For a U.S. GAAP company, which of the following statements best describes the relationship between the amount of accounting profits and the amount of economic profits of a company? A. Accounting profits and economic profits are similar. B. Economic profits are greater than accounting profits. C. Accounting profits are greater than economic profits. D. No systematic relationship exists between accounting and economic profits. The correct answer is C. Could someone please explain this why? I answered D, but that was incorrect.
because accounting profit does not take into account opportunity costs, while economic profit does. Eco profits = accounting profit - opp cost of capital, entrpreneural skills, etc opp cost > 0
I agree with Lola
Oh, that makes sense. Thanks a lot guys.
mate yick, are ya reading from schweser notes? cuz this is clearly explained in the cfai text !