcher must have the requisite knowledge and experience of the field
Researcher must be a careful and unbiased listener as well as a good evidence collector
Researchers must consult multiple sources, also called triangulation, for evidence
A need for a detailed plan of action, or protocol
Staff must be trained to conduct evidence gathering

5. Sources for Case Development
Archives of accounting firms
Supplanted with field research
Archives of the SEC
Other sources (e.g., the Wall Street Journal reports on companies)

6. Cases vs. Problems/Exercises
(Exhibit 3-2)
1. Information Setup
2. Source of Information
3. Nature of Questions
4. Solution
5. Assumptions
6. Authoritative Source

7. Cases vs. Problems/Exercises
7. Synthesis
8. Discussion
9. Cognitive Demand
10. Justification
11. Report
12. Documentation

8. Models of Case Analysis
Analysis of Simple Cases
These cases have specific requirements similar to problems and exercises
The specific requirements are designed to reduce the complexity of the case
Woodside Recreation, Inc. Is an example

9. Woodside Recreation, Inc. Facts
Campground, cabins and recreational facilities within 3-hours of major cities
Membership cost of $6,000 plus $30/year
Use as many times as you want up to three weeks each time, but don’t make it a year-round home
Average campsites 300 to be sold to 3000 members

10. Woodside Recreation, Inc. Facts
Average per site in operation over 3 years: 6.8 members
Average for all operating sites: 5.6 members
Woodside opens campground when 25-30% membership is sold
Sales during first 3-years average 24%, after that 2% additional annually
You can buy with 10% down and pay the rest over 72 months

11. Woodside Recreation, Inc. Facts
During the last 3 years, 23% of new members’ fees were received in cash
Woodside books the entire membership amount as revenue
85% of revenues are from new sales
Marketing costs are 45% of membership sales

12. Woodside Recreation, Inc. Facts
Land acquisition is capitalized and amortized by the ratio of membership sold/maximum sites per campground
Land acquisition is reported as “Operating Real Estate” net of an “Allowance for Costs of Membership Sales”
Installment Contracts Receivables are used as collateral for debt.
Current debt to equity ratio = 3.5 to 1.0

13. Woodside Recreation, Inc. Discussion
Requirement 1: Earnings quality
defined as correlation of earnings to cash flows
at issue is whether the reported earnings can be sustained over the longer period of time
Books sales with only 10% down
Over three years, only 23% have paid cash for purchases

14. Woodside Recreation, Inc. Discussion
Requirement 1: Earnings quality
This can be fine per APB No. 10 if appropriate provision for uncollectible accounts exists
But aggressive marketing and liberal credit granting makes collection questionable
Allocating cost of land acquisition on the basis of expected members/maximum membership underestimates amortization cost due to slow sales
Installment sale (SFAS 66) may be appropriate (used by analogy to make a point)

15. Woodside Recreation, Inc. Discussion
Requirement 2: What financials should be changed?
Use installment sales
Defer revenue until a certain percentage of the contract is collected
Increase provision for doubtful account
Increase write-off for land and improvement costs

16. Woodside Recreation, Inc. Discussion
Requirement 2: What financials should be changed?
(Dollars in thousands)
As Reported As Revised
Membership sales $28,000 $28,000
Dues and miscellaneous , ,000
Provision for doubtful accounts (5,600) (7,000)
Net operating revenues , ,000
Marketing expenses (45%) , ,600
Land and improvement costs , ,000
24, ,600
Income (loss) $ 2, $(1,600)

17. Woodside Recreation, Inc. Discussion
Requirement 3: Cash flows
Signs of trouble:
Installment sales, but 45% marketing expense
Debt/equity ratio is high at 3.5
Almost all installment contracts receivable are used as collateral for debt

18. Woodside Recreation, Inc. Discussion
Requirement 3: Cash flows
(Dollars in thousands)
20X3 Cash Collected
Installment contracts receivable 1/1/X $35,300
20X3 Membership sales ,000
Total to collect ,300
Accounts written-off ( 1,500)*
61,800
Less: Installment contracts receivable 12/31/X3 (45,600)
Cash collected ,200
Dues and miscellaneous (assumed collected) ,000
$21,200
*Beginning allowance $4,200 plus provision $5,600 less ending allowance $8,300.
21.6 million is needed just to cover marketing costs (12.6) and land acquisition (9.0)
Woodside has a cash flow problem!

19. Woodside Recreation, Inc. Discussion
Requirement 4: Other issues
Marketing costs are too high
Lifetime campground sales may be a fad
The membership fee ($6,000) is too high in comparison to public campgrounds
Needs additional members to grow

20. Models of Case Analysis
Analysis of Complex Cases:
A general model is needed (Exhibit 3-3):
Identify the Objectives of the Case
Begin with a set of key words to search the literature
Discuss the literature
List Alternative Solutions
Suggested Solution
Provide supplements, if any
Provide addendum, if any

21. Analysis Using the Case Analysis Model (Exhibit 3-3)
Cullen Provision Corp.
Analysis
Using the Case Analysis Model (Exhibit 3-3)

22. Cullen Provision Corp. Facts
Returned ham from the Army of $880,000 was written off against 20X1 income
The ham was rejected by the Army, but was not returned in time, resulting in spoilage
Cullen filed a claim against the the Army in 20X1, but did not disclose it in its 20X1 report

23. Cullen Provision Corp. Facts
Early in 20X3 (before issuing its annual report to public), Cullen settled for $475,000, a material amount compared to Cullen’s income
Management does not want to report it in its 20X2 income, because:
it occurred in 20X3,
has not been received
IRS will want its share in 20X2
$600,000 will have to be paid to previous owner

24. Cullen Provision Corp. Identify Case Objectives
Timing of recognition of the contingent gain
What if the settlement involves a contingent gain or loss?

25. Cullen Provision Corp. Professional Literature
SAS No. 1, Section 560, “Subsequent Events”
SFAS No. 5, “Accounting for Contingencies”
ARB No. 50, “Contingencies” for gain contingencies
SFAS No. 16, “Prior Period Adjustments”
CON No. 5, “Recognition and Measurement in Financial Statements of Business Enterprises”

26. Cullen Provision Corp. Discussion
Objective 1: Timing of recognition
Per SAS 1, Section 560, recognize in the period if subsequent discovery of the fact that the condition existed at the balance sheet date
Otherwise SAS 1 does not require recognition at the previous balance sheet date

27. Cullen Provision Corp. Discussion
Objective 1: Timing of recognition
Contingency situation per SFAS No. 5
Gain contingency per ARB No. 50
OK per CON No. 5 to postpone to 20X3
OK per SFAS 16 to postpone to 20X3
But what about the previous owner?

28. Cullen Provision Corp. Discussion
Objective 2: What if it was a loss contingency?
Conservatism would have changed the picture.

29. Cullen Provision Corp. Alternative Solutions
Were discussed in relation to case requirements
To realize gain in 20X2
What if it was a contingent loss?

30. Cullen Provision Corp. Suggested Solution
See Discussion of Objectives 1 & 2

31. Cullen Provision Corp. Supplements
None

32. Cullen Provision Corp. Addendum
None