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Accounting Allah shmoop accounting methods Life O V Fi Foh

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So there's a war It's not in the White House

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It's not in China It's not in the Middle East

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It's not in the hallowed halls of accounting firms everywhere

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Life O V Fye Foe the smackdown in this corner

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Meet life Oh last in first out and in this

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corner Meet Fife Oh first in first out Let's rewind

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a moment to illustrate in Deadpool fashion SHMOOP West Airlines

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buys jet a fuel for its fleet by the mega

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ton It typically stockpile six months fuel at a time

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So there just in case there are any global supply

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issues Shmoop West can still keep flying the somewhat friendly

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skies In the beginning of the year January ish Shmoop

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West was paying two dollars a gallon for jet eh

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But of course a bomb went off somewhere in an

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oil rich country and jet A prices spiked in March

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two three fifty a gallon Shmoop West kept using the

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same fuel in the same plains along the same routes

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and all the fuel got more less mixed together in

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the same tank So think about a given flight from

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Phoenix to Austin with one hundred nerds paying two hundred

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dollars each on that plane That's twenty thousand dollars of

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revenues with expenses of five grand for well everything else

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but fuel And we're just taking an average allocation from

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pilot Stu's peanuts landing fees insurance wear and tear on

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the plane and so on Then fuel burned is eighteen

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thousand pounds or about three thousand gallons of fuel And

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yes they quote fuel in pounds in airplane land so

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that fuel burned on the flight from Phoenix to Austin

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is the same fuel burn whether we're in January or

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April or July and whether or not fuel costs a

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dollar five dollars or twenty dollars In Alan they might

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bring slightly more on hot days than cold ones but

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it surrounding air different So just moving on so the

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flight burns three thousand gallons How do we assess the

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profitability of that flight Are reusing jet a fuel we

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bought in January for two bucks a gallon or are

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we using the recently bought fuel at three fifty a

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gallon Huge difference is here at three thousand gallons at

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two dollars a gallon Cost Six thousand dollars in that

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twenty thousand dollars in revenue from the Nerd Bird flight

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with five grant in unit expenses gave us nine grand

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in pretax operating profits Pretty good but if we use

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is our cost the three fifty a gallon fuel Then

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instead of six thousand dollars in fuel costs those costs

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were ten thousand five hundred dollars taking our profits from

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that flight all the way down to forty five hundred

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bucks So which accounting method do we use Fi faux

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or life Oh well what is always the answer here

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Yes it depends Yeah it's really about consistency Some airlines

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report a blended fuel cost and take a running average

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of what they paid for fuel say the last six

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months Others you strict life o others you strict by

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foe So let's say we took quote running hundred eighty

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day average unquote as the price that was set for

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fuel And we're now in June and roughly half the

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fuel from the two dollar a gallon purchases is left

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over Any other half is the current three fifty a

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gallon fuel that's being used So we have a fifty

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fifty allocation here or a blend that has a cost

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per gallon average of two Seventy five to give US

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six thousand seven hundred fifty bucks then in contributed profits

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on the nerd bird from a cash flow perspective in

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the end doesn't matter No matter which earnings calculation we

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used the cash went out the door to buy the

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fuel when it needed TIO It's on ly the estimation

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of earnings here That changes and the key idea here

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is consistency That is if we are always using a

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trailing one hundred eighty day fuel cost average then that's

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totally fine as long as it's disclosed and noted But

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you can imagine the chick Ai Neri that could go

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on with Rhea Learnings if accountants flipped and then flopped

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as toe which method of accounting for fuel costs they

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were using in a given quarter for poor old the

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shmoop West Airlines So consistency is the key here in

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any fife O or life Oh smackdown Pick a smacker

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downer and then you know stick with her through the 00:03:56.28 --> [endTime] fight Yeah

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