Case Teaching Package
A case teaching package is available for this case. It includes strategies for case presentation, key concepts, solutions to the assignment questions in the case, and suggestions for the most effective ways to work this case into your course.
Length
This case is
8 pages in length and its case teaching package is
8 pages.
Abstract
This disguised case is set in 1961 in rural Kentucky when a good bourbon whiskey sold for about $5.00 a "fifth" (1/5 gallon bottle) and the Vice President of the United States considered bourbon to be the national beverage.
Linkages to Textbooks or Journal Articles/Fit Within a Course
This case is great for reinforcing the interplay of accounting analysis with business decision making. Although it is more than 30 years old, it is still an excellent vehicle for reinforcing the logic of absorption costing. But it also is very useful for showing practical application of funds flow analysis, profitability analysis, project economics and strategic assessment, with a little marketing strategy thrown in.
Study Questions
Calculate the effect on the financial statements in Exhibits 1 and 2 of the case if the accounting system were changed to incorporate the cost of barrels ($31.50 each) into the inventory accounts.
What would pretax profit be in 1961?
If the change were made retroactively as of July 1, 1959 (by adding the cost of barrels to all whiskey in inventory), what would be the effect on
The balance sheet at the end of 1960?
The balance sheet at the end of 1961?
The operating statement for 1960?
The calculations required for question 1 are not massive (it takes more thinking than pencil-pushing). Working those calculations will help solidify your understanding of the relationship between inventory and cost of goods sold in a manufacturing company. You’ll know you’re on the right track if you conclude that the answer to part b(3) is "no effect".
Do you believe that Jones went from a profit in 1960 to a loss for 1961, despite the fact that sales were the same and production increased?
What method of accounting would you recommend that Jones use in preparing the annual financial statements for submission to Ridgeview Bank and the family shareholders?
Based on the accounting method you think best approximates "economic reality," calculate the Return on Equity for the business for 1960. How are they doing? Are they earning their cost of capital?
It is suggested that you spend no more than one half your preparation time on questions 1 through 4.
Can you estimate the cash flows for the business for 1961? What about for the 3-year period, 1962, 1963, 1964, combined? (Assume Jones does not change its tax accounting method.) Now, so what?
Can you estimate the economic return for the expansion decision?
Is the loan to expand production "bankable"? That is, do you believe Ridgeview Bank should be willing to lend Booker Jones the money they need now to complete the four-year inventory buildup?
What recommendations do you have for Mr. Jones regarding the business problems he faces (product positioning, production expansion, capital structure, working capital, management, etc.)?
Preparation Hint
This is a very rich case which begins with an important question about accounting policy choices for financial reporting. There are many other important issues in the case as well. Don’t stop with the accounting policy issues. How many other issues do you see? Do you see why we consider this a more comprehensive business policy case than an accounting case?
The downloadable file for this case is in Microsoft® Word 7.0 for Windows®.
If you do not have Microsoft Word, you can download the free Microsoft® Word Viewer 97 right here: For Windows 3.xFor Windows 95
