Asked by Shreyans Nanavati on May 19, 2024
Verified
Which of the following expressions is correct?
A) accounting profit = economic profit + implicit costs
B) accounting profit = total revenue − implicit costs
C) economic profit = accounting profit + explicit costs
D) economic profit = total revenue − implicit costs
Accounting Profit
The financial gain calculated by subtracting total expenses from total revenues, according to standard accounting principles.
Economic Profit
The profit from undertaking an activity after subtracting both the explicit and implicit costs associated with that activity.
Implicit Costs
Expenses that do not involve a direct monetary payment but represent the opportunity cost of using resources owned by the company or individual.
- Differentiate between the concepts of explicit and implicit costs and comprehend their significance in relation to economic and accounting profits.
Verified Answer
LR
Laura RovakMay 21, 2024
Final Answer :
A
Explanation :
Economic profit is calculated by subtracting both explicit (direct) and implicit (indirect or opportunity) costs from total revenue. Accounting profit, on the other hand, only subtracts explicit costs from total revenue. Therefore, to find economic profit from accounting profit, one must also subtract the implicit costs. This makes option A correct: accounting profit = economic profit + implicit costs.
Learning Objectives
- Differentiate between the concepts of explicit and implicit costs and comprehend their significance in relation to economic and accounting profits.