[computator]

> But oh what a difference it makes in the accounting! In the first case, where Autodesk sold the copy of AutoCAD to the dealer, that was the whole transaction; whatever happened to the copy of AutoCAD after the dealer paid for it has no effect on Autodesk’s books. Autodesk sells, dealer pays, end of story. But in the second case, when Autodesk sells to Spacely Sprockets, that appears on Autodesk’s ledger as a sale of AutoCAD for $1000. The instant the $1000 shows up, however, we immediately cut a check for the commission, $500, and mail it to the representative, leaving the same $500 we’d get from the dealer. Same difference, right? Not if you’re an accountant! In the first case, Autodesk made a sale for $500 and ended up, after expenses and taxes, with $125, and therefore is operating with a 25% margin (125/500). In the Spacely sale, however, the books show we sold the product for $1000, yet wound up only with the same $125. So now our margins are a mere 12.5% (125/1000).

I'd like to know how an accountant would respond to the above. Based on his two examples, it seems like accounting rules really distort the financial picture of a company.

[mlyle]

I think the accountant would retort that it's way better to get $125 of profit from $500 of revenue than from $1000 of revenue, overall. In the former case, you have a lot of padding for conditions to change, and in the latter case you don't.

And, if there's some outside dealer that can make a profit taking their $500 cut, but you need to pay all of the $500 out-- it seems like your sales function is less efficient-- less efficient than the rest of Autodesk and less efficient than the outside dealer.

Margins aren't everything. Absent outside judgment, I think I'd rather make, say, $175 profit from $1k of revenue than $125 from $500. But I wouldn’t trade $125 on $500 for $126 on $1,000.

And, of course, there's always the strategic concerns. Control of accounts, opportunities to upsell or cross-sell, etc, etc. Financial reporting can't tell the whole story, because you can't boil down the whole story of a company to a few numbers. It's the triumph of GAAP that it's a pretty dang good start to understanding most companies.

[Spooky23]

You should see the accounting bullshittery around data centers!

[rawgabbit]

He is talking about the effect on stock price. The second scenario results in lower margins. Stock market analysts look unfavorably on this.

[lotsofpulp]

Any investor with half a brain is not solely looking at one specific margin to analyze an investment. That is why you compare profit margin and operating margin and revenue and other measures to build a more accurate picture.

[jaynate]

Depending on what you’re optimizing for could be revenue (high growth) or Net income per share (lower growth).

Reality is once you’ve established a baseline it’s difficult to move from one to the other or have substantial changes to the negative for either.

[akgoel]

We have something similar with tariffs. We pass them through to the client, and they show up as revenue and expenses like this Autodesk example.. But, we immediately deduct the tariff expense from the tariff revenue above the gross revenue line, so Gross Revenue is not affected.

[jll29]

Perhaps R&D expenditures should be a mandatory disclosure?

[Foobar8568]

Profitability is all lies, you report what you want, the goal is to ensure whatever numbers you want to communicate raises nicely quarter over quarter.

[MichaelZuo]

Yeah the advice I’ve heard is that if a company refuses to provided audited GAAP numbers, just run away, no point at all in engaging beyond that.

And even if they do provide those numbers, you still need to scrutinize the cash flow statement and balance sheet.

[Foobar8568]

Even that...I can't comment but companies play with CAPEX, OPEX, what they call innovation, what they amortize etc.

Amortizing CAPEX, claiming it's innovation and building on the future when it's done by consultancy having a 1-3y turn over.

Oh and let's fake maintenance works under "projects".

I am not accountant, so there might be some stuff missing but the 3 upper points are stuff I have seen in many companies.

[mrandish]

> companies play with CAPEX, OPEX, what they call innovation, what they amortize etc.

True but most public companies reporting under GAAP tend to play roughly similar games to roughly similar degrees. So these metrics alone may not reflect much objective reality about a particular company at a given moment but can be useful in benchmarking the relative performance of similar types of companies against each other.

[Spooky23]

Exactly. That drives alot of the faddish nature of business. After Microsoft and Adobe started printing money with SaaS, suddenly everyone decided that selling software, one of the most lucrative businesses to ever be devised was a loser. Everyone wants $50/user/month now.

I realized it at a big enterprise. I couldn't figure out why one of my suppliers was flying out senior execs if I looked at the salesguy funny. We had a $2M account, and it turns out in the transition to SaaS, they value it like a financial product like insurance or a bond. So my stupid $2M spend may impact the market cap of the company 100x... which gets the Chief Revenue/Sales Dude a fat bonus.

[gxs]

Exactly - this is a case where consistency is more important than accuracy

If everyone is optimizing their GAAP figures, eventually everyone converges on a similar number you can compare across companies

Downside is that if you don’t play the game you’re sort of screwing yourself

[jacquesm]

By the time you understand this that particular Monthy Python sketch (the machine that goes 'ping') will really have you in stitches.

[jaynate]

There are revenue recognition rules that govern what Revenue is on the P&L. Same with costs/expenses. But I would say if anything, profits are easier to manipulate than revenue.