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Author Topic: [ok] Profit vs. Cash flow, Accounting, Income statement  (Read 19830 times)

Offline Sami

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #20 on: December 09, 2013, 11:31:42 AM »
Don't know if ongoing monthly leases should be under 'Net operating income/expense'?  And one-time lease costs under 'capital expenditures'?  ..did not quite find a reference for this how it's used to calculate.

Fuel contract's monthly fixed cost is under 'Purchases of investments' (='Fuel contract fees' in income statement) . But fuel cost (hedged or not) itself is under ops costs. It's rather hard to split it into any more pieces.

Offline JumboShrimp

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #21 on: December 09, 2013, 02:16:54 PM »
I am not sure if AWS needs the full GAAP accounting, if someone wants to take a shot at explaining it, feel free...

Things such as depreciation of aircraft, book value that is different from market value, then perhaps back to mark-to-market seems may be an overkill.  For extra joy, we may have GAAP depreciation separate from tax depreciation, to confuse everyone but a couple of CPA who may be playing.

I think the current cash accounting may be sufficient for purposes of AWS, while fixing very few things that drive everyone crazy.  When Monday comes, and some figure shows up, everyone know that that figure is useless.  We need to go to full Income statement and decode things:  Everyone spends a minute to subtract out all of the one time items in order to arrive at the real figure.  Doing just that, segregating one time items would solve 90% of the issues people have with the accounting.

To make players 90% satisfied, I would just keep the current cash accounting system and just improve the reporting of it to make it useful.
The improvements to accounting that would still be common sense, and also very simple.  For P/L:
1. segregate all of the one time items, (deposits, pre-payments) on the P/L from ongoing expenses so that the player can easily see his operating P/L
2. there is no #2

For balance sheet, assets = current calculation for CV + deposits + prepayments

What is there to gain from GAAP style accounting?
- taxes could be more correct, less wacky
- more accurate representations of costs when expense of using an aircraft is its depreciation

Kind of useful, but at the same time, more difficult to understand for some.  If we do end up building GAAP accounting, some of the ingredients to make it work would still be things lacking now, such as segregating, for example, a billion dollar 40 aircraft lease prepayment from the rest of my lease payments, since they would be categorized differently.
« Last Edit: December 09, 2013, 02:28:49 PM by JumboShrimp »

Offline JumboShrimp

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #22 on: December 09, 2013, 02:22:36 PM »
And in a cash accounting system, I think lease payments would be under operating expenses, fuel contract (cost and savings from it) would also be under operating expenses. 

Hedge, gain or loss from it is more of a financial activity.

Offline JumboShrimp

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #23 on: December 09, 2013, 03:38:37 PM »
Maybe the thing to do would be to just completely take all the one time items from the Income statement and move them to Cash Flow and Balance sheet and make things more GAAPish

These would be:
- Purchase, sale of aircraft
- Pre-payments of leases (both sides)
- Slot Purchases

When aircraft is leased:
- P/L nothing
- Cash Flow Pre-payment category is increased by the amount
- Balance sheet Prepayment Category is increased by the amount

At midnight
- P/L statement would record 1 day lease of the aircraft
- Cashflow statement would do nothing for aircraft in pre-paid period (Aircraft after prepaid period would record 1 day use in Lease category)
- Balance sheet Lease Prepayment category is reduced by 1 day lease of the aircraft

When aircraft is purchased, New:
- P/L nothing
- Cashflow would reflect the amount of down payment
- Balance Sheet would increase Deposit / Down Payment Category

When aircraft is purchased Used
- P/L nothing
- Cashflow would reflect the amount spent
- Balance Sheet would increase Deposit / Down Payment Category

When aircraft is delivered
- Cashflow: nothing if fully prepaid, or balance
- Balance sheet: Deposit / Prepaiment - subtract the amount paid originally
- Balance sheet: Add Market Value of the aircraft to current assets
- P/L: record difference between Market value and sum of prepayment and current payment as Gain / Loss

The expense of flying the aircraft could be its depreciation, but we can forget that and just use changes to Value of the aircraft.  Normally, value goes down with age.  So on the day of the week when it happens:
- P/L: record the difference between the old and new as Gain / Loss
- Balance Sheet: Reduce Assets by change in aircraft market value
- Cashflow: Nothing

This would side-step dealing with differences Market (Calculated) Value and Book Value.  The Market Value would be a proxy for Book value, changes to Market Value would be proxy for Depreciation.  At the end of useful life of an aircraft, the value would approach zero and it would eventually be scrapped...  This Gain / Loss would be sort of a depreciation, or close to it.  It would be the only source of "losses", and it would prevent whole-sale tax evasion that is going on  :o :o :o
« Last Edit: December 09, 2013, 03:41:46 PM by JumboShrimp »

Offline Sami

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #24 on: December 09, 2013, 09:55:02 PM »
The calculated value for a/c in current format is a bad metric as it may go up even if inflation is rapid. And all companies depreciate their assests on some, usually fixed, schedule so it would be completely opposite....

And AWS has potential also outside the regular public consumer field, so I'm taking this a bit further than just fixing the issues in the current incomesheet (been in plans for long already). But still trying to keep it down a bit so that it is understandable to normal players (and manual will explain them too).

Balance sheet will be added, and income sheet won't change that much so I guess most people still use that later on too.
« Last Edit: December 09, 2013, 09:57:51 PM by sami »

Offline JumboShrimp

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #25 on: December 09, 2013, 11:40:17 PM »
I was just trying to side-step the issue of book value vs. market value by coming up with a simplification that in the end is close enough, and serves 2 purposes: depreciation-like accounting expense, while maintaining market value of Airline's assets.

But it could just as well be replaced with proper depreciation.  Here is a document I found to get some basic conventions:
https://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/components-of-aircraft-acquisition.pdf

Some quotes:
"Generally, aircraft assets are depreciated over 15-25 years to residual values of between 0-20 percent.  Straight line method of depreciation is the most commonly used."

Some differences are noted between LH aircraft and SH aircraft, I am guessing LH aircraft may be at the longer end, SH shorter end.  As opposed to using more realistic life of say 15 years, they get into impairment (such as having a 15 year Classic when MAX is launched).  In appendix, the most sane method seems to be Singapore that avoids some of the issues:
New: 15 year depreciation residual value of 20%
Used: 15 years less age of aircraft, residual value of 20%

As far as leases, the US method is the most straight forward:
"in the US, operating lease expenses are generally reported as operating expenses, similarly to fuel or wages"
http://en.wikipedia.org/wiki/Aircraft_finance

Of course, we will have to segregate the prepayments as I described above.

I am hoping that someone with accounting background can come up with a chart of accounts applicable to an airline.  Or maybe, an quarterly / annual report of a real airline may be a good start.

Offline Sami

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #26 on: December 10, 2013, 12:00:26 AM »
I am hoping that someone with accounting background can come up with a chart of accounts applicable to an airline.  Or maybe, an quarterly / annual report of a real airline may be a good start.

(I do have a couple of airline finance related books here.  .. haven't read those from cover to cover yet but got most info I need)

Straight-line depreciation from ordering value to 15/20% remaining value over the period of 15/20 years is probably what will be used. No need to make it complicated. (15 or 20, not sure if that matters but have to choose either of those ... Probably 20y and 15% value.)
« Last Edit: December 10, 2013, 12:10:17 AM by sami »

Offline JumboShrimp

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #27 on: December 10, 2013, 01:03:59 AM »
Came across some info from Southwest annual report, starting page 83, selecting categories useful to us:
http://southwest.investorroom.com/download/2012+Annual+Report.PDF

Balance Sheet:

ASSETS
Current assets:
  Cash
  Prepaid expenses (leases)
Total current assets
Property and equipment, at cost:
  Flight equipment
  Deposits on flight equipment purchase contracts
  Less allowance for depreciation and amortization

LIABILITIES AND STOCKHOLDERS’ EQUITY
  Loans
  Retained earnings?


Income Statement:

OPERATING REVENUES:
  Maybe broken down by classes
  Lease income?
Total operating revenues

OPERATING EXPENSES:
  Salaries, wages, and benefits
  Fuel and oil
  Maintenance materials and repairs
  Aircraft rentals (leases)?
  Landing fees and other rentals
  Depreciation and amortization
Total operating expenses

OPERATING INCOME (revenue - expense)

OTHER EXPENSES (INCOME):
  Interest etc

INCOME BEFORE INCOME TAXES
PROVISION FOR INCOME TAXES (maybe actual)
NET INCOME

I hope I did not edit out anything important

Offline LemonButt

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #28 on: December 10, 2013, 02:40:28 AM »
I didn't read this entire thread word-for-word, but the one item that absolutely needs to be included in the income statement for tax calculation purposes is carry forward losses.  If you have $100 million in revenue and $110 million in expenses, that negative $10 million needs to carry forward to the following year.

For the balance sheet, retained earnings is essentially the difference in company value year-over-year and would be the figure used for calculating taxes.  Stockholder equity I don't think would be a line item unless sami incorporated some sort of stock shares/options for CEO pay, which would be a cool feature to include and would make CEO wealth a little more relevant.

Prepaid leases are an asset and a liability when leasing out aircraft (you get the lump sum for 4 months, but still owe 3 months of lease time, for example).  The easiest way to handle this IMO is create an escrow account for every airline.  When you prepay a lease, the money goes into the escrow account and instead of having a lump sum lease item and then 4 months of zeros, you'd have that lump sum go into the escrow account and each week a portion would go to the leasing company and show up as a weekly operating expense (because it is).  Then for company value you can just add the escrow account balance in to adjust for prepaid leases that are assets/liabilities.  If you are leasing an aircraft out, you would get the lump sum as you do today, but your escrow account would have a negative balance that would zero out after 4 months (negative balance = liability because you owe an airline several months of lease).

The escrow account could also handle taxes.  If we are going from accrual to cash accounting, you could also use the escrow account to set aside staff salaries on a daily basis instead of weekly.  So instead of $7 million getting taken out on Tuesday, you'd have $1 million taken out every day.  This will also slow down airline growth (which is a good thing) as players can wait until Monday when their cash levels peak to make big purchases they couldn't otherwise since staff salaries can be paid with negative cash.

An escrow account will always just be a number and players wouldn't be able to spend the money, but would reflect prepayments and liabilities and make it easier to create an income statement with prepayments taken into consideration.  It will also provide a structure to build on if new features, such as selling tickets more than a day in advance.  If I buy a ticket online two weeks before a flight, the airline gets my money today in their bank account and has a liability on their books.  There could also be legacy/pension costs for airlines that have been in business long enough to have retirees which could add another layer to the game.

BD

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #29 on: December 10, 2013, 04:22:56 AM »
OPERATING EXPENSES:
  Salaries, wages, and benefits
  Fuel and oil
  Maintenance materials and repairs
 Aircraft rentals (leases)?
  Landing fees and other rentals
  Depreciation and amortization
Total operating expenses
Are prepaid aircraft leases amortized over the period they cover?  Right now, on a cash accounting basis they hit in lumps when paid, then zero for the duration of the period covered.

Offline Sami

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #30 on: December 10, 2013, 03:43:09 PM »
The 'beta' cash flow statement page is updated: http://www.airwaysim.com/game/Office/Cashflow    (ctrl+f5 on first page load please to load the new script)

It's mainly a technical update with the charts and expandable data. Placement of data (ref. previous posts) is unchanged still, but items for prepaid leases/planes will be added, and I guess then it's ready?  And ongoing lease payments moved to ops costs.
« Last Edit: December 10, 2013, 04:00:10 PM by sami »

Offline LemonButt

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #31 on: December 10, 2013, 04:13:44 PM »
The 'beta' cash flow statement page is updated: http://www.airwaysim.com/game/Office/Cashflow    (ctrl+f5 on first page load please to load the new script)

It's mainly a technical update with the charts and expandable data. Placement of data (ref. previous posts) is unchanged still, but items for prepaid leases/planes will be added, and I guess then it's ready?  And ongoing lease payments moved to ops costs.


There is a typo with "Sales of fixed assests".

"investing activities" should probably be called "capital expenditures" and change the capital expenditure lines to just "Fixed Assets" and "Intangible Assets" because investing isn't the best word IMO (technically every expense is an investment in the business).

Also, "Liquid Funds" should just be called "Cash on hand".  "Change in cash flows" should just be "Net cash flow".

Are new base fees included as an intangible or fixed asset expenditure that can be depreciated or amortized over time?

Offline LemonButt

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #32 on: December 10, 2013, 04:15:04 PM »
It also looks like the Yearly view isn't working properly (not sure if the data just isn't there).  It says I had $500 million in cash three years ago...I wish.

Offline Sami

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #33 on: December 10, 2013, 04:22:06 PM »
It also looks like the Yearly view isn't working properly (not sure if the data just isn't there).  It says I had $500 million in cash three years ago...I wish.

Since withdrawn loans from the past are not in the data, I guess that screws it up (since only loan payments are there). So that'll work for new games only


And the item 'Cash flow from investing activities' is a commonly used term, that's why I used it.

Offline 11Air

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #34 on: December 10, 2013, 04:36:43 PM »
And Company index should start at 100pc. Pax x CI/100 then gives the number of available Passengers prepared to book with this airline.
Same way the Company Pre-Tax Profit where expressed as a pc should be based on Company Value.
The figures then would mean something to 'normal' people rather than just fluctuating wildly.
The idea is that the co.profit over co.value gives an idea of company management performance being good or bad and will show trends.

That's enough accounting now, I'm need to sleep.

Offline JumboShrimp

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #35 on: December 10, 2013, 06:58:18 PM »
I didn't read this entire thread word-for-word, but the one item that absolutely needs to be included in the income statement for tax calculation purposes is carry forward losses.  If you have $100 million in revenue and $110 million in expenses, that negative $10 million needs to carry forward to the following year.

That would be a nice option, but in general, this scenario will be rare - a lot more rare than currently.  Currently, most of the "losses" are from prepaying leases or deposits on purchases.  These spikes will disappear.  The P/L will be a lot smoother once these one time items no longer affect P/L.

The only other one time item, slot purchases, probably does not need to be amortized, it can probably be expensed, so that may affect things.  I think we are quite far from having this GAAP style accounting and taxation implemented, and this sounds like an additional feature on top of that, once it is implemented.

For the balance sheet, retained earnings is essentially the difference in company value year-over-year and would be the figure used for calculating taxes.

I think so.  I guess the system maintains all of the other variables, and the end result, the profit/loss will be calculated as a difference between income and expenses and added to retained earnings.

Stockholder equity I don't think would be a line item unless sami incorporated some sort of stock shares/options for CEO pay, which would be a cool feature to include and would make CEO wealth a little more relevant.

Yeah, I skipped that, too complicated.

Prepaid leases are an asset and a liability when leasing out aircraft (you get the lump sum for 4 months, but still owe 3 months of lease time, for example).  The easiest way to handle this IMO is create an escrow account for every airline.  When you prepay a lease, the money goes into the escrow account and instead of having a lump sum lease item and then 4 months of zeros, you'd have that lump sum go into the escrow account and each week a portion would go to the leasing company and show up as a weekly operating expense (because it is).  Then for company value you can just add the escrow account balance in to adjust for prepaid leases that are assets/liabilities.  If you are leasing an aircraft out, you would get the lump sum as you do today, but your escrow account would have a negative balance that would zero out after 4 months (negative balance = liability because you owe an airline several months of lease).

Yes, in effect.  These accounts that would be on the Balance Sheet (Prepaid leases, incoming and outgoing) act as an escrow account.  I have an example above, that shows how, using these accounts, the pre-payments will not create spikes in P/L.

The escrow account could also handle taxes.  If we are going from accrual to cash accounting, you could also use the escrow account to set aside staff salaries on a daily basis instead of weekly.  So instead of $7 million getting taken out on Tuesday, you'd have $1 million taken out every day.  This will also slow down airline growth (which is a good thing) as players can wait until Monday when their cash levels peak to make big purchases they couldn't otherwise since staff salaries can be paid with negative cash.

Taxes will be a lot more gradual thing under the new system.  One feature I would like to see implemented is that each new month would not be treated independently.  Let's say January is.  Then on February, liability YTD would be calculated, and only the difference would be paid.  I guess kind of like an escrow account that you describe.  If January had a 1m loss, and Feb had 2m profit, YTD profit would be 1m, and since nothing is in the escrow account, taxes on 1m would be paid.  Then, year end (January 15) would generally be very uneventful...

An escrow account will always just be a number and players wouldn't be able to spend the money, but would reflect prepayments and liabilities and make it easier to create an income statement with prepayments taken into consideration.  It will also provide a structure to build on if new features, such as selling tickets more than a day in advance.  If I buy a ticket online two weeks before a flight, the airline gets my money today in their bank account and has a liability on their books.  There could also be legacy/pension costs for airlines that have been in business long enough to have retirees which could add another layer to the game.

Those features should be left out, not to make things complicated.  A simple system of cash for tickets coming in on the day of the flight is sufficient for now.

Offline LemonButt

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #36 on: December 10, 2013, 07:11:56 PM »
That would be a nice option, but in general, this scenario will be rare - a lot more rare than currently.  Currently, most of the "losses" are from prepaying leases or deposits on purchases.  These spikes will disappear.  The P/L will be a lot smoother once these one time items no longer affect P/L.

If you start an airline with $10 million and bootstrap to grow quickly, you will be carrying forward losses from day 1 for several years into the game.  It wouldn't be rare--it would affect every airline starting on day 1.

Offline JumboShrimp

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #37 on: December 10, 2013, 07:33:25 PM »
If you start an airline with $10 million and bootstrap to grow quickly, you will be carrying forward losses from day 1 for several years into the game.  It wouldn't be rare--it would affect every airline starting on day 1.

Not to get bogged down on the details, I think once this is implemented taxes will be far less of an issue.  For example, the 10m, let's say you spend 8m on aircraft, that expense will take 4 months to recognize fully, so you would not see a sudden loss of 8m on day 1.

Another big item early on - slots - maybe those should be depreciated and eventually carried as asset worth zero, since they can't be sold anyway...  And if the slots are depreciated over, say 5 years, they will only very slowly be hitting the P/L.

I think in general, profitable and growing airline will be profitable, paying yearly taxes along vast majority of its life time.  When the airline is truly losing money, it probably is on its way out...

Offline LemonButt

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #38 on: December 10, 2013, 08:17:57 PM »
Not to get bogged down on the details, I think once this is implemented taxes will be far less of an issue.  For example, the 10m, let's say you spend 8m on aircraft, that expense will take 4 months to recognize fully, so you would not see a sudden loss of 8m on day 1.

Correct, but if you start with $10 million, spend $8 million and then do nothing, your bank account would have to reach $10 million before you are taxed (any balance less than $10 million would indicate you still have losses).  Most airlines won't see $10 million for years because they are growing rapidly at the start and spending that money.  This is mission critical for small airlines because they can spend months saving up to buy one set of slots only to get undercut unnecessarily by the taxman.

Offline JumboShrimp

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Re: Profit vs. Cash flow, Accounting, Income statement
« Reply #39 on: December 10, 2013, 08:25:41 PM »
Correct, but if you start with $10 million, spend $8 million and then do nothing, your bank account would have to reach $10 million before you are taxed (any balance less than $10 million would indicate you still have losses).  Most airlines won't see $10 million for years because they are growing rapidly at the start and spending that money.  This is mission critical for small airlines because they can spend months saving up to buy one set of slots only to get undercut unnecessarily by the taxman.

The cash account itself is not relevant to what would be recognized as profit.  It is just one of many on the asset side, and money can flow freely between these accounts without necessarily affecting profit.

It is in the end (as you mentioned earlier) the retained earnings account that is a measure of profitability, and that account will move up and down slowly.

 

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