Revenue vs Profit

8 Key excerpts on "Revenue vs Profit"

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  eBook - ePub

  Entrepreneurial Finance

  Fundamentals of Financial Planning and Management for Small Business

  • M. J. Alhabeeb(Author)
  • 2014(Publication Date)
  • Wiley

    (Publisher)

  CHAPTER 8

  PROFIT AND THE COST–VOLUME ANALYSIS

  8.1 Profit Concept Between Economics and Accounting

  There is no doubt that “profit” is the most common and widely used term in the business world. However, the commonality and popularity of the term does not necessarily make it a clear concept with an unequivocal connotation. When the classical economics specified the four major factors of production as land, labor, capital, and entrepreneurial management, it also specified the payments these factors get for their individual contribution in the production process. These payments are respectively: rent, wages, interest, and profit. From here we can conclude that profit is the monetary return to those who initiate and manage the entrepreneurial function of production. If the first three payments (rent, wages, and interests) are made out of the product's sale revenue, the residual, if any, would constitute the fourth payment to the entrepreneur or owner as profit. It is in this sense we get the equality between profit and the net revenue since what we call profit is in fact the surplus over and above the costs of production. These costs may also include taxes, financing cost, and the like. Technically, profit would equal the difference between the total cost of production (TC) and the total revenue brought by the sale of products (TR).

  It is worthwhile to note here that while the term total revenue is a clear and well-defined concept, the total cost is less clear. Total revenue is the dollar value of the product sold, which is obtained by multiplying the quantity of the units of products sold by the market price per unit. Total cost could include only the explicit cost or the outlay such as the expenditures on the factor of production mentioned earlier and other direct payments such as taxes and interests on loans. If the total cost includes only the explicit cost (EC), the calculated profit would be considered as business or accountant's profit (πa

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  Managerial Economics

  The Analysis of Business Decisions

  • Stephen Hill(Author)
  • 2016(Publication Date)
  • Red Globe Press

    (Publisher)

  In particular, economic profit needs to be careful-ly distinguished from the concept of accounting profit. The differ-ence is largely due to a difference in purpose. It is the purpose of the accountant to present a 'true and accurate' record of the firm's activities. Given this criteria, it is inevitable that the accountant will be concerned with the precise recording of previous activities, dealing wholly in payments and receipts actually occurring. The measurement of profits for decision-making purposes is a rather different objective, involving especially the notion of opportunity cost, i.e. the conceptualisation of what might have happened but did not. 'In business problems the message of opportunity cost is that it is dangerous to confine cost knowledge to what the firm is doing. What the firm is not doing but could do is frequently the critical cost consideration which it is perilous but easy to ignore.' 2 The measurement of profit The notion of profit has developed a variety of meanings, some technical and some emotive. Defining profit as the surplus over opportunity cost is conceptually ideal from a decision-making point of view, but notoriously difficult to measure in any consistent and objective sense. It is time to take a closer look at the details of profit measurement, and to attempt to arrive at a working definition of profit that has operational value. In a sense the firm can be considered as an organisation that transforms inputs into output. Any input-output mechanism can be evaluated in terms of the ratio of the output to input. For example, Profits and objectives 45 the efficiency of a motor car can be measured in terms of the ratio of output (miles) to input (petrol). Thus a car returning 40 miles per gallon is more fuel efficient than a car which gives 30 miles per gallon. Problems arise, however, when the inputs and outputs have more than one dimension. Continuing the motor car example, inputs include oil , servicing time , tyres etc.

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  New Perspectives of Profit Smoothing

  Empirical Evidence from China

  • Domitilla Magni(Author)
  • 2019(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  accounting rules. Many, from the classical economists, have tried to approach the issue of profit and its assessment; others have governed just the accounted nature and added, in an already-busy contest, many theories and definitions on the subject. The evolution of knowledge of business, finance, and economics has allowed an increase in previous studies on profit. Firm and its management have become, over the years, the main focus of managerial analysis, assuming relevance that is both increasingly global and interdisciplinary. The rules and economic directives require continuous management apparatus, overwhelmingly, on the ability to persist over time, in conditions of economic and financial equilibrium. Changing the appearance and nature of the firm changes accordingly the approach of business manager and the role of profit management. Profit has always been analyzed as a residual item in the firm but it changes its shape, and is approached by most as a strategic financial variable.

  Profit must be closely related to the concept of enterprise, and, in that sense, the very determination of profit justifies the existence of all the firm’s production equipment and is considered indispensable and underlying any business activity. At a firm level, profit is considered as a goal to itself or, alternatively, in connection with other goals such as growth or efficiency.1

  Before analyzing all the literature and theories of economists who have debated the notion of profit,2 it is necessary to clarify how and through which mechanisms the search for profit can influence the business behaviors, and, finally, it is appropriate to dissolve some inherent nodes both the role of profit as an economic category and its nature.

  From these initial considerations, it is understood that, in the first place, the subject of the profit should be identified. The need to differentiate, in a theoretical way, the profit from the worker’s wage, from the natural resource owner’s income, and from the interest generated by the liquidity loan, manifests itself at the same time as the historical process of capitalist division of labor.3 In this case, the historical recalls are fundamental: on the one hand, the progressive fragmentation of trades into specializations, the fragmentation of craftsmanship, and the expansion of the merchant system have prompted the making of entrepreneurs-merchants, concerned about buying the products to bring them to the markets and to sell raw material to every single producer, gaining a profit. On the other hand, the separation of workers from work tools, the organization of work in the factory, and the continuous technological changes have overwhelmingly overlooked the overproduction of production, creating new problems with regard to its appropriation and its intended use for purpose consumption or accumulation. In parallel, a new social structure emerged, in which a class—that of entrepreneurs-producers—took the power to decide how, what, and how many to produce.4

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  Intermediate Microeconomics

  • John H Hoag(Author)
  • 2012(Publication Date)
  • WSPC

    (Publisher)

  To make progress toward understanding how this assumption yields results, we need to move forward with our discussion of the general revenue concepts. We will then develop the revenue concepts for competitive firms, which we will then combine with the cost concepts of the previous chapter to obtain profit. Once we have profit, we can move to profit maximization, the shutdown condition, and the firm’s supply curve. Here we go!

  5.2  Revenue Concepts

  In this section, we will develop the revenue concepts that will be used for all firms. When we are done with the general concepts, we will turn to the particular case of the competitive firm and see what the revenue curves look like in this case. We begin with definitions.

  Definition 5.1:  Total revenue (TR) is a relationship between output and dollars showing price, P, times quantity sold, X.

  We can use a formula to find total revenue: TR(X) = P × X.

  Definition 5.2:  Marginal revenue (MR) is a relationship between output and dollars per unit of output showing the change in total revenue due to a change in output at each level of output.

  We can think of MR in a variety of ways. We can find the MR by using the following formula: . Alternatively, MR is the slope or derivative of TR. You should realize that we can use the fundamental theorem here.

  Exercise 1.  State the fundamental theorem using MR and TR.

  Definition 5.3:  Average revenue (AR) is a relationship between output and dollars per unit of output showing total revenue per unit of output.

  Again, we can use a formula to compute the average revenue: . But there is one more concept we need, and we define it now, even though it is not a revenue concept.

  Definition 5.4:  Profit (π) is a relationship between output and dollars showing the total revenue minus the total cost at each output.

  You can see that profit is a total relationship, as it involves output and dollars, not an average or marginal relationship that involves output and dollars per unit of output. You should also see that the profit could be negative; there is nothing in the definition that guarantees profit is positive. We use the word “profit” for both the case where the profit is positive and the profit is negative. You will also note that we have not defined marginal or average profit. We leave that to you now.

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  Available until 8 Dec |Learn more

  The Meaning of Company Accounts

  • Walter Reid(Author)
  • 2018(Publication Date)
  • Routledge

    (Publisher)

  Notice that profit for a period need not be the same as the cash inflow from operations. We discuss cash flows in Section 10. Profit measurement: a valuation process? The way we define profit for a period -‘sales revenue minus expenses’ -has long been universally accepted. Later in this section we discuss how to measure both sales revenue and expenses. Given the double-entry framework, one can also think of ‘profit’ for a period as being (a) any dividends distributed plus (b) the balance sheet increase in ‘accumulated retained profits’ (= the increase in shareholders’ funds less any capital items). That is true from a purely arithmetical point of view. But firms do not actually calculate profit by ‘deducting’ one balance sheet from another. The assets in balance sheets represent estimates not of value but of recoverable cost. If a firm changes the balance sheet amount of tangible fixed assets (by means of depreciation) or of stocks (by reducing cost to net realizable value) or of debtors (by providing for bad debts), that reduces profits for the period to the same extent. They are two aspects of the same process dealing with incomplete transactions. Thus the example on the next page shows (in £ thousands) an after-tax profit of £100. This is sales of £1 200 less expenses totalling £1 100. It also happens to be equal to closing shareholders’ funds of £550 less opening shareholders’ funds of £450; though of course this would not be so if there had been (a) any dividends paid or (b) any capital changes during the year.

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  Economics, Strategy and the Firm

  • Paul Cashian(Author)
  • 2017(Publication Date)
  • Red Globe Press

    (Publisher)

  The output market determines the price for the output which, when multiplied by the amount sold by the firm, becomes the firm’s revenue. Figure 2.2 summarises the monetary flow for the firm. As can be seen, the money flows in the opposite direction to the physical flow, costs represent money flowing out of the firm whilst revenue is money flowing into the firm. Profit represents the difference between the money coming in and going out, that is, revenue minus cost. It is this potential difference that is the main motivating force behind the entrepreneur organising the firm to undertake the transformation process of turning inputs into outputs. The entrepreneur, as the organiser and owner of the firm, is entitled to the residual left once the cost of inputs has been deducted from the revenue obtained from selling the THE FIRM PROFIT Revenue – costs COSTS Factor prices multiplied by the quantity bought INPUTS PRODUCTION OUTPUTS REVENUE Goods and services sold multiplied by the price obtained Figure 2.2 The production process (monetary flow) ........................................................ 24 Economics, Strategy and the Firm output. To maximise this residual, and therefore his potential income, the entre-preneur will seek to obtain his inputs as cheaply as possible whilst, at the same time, seeking to gain as much revenue as possible from his output. In other words, the firm will seek to maximise its profits by minimising costs and maximising revenue. 2.1.1.3 An illustrative example To illustrate this, let us return to our window cleaner. He will probably acquire the capital inputs (buckets, leathers, window scraper, ladders) from a local DIY or hardware store which, in this case, represents his ‘capital’ market. The purchase of these capital items would represent the window cleaner’s capital costs.

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  Accounting For Canadians For Dummies

  • Cecile Laurin, Tage C. Tracy, John A. Tracy, John A. Tracy(Authors)
  • 2023(Publication Date)
  • For Dummies

    (Publisher)

  It doesn’t tell us what profit consists of or the substance of profit. In this section, we explain the anatomy of profit. Having read the product company’s income statement, you now know that the business earned net income for the year ending December 31, 2024 (see Figure 6-1). Where’s the profit? If you had to put your finger on the profit, where would you touch? Recording profit works like a pair of scissors: You have a positive revenue blade and a negative expenses blade. Revenue and expenses have opposite effects. This leads to two questions: What is a revenue? And what is an expense? 112 PART 2 Exploring Financial Statements Figure 6-3 summarizes the financial natures of revenue and expenses in terms of effects on assets and liabilities. Note the symmetrical framework of revenue and expenses. It’s beautiful in its own way, don’t you think? In any case, this sum- mary framework is helpful for understanding the financial effects of revenue and expenses. Revenue and expense effects on assets and liabilities Here’s the gist of the two-by-two matrix shown in Figure 6-3. In recording a sale, the bookkeeper increases a revenue account. The revenue account accumulates sale after sale during the period. So, at the end of the period, the total sales reve- nue for the period is the balance in the account. This amount is the cumulative end-of-period total of all sales during the period. All sales revenue accounts are combined for the period, and one grand total is reported in the income statement on the top line. As each sale (or other type of revenue event) is recorded, either an asset account is increased or a liability account is decreased. We’re sure that you follow that revenue increases an asset. For example, if all sales are made for cash, the company’s cash account increases accordingly. However, you may have trouble understanding that certain revenue transactions are recorded with a decrease in a liability.

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  Available until 4 Dec |Learn more

  The Meaning of Company Accounts

  • Walter Reid(Author)
  • 2020(Publication Date)
  • Routledge

    (Publisher)

  Section 1 0.

  Profit measurement: a valuation process?

  The way we define profit for a period — ‘sales revenue minus expenses’ — has long been universally accepted. Later in this section we discuss how to measure both sales revenue and expenses.

  Given the double-entry framework, one can also think of ‘profit’ for a period as being (a) any dividends distributed plus (b) the balance sheet increase in ‘accumulated retained profits’ (= the increase in shareholders’ funds less any capital items). That is true from a purely arithmetical point of view. But firms do not actually calculate profit by ‘deducting’ one balance sheet from another.

  The assets in balance sheets represent estimates not of value but of recoverable cost. If a firm changes the balance sheet amount of tangible fixed assets (by means of depreciation) or of stocks (by reducing cost to net realizable value) or of debtors (by providing for bad debts), that reduces profits for the period to the same extent. They are two aspects of the same process dealing with incomplete transactions.

  Thus the example on the next page shows (in £ thousands) an after-tax profit of £100. This is sales of £1 200 less expenses totalling £1100. It also happens to be equal to closing shareholders’ funds of £550 less opening shareholders’ funds of £450; though of course this would not be so if there had been (a) any dividends paid or (b) any capital changes during the year.

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