Financial Statements

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The difference between the revenue received from the sale of an output and the opportunity cost of the inputs used Don't confuse this with "accounting profit," which is what most people generally mean when they refer to profit.

The main difference is that the cost component of economic profit is the opportunity cost of the inputs. That is, the best alternative returns from these inputs if they hadn't been committed to the creation of the output. As a result, you can have a significant accounting profit with little to no economic profit

HOW TO ESTIMATE THE EVA
Economic Profit (EP) is an old method that Stewart Stern & Co. reintroduced under the now more well-known name Economic Value Added (EVA). The purpose of EP is to indicate to what extent and where economic value is generated.
EP is defined as follows;
Operating profit
- Taxes
- Cost of Capital
= Economic Profit
A positive EP indicate that book value is increasing which over time will yield a positive shareholder value. A negative EP, however, indicates that the capital of the organization is being eroded, that is, operations are not profitable enough to support the cost of capital, or the organization has too much capital for its operations. This information is vital for any for-profit organization, yet it is remarkably few companies that employ the EP concept.
EP can become even more powerful in conjunction with Activity-Based Costing (ABC) as ABC ensures much better attention direction in cost management than any other cost management method. However, ABC stops at operating costs and ignores the cost of capital. Therefore, the combination of the two gives organizations revolutionary (as one of our customers described it) insight into their costs, the formation of costs and profitability. Needless to say, this information is crucial for;
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