accounting question

Question

1. On January 1st, 2018, Dr. Marcie Cousins established Health-Wise Medical, a medical practice organized as a proprietorship. The following conversation occurred the following August between Dr. Cousins and a former medical school classmate, Dr. Avi Abu, at an American Medical Association convention in Seattle.

Dr. Abu: Marcie, good to see you again. Why didn't you call when you were in Miami? We could have had dinner together.

Dr. Marcie Cousins: Actually, I never made it to Miami this year. My husband and kids went up to our Vail condo twice, but I got stuck in Jacksonville. I opened a new consulting practice this January and haven't had any time for myself since.

Dr. Abu: I hear about it....Health....something....right?

Dr. Marcie Cousins: Yes, Health-Wise Medical. My husband chose the name.

Dr. Abu: I've thought about doing something like that. Are you making money? I mean, is it worth your time?

Dr. Marcie Cousins: You wouldn't believe it. I started by opening a bank account for my business with $25,000, and my July bank statement for my business has a balance of $80,000. Not bad for six months---ALL PURE PROFIT!

Dr. Abu: Maybe I'll try it in Miami! Let's have breakfast together tomorrow and you can fill me in on the details.

Use supporting details to explain several reasons why Dr. Cousins may be wrong in her assessment that the difference in her bank account balance over 6 months is all pure profit.

Answer 1

In accounting, total revenues less total expenses including income tax leads to Net Income After Tax (NIAT), so Dr Cousins has not considered all her costs.

However, there is an alternative solution as I don't know the full context of your question:

Pure Profit often means economic profit. Economic profit considers both explicit and implicit costs. Thus, Pure Profit is what remains after subtracting all conceivable costs (including implicit costs) from gross revenue.

Accounting Profit = Total Revenues - Explicit Costs

Economic Profit (also known as Pure Profit) = Accounting Profit - Implicit Costs

Note

1. Explicit costs are regular business expenses.
2. Implicit costs are what the business gave up in order to do something else (opportunity costs).

Answer 2

Dr. Cousins assessment may be wrong because profit is actually Cost of Goods Sold subtracted from Revenue. It appears that Dr. Cousins bank account reflects the Revenue she's made, but doesn't show for the direct materials, labor, etc. that was incurred in the last six months.