Us Relies On "transformation"

[funguy2]

I'm not talking about paying for a house all cash. I stated buying a house that is way beyond your means...meaning "disposable monthly income" outlay.

Where did you get the implication you cite? You made no sense, because rarely, folks pay all cash for a house, especially in our income. So, why would you illustrate that meaning? My example was an analogy to spending money, you don't have! LIke building a yearly budget on the prospects of winning the lottery.

My point was this...

If I buy a $500K house (way above my means), I do not pay $500K in year 1 and $0 in years 2-30.

Same for US Airways, if they buy an ERJ-170, they do not pay for the whole thing in year 1.

I was mearly illustrating that the way the financial statements work, you don't pay for the whole thing up front.

I did not disagree with your assertion that the downpayment on US Airways "new house" might be beyond the company's means.

 

[BoeingBoy]

funguy2,

Basically, I agree with you except for one small thing. If we buy a RJ, we do indeed pay for it at the time (forgetting the details of deposits, progress payments, etc.) What we do not do is expense it at the time it is purchased - we depreciate it. That is what spreads the cost over years (at least that's my feeble understanding).

Alternatively, when we buy a RJ and then sell it to a leasing company (GECAS for example), there is in theory zero cost to the company in that transaction. The lease payments become expense items going forward. I say "in theory" because I have no idea if we make or lose money in this transaction - if anyone can dig that out of the financial reports my hat is off to them.

At least, this is my "farmboy" understanding.

Jim

 

[funguy2]

funguy2,

Basically, I agree with you except for one small thing. If we buy a RJ, we do indeed pay for it at the time (forgetting the details of deposits, progress payments, etc.) What we do not do is expense it at the time it is purchased - we depreciate it. That is what spreads the cost over years (at least that's my feeble understanding).

Alternatively, when we buy a RJ and then sell it to a leasing company (GECAS for example), there is in theory zero cost to the company in that transaction. The lease payments become expense items going forward. I say "in theory" because I have no idea if we make or lose money in this transaction - if anyone can dig that out of the financial reports my hat is off to them.

At least, this is my "farmboy" understanding.

Jim

Boeing Boy:

I think there is a little more to the story here, which is Accounting 102, and where I get a little bit fuzzy.

Just like buying a house, you do pay for it all at once, but you also take out a loan in order to make that payment (unless you can pay for the house completely out of pocket, which almost nobody can). Thus, yes you do recognize a cash out of the cost of the airplane, but you also recognize cash in proceeds of the loan.

Then, as you pay back the loan, over time, on the balance sheet, your assets remain the same, but your liabilities are less... Like the house, if in 2003 your principle balance on your house was $50K, and its worth $100K, then you own 50% of your house. Next year, your mortgage balance is $45K, now you own $55% of your house... Thus net worth increased. Same for the airplane.

The issue then becomes that airplanes, unlike houses, generally depreciate over time. So, instead of recognizing the loan payment as the "expense" they recognize the depreciation on the aircraft... Similar to the way on the house above you would recognize the appreciation... Using the same example... $100K value of home $50K principle loan balance, you own 50% of your home. After a year, the principle balance declines to $45K, but the house value appreciates to $105K, then you own 57% of your home (you keep the appreciation in your investment, not the bank).

The airplane works more like a car, where you want to expense more of the cost the first year than the 10th year of ownership because the value drops more during the first year than the 10th year...

Now, the company is recognizing an expense of depreciation, however, the company does not make a payment of depreciation to anyone. Depreciation is not a cash expense... When you buy a $20K car, and drive it off the lot, it depreciates to $15K immediately, but nobody took $5K from your wallet. The payment they make is the loan payment back to the bank... This is where the cash flow statement (shows cash balance) and the income statement (shows profit/loss) begin to diverge, and is why cash flow is not the same as profit/loss.

That is the conceptualization, however, the reality is where I get a bit more fuzzy on the issue.

 

[BoeingBoy]

funguy2,

Got it. I was thinking of "paying out of pocket", but the loan does change things. Thanks.

Jim

 

[funguy2]

Yeah... my brain hurts trying to remember the details... And simple examples are tough to come by...