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Varo Jan
Minmatar
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Posted - 2009.10.28 05:20:00 -
[91] - Quote
The Dominion loot logger should help: Link
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Claire Voyant
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Posted - 2009.10.28 12:23:00 -
[92] - Quote
 Originally by: Varo Jan
Originally by: Claire Voyant
Originally by: Varo Jan
Read IAS2. The fundamental principle of that accounting standard is: "Inventories(stock) are required to be stated at the lower of cost and net realisable value (NRV). [IAS 2.9]" In practice, that means that stock enters the balance sheet at cost and remains at cost unless seriously adverse conditions occur. You do *not* revalue stock (a current asset & part of your working capital) upwards. Ever.
While I understand the need for this rule in the real world with real-word products, we are playing an internet space ship game with the possibility of perfectly efficient production and perfectly efficient reprocessing. I for one would like to talk more about why you feel this rule is appropriate in Eve, and less about the way it is done in the real world.
If I am producing shuttles, give me one good reason why I shouldn't value them based upon the current value of the trit they contain, or for that matter, why I shouldn't value a pile of trit at it's current market price.
 Is coding in Eve any different to the real world? Is marketing in Eve different? Is man-management different? Is researching a market different? No, no, no and no. So what&s with all the angst about accounting?
One of the foundations of accounting is conservatism. That principle doesn&t disappear here in Eve. That&s why you should show your shuttles at cost - not at some hypothetical selling price. In fact, the principle applies very strongly here. Look at the recent massive drop in trit alone. Look at the wild fluctuations in module prices you see on a daily basis.
I have repeatedly said I'm not talking about valuing manufactured items at their hypothetical selling price. What I am talking about is updating the "cost" to reflect current mineral prices, call it "current production cost" and updating the value of raw mineral inventory to current market prices. If you ask me, the recent massive drop in trit supports my case.
My first coding project thirty years ago was an accounting program for a commodities futures trader. We used mark-to-market accounting because that was the standard and our statements had to agree with the statements the customers were receiving from their brokers. I know for a fact that accounting standards do change to reflect new technologies, etc.
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SencneS
Rebellion Against Big Irreversible Dinks
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Posted - 2009.10.28 13:52:00 -
[93] - Quote
Originally by: Claire Voyant
I have repeatedly said I'm not talking about valuing manufactured items at their hypothetical selling price. What I am talking about is updating the "cost" to reflect current mineral prices, call it "current production cost" and updating the value of raw mineral inventory to current market prices. If you ask me, the recent massive drop in trit supports my case.
The recent drop in Trit price is the finest reason of all to NOT do what you suggest.
If I purchased 100mil units of trit for 3ISK p/u, build stuff that uses 40mil units. The items I build I would list consists of 3ISK p/u of trit used. If I then adjust the price of the Trit to the now market value of 2.5 ISK, for the remainder of the inventory. I have lost 30mil ISK value. That is simply bad business, regardless of how much the material is worth right now, the cost is ALWAYS what I paid for it.
This is the bases for the whole issue and why NAV is junky.. NAV works well when everything is going up in price, but when it's crashing it's a nightmare waiting to happen.
Now I understand where you're coming from, you're saying. "If I was to buy that trit for 2.5 to replace the Trit I used in my inventory, I why would I use the 3 ISK price I purchased the other units for." That's is LIFO. You use your inventory and instantly replace it with current market value material. It's a fair call and I can see that, in fact I was thinking of using a new term in my sheet and am currently testing it out in theoretical production and marketing runs.. CIFO (Cheapest In - First Out) meaning if I have a stack of raw materials that I have purchased over time, for different prices, I always use the production cost of the cheapest component (Like NASA) 
Example.
I build shuttles, I want to produce 1,000,000 shuttles, and I have a perfect ME BPO.
I goto Jita and refuse to purchase 2.5B units of Trit off sell orders, so I place buy orders.
Lets say I get 2.5B in batchs of 500mil units.
Batch one I paid 2.78 p/u
Batch two I paid 2.63 p/u
Batch Three I paid 2.53 p/u
Batch four I paid 2.69 p/u
Batch five I paid 2.9 p/u
The first 200,000 shuttles I produce use the 2.53ISK p/u batch.
The second 200,000 shuttles the 2.63ISK p/u batch.
If I chose to purchase another 1B units of Trit and the market price is say 2.51 ISK. The next 400,000 shuttles I produce use the 2.51 price.
In real life this would be a crazy idea because there is cost for storing inventory, this cost doesn't exist in EVE so holding onto ancient raw materials carries no burden. What it does do is allow you to ALWAYS get close or better market value (Depending on how often you purchase materials). As the price of materials decline you consume those materials first, as the price of materials goes up, you still consume the cheapest material which could be the 2.9 ISK p/u price.
If you always carry an inventory of Raw materials the "inventory" will always be made up of the most expensive price you paid for the raw material. In the case of the shuttles it's likely I would be holding onto the 2.9 Trit forever if I held an inventory and keep purchasing quantity of trit I consumed in production. My Profit margin would always be higher then LIFO and FIFO even if I sold at the same price.
The point of all of this is you MUST keep your inventory of the unused material at the price you paid for it regardless of what it's worth.
If you the price of Trit say raised to 4 per unit, why would you adjust the price to 4 ISK. You would sell your inventory to get that opportunity cost profit. Then purchase more trit at 4 ISK.
The ONLY way I could justify adjusting inventory cost to market value is if you record the adjustment as a profit or loss.
Meaning if you lose 30mil ISK adjusting the price to current market value you report a 30mil loss.
Amarr for Life |
Wyehr
Shadow Of The Light
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Posted - 2009.10.28 14:23:00 -
[94] - Quote
SencneS, please stop and read your post carefully. You are saying that two identical units of tritanium have different values depending on how much you paid for them. This may be "good accounting", but is it totally ****ing wrong.
If you are wondering, the least insane way for a builder to view the value their inventory is at the price their next batch will cost.
In your example, when the price of trit swung from 2.9 to 2.51, you can put that trit into a new pile, shine it up real good and pass it down to your children as a cherished family heirloom, but that money is gone. If you wait for the value to come back up over 2.9, you'll get your 195M ISK back, but it'll cost you however much you could have earned if you hadn't idled 1.255B ISK of your assets for the duration, and if it never comes back you won't have lost 195M ISK, but 1.45B ISK. |
SencneS
Rebellion Against Big Irreversible Dinks
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Posted - 2009.10.28 14:47:00 -
[95] - Quote
Edited by: SencneS on 28/10/2009 14:48:45
Originally by: Wyehr
SencneS, please stop and read your post carefully. You are saying that two identical units of tritanium have different values depending on how much you paid for them. This may be "good accounting", but is it totally ****ing wrong.
If you are wondering, the least insane way for a builder to view the value their inventory is at the price their next batch will cost.
In your example, when the price of trit swung from 2.9 to 2.51, you can put that trit into a new pile, shine it up real good and pass it down to your children as a cherished family heirloom, but that money is gone. If you wait for the value to come back up over 2.9, you'll get your 195M ISK back, but it'll cost you however much you could have earned if you hadn't idled 1.255B ISK of your assets for the duration, and if it never comes back you won't have lost 195M ISK, but 1.45B ISK.
You do realize in the example I'm also purchasing what was consumed. If I used 1b units of trit I repurchase 1b to recovery the consumption.
I didn't say it was a smart business plan, just the way I was considering accounting for consumption and the rather quick market changes in materials.
What I don't think you understand is I could care less about that trit that cost 2.9 ISK, if it sits there for an eternity, so be it. If I used it in production, a Shuttle would cost 7,250 ISK in materials. There is no way it will ever sell if people are selling for 7,249 and making a 974 ISK per shuttle because they purchased trit for 2.51. It would be utter stupidity for me to keep the shuttles at build cost on the market when everyone else is buying new trit at 2.51 and selling them cheaper.
Sure I could take a loss, but I'd rather sit on the inventory which costs nothing to sit on, and hope one day the price of trit gets above 2.9. And here is why - You say "You'll get your 195M back but it'll cost you however much you could have earned if you hadn't idled 1.255B ISK in your assets..." I didn't idle anything, you can only produce at a given rate, if I choose to purchase materials cheaper then my inventory cost, use it, and sell, my production didn't idle. You can only produce so fast.
Maybe it might help if I added ONE SINGLE LINE to the example.
"I produce shuttles at the fastest rate possible and at the maximum production rate I can obtain, constantly without break."
There does that make it better for you?
Amarr for Life |
Wyehr
Shadow Of The Light
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Posted - 2009.10.28 16:04:00 -
[96] - Quote
Originally by: SencneS
Edited by: SencneS on 28/10/2009 14:48:45
You do realize in the example I'm also purchasing what was consumed. If I used 1b units of trit I repurchase 1b to recovery the consumption.
I didn't say it was a smart business plan, just the way I was considering accounting for consumption and the rather quick market changes in materials.
What I don't think you understand is I could care less about that trit that cost 2.9 ISK, if it sits there for an eternity, so be it. If I used it in production, a Shuttle would cost 7,250 ISK in materials. There is no way it will ever sell if people are selling for 7,249 and making a 974 ISK per shuttle because they purchased trit for 2.51. It would be utter stupidity for me to keep the shuttles at build cost on the market when everyone else is buying new trit at 2.51 and selling them cheaper.
Sure I could take a loss, but I'd rather sit on the inventory which costs nothing to sit on, and hope one day the price of trit gets above 2.9. And here is why - You say "You'll get your 195M back but it'll cost you however much you could have earned if you hadn't idled 1.255B ISK in your assets..." I didn't idle anything, you can only produce at a given rate, if I choose to purchase materials cheaper then my inventory cost, use it, and sell, my production didn't idle. You can only produce so fast.
Maybe it might help if I added ONE SINGLE LINE to the example.
"I produce shuttles at the fastest rate possible and at the maximum production rate I can obtain, constantly without break."
There does that make it better for you?
Of course I realize that you are replacing what you use. That's my whole point. Are you sure that you understand the implications?
As a builder, your cost for production is how much it will cost you in the future to replace the materials you are using right now, not how much you paid for them in the past.
I bolded the funny parts. Your production of shuttles might be humming right along, but you are sitting on a half billion units of trit (or two billion) which are idle, or if you prefer, you are sitting on the liquidation value of that trit in ISK, which is idle. You are throwing good money (the ISK you could earn if you sold that trit and put the proceeds to productive use) after bad (the money you already lost when the price dropped).
By holding onto it in hopes that the value comes back up you aren't engaged in building activity, you are speculating at best, or gambling at worst. This may or may not be a good move for you, but at the very least you should recognize what you are doing.
To tie this back into the main thread, and to the points I've been trying to make since page 1, there is no one right way to do accounting. Even if you follow good practices and make an effort to be open, honest and transparent (as I believe SencneS is) your numbers will lead you into fantasy land if you aren't careful. If you've been paying attention to the real world for the last two years, you've seen thousands of examples this, from real estate to banking and beyond. |
SencneS
Rebellion Against Big Irreversible Dinks
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Posted - 2009.10.28 16:12:00 -
[97] - Quote
My idea - After speaking with Hexxx he said "It's a way for you to ever account for a loss." Which I can see, if the price of Trit never got above 2.9, I'd sit on that inventory forever, assuming the margins I where making where less then the loss I would take by using it.
The issue that I'm trying to solve is one I had in EVE. I would consume a lot of Trit at any given time, between a few mil and up to as much as 80mil units when I ran a production cycle. So in order to get the product out as quick as possible I would hold an inventory of about 100-120mil units of trit. For convenience sake I would use "Average cost" as the cost of the Trit (NOT Market value, but average cost to me). I believe most people do this, some may use market value but I wanted to know how much it cost, not how much it's worth. When I stopping producing close to Trit crashing, the average cost of my almost 100mil units in inventory cost 3.13.
I couldn't sell it for 3.13 even though for a month I was purchasing trit at about 2.95. It was lowering the average every time I purchased but I realized that the average over all had to have a limit on how much to average. I started working using FIFO in my cost of materials but realized there must be a different way. At any given time I would have between 40-60mil units of trit. I ALWAYS had that, while I could have adjusted my inventory to 80mil in stock I didn't because the potential to use 100mil units WAS there.
I realized that in some weeks the rate of consumption was low and FIFO was actually working against me. I had purchased trit for 3, and using it at that price, but there was no way I could use it fast enough to compete with people using 2.8 valued trit. It was then I rationalized myself into using the cheapest inventory I had on hand, regardless of when I purchase it. I couldn't compete with lower prices because EVE's margins are razor thin, and in the ammo business volume is king.
I know that not using the more expensive inventory can lead to artificially inflated profits. My rationalization was pretty simple - While I'm sitting on it, it on my books and the cost in which I paid for it. It's just an asset sitting there not costing anything and I haven't take a loss on it, and eventually trit will be back up over 3 ISK a unit in which I would then be ahead of market cost.
It's like a gamble, at the time the business shuts down the asset at whatever price it is worth then takes a loss. I'm not disputing that, what I'm suggesting is if the company has the means to sit on inventory that may never get used why wouldn't they?
Maybe this is an argument for depreciation, assets sitting in inventory for over a month start to take losses, after a while the depreciated value of the asset is below market value in which you sell it or use it. I could live with depreciation on stagnant assets.
Amarr for Life |
Amentis Artaurus
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Posted - 2009.10.28 16:28:00 -
[98] - Quote
Originally by: Wyehr
This may be "good accounting", but is it totally ****ing wrong.
I've been reading this thread through, especially your posts, because I couldn't understand your line of thinking, but now I think I understand. You are thinking like an economist, not an accountant. Which is fine, and it explains a lot, for me anyway.
Originally by: Wyehr
If you are wondering, the least insane way for a builder to view the value their inventory is at the price their next batch will cost.
I would respectfully disagree. This presupposes that you will actually build a next batch. It may be the best way to view it when you make decisions on what to build or not build, but remember that the op's objective is a representation of assets at a moment in time, existing outside of future decisions, for auditing purposes. Future building costs are irrelevant for the ops purpose, though a builder will obviously need to follow them closely and make decisions based on them. The correct way accounting represents this is cost. Past costs cannot be eliminated for convenience, ever. Except in maybe one case in mergers and acquisitions.
Originally by: Wyehr
In your example, when the price of trit swung from 2.9 to 2.51, you can put that trit into a new pile, shine it up real good and pass it down to your children as a cherished family heirloom, but that money is gone. If you wait for the value to come back up over 2.9, you'll get your 195M ISK back, but it'll cost you however much you could have earned if you hadn't idled 1.255B ISK of your assets for the duration, and if it never comes back you won't have lost 195M ISK, but 1.45B ISK.
Accounting does not attempt to look into the future or record theoretical ways money/materials could be or should be used better. An economist or a financier takes what you describe into account when they make decisions, but auditors simply record things, looking into the past.
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SencneS
Rebellion Against Big Irreversible Dinks
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Posted - 2009.10.28 16:29:00 -
[99] - Quote
I just remembered the biggest reason why I rationalized doing that. I considered the fact that I had IDLE Cash/Capital. Which is worse, Idle cash or idle inventory?
Using the idle inventory is guaranteed to take a loss. Using idle cash to purchased cheaper inventory, use it, and sell product results in a profit.
Amarr for Life |
Wyehr
Shadow Of The Light
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Posted - 2009.10.28 17:22:00 -
[100] - Quote
Originally by: SencneS
I just remembered the biggest reason why I rationalized doing that. I considered the fact that I had IDLE Cash/Capital. Which is worse, Idle cash or idle inventory?
Using the idle inventory is guaranteed to take a loss. Using idle cash to purchased cheaper inventory, use it, and sell product results in a profit.
While I understand your process, I still think that it is an artifact of your accounting method and doesn't reflect reality. In my view, if your inventory is idle because you paid more for it in the past than it is worth now, the loss has already happened. And the fact that you aren't using it means that you know you've taken a loss, even if you don't put it in your books yet.
You are using accounting to justify an irrational decision that you made on an emotional basis.
Holding onto it is a bet that the price is going to come up in the future. If you are sure that the price is going to come back up, you should hold it. Actually, you should buy as much of it as you can afford. If it was a good deal (in this example) at 2.9, surely it must be even better at 2.51, right? |
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Hexxx
Minmatar
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Posted - 2009.10.28 18:43:00 -
[101] - Quote
My solution:
For accountable transactions (cost is known AND price of item sold is known) a cashflow report, income statement, and balance sheet can be automatically constructed using FIFO.
For unaccountable transactions (cost is unknown OR price of item sold is unknown) a cashflow report and NAV report can be automatically constructed.
Now, an auditor/analyst would then probably comment on these published reports. These reports would be generated on a monthly basis for businesses with shareholders and for businesses without shareholders, prior to a bond sale (to assess ability to repay debt).
Whew.
So, how's that look? Also, for private businesses, a regulator could attest that these reports are being generated (preventing a possible EBANK situation from happening again.) Bonus. 
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Prodigal
Caldari
New Genesis Project
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Posted - 2009.10.28 20:55:00 -
[102] - Quote
Originally by: Wyehr
As a builder, your cost for production is how much it will cost you in the future to replace the materials you are using right now, not how much you paid for them in the past.
ZOMG
Sry Hexx (I know this is your thread) but I simply cannot resist stomping all over this one.
Are you really serious about that statement!?!?
This is fundamentally wrong no matter what "accounting method" you are using.
Cheers,
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Wyehr
Shadow Of The Light
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Posted - 2009.10.28 21:44:00 -
[103] - Quote
Originally by: Prodigal
Originally by: Wyehr
As a builder, your cost for production is how much it will cost you in the future to replace the materials you are using right now, not how much you paid for them in the past.
Are you really serious about that statement!?!?
This is fundamentally wrong no matter what "accounting method" you are using.
Yes, I am totally serious. If there is another way to look at (from a builder's point of view) that is more right, it isn't obvious to me.
I'll do a car analogy. You buy a new car and it either comes with a full tank of gas or you fill it up. The cost of that gas either way is part of the cost of the car. As you drive, you borrow from the tank, and you have to refill it at some future rate. If you get screwed and end up paying way too much for gas one day, you sure as hell don't park the car and tell yourself that it is the right thing to do because the gas in it is "worth" a fortune. The gas is "worth" as much as it is going to cost you to replace it after you use it, regardless of how much you paid for it, or how much you should have paid for it.
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Prodigal
Caldari
New Genesis Project
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Posted - 2009.10.28 22:18:00 -
[104] - Quote
Originally by: Wyehr
I'll do a car analogy. You buy a new car and it either comes with a full tank of gas or you fill it up. The cost of that gas either way is part of the cost of the car. As you drive, you borrow from the tank, and you have to refill it at some future rate. If you get screwed and end up paying way too much for gas one day, you sure as hell don't park the car and tell yourself that it is the right thing to do because the gas in it is "worth" a fortune. The gas is "worth" as much as it is going to cost you to replace it after you use it, regardless of how much you paid for it, or how much you should have paid for it.
Only one problem with your analogy....
When you buy a BPO or BPC - It DOES NOT come along with a manufacturing job running in it already.
If this does not make sense to you, then you will have to accept the fact that I simply cannot waste any more time explaining it.
We will simply have to write you off of the books.
Cheers,
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Wyehr
Shadow Of The Light
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Posted - 2009.10.28 22:42:00 -
[105] - Quote
Originally by: Prodigal
Originally by: Wyehr
I'll do a car analogy. You buy a new car and it either comes with a full tank of gas or you fill it up. The cost of that gas either way is part of the cost of the car. As you drive, you borrow from the tank, and you have to refill it at some future rate. If you get screwed and end up paying way too much for gas one day, you sure as hell don't park the car and tell yourself that it is the right thing to do because the gas in it is "worth" a fortune. The gas is "worth" as much as it is going to cost you to replace it after you use it, regardless of how much you paid for it, or how much you should have paid for it.
Only one problem with your analogy....
When you buy a BPO or BPC - It DOES NOT come along with a manufacturing job running in it already.
If this does not make sense to you, then you will have to accept the fact that I simply cannot waste any more time explaining it.
We will simply have to write you off of the books.
You've not made any attempt to explain anything. Actually, I don't see any evidence to suggest that you've made any effort to understand anything either. Unless there was some insight hidden in the numerous smileys and veiled insults that you've offered so far.
I'll admit the car analogy was inexact. I should have anticipated that a person could focus on the car part and totally miss the point. Hint: it was the gas, not the car. It would have been more clear if I'd said "siphon the gas out, store it, and fill it up with new cheap gas" rather than "park the car". Does that help?
Back in Eve production terms, a builder's inventory is part of the investment. On a daily basis, it is the zero point. To build is to borrow from the inventory, and when a sale is made, that loan is paid back. If there is money left over after putting the materials back and paying expenses, that is profit, otherwise there is loss. That profit can be paid out in dividends, used to increase the size of the inventory (aka reinvestment), or whatever. |
Wyehr
Shadow Of The Light
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Posted - 2009.10.28 23:09:00 -
[106] - Quote
Hexxx:
Sorry if it seems like I'm derailing your thread by inviting and following arguments about the utility of accounting in general and about the universality of particular methods thereof. I like to hope that someone has profited from the discussions.
For the record, I think that what you are trying to do is a good thing, and will even be useful. However, I don't think that it will make more than a small dent in the real problem which I see as our inability to understand, assess and price risk.
Just like in real life, a standard for accounting will help assess the risks that we already understand, but won't do much for the risks we don't understand, it I'm not at all sure that it'll help us price any of them. |
Varo Jan
Minmatar
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Posted - 2009.10.30 04:06:00 -
[107] - Quote
Originally by: Claire Voyant
What I am talking about is updating the "cost" to reflect current mineral prices, call it "current production cost"
Financial accounts are compiled from actual data. A company paid 100 for its materials and sold the finished product for 110, resulting in a profit of 10. What the cost price of the materials happened to be on the date the finished product was sold, or any other date between material purchase date and product sale date, is irrelevant.
However, updating costs (outside the financial accounts) to reflect current prices is very relevant for decision-making purposes. I suspect you are failing to differentiate between statutory financial records and management accounts or financial tools to assist in decision-making.
Quote:
My first coding project thirty years ago was an accounting program for a commodities futures trader. We used mark-to-market accounting because that was the standard and our statements had to agree with the statements the customers were receiving from their brokers. I know for a fact that accounting standards do change to reflect new technologies, etc.
None of the 26 industry sectors I&ve worked or consulted in used mark-to-market accounting, so I can&t comment. However, commodities futures trading is not manufacturing, where stock is valued at the lower of cost or net realisable value, and that cost could be standard, average - or very rarely FIFO.
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SencneS
Rebellion Against Big Irreversible Dinks
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Posted - 2009.10.30 13:32:00 -
[108] - Quote
Wyehr is "partly" correct about manufactures using future cost of raw materials as "cost" of materials on current production runs. However what he failed to include is it always comes with a contract from the raw materials supplier and the finished goods producer.
I work for a Automotive Supplier company, one of the, if not largest ones in the world. The process that happens is this.
I'll use Ford because it's smaller to type.
Ford says We need x amount of y component.
Company says We can supply x amount of y component, quote will come shortly.
Company says to Raw materials provider - We will need z amount of w materials, contingent of Ford signing contract i.
Raw materials provider says z amount of w materials will cost v amount.
Company sign contract with Raw materials provider to provide raw z amount of w materials at v amount only if Ford signs contract i.
Company goes back to Ford to with quote where x amount of y component is based on v amount.
Ford signs contract i.
Company doesn't wait for the Raw materials provider to deliver z amount of w materials but starts producing from raw material inventory, or in some cases y component in inventory if that component was cheaper then components made up of w materials, and a discontinued contract on Ford behalf (Which they would have paid part of for breach of contract). 
So it does happen in real life, I can't speak for any other industries but for automotive this IS the way it works. The only reason it is this way for automotive is Ford and pretty much all vehicle manufactures have incredible time constraints. When they want x amount of y components part of the contract is time, how quickly the supplier can provide them. So it's in the best interest of the supplier to maintain a full inventory of raw materials.
I wouldn't be surprised if other suppliers for finished goods manufactures work the same way. It makes sense and is GOOD business for the supplier. To translate that in EVE you would need to be a T2 Component Manufacture suppling JUST T2 ship builders. However in EVE, Raw materials are quick, and easy to get and every raw material you get as exactly the same quality level (perfect) so there is no need to keep an inventory of materials. So in EVE this methodology is extremely redundant and offers no benefit of doing it, and adds complexity that doesn't need to be there.
Amarr for Life |
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