This week's Wiki-Wednesday topic is Profit. An excerpt of the article from Wikipedia is below, but you can click here to read the full article at the source. I selected this topic for the week because of a webinar I attended Tuesday by AT Kearney and Sourcing Interests Group on the results of ATK's 2011 Assessment of Excellence in Procurement survey. If you would like to read my notes from the webinar, you can click here. Generally speaking, my reason for selecting Profit as the topic this week comes from the need for procurement to re-immerse ourselves in the reason for our existence - to maximize (and protext) the profits of the corporation.
In accounting, profit can be considered to be the difference between the purchase 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.
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 minus 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 minus 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 minus interest expense (but before taxes). It is also known as earnings before taxes (EBT), pre-tax book income (PTBI), net operating income before taxes or simply pre-tax 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 extraordinary items.
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.