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)
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