Finance Formulas / July 17, 2018 / Rory Wise
Economic profit is determined by economic principles, not GAAP. Just like accounting profit, costs are deducted from revenues. Economic profit uses implicit costs, not just explicit costs. Implicit costs are considered opportunity costs and are normally the company's own resources. Examples of implicit costs include company-owned buildings, equipment and self-employment resources. Economic profit computations are not normally limited to time periods like accounting profit computations are. Economic profit is used more to judge total value of the company somewhat like the performance metric economic value added (EVA) would and is helpful in calculating total production costs.
The statement of cash flows or the cash flow statement, as it's commonly referred to, is a financial statement that summarizes the amount of cash and cash equivalents entering and leaving a company.
The asset turnover ratio is an efficiency ratio that measures a company’s ability to generate sales from its assets by comparing net sales with average total assets. In other words, this ratio shows how efficiently a company can use its assets to generate sales.
Common shareholders expect to obtain a certain return on their equity investment in a company. The equity holders' required rate of return is a cost from the company's perspective because if the company does not deliver this expected return, shareholders will simply sell their shares, causing the price to drop. The cost of equity is basically what it costs the company to maintain a share price that is theoretically satisfactory to investors.
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