Economic profit is a better indicator of a firm's performance than accounting profit because economic profit takes into account the normal expected return to capital.

Question

Quizplus · Accepted Answer

Economic profit subtracts the opportunity cost of using resources, including the normal expected return to capital, while accounting profit only subtracts explicit costs. Therefore, economic profit provides a more accurate measure of a firm's true profitability.

Economic Profit Is a Better Indicator of a Firm's Performance