Scenario 9.2
Consider a publicly held firm (one whose stock shares are traded on the stock exchange) that earned revenue worth $350 million and incurred land, labor, and debt costs worth $320 million. The stockholders who have invested a total of $100 million in this firm could have earned 10 percent return on other comparable investments.
-Accountants do not often report economic profits on income statements and balance sheets because:
A)economic profits are exactly the same as accounting profits, and thus they do not need to be broken out in financial statements.
B)the cost of capital, while easy to measure, is very difficult to report.
C)it might make some firms look as though they possessed an unfair competitive advantage over other firms.
D)the cost of equity capital is very difficult to measure, and opportunity costs vary from investor to investor.
E)the concept of economic profit is not firmly established in economic theory.

Question

Quizplus · Accepted Answer

Accountants do not often report economic profits on financial statements because the cost of equity capital is difficult to measure, and the opportunity costs vary from investor to investor. While accounting profits are based on explicit costs, economic profits also account for implicit costs, such as the opportunity cost of capital. Therefore, it is difficult to calculate economic profit accurately and consistently across different firms and investors, which makes it challenging to report on financial statements.

Scenario 9.2 Consider a Publicly Held Firm (One Whose Stock Shares Are