There are times when we get a headache from slapping our foreheads after
reading really bad financial analysis, especially when done by a
well-respected S&P 500 company like Boeing. But, after reading this recent article,
it may be a headache that lasts for a while. As you can read, the
article states that Boeing loses $23 million on each 787 it sells. And
while we understand Microsoft loses money on every XBox One, it makes up for those
losses on the sale of each video game. So, we were wondering how Boeing
was making up the losses on the sale of each 787 until we read this:
"Commercial
jetliner programs typically lose money in the early years of production
until the heavy upfront investments in engineering and production are
repaid. Boeing's accounting spreads those costs over a large block of
planes the company expects to deliver."
In other
words, Boeing is losing money only because they are spreading the
initial cost of the project over the life of the project! Accounting for
the initial cost of a project in this manner not only violates a basic
tenet of capital budgeting, but gives a misleading profitability number
to investors.
