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Need Info on Gross Margin Computations, GAAP and non-GAAP earnings

Discussion in 'TSLA Investor Discussions' started by Papafox, Apr 6, 2015.

  1. Papafox

    Papafox Active Member

    Jan 12, 2013
    #1 Papafox, Apr 6, 2015
    Last edited: Apr 6, 2015
    I'm trying to better understand how certain costs affect gross margins and both GAAP and non-GAAP earnings. Your insights are appreciated.

    For Gross-margins, I need to understand this issue. If Tesla produces 11,000 cars in a quarter and delivers 10,000 of them, are the gross-margins figured on the cost of producing the 10,000 that were delivered and paid for? That is my understanding, but I want to know if I have it correctly.
    * Are R&D expenses figured into gross margins? If so, how do R&D expenses for work on Model X get assigned while Model S is under construction? Does Model S have to carry some of Model X's R&D expenses or are these expenses carried forward to Model X? If so, how can these expenses divided up when the size of the Model X production run is unknown?

    For GAAP and non-GAAP earnings, where do we draw the line between CapEx and costs?
    * I suspect that R&D is considered an expense when figuring earnings, correct?
    * Are the installation of supercharger stations, stores, and service centers CapEx or costs?
    * I've been told that gigafactory work is CapEx. Do you agree?
    * I assume that anything that is considered CapEx is depreciated and that depreciation is a cost figured into GAAP and non-GAAP earnings. Correct?

    Many thanks!
  2. cpa

    cpa Active Member

    May 17, 2014
    Central Valley
    I cannot comment on non GAAP, as I do not have their trial balance or their accounting policies and procedures, and how they reconcile.

    Gross margin (also known as gross profit) is simply defined as sales minus cost of goods sold. Cost of goods sold is all the direct costs in manufacturing their automobiles plus Tesla's allocation of indirect costs towards the manufacturing. All raw materials, work in process and finished goods that are unsold or unused at the end of each accounting period are on the balance sheet as inventory. Essentially, cost of goods sold equals beginning inventory plus purchases plus indirect costs allocated less ending inventory.

    Under GAAP, research and development costs are generally expensed as incurred. There may be exceptions to this general rule, but it has been a long time since I performed accounting and auditing services.

    Supercharger locations are capitalized and depreciated over their estimated useful lives. Once the stations are "placed in service," all continuing costs to operate, repair, replace, etc., are period costs and expensed as incurred. I suspect that service centers and stores are on leased property, so the costs for leasehold improvements and the like are capitalized and depreciated. Those costs would include demolition of existing structures and likely the lease payments to the lessor until they receive an occupancy permit from the city. Yes, almost all costs associated with the gigafactory will be capitalized into various categories on Tesla's balance sheet. There may be a few period costs, but they would be immaterial.

    Capital expenditures are depreciated over their estimated useful lives from the date the assets are placed into service. Tesla's policies might have different useful lives or depreciation methods for GAAP and non-GAAP purposes. Tesla may have salvage values on selected assets that are different between GAAP and non-GAAP. Tesla may capitalize research and development costs (including interest) for the Model X for non-GAAP purposes.

    I would hazard a guess that Tesla's 10K might shed more light on their accounting policies and procedures, so you might take a gander at that document. You can find a copy at the SEC "Edgar" website.
  3. Papafox

    Papafox Active Member

    Jan 12, 2013
    CPA, your quick reply is much appreciated!

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