- Brookings released a great report today on the route-by-route finances of Amtrak. Matt Yglesias read it and demonstrated that he knows literally nothing about basic accounting.
- The hitch? The Brookings report excluded roughly 30% of Amtrak's annual costs that are not directly attributable to the specific routes, to the tune of $1.2 billion. In accounting parlance, these expenses are generally referred to as "overhead" and are incurred every year. One of the very first accounting courses required of most finance and accounting students is called Managerial Accounting or Cost Accounting and involves the allocation of overhead to products.
- If you allocate the overhead to each route, either as a percentage of total costs incurred or revenue generated by route, the "operating surplus" from Amtrak's NE corridor disappears. In fact, the allocation of overhead for 2011 turns a $46.6 million "operating surplus" into an $800 million deficit. Those "operating surpluses" are an accounting fiction.
- I read his post, but it turns out that Matt Yglesias didn't read the whole report. How do we know this? Because although his column uses the term "operating profits" multiple times, the phrase doesn't appear a single time in the Brookings report. And why not? Because the Brookings authors know that there are no "operating profits" due to -- you guessed it -- $1.2 billion in overhead costs.
- And we're back to step 1.
- Keep this exchange in mind next time Yglesias opines on stocks and company valuations. After all, he's an expert.
[ADDENDUM: The following hilarious and depressing exchange happened after the Storify story was initially published]