Gibson486
Lifer
- Aug 9, 2000
- 18,378
- 2
- 0
If you lose $100, where does it go? It gets absorbed some where and it s not your pocket. the loss is quickly recovered due to you having money to back up the losses. If you do not have that cash, you always could pay it back over time. Also, most suppliers are paid on credit with the term net30 or 60 (you have 30 or 60 days to pay it). If you cannot pay, companies will begin to try to collect (not via collections, though, but through there own annoying means). If enough time goes by, some suppliers will simply blacklist you. However, a company would be pretty dumb to blacklist one of their biggest clients.
Originally posted by: thatsright
Originally posted by: BrownTown
ITs not that complicated, you spend $20,000 to make a car and only sell it for $18,000, then repeat that a million times and your set...
Ok, but if a company losses $5 Billion over the course of 13 weeks, ANY company would shut down and fold quickly. How can a company stay open while this is going on?
You have to consider that the net gain/loss over a longer period of time. In one quarter, a company may spend 10 billion in production costs building these cars. Now, just because they built the cars doesn't mean they sell the second they roll off the assembly line, right? Sometimes they can sit on a car lot for a few months before they sell.
In accounting, a transaction occurs when the expense or income is made, NOT when it balances out. So let's say the car company spends 3 months (or one financial quarter [Q1]) building these cars at the cost of $5B and sending them to dealerships. The expenditure is $5B. That is owed to the people who built it and the parts suppliers immediately, regardless of whether the cars sell or not. It's not their problem after they do what they were paid to do. So the company is now down $5B, but they have the cars as assets. Now, say the profit on these cars is 150% of cost and by Q2 they are ready to sell. Over the span of Q2, Q3, & Q4 the cars sell out. let's say they sell 1/3 of the total yearly stock every quarter.
Q1 = -$5B
Q2 = +2.5B
Q3 = +2.5B
Q4 = +2.5B
Financial year ends at +$2.5B. They reported a loss of 5 Billion in one quarter, but their profits from their investment in the remaining 3 quarters bounced it above and beyond.
Now, realistically speaking, it won't be this ideal and some deals a company makes can take a decade before they pay for themselves (If they even do.)
You could also bring in the scenario that halfway through the year, the demand for the car went down and in Q3 & Q4 the expected profit was only 125% of cost and such. It's still above their goal but it's not what was expected. It can also go lower than that like many trucks/SUVs are now where they have to sell them off breaking even or at a loss just to avoid having a depreciating asset sitting around. Because a year or two from now they want people looking at their most recent line of vehicles instead of last year's vehicle at the same price.
To answer your question directly, the original money (capitol) probably came from a loan backed by the company's assets and/or portions of money already in the bank from a previous revenue stream.
It's also entirely possible that the company just flat out became worth less as a whole. A big company like ford or GM is probably worth a few hundred billion. So while 5 Billion is losses might seem like an insane amount of money to lose it's not as much to company worth much more than that. (Although I think it would still be cause for concern)
OP, how fucking stupid do you have to be to not know how to spell "loses" correctly? I mean seriously, does "looses" even look right to you?
Originally posted by: Injury
Originally posted by: thatsright
Originally posted by: BrownTown
ITs not that complicated, you spend $20,000 to make a car and only sell it for $18,000, then repeat that a million times and your set...
Ok, but if a company losses $5 Billion over the course of 13 weeks, ANY company would shut down and fold quickly. How can a company stay open while this is going on?
You have to consider that the net gain/loss over a longer period of time. In one quarter, a company may spend 10 billion in production costs building these cars. Now, just because they built the cars doesn't mean they sell the second they roll off the assembly line, right? Sometimes they can sit on a car lot for a few months before they sell.
In accounting, a transaction occurs when the expense or income is made, NOT when it balances out. So let's say the car company spends 3 months (or one financial quarter [Q1]) building these cars at the cost of $5B and sending them to dealerships. The expenditure is $5B. That is owed to the people who built it and the parts suppliers immediately, regardless of whether the cars sell or not. It's not their problem after they do what they were paid to do. So the company is now down $5B, but they have the cars as assets. Now, say the profit on these cars is 150% of cost and by Q2 they are ready to sell. Over the span of Q2, Q3, & Q4 the cars sell out. let's say they sell 1/3 of the total yearly stock every quarter.
Q1 = -$5B
Q2 = +2.5B
Q3 = +2.5B
Q4 = +2.5B
Financial year ends at +$2.5B. They reported a loss of 5 Billion in one quarter, but their profits from their investment in the remaining 3 quarters bounced it above and beyond.
Now, realistically speaking, it won't be this ideal and some deals a company makes can take a decade before they pay for themselves (If they even do.)
You could also bring in the scenario that halfway through the year, the demand for the car went down and in Q3 & Q4 the expected profit was only 125% of cost and such. It's still above their goal but it's not what was expected. It can also go lower than that like many trucks/SUVs are now where they have to sell them off breaking even or at a loss just to avoid having a depreciating asset sitting around. Because a year or two from now they want people looking at their most recent line of vehicles instead of last year's vehicle at the same price.
To answer your question directly, the original money (capitol) probably came from a loan backed by the company's assets and/or portions of money already in the bank from a previous revenue stream.
It's also entirely possible that the company just flat out became worth less as a whole. A big company like ford or GM is probably worth a few hundred billion. So while 5 Billion is losses might seem like an insane amount of money to lose it's not as much to company worth much more than that. (Although I think it would still be cause for concern)
Well, not sure I got all of it but I did get it. Thanks man, you actually took time ton really answer the question.
For the all the rest of you who had to spend time out of your busy lives to point out a misspelled word, get a liffe.
A lot of the losses are due to asset impairment.
Lets say you had a factory that was worth $100 and you shut it down, now it might be worth $50 in its shut down mode. That 50 dollar write-off/down is a loss and impacts net income, which flows to equity, since bondholders won't take a loss.
Losses, a lot of the time, have nothing to do with cash, but a lot to do with how assets are written down/off.
All of those mortgages? Asset impairment/revaluation, which hits equity.
What do I mean by that?
Remember our $100 asset now worth $50? Well, that has to be funded somehow, the classic formula is:
Assets = Liabilities + Equity
Let's say our $100 asset is funded by $25 in liabilities and $75 in equity.
A = L + E, $100 = $25 + $75
Now, since we wrote-down our asset, the formula is -> $50 = $25 + $25
Where the big problem is, is that many financial institutions need to have a certain amount of equity, a capital ratio base. Thus, if that erodes too much, they can be considered insolvent, so they have to go raise equity (capital).
Clear as mud?
Lets say you had a factory that was worth $100 and you shut it down, now it might be worth $50 in its shut down mode. That 50 dollar write-off/down is a loss and impacts net income, which flows to equity, since bondholders won't take a loss.
Losses, a lot of the time, have nothing to do with cash, but a lot to do with how assets are written down/off.
All of those mortgages? Asset impairment/revaluation, which hits equity.
What do I mean by that?
Remember our $100 asset now worth $50? Well, that has to be funded somehow, the classic formula is:
Assets = Liabilities + Equity
Let's say our $100 asset is funded by $25 in liabilities and $75 in equity.
A = L + E, $100 = $25 + $75
Now, since we wrote-down our asset, the formula is -> $50 = $25 + $25
Where the big problem is, is that many financial institutions need to have a certain amount of equity, a capital ratio base. Thus, if that erodes too much, they can be considered insolvent, so they have to go raise equity (capital).
Clear as mud?
Not the same context, he said, "they were too looses ." Nope, nothing there about tranmission lines.
He was joking of course, as was I, and you fell for it
SUCKER!
meltdown75
Lifer
- Nov 17, 2004
- 37,548
- 7
- 81
when they say losses, they can mean they have to lower the values of their assets. perhaps they originally predicted that they can sell each F-150 on the lot for $35k a piece, but now people are only willing to pay $25k a piece
and I wish uneducated union workers didn't make more money then me, but that's just life eh?
actually I have no clue what they make, but based on everything you hear its probably alot more then they are worth...
EDIT: and as for losing 5 Billion in a quarter, is that a 5 Billion dollar write down of their assets, or an actual 5 Billion dollar loss?
Fern
Elite Member
- Sep 30, 2003
- 26,907
- 174
- 106
Accountant here.
I'll give a simplified version, no real need for complexities.
2 kinds of losses - cash and paper.
Cash losses can come out of 2 places generally - capital and debt/loans
Capital is composed of 2 things - money the company received from selling stock to investors, and accumulated earnings/profits from prior years.
So, the company could have paid for any (cash) losses out of funds it had accumulated from selling stock or prior years' profits.
The company could have also borrowed funds, whether long-term or short-term loans from banks (and bondholders) or short-term accounts payables-type. The latter would vendors whom they purchase materials and supplies from. If the company were to go bankrupt, these *lenders* may not be paid off.
Paper losses some from write downs of assets. I.e., the value of an asset on the company's balance sheet is reduced. Some of this is from regular annual depreciation of assets (equipment and furnishings), other's can be the write down (reduction in value) of a company's investment-type assets. Quite a bit of those bad mortgage investments we hear so often about now are held by regular companies (not banks or investment firms).
Fern
Well, GM reported an operating loss of $6.3 B in the 2nd quarter. :Q Has any company ever had a bigger operating loss?
http://money.cnn.com/2008/08/0...neral_motors/index.htm
http://money.cnn.com/2008/08/0...neral_motors/index.htm
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