Economic profits differ from accounting profits because ________.
A)the former is calculated by economists and the latter by accountants
B)many firms own their own capital so accounting profits do not factor this cost
C)most firms report economic profits once a year and accounting profits every pay period
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

Economic profits take into account all explicit and implicit costs, including the opportunity cost of using the firm's own capital. Accounting profits only consider explicit costs, such as wages, rent, and materials. Many firms own their own capital, which means they do not pay explicit costs for it, but economic profits factor in the implicit cost of not using that capital in alternative investments. Therefore, economic profits are generally lower than accounting profits. Option A is incorrect because economists and accountants can both calculate economic profits, but with different methodologies. Option C is incorrect because economic profits can be calculated as frequently as accounting profits, it is not a matter of timing. Option D is incorrect because only option B describes the accurate difference between economic and accounting profits, whereas options A and C include inaccurate statements.

Economic Profits Differ from Accounting Profits Because ________