Suppose That You Open Your Own Business and Earn an Accounting

question 189

Multiple Choice

Suppose that you open your own business and earn an accounting profit of $40,000 per year. When you started your business, you left a job that paid you a $25,000 salary annually. Also, suppose that you invested $70,000 of your own funds to start up your business. If the normal rate of return on capital is 5 percent, your economic profit is

• A) $15,000.
• B) -$11,500.
• C) $11,500.
• D) -$55,000.

---

Definitions:

Period Costs

Expenses that are recognized in the income statement when incurred, instead of being tied to inventory, include utilities and rent for office space.

Selling Expenses

Costs incurred directly and indirectly in selling products or services, including advertising, sales staff salaries, and commission.

Administrative Expenses

Expenses that relate to the general operation of a company and do not directly tie to production activities, such as office supplies and salaries of administrative personnel.

Direct Labor

The labor costs of workers who are directly involved in manufacturing a product or providing a service.