Question

'Profit is the maximum value a company can distribute during the year and still expect to be worth as much at the end of the year as it was at the beginning.' Discuss this statement, and comment on its value in measuring profit for decision-making. (answer 400-500 words)

Answer 1

Answer :-

By reducing direct costs such as labor, raw material and indirect costs (overheads) from sales value, profit can easily be calculated.

In order to calculate annual profits, we can use the following relation or formula ;

Annual Profit = (Total Sales - Direct Cost - Indirect Cost)

Thus, this will be the extra amount which a company generates in a year apart from its proper functioning and external liabilities, so even if company distributes this money, it will come at the stage where it was in the beginning of current year. Because if it distributes current year profit it will be left with only last year profit which will make its valuation at the same level where it was at the beginning of the year as there is no gain in profit this year after distribution to increase its valuation.