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Proposal: FIFO accounting applied to automated profit valuation

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Hexxx Minmatar	Posted - 2009.10.26 17:28:00 - [1] - Quote Challenge: Lack of mature accounting tools for business owners who engage in manufacturing/trade and their auditors. Solution: A solution which automatically stores the most up-to-date API data and processes this data in a way that provides information (individual cost of manufactured items) and knowledge (what is my profit/costs for a given month). Likewise, tracking first in and first out (FIFO) allows not just for assigning specific costs to individual manufactured items but the profits for trading any given item. Doing so is a superior solution to simple cost averaging (though cost averaging remains a useful tool) for accounting for cash flows and balance sheets. Supplemental: Reconciling on a daily basis allows for reconciling direct trades and pulls from Corporate hangers. By aggregating numerous accounting for each character into a single corporate account, multiple characters can provide inputs into a single automatic and near real-time business report. Notes: Technical requirements are high due to the not insignificant need to design some complex algorithms around the reconciliations. Manufactured cost is actually pretty simple since manufactured items and associated costs can be maintained in a separate table and then simply reconciled against transaction logs. Why Hexxx, Why?!?! I am attempting to provide a solution for my greatest failure. I am already coding this, but many of the reconciliation algorithms are not yet designed. These remain a great challenge to me but ones I believe I will eventually overcome. I submit this now to gain feedback from the public. Much of the code stems from my Insurance project and how to deal with API data there and my thinking on how to restrict API data in whole or mask it in parts. There is much that can be done to facilitate and assist in the task of auditing...I am trying to address that.
Claire Voyant	Posted - 2009.10.26 17:42:00 - [2] - Quote Isn't FIFO kind of archaic? Does it make sense to say the profit on an item is based on materials purchased maybe months ago, instead of comparing current sales price against current material cost on the market. Then you also track you inventory (both materials and finished goods) against market value and try to manage the market risk of your inventory. Either by keeping inventory as low as possible, or by "hedging" by buying inventory when prices are low and not buying when prices are high. Anyway, that is what I would do if I could be bothered.
Hexxx Minmatar	Posted - 2009.10.26 17:51:00 - [3] - Quote Originally by: Claire Voyant Isn't FIFO kind of archaic? Does it make sense to say the profit on an item is based on materials purchased maybe months ago, instead of comparing current sales price against current material cost on the market. Then you also track you inventory (both materials and finished goods) against market value and try to manage the market risk of your inventory. Either by keeping inventory as low as possible, or by "hedging" by buying inventory when prices are low and not buying when prices are high. Anyway, that is what I would do if I could be bothered. Operationally speaking, it does make sense to track current mineral valuation and current market valuation of finished products....however, from an accounting perspective, how do you account for the adjusted cost of what you build from the materials you purchased months ago? This is more about accounting and reporting profits than it is about managing the operations of a business (which I think you were addressing above).
SencneS Rebellion Against Big Irreversible Dinks	Posted - 2009.10.26 17:55:00 - [4] - Quote Hexxx and I talked about this, while Hexxx is looking at it from an accounting and consolidation point of view, I was looking at it from a "user" point of view. With my first hand experience of running a slightly complex large manufactures operation I had similar thoughts a while ago. The issue at hand is inventory vs market value and how to account for that when calculating profits. If you persistently use averages you'll notice it works well for raw materials on the rise in price, but it starts to get ugly when materials drop in price. FIFO Hexxx mentioned actually solves this issue, as mineral get consumed the cost of the minerals adjusts to real pricing rather then averages. This gives you a much better handle on how much something cost. While averages are OK for smaller or small number of items produces, it doesn't work really well for large bulk mass item production when you have large inventories of the materials needed. An example of this would Shuttles. You purchase enough Trit to manufacture 10,000 shuttles. But you only produce 5,000 of them, sell them, then purchase enough minerals to make another 5,000 shuttles while you are producing and selling the second batch of 5,000. The Trit price has changed, gone down. Working on averages the trit average when you calculate the cost also went down. If the average went down low enough, the second lot of 5,000 Shuttles would actually be sold at a loss, even though according to the average you made a profit. With what Hexxx is thinking about, is account method the would report real time consumption and cost of those materials consumed. Like I said for smaller businesses this is not a real major concern, but when you run multi-hundred billion ISK worth of production lines the "Average" can work against you. Amarr for Life
Chi'kote Serenity Ascension	Posted - 2009.10.26 20:32:00 - [5] - Quote Technically, I don't think you're looking for textbook FIFO, but specific identification. Ex/ You built 3 harbingers in this order: 1 for 30 mill in jita, 1 for 32 mill in amarr, and 1 for 34 mill in rens. You first sell the one in Amarr. FIFO would assign the cost of the harbinger built in Jita (first in) to the one sold in amarr (first out). If you want to apply the 32 mill build cost for that specific ship built and sold in amarr (second in, first out), that is specific identification. And no FIFO is not archaic. FIFO, LIFO, and specific identification are all common. SI isn't really even practical yet in most applications.
Chingyz Caldari untaught Blade.	Posted - 2009.10.26 20:43:00 - [6] - Quote If your program is going to be used by auditors then you are looking at a bigger problem then just the pros and cons of FIFO versus average (or any of the other types of valuation). For finding profit of historic transactions then it really doesn't matter that much which type of valuation you use (although there are more benefits to FIFO). The problem lies in the valuation of your assets. When it comes to assets like stock of finished goods or raw materials it's often better to use current prices for valuation rather than FIFO. This is due to the nature of assets, which is to show what they are worth at the end of the historic period The best way to get around this is to have several layers/pages in your program. Use one for profit calculations, based on the FIFO principle. One for assets based on current prices. This can also be used as a tool for setting sale price of your items.
Claire Voyant	Posted - 2009.10.26 20:58:00 - [7] - Quote If you are build real-word things like automobiles, FIFO makes sense. You contract with a company to make parts for your car, the parts are only for a limited number of car models, and you can't scrap them for anywhere near what you paid for them. Also the production chain from raw materials to finished goods has many more steps than in eve. What I'm suggesting is something like the "mark to market" accounting rules for financial companies. For my business, I could take the inventory of all my raw materials, components, and finished products and calculate their value according to the current prices of 7 minerals. Seems a lot simpler to me. It's a little more complicated for tech2 production, and named items would be another matter altogether.
Hexxx Minmatar	Posted - 2009.10.26 21:01:00 - [8] - Quote Originally by: Chingyz If your program is going to be used by auditors then you are looking at a bigger problem then just the pros and cons of FIFO versus average (or any of the other types of valuation). For finding profit of historic transactions then it really doesn't matter that much which type of valuation you use (although there are more benefits to FIFO). The problem lies in the valuation of your assets. When it comes to assets like stock of finished goods or raw materials it's often better to use current prices for valuation rather than FIFO. This is due to the nature of assets, which is to show what they are worth at the end of the historic period The best way to get around this is to have several layers/pages in your program. Use one for profit calculations, based on the FIFO principle. One for assets based on current prices. This can also be used as a tool for setting sale price of your items. I'd imagine I would use FIFO for the Income statement and then asset valuation on current market prices for the Balance Sheet.
Drab Cane Carbenadium Industries	Posted - 2009.10.26 21:28:00 - [9] - Quote Originally by: Chingyz The best way to get around this is to have several layers/pages in your program. Use one for profit calculations, based on the FIFO principle. One for assets based on current prices. This can also be used as a tool for setting sale price of your items. I believe Chingyz has raised the correct question. If you're just creating an accounting package to tie out all the numbers, FIFO makes complete sense. If you're trying to provide information related to current valuation of the operation's assets, then you'll want to record current value and show that value on a separate set of reports. I've been toying with the same idea, an acctng package for mfg/trade - the concept I came up with would record the API information (Transactions and Journal Entries) in their own table, then link each API transaction and journal entry to entries in a second set of tables that would handle the GL Journal, AR/AP Journals and the Inventory system. This way I can handle all the logic and records in the accounting tables, including posting correcting entries. The downside of this for the auditors, is that the accounting information is a step removed from the API data. However, by using the book value for all assets, the auditor should be able to tie out the operation's assets between the financials and the API. Also, there should be reports/features that allow the auditor to inspect that individual book transactions are linked to existing API transactions and such. ----------------------------------------------- - Who Dares, Wins
Claire Voyant	Posted - 2009.10.26 21:35:00 - [10] - Quote Originally by: Hexxx I'd imagine I would use FIFO for the Income statement and then asset valuation on current market prices for the Balance Sheet. Very difficult to do because the numbers on the two statements need to agree. You would probably need some inventory adjustment on the income statement to account for market changes, but that would make your whole FIFO valuation moot.

Drab Cane Carbenadium Industries	Posted - 2009.10.26 21:52:00 - [11] - Quote Originally by: Hexxx I'd imagine I would use FIFO for the Income statement and then asset valuation on current market prices for the Balance Sheet. Clair Voyant beat me to the post In that case, you'll want to place a separate line just before your total net profit/loss, stating a profit/loss from mark-to-market (or whatever the correct term is). This way your income statement and balance sheet will match up, and you've accurately called out where the profits came from. This would be especially useful if you're playing the minerals market (stocking up when minerals are low, etc). This could be difficult to calculate (totalling all the differences between your assets' market- and book-value) or easy (calculate the net profit/loss from the balance sheet, and use the difference between that and the actual profit/loss on the income statement). Your auditor will probably be most happy with a solid inventory report - regardless of what the current value of the assets, the auditor should be able to confirm your inventory. ----------------------------------------------- - Who Dares, Wins
Varo Jan Minmatar	Posted - 2009.10.26 21:54:00 - [12] - Quote Originally by: Hexxx I'd imagine I would use FIFO for the Income statement and then asset valuation on current market prices for the Balance Sheet. No, no! You can&t use one valuation method for one side of the balance sheet and another for the other side! Not if your intention is to provide a "mature" accounting tool, one in accordance with even the simplest accounting standards.
Dzil Caldari Sausage Banking	Posted - 2009.10.26 21:54:00 - [13] - Quote Originally by: Claire Voyant Originally by: Hexxx I'd imagine I would use FIFO for the Income statement and then asset valuation on current market prices for the Balance Sheet. Very difficult to do because the numbers on the two statements need to agree. You would probably need some inventory adjustment on the income statement to account for market changes, but that would make your whole FIFO valuation moot. If I understand correctly, the point is to be better able to itemize your profits and losses. Thus being able to show that your manufacturing arm of the business still successfully generated X profit, but the businesss as a whole suffered a net loss of Y due to the devaluation of inventory that it's holding. This is useful when you have different folks leading different divisions and want to pay them for their performance, or just for self evaluation as you look for opportunities to improve your own overall money making operations. Dzil's Corp Sales - 200m
Don Caetano	Posted - 2009.10.26 21:59:00 - [14] - Quote I gave some hard thought to the subject recently (when I was setting up my manufacturing profit database) and what I was actually looking for was not FIFO but LIFO accounting, as I am more interested in accurate representation of current P/L than balance sheet. After some more hard thought on how it could be acheived (and how much time it would take) I settled on averaging as an acceptable compromise.
Varo Jan Minmatar	Posted - 2009.10.26 22:15:00 - [15] - Quote Quote: Tracking first in and first out (FIFO) allows not just for assigning specific costs to individual manufactured items but the profits for trading any given item. You&re assuming all items are purchased from the market. How do you intend to value minerals obtained by mining, ore refining or module reprocessing? And how would you value modules acquired on missions or by PvP? Quote: Doing so is a superior solution to simple cost averaging (though cost averaging remains a useful tool) for accounting for cash flows and balance sheets. No, not so. That&s just a personal opinion. Both FIFO and average costing are acceptable in accounting. I prefer average costing in this specific case (minerals), but again that&s my personal opinion. However, if you intend to develop an application, I&d suggest you allow the user to decide which method he wishes to employ. Quote: Reconciling on a daily basis allows for reconciling direct trades and pulls from Corporate hangers. Is this information available from the API? Quote: Multiple characters can provide inputs into a single automatic and near real-time business report. Nice idea, but is it really, really necessary to aim for real-time reporting? Quote: Manufactured cost is actually pretty simple since manufactured items and associated costs can be maintained in a separate table and then simply reconciled against transaction logs. It is simple providing you assume all characters have Production Efficiency V, and all manufacturing is carried out at an NPC station at a standard rate including the good standings discount. It is not so simple if carried out at a POS, unless you apply a standard rate. You&re then faced with the issue of reconciling POS running costs. I don&t know anything about T2 production, but I&m guessing that&s not simple.
Prodigal Caldari New Genesis Project	Posted - 2009.10.26 22:19:00 - [16] - Quote How we do it here in Canada at least makes it relatively simple - which it really is once you sort it out on paper. The value of the assets you have manufactured should always come down to exactly how much it really cost you to make said item. (i.e. materials, labor and other associated costs) The manufactured items remain in your inventory as assets on the balance sheet until they are sold which then affects both the balance sheet and income statement. Not sure if this helps the discussion at all but there it is. The FIFO method I agree is the one that should be used anyways. I mean does not everyone use this method anyways? When would averaging Costs of Goods Sold ever benefit any kind of analysis? I mean, an asset line for say Tritanium in any companies balance sheet may have one value, but that is typically a consolidated value which represents a bunch of different amounts of tritanium listed at the price they were purchased at. Or in another example, if said tritanium was actually physically harvested then that trit should be valued at what you would get for selling that same amount of trit (how you average that figure is really up to each company and how they want to set that value)
Drab Cane Carbenadium Industries	Posted - 2009.10.26 22:21:00 - [17] - Quote Regarding the FIFO calculation, I've seen this handled before by using an Inventory Transaction Log. Every input and every output from inventory is added to the transaction log, with a datestamp. Every input includes the per item cost it was purchased/booked at. Much like any other account ledger, initial entries are made for starting inventory counts, along with their book value. The transaction log can then be used for calculating the FIFO amounts. ----------------------------------------------- - Who Dares, Wins
SencneS Rebellion Against Big Irreversible Dinks	Posted - 2009.10.26 22:22:00 - [18] - Quote Originally by: Don Caetano I gave some hard thought to the subject recently (when I was setting up my manufacturing profit database) and what I was actually looking for was not FIFO but LIFO accounting, as I am more interested in accurate representation of current P/L than balance sheet. After some more hard thought on how it could be acheived (and how much time it would take) I settled on averaging as an acceptable compromise. That is what got me about 5 months ago, if I had put the time and effort into it, I would have considered using my own take on the ideas of both. CIFO Cheapest In First Out. This would have allowed for a much higher margin of return. By my desire to create this was simply replaced with my laziness, and I went with averages. Originally by: Claire Voyant What I'm suggesting is something like the "mark to market" accounting rules for financial companies. For my business, I could take the inventory of all my raw materials, components, and finished products and calculate their value according to the current prices of 7 minerals. Seems a lot simpler to me. That would work for current valuation of the product as a check, for something like a Titan this would be different. By the time the Titan came out of Production the price of minerals would have changed enough to significantly impact the cost. You could either be turned a larger profit or a smaller one depending on when you purchased the materials. Cost needs to be collected before production, not after. FIFO on Income and Market valuation on Balance, No I don't agree. Balance sheet would need to be FIFO as well, but assets would be considered market valuation, maybe as some sort of passive growth. Say you have 100mil units of trit which you purchased for 2ISK each, and it's now worth 2.1 ISK each. You'd show 10mil in asset growth, which on the balance sheet would be it's own line entry. Each month this could be up or down. However it doesn't effect FIFO as it's asset value is being captured on it's own record. Amarr for Life
Krathos Morpheus Gallente Legion Infernal ALPHA-0MEGA	Posted - 2009.10.26 22:22:00 - [19] - Quote One issue that comes to my mind is what happens when you buy minerals, make different items and some of them sold and you make more of them while the others are unsold. Do you plan to track items as you make them until you sold them or do you plan to "discount" the minerals from the items you sell? I thought about this FIFO (without that name) when thinking about the program I'd like to see/make (I lack the language knowledge to do it atm unfortunately, although I know the design and I know how to do it with logic and maths). But that was for trading purposes. If I had to do it for manufacturing I would match the manufactured items with the last unusued minerals bought at the time of manufacturing, putting that minerals out of the recorded pool and keeping the first ones as trade assets wich go out of the pool when they are sold directly. There is no point looking an item profit whith old mineral prices, because profit or lose on it is done through time, not manufacturing alone.
Prodigal Caldari New Genesis Project	Posted - 2009.10.26 22:44:00 - [20] - Quote Originally by: SencneS FIFO on Income and Market valuation on Balance, No I don't agree. Balance sheet would need to be FIFO as well, but assets would be considered market valuation, maybe as some sort of passive growth. Say you have 100mil units of trit which you purchased for 2ISK each, and it's now worth 2.1 ISK each. You'd show 10mil in asset growth, which on the balance sheet would be it's own line entry. Each month this could be up or down. However it doesn't effect FIFO as it's asset value is being captured on it's own record. Asset "appreciation" (asset growth as you called it) does not make it on the balance sheet in its own line. On the balance sheet that becomes Gross Profit and valued against the Cost of Goods Sold line of the assets of your Balance Sheet. The only time an assets market value is being considered is when said company is disposing of that asset (or i.e. selling said asset) is looking to sell shares of said company or selling the entire company or operation.

SencneS Rebellion Against Big Irreversible Dinks	Posted - 2009.10.26 23:14:00 - [21] - Quote Edited by: SencneS on 26/10/2009 23:15:36 Originally by: Prodigal Asset "appreciation" (asset growth as you called it) does not make it on the balance sheet in its own line. On the balance sheet that becomes Gross Profit and valued against the Cost of Goods Sold line of the assets of your Balance Sheet. The only time an assets market value is being considered is when said company is disposing of that asset (or i.e. selling said asset) is looking to sell shares of said company or selling the entire company or operation. In real life this is acceptable, however in EVE, you never really "Dispose" of an asset. Sure you can, but why would you, you'd sell it for whatever you can get for it. Since items don't expire, appreciation and depreciation should be accounted for when running an audit. Although I can see it being used in "Gross Profit" I think it's a little dangerous in there, because unrealized gain or loss. You really shouldn't report it month after month in profits or losses for that matter. Imagine you buy something for 100mil and it's value goes up to say 110mil and you don't move it for 3 months. It stays at 110mil for those three months, in which you finally sell it for 110mil. However, each month your profits would report 10mil profit for that month, over say 3 months it would appear you have 30mil Profit. An auditor or an investor would expect that profit to be those three months of Gross Profit ie 30MIL, which in this case it's not, it's just 10mil. edit:- lol sorry I had a brain fart, you wouldn't report it 10mil per month LOL Just 10mil on the first month and 0 as it's value hasn't gone up any more. duh, been a long day. Amarr for Life
Drab Cane Carbenadium Industries	Posted - 2009.10.27 00:01:00 - [22] - Quote Edited by: Drab Cane on 27/10/2009 00:04:39 Can someone explain again why it would be advantageous (sp?) to show the assets at market value on the balance sheet? In a period of rising mineral prices (and savvy purchasing), the book value of raw materials would be undervalued, and therefore so would the NAV. But is that a bad thing? Based on book value, the NAV would be more accurate, and so would the Return on Equity (ROE). In fact, the ROE would look slightly better when based on book value. Edit: I think Sencnes has a valid point regarding the mark-to-market causing an unrealized gain/loss. Financial markets are one thing, but manufacturing/retail is not the same. ----------------------------------------------- - Who Dares, Wins
Akita T Caldari Caldari Navy Volunteer Task Force	Posted - 2009.10.27 00:07:00 - [23] - Quote In an inflation scenario (material prices go up), the FIFO inventory method undervalues your liabilities ("used up" stocks) and overvalues your remaining stock while the LIFO method (depending on how you look at it) either overvalues or perfectly estimates liabilities while possibly undervaluing remaining stock. In this case, FIFO lets you "claim" lower costs and higher profits early, drastically reducing future reportable profits if the inflation ceases or you try to liquidate the stocks ; conversely, LIFO more or less accurately reports current costs but can only claim lower profits, however in case the inflation ceases or you liquidate your stock your future reportable profits will actually go up. In a deflation scenario (material prices go down), the FIFO inventory method overvalues your liabilities ("used up" stocks) and undervalues your remaining stock while the LIFO method (depending on how you look at it) either undervalues or perfectly estimates liabilities while possibly overvaluing remaining stock. In this case, LIFO more or less accurately reports current costs and can "claim" lower costs and higher profits early, but ignores older, more expensive stocks and therefore it drastically reduces reportable profits if the deflation ceases or you are trying to liquidate the stocks ; conversely, FIFO more or less accurately reports historic costs but claims lower profits, however in case the deflation ceases or you try to liquidate the stocks your future reportable profits will actually go up. Obviously, your total profits in either case are exactly the same, it's only a matter of when you prefer them to be reported (and on whether you are planning to liquidate stocks or not). If there's no material price movement, both FIFO and LIFO methods perfectly evaluate your stock's value, as there's absolutely no difference in the calculations. Obviously, the moving and/or weighted average methods fall somewhere in-between FIFO and LIFO, so, for all intents and purposes, it's a much more accurate (and "honest") depiction of inventory/stock/liabilities values. _ We are recruiting \| Beginer's ISK making guide \| Manufacturer's helper
Wyehr Shadow Of The Light	Posted - 2009.10.27 01:46:00 - [24] - Quote Ok, I could never be an accountant. Not that the math is hard, but keeping a straight face would be. Accounting isn't really math, it is literature. Fiction, actually. Historical fiction or speculative fiction. Usually both. We do accounting not because it is useful to us, but because it satisfies outside parties. Governments, for example, mandate accounting standards either directly or through tax laws. That clearly does not apply in EVE. Additionally, if we carry debt, or if we desire to acquire debt, our creditors may require accounting statements. So, what accounting methods do your creditors require? If they are clever, they should insist on your current ISK balance and your instant liquidation value. Anything else is an opportunity for deception. And not necessarily malicious either. The worst deceptions come from honest people. If someone is totally open and transparent, it is really easy for both of you to miss the structural problems. (Wanna buy a house? Maybe some credit default swaps?) FIFO makes it really easy to hide today's mistakes because all data is, by definition, yesterday's data. And not just one yesterday either, a bunch of different yesterdays all rolled into one. It also, as someone else pointed out, makes your company look freaking awesome during inflation (which may or may not exist in EVE). LIFO isn't any better. It lets you hide today's mistake for as long as you care to. Buy some trit for 3 million ISK each? Not a problem, just buy some more at the regular price and never dip deeply enough into your stockpile to dredge up that old purchase. Oh, and since it is the mirror version of FIFO, if there is any deflation in EVE, someone pointed out that it'll make everything look better. I could go on and on. There are problems with other methods, and there are problems with timing of profits and losses, and there are problems with every possible option for every possible aspect of your accounting procedure. It really is a field where there are no right answers. Hell, there aren't even any right questions. Keep in mind that beyond simple common sense, I am supremely unqualified to have any opinions on accounting. I have no formal education in the field. On the other hand, I have a lot of conversations with the people responsible for the accounting and finance of a local county government, and my roommate is an accountant that rips apart contract accounting statements looking for choices that were made in one party's favor (some honest, some less than honest), then applies them in the other party's favor, and bills for the difference.
Varo Jan Minmatar	Posted - 2009.10.27 02:42:00 - [25] - Quote Originally by: SencneS Imagine you buy something for 100mil and it's value goes up to say 110mil and you don't move it for 3 months. It stays at 110mil for those three months, in which you finally sell it for 110mil. However, each month your profits would report 10mil profit for that month, over say 3 months it would appear you have 30mil Profit. An auditor or an investor would expect that profit to be those three months of Gross Profit ie 30MIL, which in this case it's not, it's just 10mil. edit:- lol sorry I had a brain fart, you wouldn't report it 10mil per month LOL Just 10mil on the first month and 0 as it's value hasn't gone up any more. duh, been a long day. edit#2:- I still don't like it in Gross Profit though.. If you account for asset appreciation of materials in one month, then you use those materials the following month you'll have to remove the "Profit" the following month as now you're using those materials which will also have realized profits when the produced item sells. Some simple, basic, fundamental accounting principles: 1. Stock is valued at the lower of cost or net realisable value. 2. Profit is only taken on sale. So in your example, the stock you purchased at 300m sits in the balance sheet for three months at 300m. It does not get revalued to 310m, no profit is shown as it hasn&t been sold. The other side is a reduction in cash of 300m. Both stock and cash are classified as current assets. When it is eventually sold for 310m, stock is reduced by 300m, cost of goods sold is 300m, sale is 310m, gross profit is 10m. Cash increases by 310m.
Dzil Caldari Sausage Banking	Posted - 2009.10.27 02:56:00 - [26] - Quote Originally by: SencneS Edited by: SencneS on 26/10/2009 23:20:10 Edited by: SencneS on 26/10/2009 23:15:36 Originally by: Prodigal Asset "appreciation" (asset growth as you called it) does not make it on the balance sheet in its own line. On the balance sheet that becomes Gross Profit and valued against the Cost of Goods Sold line of the assets of your Balance Sheet. The only time an assets market value is being considered is when said company is disposing of that asset (or i.e. selling said asset) is looking to sell shares of said company or selling the entire company or operation. In real life this is acceptable, however in EVE, you never really "Dispose" of an asset. Sure you can, but why would you, you'd sell it for whatever you can get for it. Since items don't expire, appreciation and depreciation should be accounted for when running an audit. Although I can see it being used in "Gross Profit" I think it's a little dangerous in there, because unrealized gain or loss. You really shouldn't report it month after month in profits or losses for that matter. Heh. Ebank staff's lack of understanding regarding accounting practices shows it ugly colors. And you even quoted prodigal explaining what dispose/disposition means in accounting. Its tricky business all the way around. Suppose you have a shareholder agreement to increase NAV by 10B in a given year. Now, if you only count NAV changes when you dispose of the inventory, it could mean rushing inventory out the door to prematurely spike the NAV. But to trace the change in value of your investory constantly is a nightmarish accounting task. Dzil's Corp Sales - 200m
Drab Cane Carbenadium Industries	Posted - 2009.10.27 04:03:00 - [27] - Quote Wyehr, its a shame you've only seen the 'external' side of accounting. Yes, the tax laws and public securities laws place many requirements on how things are handled. Yes, it was the need for audited financial for public corporations that really spurred the accounting profession. Yes, the math involved in accounting is relatively simple - its mostly about where to put the numbers. And yes, the numbers can (and often are) manipulated. And fund accounting (used by government and non-profits) is a really strange world. That said, accounting is very important for internal use. Owners and managers need to know where the money is going, where the money is coming from, what's selling, what's not, what expenses are getting out of control, what trends are appearing, how much reserve cash (or line of credit) is necessary to make it through the lean months, etc, etc, and so forth. A successful operation can (and sometimes will) relax their recordkeeping and still turn a profit. But if the managers go too long without watching their numbers, expenses creep up, revenues creep downward, and suddenly there's no profit, no reserves, and eventually no business. I believe this is why Hexx is trying to automate a true accounting system, so his operations have a solid system of reporting and tracking for the managers running the operations. And so the auditors can make sense of it all. And yeah, I'm guilty of having a background in accounting. :) ----------------------------------------------- - Who Dares, Wins
Towaoc Caldari Applied Technologies Inc	Posted - 2009.10.27 04:41:00 - [28] - Quote We've had reasonable success utilizing a standard cost system - essentially an enhanced cost averaging system - for accounting for our manufacturing operations. All purchased materials are applied to work in process at predetermined standard costs. Finished goods coming out of production have a standard cost, which simplifies the task of accounting for inventory and gross margins, particularly when a wide range of goods are being distributed to multiple sales locations. To ensure a high degree of accuracy, standard costs are set and adjusted frequently - typically concurrent with the preparation of weekly financial statements. Standards are set with some "head room" for the purchasers, usually near the midpoint between the bid and asked price of the purchased material, with consideration given to the general price trend of the material. A purchase price variance - the difference between the actual price paid and the standard cost - is recorded at the point of each purchase and accumulated into a running total. The total variance is accounted for as an adjustment to earnings when the financial statements are prepared. Adjustments to standard costs result in inventory revaluations which must also be accounted for as an adjustment to earnings. What about these variances - how accurate is this system? Using our financial results as an example, the year to date purchase price variance and inventory revaluation gain/(loss) combined is less than 1% of sales. Properly managed, a standard cost accounting system can be accurate, reliable and relatively simple to use.
Prodigal Caldari New Genesis Project	Posted - 2009.10.27 05:37:00 - [29] - Quote Originally by: SencneS In real life this is acceptable, however in EVE, you never really "Dispose" of an asset. People dispose of assets all the time. When you sell an asset (i.e. inventory) then you are disposing of it. Most folks just call it a sale but it is still technically disposing of the asset. Originally by: SencneS Imagine you buy something for 100mil and it's value goes up to say 110mil and you don't move it for 3 months. It stays at 110mil for those three months, in which you finally sell it for 110mil. However, each month your profits would report 10mil profit for that month, over say 3 months it would appear you have 30mil Profit. An auditor or an investor would expect that profit to be those three months of Gross Profit ie 30MIL, which in this case it's not, it's just 10mil. edit:- lol sorry I had a brain fart, you wouldn't report it 10mil per month LOL Just 10mil on the first month and 0 as it's value hasn't gone up any more. duh, been a long day. edit#2:- I still don't like it in Gross Profit though.. If you account for asset appreciation of materials in one month, then you use those materials the following month you'll have to remove the "Profit" the following month as now you're using those materials which will also have realized profits when the produced item sells. This it totally wrong. This is the kind of accounting that Enron was doing (an oversimplification of the example but still valid non-the-less). It is the kind of accounting that caused the whole damn real estate bubble in North America which is still causing the rest of the world grief. You cannot account for the "market" value of an asset in your statements. That market value is only relevant at the time you have disposed of said asset. The math in this is pretty straightforward.... You have an inventory item which is worth 100M because either it cost you that much to make it or you bought it from someone else. You now have an asset worth 100M. When you dispose of the asset (i.e sell it) for 110M which is the current market value (i.e. current market value because someone was willing to pony up 110M for it) your reduce your inventory (asset) by 100M and increase your Gross Sales by 110M. The Cost of Sales of that transaction was 100M which leaves you with a Net Profit of 10M. This is essentially what you referred to as "asset appreciation" but you cannot record it as such UNTIL the sale has been made. And the transaction leaves you with net profit not "asset appreciation".
Mahke Aeon Of Strife	Posted - 2009.10.27 05:59:00 - [30] - Quote While FIFO seems like it would make sense to a manufacturer, as a trader LIFO makes a lot more sense (and all actual decisions are of course based on mark to market).

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