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From the firm's perspective, is an accounting profit of zero a good result, a bad...

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yaga49 | Valedictorian

Posted May 15, 2013 at 1:42 PM via web

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From the firm's perspective, is an accounting profit of zero a good result, a bad result, or merely a satisfactory resut?  Why?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted May 15, 2013 at 1:55 PM (Answer #1)

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From a firm’s perspective, an accounting profit of zero is certainly better than a negative accounting “profit” but it is not a good result.  Depending on the specific situation, it may be a satisfactory result, but it is certainly not what the firm is looking for.  The firm might be satisfied with a zero economic profit, but not a zero accounting profit.

Accounting profit is what most people think of simply as “profit.”  This is found by subtracting a firm’s costs (technically, its explicit costs) from its revenues.  If a firm takes in exactly as much as it spends, it at least does not lose money.  However, it is not making a profit and it is not covering its implicit costs (the opportunity costs of using the resources that the firm does not buy or rent).  This is not a good result.

That said, there are certainly times when a zero accounting profit would be acceptable.  A firm that is just getting started and is trying to gain market share might be very happy with zero accounting profit.  A firm whose industry has had a bad year might be satisfied with zero accounting profit.  Overall, however, zero accounting profit is bad because it means that the people who own the firm are not making any money at all in return for their efforts.

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