Midterm 2 Content Part 2 Flashcards
(47 cards)
What are explicit costs?
Resources bought or hired on the market
What must happen in order for a cost to be explicit?
money must change hands.
wages to workers.
paying for inputs
What are implicit costs?
costs where money does not change hands.
What are the two categories of implicit costs?
- Opportunity cost of capital resources by firms
2. OC of “labor” resources supplied by owner
Implicit rental rate of capital has which categories?
- forgone interest on owner’s funds
2. Economic depreciation on capital equipment
What’s an example of forgone interest on owner’s funds?
take money out of savings–no interest–economist thinks this has an opportunity cost
$ not in savings– forgone interest– no money changed hands
Whats an example of Economic depreciation on capital equipment?
rent computers–rental company sustains depreciation
depreciation- equipment wears out
everyday the machine is used the value depreciates
What is an example of lost wages and salaries for labor supplied by the owner?
- wages you could have gotten working for someone else
What is an example of Opportunity cost of owner’s entrepeneurship?
opportunity cost of entrepreneurship
management talent to your firm OC $ for running someone else’s company
What implicit cost does an accountant pay attention to?
depreciation -THIS WILL AFFECT THE COMPUTATION OF PROFIT
How do firms figure their costs and profits?
- economists consider costs in an opportunity cost sense
* There’s a distinction between economic and accounting costs and economic and accounting profit
Why doesn’t an account regard all of the implicit costs?
not cost deductible
How is economic profit calculated?
TR- Total Economic Cost
where economic cost includes all implicit costs.
Economic costs can be ____than accounting cost meaning?
greater
ECONOMIC PROFIT MAY BE LESS THAN ACCOUNTING PROFIT
What are the three major types of business organizations?
- Proprietorship
- Partnership
- Corporation
(CPP)
A proprietorship has _____________
which extends to_____–
unlimited liability
this extends to personal assets
single person/ unit start a business-profit goes to a single owner, profit to single owner
if business fails and debts are incurred– creditors can take home, car, anything that is valuable.
What are the three different kinds of partnerships?
- Traditional
- Limited partnership
- Limited liability partnership
What does a traditional partnership entail?
each partner has joint unlimited liability
each partner liable w/o limit for all debts contracted by partnership friend- owns 90%, gets 90% of the profit-but if business fails you’re responsible for 100% of the money.
What is limited partnership?
“limited” partners don’t have unlimited liability but they also have no say in running the firm
-can only loose the money that they put into the business- can’t make operational decisions- want investors – gray area when someone does help with the decisions
What is a limited liability partnership?
- one partner is not liable for misconduct of another partner
- all partners have a say
ex: if there is debt because of embezzlement- “not liable” for losses
What are some features of a corporation?
- limited liability
- corporation can be sued as a legal entity
What is a disadvantage of a corporation?
multiple layers to taxes, subjected to more
Corporate profits tax plus income tax on dividends and capital gains tax for shareholders.
What is a Limited Liability Company?
- limited liability - loose $ invested, loose shares
- can pass through taxes to personal income taxes
- tax dodge
What is a S corporation?
owner takes part of return as wage and part as profit. Avoid SSI taxes
