week 6 Economic Summary Report

Week Six Written Assignment Directions and Advice At this point you should have three accounting periods of data. Make sure seasons are connected. See the explanation of connection in the Financial Summary Report instructions. You must use Excel to produce the income statement and balance sheet with appropriate ratios.

In addition to the Balance Sheet and Income Statement, the Economic Summary Report must include an Economic Profit statement, with implicit revenues and expenses by your own estimates. Explain you rationale for arriving at these estimates. Implicit revenues are related to the intrinsic value of running the business; implicit expenses are opportunity costs. The format of the financial statements should match the Season Three sample.

Economic Advice:

Economic analysis deals with looking at “lost” opportunities. The difference between accounting costs and economic costs is opportunity costs. Opportunity costs are the costs of not being able to participate in, or derive benefit from, an alternate activity. In this part you can make some reasonable assumptions. The first one is what the next best opportunity is for the owners.

The same is true with revenue. Accounting revenue can be less than economic revenue if there is a non-monetary benefit to the owners. This is why some people take a job that pays less money than another job because they like something about the job better, like many people who like their job or their coworkers have been known to turn down better paying jobs because they thought the extra money wasn’t worth it.

The economic analysis isn’t hard, you simply need to make some reasonable assumptions and support the assumptions. Obviously if Pat’s and Jan’s next opportunity was to be CEO of Microsoft, this business would have a big economic loss. If Pat’s and Jan’s next best opportunity was cutting grass in India for 10 cents an hour, it is a very profitable business. Even if Pat and Jan really like the advantage of running their own business versus flipping burgers for someone else, you still have to put a price on it. There is a price in which Donald Trump is willing to work for someone else – his TV commercials and shows do take time away from his business.