Let us start with a small company, called Hot Dog Ventures, Inc. As the name suggests, this company sells gourmet frankfurters in a small store. The operation consists of buying the materials hot dog, top-flight buns, expensive mustard, espresso coffee beans, and hiring people to prepare and sell the food. In addition, the company has taken out a loan of $100,000 for its cooking equipment and other restaurant furnishing, and it must pay rent on its store. The founders of Hot Dog Ventures have big aspirations, so they incorporated the business and issued common stock.
To determine whether Hot Dog Ventures is earning a profit, we must turn to the income statement, or as many companies prefer to call it the statement of profit and loss.
This definition gives the famous bottom line of profits that firm want to maximize. And in many ways, business profits are close to an economist's definition of economic profits. Let's next examine the profit and loss statement in more detail, starting from the top. The first line gives the revenues. Lines 2 through 9 represent the cost of different inputs into production process. For example, the labour cost is the annual cost of employing labour, while rent is the annual cost of using the building. The selling and administrative costs include the cost of advertising the store and running the back office, while miscellaneous operating costs include the cost of electricity.
To determine whether Hot Dog Ventures is earning a profit, we must turn to the income statement, or as many companies prefer to call it the statement of profit and loss.
This definition gives the famous bottom line of profits that firm want to maximize. And in many ways, business profits are close to an economist's definition of economic profits. Let's next examine the profit and loss statement in more detail, starting from the top. The first line gives the revenues. Lines 2 through 9 represent the cost of different inputs into production process. For example, the labour cost is the annual cost of employing labour, while rent is the annual cost of using the building. The selling and administrative costs include the cost of advertising the store and running the back office, while miscellaneous operating costs include the cost of electricity.