Thousand Trails, Inc. (Cases 2.1 & 3.

1 in White, Sondhi & Fried)

Facts:
Owned and operated private membership resort campgrounds.
Sources of Reenue:
Membership sales:
Initial membership fees. ( accounted for over 2/3 of total revenue)
nnual dues b! e"isting members.
Interest on installment receivables (membership sales).
Reenue Reco!nition Criteria:
#arned when future campgrounds materiali$ed
%o refunds& so ma! be.
'eali$abilit! amount of sales in cash
(ersus amount as installment pa!ment
) no guarantee/ recourse of future pa!ments b! members.

)installment sales method * revenue recogni$ed prior to
cash collection. (average: +, months)
#arl! recognition
Sources of "#$enses:
Mar-eting costs
.reserve development costs.
"#$ense Reco!nition:
.reserve improvements capitali$ed * deferred though cash
outla! ta-es place.
.ercentage completion) application without a customer/
0eferred recognition.
1rowth assumptions drive e"pected revenue and e"pected e"penses
resulting in overstatement of revenues and understatement of e"penses.
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'esults in 1ap between Income and cash flows.
%ther issues & 'ould the current trends continue.
).ast growth rates * how can the! be maintained/
)'epeat purchases * lifetime membership implies no repeat customers.
)0egree to which past growth was a function of e"pected and promised new
campgrounds.
) fter saturation source of revenue 2 annual dues 3 interest on installment
pa!ments 2 ,/3 of revenue per current trends.
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(rofita)ilit* & +i,uidit*
4tatement of 5hanges in 6inancial .osition ,78,),783
0efinition of Operating 5ash flows:
- prior to 464 79 so operating& investing and financing not
delineated.
- In an! case :uestion/
- 0oes preserve improvements fall in the categor! of
operating cash flows or investing cash flows.
- ;hat is definition under 46479 for classif!ing as an
operating activit!/
- re< nt preserves (or access to them) being sold * in this
sense is it inventor! and fi"ed assets/
6ree 5ash 6low:
Intended to measure cash available to the firm for discretionar!
uses after ma-ing all re:uired cash outla!s.
=sed as valuation basis
4trict definition:
6562 56O less amount of capital e"penditures re:uired to maintain
e"isting productive capacit! (e"cludes e"pansion)

0ifficult to separate replacement versus e"pansion *so all capital
e"penditures .
lso ma-es it closer to 6inance valuation models.
.ractical implementation:
656 2 56O ) 56I
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-et inco.e to cash Flo's:
4ee graph.
56O lags reported income
56O goes opposite after ,782.
Cash Flo' and Inco.e Co.$onents:
'evenue recogni$ed versus cash inflow:
<8, <82 >83
'evenue ?@ 9+.9 8@
5ash inflow (2A.,) (39.3) (?+.2)
0ifference ,2.7 2,.2 33.8
(?+.222A.AB28.+ * ,@., (from income stmt))
5ollections lagging.
#"pense 'ecogni$ed versus cash outflow:
(preserve improvement)
#"pense 9.8 8.? ,3.@ (I/4)
5ash outflow (+.8) (,,.3) (,8.?)
0ifference (,.@) (2.7) (9.?)
#"pense recognition being deferred.

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/dditional %utla*s & Inest.ent in $reseres (addition to i.$roe.ents)
5ash 6low from Investment:
6rom balance sheet:
Increase in land 3 improvements 2+.,
dd: under development ?.3
Cotal 3@.? million.
6rom cash flow statement:
,8.?m
0ifference ,2.@ m
Implies ,2 m of non)cash transactions ) possibl! debt
footnote data confirms this though not available in the case
material)
;hat does 464 79 tell us: should be reported under 4ignificant
%on)cash 6inancing 3 Investing ctivities.
- pa!ments on debt related to preserve properties (?.3 m in ,783)
classified as operating activit!
- cash from operations under stated b! ,2 m.
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Financin! Cash Flo's:
%et borrowings:
<8, <82 >83
6rom 56O
.a!ments on debt (2.@) (3.A) (?.3)
(preserve improvements)
6rom other sources:
.roceeds of borrowings 7., 8.+ @.7
.a!ments (@.A) (@.A) (,.,)
%et borrowings +.? ?.2 (?.9)
6rom balance sheet:
5hange in current portion
Of DC0 ,.9 (9.7)?.?)
DC0 ?.2 (?A.3)?3.,)
Cotal change 9.A m
Chus increase in debt is 9.A m based on E/4.
Fet& per cash flow debt decreased b! ?.9 m.
Eoth are true.
0ebt on ac:uisition of preserves (hiding as assets) under development did not
pass through cash flow statement.
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- /sset 0ased 1aluation of Thousand Trails:
'esources in place that generate future benefits:
#arnings generating abilit!
5ash convertabilit!/ collectabilit!.
re operating preserves more a-in to inventor! or fi"ed assets/
;hat future benefits do the! provide/
Or are these e"penses waiting to happen without an! matching
revenues being generated /
re receivables collectible * installment receivables ma! not be.

6rom balance sheet (,783):
G of total assets
'eceivables (net of allowances)
5urrent 2@.8 m ,3.AG
%on)current +?., m ?2.2G
Cotal 8?.7 m 99.7G

Operating preserves ?3.8 m. 28.8G
Cotal ,28.A m 8?.AG
4o what assets are left/
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+essons to )e +earnt fro. a Research (ers$ectie 0ased on a sin!le 2nit
of o)seration:
)abilit! to identif! the problem& and search relevant authoritative statements *
here 'evenue and #"pense 'ecognition& .rovisions and definitions of 464 79.
)appl! the relevant literature to the situation and anal!$e the pros and cons.
)diagnose the problem if an! * in this case the lagging of cash flows and income
is li-el! to continue and affect the solvenc! of the firm and :uestion the Hgoing
concernI assumption.
)we cannot generali$e our conclusions regarding Chousand Crails to another firm.
)Ma! need additional historical data be!ond the three !ears provided to do a
more comprehensive anal!sis.
)search for other similar firms& if an!& and use as a benchmar-.
)to what e"tent are trends in the camping industr! / behavior and inflationar! or
recessionar! trends responsible for the financial situation of Chousand Crails.
)raises concern about whether investors should onl! be fi"ated on accrual based
earnings. DC#'%CI(#DF& what is the incremental information content of cash
flows over and be!ond accruals.
)this is what the 0echow paper addresses using mar-et data and a pool of firms
to ma-e some Hon averageI conclusions regarding the behavior of investors.
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