Profit (accounting)

In accounting, profit is the difference between price and the costs of bringing to market whatever it is that is accounted as an enterprise (whether by harvest, extraction, manufacture, or purchase) in terms of the component costs of delivered goods and/or services and any operating or other expenses.

1 Definition 2 See also 3 Notes 4 References 5 External links

Definition

There are several important profit measures in common use which will be explained in the following. Note that the words earnings, profit and income are used as substitutes in some of these terms (also depending on US vs. UK usage), thus inflating the number of profit measures.

Gross profit equals sales revenue less Cost of Goods Sold (COGS), thus removing only the part of expenses that can be traced directly to the production of the goods. Gross profit still includes general (overhead) expenses like R&D, S&M, G&A, also interest expense, taxes and extraordinary items.

Operating profit equals gross profit less all operating expenses. This is the surplus generated by operations. It is also known as Earnings Before Interest and Taxes EBIT, Operating Profit Before Interest and Taxes OPBIT or simply Profit Before Interest and Taxes PBIT.

(Net) Profit Before Tax PBT equals operating profit less interest expense (but before taxes). It is also known as Earnings Before Tax EBT, Net operating income before taxes or simply Pretax Income.

Net profit equals Profit After Tax (unless some distinction about the treatment of extraordinary expenses is made). In the US the term Net Income is commonly used. Income before extraordinary expenses represents the same but before adjusting for extroardinary items.

Net income less dividends becomes retained earnings.

There are several additional important profit measures, notably EBITDA and NOPAT.

To accountants, economic profit, or EP, is a single-period metric to determine the value created by a company in one period - usually a year. It is the net profit after tax less the equity charge, a risk-weighted cost of capital. This is almost identical to the economist's definition of economic profit.

There are commentators who see benefit in making adjustments to economic profit such as eliminating the effect of amortized goodwill or capitalizing expenditure on brand advertising to show its value over multiple accounting periods. The underlying concept was first introduced by Schmalenbach, but the commercial application of the concept of adjusted economic profit was by Stern Stewart & Co. which has trade-marked their adjusted economic profit as EVA or Economic Value Added.

Some economists define further types of profit:

• Abnormal profit (or supernormal profit)
• Subnormal profit
• monopoly profit (super profit)

Optimum Profit - This is the "right amount" of profit a business can achieve. In business, this figure takes account of marketing strategy, market position, and other methods of increasing returns above the competitive rate.

Accounting profits should include economic profits, which are also called economic rents. For instance, a monopoly can have very high economic profits, and those profits might include a rent on some natural resource that firm owns, where that resource cannot be easily duplicated by other firms.

http://en.wikipedia.org/wiki/Operating_profit

Bottom lines and other lines

Revenue
less COGS
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Gross Profit
less Operating Expenses
-SGA
-R&D
-Depreciation & Amortization
-Impairment, Investments & Write Downs
-Goodwill amortization
-----------
less or add interest
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PBT
less tax
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Operating Income or Income from continuing operations
less or add extraordinaries
-----------
Net Income



The bottom line, refers to the net earnings or income after all expenses, taxes, and extraordinary items are factored in. The bottom line is the final "net" measure of all business activity.

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Gross profit:

This is simply the sales less the direct cost of producing the company's product or service.

Direct cost includes:

• labor,
• material, and
• expenses directly attributable to producing it.

Gross profit, often called gross margin, is the purest indicator of business productivity, because each cost dollar is directly generated by production and sale of the product.

Value investors closely watch gross margin trends as an indicator of market dominance, price control, and future profitability.

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Operating Income:

This term refers to gross profit less period expenses, such as overhead or marketing costs not directly attributable to product production.

Selling, general, and administrative expenses (SG&A) usually cover all headquarters functions, information technology, marketing, and other indirect costs.

It generally includes financing costs, such as interest, and taxes.

Amortization is usually included, because cost recovery for property, plant and equipment is part of operating expense.

Items deemed extraordinary are not included.

Operating profit gives a more complete picture of how the business is performing on a day-to-day basis.

It sometimes appears as operating income, earnings from operations, or something similar.

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Net Income:

This represents the net result of all revenues, expenses, interest, and taxes.

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There are other supplemental earnings measures, such as free cash flow and "EBITDA."

The point is that there are many ways to measure income.

Each reveals an important layer of business performance, both for determining intrinsic value and also for comparing companies.