Finance Formulas / July 13, 2018 / Luz Tyson
For example, an investor starts her own business with $100,000 and earns $120,000 in profits during the first year. Her accounting profit is $20,000. But that same year, she could have earned an income of $45,000 working as an employee for ABC Corporation. The investor’s economic profit for the year is actually a loss of $25,000.
Accounts receivable, inventory, prepaid assets and certain investments are not included in the cash ratio. These items may require time and effort to find a buyer in the market. In addition, the amount of money received from the sale of any of these items may be indeterminable. The cash ratio restricts the asset portion of the equation to only the most liquid of assets, such as cash, cash equivalents and marginable securities.
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