> But oh what a difference it makes in the accounting! In the first case, where Autodesk sold the copy of AutoCAD to the dealer, that was the whole transaction; whatever happened to the copy of AutoCAD after the dealer paid for it has no effect on Autodesk’s books. Autodesk sells, dealer pays, end of story. But in the second case, when Autodesk sells to Spacely Sprockets, that appears on Autodesk’s ledger as a sale of AutoCAD for $1000. The instant the $1000 shows up, however, we immediately cut a check for the commission, $500, and mail it to the representative, leaving the same $500 we’d get from the dealer. Same difference, right? Not if you’re an accountant! In the first case, Autodesk made a sale for $500 and ended up, after expenses and taxes, with $125, and therefore is operating with a 25% margin (125/500). In the Spacely sale, however, the books show we sold the product for $1000, yet wound up only with the same $125. So now our margins are a mere 12.5% (125/1000).

I'd like to know how an accountant would respond to the above. Based on his two examples, it seems like accounting rules really distort the financial picture of a company.

I think the accountant would retort that it's way better to get $125 of profit from $500 of revenue than from $1000 of revenue, overall. In the former case, you have a lot of padding for conditions to change, and in the latter case you don't.

And, if there's some outside dealer that can make a profit taking their $500 cut, but you need to pay all of the $500 out-- it seems like your sales function is less efficient-- less efficient than the rest of Autodesk and less efficient than the outside dealer.

Margins aren't everything. Absent outside judgment, I think I'd rather make, say, $175 profit from $1k of revenue than $125 from $500. But I wouldn’t trade $125 on $500 for $126 on $1,000.

And, of course, there's always the strategic concerns. Control of accounts, opportunities to upsell or cross-sell, etc, etc. Financial reporting can't tell the whole story, because you can't boil down the whole story of a company to a few numbers. It's the triumph of GAAP that it's a pretty dang good start to understanding most companies.

You should see the accounting bullshittery around data centers!

He is talking about the effect on stock price. The second scenario results in lower margins. Stock market analysts look unfavorably on this.

We have something similar with tariffs. We pass them through to the client, and they show up as revenue and expenses like this Autodesk example.. But, we immediately deduct the tariff expense from the tariff revenue above the gross revenue line, so Gross Revenue is not affected.

Perhaps R&D expenditures should be a mandatory disclosure?

Profitability is all lies, you report what you want, the goal is to ensure whatever numbers you want to communicate raises nicely quarter over quarter.