accounting profit formula
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In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise (whether by harvest, extraction, manufacture, or purchase) in terms of the component costs of delivered goods and/or services and any operating or other expenses.
There are several important profit measures in common use which will be explained in the following. Note that the words earnings, profit and income are used as substitutes in some of these terms (also depending on US vs. UK usage), thus inflating the number of profit measures.
Gross profitequals sales revenue lesscost of goods sold (COGS), thus removing only the part of expenses that can be traced directly to the production of the goods. Gross profit still includes general (overhead) expenses like R&D, S&M, G&A, also interest expense, taxes and extraordinary items.
Operating profit equals gross profit less all operating expenses. This is the surplus generated by operations. It is also known as earnings before interest and taxes (EBIT), operating profit before interest and taxes (OPBIT) or simply profit before interest and taxes (PBIT).
(Net)profit before tax (PBT) equals operating profit less interest expense (but before taxes). It is also known asearnings before taxes (EBT), net operating income before taxes or simply pre-tax Income.
Net profit equals profit after tax (unless some distinction about the treatment of extraordinary expenses is made). In the US the term net incomeis commonly used. Income before extraordinary expenses represents the same but before adjusting for extraordinary items.
To accountants, economic profit, or EP, is a single-period metric to determine the value created by a company in one period - usually a year. It is the net profit after tax less the equity charge, a risk-weighted cost of capital. This is almost identical to the economist's definition of economic profit.
There are commentators who see benefit in making adjustments to economic profit such as eliminating the effect of amortized goodwill or capitalizing expenditure on brand advertising to show its value over multiple accounting periods. The underlying concept was first introduced by Schmalenbach, but the commercial application of the concept of adjusted economic profit was by Stern Stewart & Co. which has trade-marked their adjusted economic profit as EVA or Economic Value Added.
Some economists define further types of profit:
Optimum Profitâ€”This is the "right amount" of profit a business can achieve. In business, this figure takes account of marketing strategy, market position, and other methods of increasing returns above the competitive rate.
Accounting profits should include economic profits, which are also called economic rents. For instance, a monopoly can have very high economic profits, and those profits might include a rent on some natural resource that firm owns, where that resource cannot be easily duplicated by other firms.
accounting classification, analysis, and interpretation of the financial, or bookkeeping , records of an enterprise. The professional who supplies such services is known as an accountant. Auditing is an important branch of accounting. The Role of the Accountant The accountant evaluates records drawn up by the bookkeeper and shows the results of this investigation as losses and gains, leakages, economies, or changes in value, so as to reveal the progress or failures of the business and also its future limitations and possibilities. Accountants must also be able to draw up a set of financial records and prescribe the system of accounts that will most easily give the desired information; they must be capable of arriving at a comprehensive view of the economic and the legal aspects of a business, envisaging the effect of every sort of transaction on the profit-and-loss statement; and they must recognize and classify all other factors that enter into the determination of the true condition of the business (e.g., statistics or memoranda relating to production; properties and financial records representing investments, expenditures, receipts, fiscal changes, and present standing). Cost accounting shows the actual cost, over a certain period of time, of particular services rendered or of articles produced; by this system unprofitable ventures, services, departments, and methods may be discovered. Development of Modern Accounting Although there were stewards, auditors, and bookkeepers in ancient times, the professional accountant is a 19th-century development. Unlike those precursors, modern accountants usually do not service a single client or employer; instead they offer their expertise, for a fee, to several individuals and businesses. The profession was first recognized in Great Britain in 1854, when the Society of Accountants in Edinburgh was given a royal charter. Similar societies were later established in Glasgow, Aberdeen, and London. In the United States the first such professional society was the American Association of Public Accountants, chartered by the state of New York in 1887. All the states and Puerto Rico and the District of Columbia now have laws under which an accountant who fulfills certain educational and experience requirements and passes an examination may be granted the title Certified Public Accountant (CPA). CPAs have organized into state and national societies. The bodies representing the accounting profession in the United States are the American Institute of Certified Public Accountants, which is the contemporary successor organization of the American Association of Public Accountants, and the American Accounting Association, organized in 1916. In the United States, the Financial Accounting Standards Board, an independent nongovernmental organizaiton sponsored by financial-reporting industry groups, is the main institution responsible for establishing accounting standards and rules. The International Accounting Standards Board develops standards and rules that are accepted by many nations. With the growth of corporate activity in the 20th cent., the field of accounting has increased greatly in importance and has seen many improvements in theory and techniques. The chief causes of changes in accounting methods have been more complex tax laws and regulations and the need to keep uniform accounts for possible governmental or public scrutiny. Contemporary accounting firms also have taken on managerial functions and are no longer concerned simply with ascertaining and reporting financial condition but also with advising a client how to act on this information; they also consult on information-technology systems and other services. This has greatly increased the potential for conflicts of interest, because the services provided to clients by accounting firms must be evaluated in their audits and because the fees paid by a client for such services may be more important to the accounting firm than that paid for an audit, potentially undermining the independence of the audit. As a result, in 2000 the Securities and Exchange Commission specified the types of services accounting firms could provide without compromising their independence as auditors. A series of revelations concerning accounting firms' failure to detect or publicly challenge irregularities or fraud when auditing the finances of a number of corporations led Congress to establish (2002) the Public Company Accounting Oversight Board. The board is appointed by the Securities and Exchange Commission and has the power to register and regulate accountants and firms that act as auditors. It sets standards for audits and is responsible for reviewing audits and disciplining accountants and accounting firms. Bibliography See N. A. H. Stacey, English Accountancy, 1800-1954 (1954); M. Backer, ed., Modern Accounting Theory (1966); L. Goldberg and V. R. Hill, The Elements of Accounting (3d ed. 1966); J. D. Edwards, History of Public Accounting in the United States (1960); A. J. Briloff, Unaccountable Accounting (1972); M. Chatfield, A History of Accounting Thought (1977).
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Answers:Tanya would get 100'000 in ad agency as opportunity profit. But she gets 175'000 instead. So just calculate difference 175'000-100'000=75'000 Correct answer is "C" Economic profit is 75'000.
Answers:This is a simple algebra problem. The only difference between the two formulas is the addition of actual revenue values in the second formula, compared to just the raw contribution values in the first formula. To make it easier to understand, here is an example: Say a company has fixed costs of $100,000, desired profit of $250,000, and a unit contribution of $5. Also assume that the sales price of each unit is $15, which means the variable cost is $10. Sales = (100,000 + 250,000) / 5 Sales = 70,000 By plugging these numbers into the first formula, you find that the company needs to sell 70,000 units to meet their goals. Now onto the second formula: Sales($) = (100,000 + 250,000) / (5/15) Sales($) = $1,050,000 Converting this sales figure back into units (1,050,000 / 15), you arrive back at the same value of 70,000. Hope this helps! :)
Answers:The usual practice is 1.75 times the overhead cost (i.e. the overhead is $2K, the profit should be $3.5K)
Answers:Gross Profit = Revenue Cost of Goods Sold Gross Margin Percentage = (Revenue-Cost of Goods Sold)/Revenue Gross margin is just the percentage of the selling price that is profit. Todd find Gross Margin($) -- if you have a wholesale cost of $10 and a selling price of $15 dollars, your gross margin is $5.00. (15-10=5)