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Accounting explanation - Fourth-quarter losses of automakers

The press report carried the following news item: General Motors, Ford, and Chrysler are expected to post losses on fourth-quarter operations despite sales gains. Automakers' revenues are based on factory output rather than retail sales by dealers, and last quarter's sales increases were from the bulging inventories at the end of the third quarter, rather than from models produced in the fourth quarter.

Required:

Discuss likely accounting-based reasons that contribute to these expected fourth-quarter losses of automakers.

Solution Preview

The comment is misleading because it IMPLIES that the sales and the losses are with the same firms. But, the sales are to the consumers and the losses are at the manufacturing level. Here is the supply chain:

1. Manufacturers sell to Dealers

Then...

2. Dealers sell to consumers

The auto manufacturers record revenues ...

Solution Summary

The solution explains how the supply chain creates profits at manufacturers at different times than the profits at dealers. It is about 194 words.

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