Observable profit is equal to economic profit if perfect markets exist for all commodities and inputs relevant to the entrepreneur under investigation because then there is a coincidence of virtual and market prices.
It is clear that employing observed profit, equation (20), as a measure of economic profit can be in error when dealing with a utility-maximizing entrepreneur who makes choices in an environment of imperfect markets.
The five new terms introduced are market value of the total assets of the business, total intangible assets, identified intangible assets, residual intangible assets, and capitalized economic profit.
Accounting profit is computed in accordance with generally accepted accounting practices, whereas economic profit includes deductions for additional implicit business expenses and opportunity costs such as uncompensated or under-compensated owner work effort.
The board now has a more concrete and effective means of assessing the performance of the executives who run the units, seeing who is most capable of growing economic profits over time.
If a CEO wants to perpetuate value-destroying businesses, the board should actively intercede and insist on a resolution that quickly yields positive economic profits or else remove that business from the portfolio.
Section 2 discusses the standard incorporation of sunk costs into the total cost function and the resulting problem of measuring economic profits.
Using a total cost function with this theoretical inconsistency leads to an incorrect assessment of economic profits and may lead to incorrect decisions on the profit-maximizing production level.
Further support for the claim against transfer pricing rules is that counter-intuitively, transfer pricing inures to the benefit of the integrated producer by inflating accounting costs and permitting the producer to hide economic profit
, thereby achieving a result undermining transfer pricing theory and regulation.
For the period between June and December 2007, Isla's monthly accounting and economic profits
were both negative, based on the calculation below:
com to download "How to Fix Accounting -- Measure and Report Economic Profit
is a point-in-time measure of shareholder value creation, based on the company's last filed accounts.