1. Problem in profit measurement
A.Eskaline yomina
18APCO09

2. Accounting profit = revenue – all explicit costs
economic profit = revenue - explicit and implicit costs.
profit is defined it should not be difficult to measure the profit of a firm for a given period. But two questions complicate the task of the measuring profit
1.    Which of the two concepts of profit be used for the measuring profit?
2.    What costs should be and what should not be included in the implicit and explicit cost?

4. The answer of the first question is that the use of a profit concept depends on the purpose of the measuring profit. Accounting concept of profit is used when the purpose to be used is to produce a profit figure to for
1)The shareholders to inform them of progress of the firm
2) financiers and creditors who would be interested in the firm's progress.
3)The managers to access their own performance

5.  On the other hand, if the objective is to measure true profit, the concept of economic profit should be used. However true profitability of any investment or business cannot be determined until the ownership of that investment or business cannot be fully terminated.
To estimate income then a forecast of all future changes in demand
changes in production process
cash outlays to operate the business
cash revenues and price changes.

6. But measuring even the accounting profit is not any easy task
But measuring even the accounting profit is not any easy task. The main problem is to decide as to what should not be included in to the cost
One might feel that profit and loss account and balance sheet of the firms provide all the necessary data to measure accounting profit.

7. 1.    Depreciation
2.    Capital gains and losses and
3.    Current vs. Historical costs.
The measurement problem arise for two reasons
A)Economist’s view on these items differ from that of accountants
B)There is more than one accepted method of treating these items

8. Problem in measuring depreciation
Economist view depreciation as capital consumption there are two distinct ways of charging for depreciation
1)the depreciation of an equipment must equal its opportunity cost
2)the replacement cost that will produce comparable earning
Straight-line Method
Reducing Balance Method
Annuity Method
Sum-of the Years Digit Method

9. Straight method Depreciation Carrying Value Purchase – 20,000
Year ended
1,875
18,125
3,750
14,375
10,625
6,875
5,000

10. Reducing balance method

11. Annuity method

12. Sum of the year’s digit approach

13. Treatment of capital gains and losses
Capital gains and losses are regarded as windfalls
Market prices is one of the most common sources of windfall
Many of the capital losses are of insurable nature and where business over-insures the excess becomes eventually a capital gain
Profit is also affected by the way capital gains and losses are treatment accounting.
It would help to take right decision in respect of affected asset

14. Current vs historical costs
The accountants prepare income statement typically in terms of historical costs or in terms of purchase price rather than in terms of current price
Historical costs produce more accurate measurement of income
Historical costs are less debatable and more objective than the calculated present replacement value
The accountants job is to record historical costs whether or not they may have relevance for future decision making

15. There are three popular method of inventory valuation first in first out (FIFO) last in first out (LIFO) weighted average cost (WAC)

16. First in first out

17. Last in first out

18. Weighted average cost
The WAC method takes the weighted average of the costs of raw material purchased at different prices and different point of time is evaluated the inventory