Finance Formulas / July 18, 2018 / Chanel Cleveland
Accounting profit uses realized or actual gains and losses and is calculated according to generally accepted accounting principles (GAAP). It is a company's total revenue reduced by the explicit costs of producing goods or services. These explicit costs involve direct monetary movement and include expenses such as the cost of raw materials, employee wages, transportation, rent and interest on capital. Usually, accounting profit is limited to time periods, such as a fiscal quarter or year. Accounting profit computations are primarily used for income tax purposes, financial statement preparations and to review financial performance.
The cost of equity can be a bit tricky to calculate as share capital carries no "explicit" cost. Unlike debt, which the company must pay in the form of predetermined interest, equity does not have a concrete price that the company must pay, but that doesn't mean no cost of equity exists.
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