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Put It To The Test 2

Problem given by Vijge (inclusive individual f standards) 

Vijge elaborates the system-Bakker in his book 'Winstbepalingsstelsels c.a.' (1989) on the basis of this example.

Successively has to be measured: 

• Fiscal profit.
• Net profit. 

Opening Balance Sheet at t, in euro

Fixed assets (new)	100,000		Proprietor's capital	200,000
Stock	100,000		Loans	100,000
10,000 products A
at € 10 each
Liquidities	100,000
	------------			------------
Total assets	300,000		Total liabilities	300,000

On the opening balance note the 10,000 units of product A.
Is that the NORMAL amount?

Yes!

                                                                                                                                                      Something (and that could be 'nothing') is normal. And someone has to state what is normal, between pessimistic lowest levels and optimistic upper boundaries. If 10,000 is NORMAL, then one will have to replace them eventually, no more, no less. 

The same holds true for the fixed assets.
If it is said that it is NORMAL in the present new state, then there is a duty of replacement.                       

Yes, the fixed assets are also normal (alike 10,000 products A).  

N.B.  
It is evident that NORMAL assets are not completely present at an arbitrary balance sheet date. They may even be totally absent.

Concerning liquidities, no special requirements are made by Vijge.

In fact it is 100,000 markers at 1 euro each.

Here, these 100,000 markers are normal. 

In the above-mentioned example, there is an enormous lack of information about what is normal. Which NORMAL gearing? It is an arbitrary choice: f₁ = 0.80 asset 1 (fixed assets); f₂ = 0.65 asset 2 (stock) and f₃ = 0.55 asset 3 (liquidities).

The problem is gauging i.e. calibration. Some arbitrary choices have been made. They are merely the creation of necessary input, to facilitate measurement.

Soon after starting point t the New Value (NV) of the fixed assets has risen by € 10,000. At (t + 1) the NV of the fixed assets is € 110,000. These assets are to be depreciated over a ten-period life-cycle by the 'straight-line' method (i.e. at 1/10 of cost per period). 

The selling/purchasing facts for period 1 (t to t + 1) are:

• 5,000 products A sold for € 25 cash each.
• 4,000 products A purchased for € 12 (at current cost) cash each. 

The selling/purchasing facts for period 2 (t + 1 to t + 2) are:

• 10,000 products A sold for € 15 cash each.
• 5,000 products A purchased for € 13 (at current cost) cash each.  

The levels of the general price index and the corresponding periodic increases, are as follows:           

At (t + 2) the NV of the fixed assets is € 120,000.  

• General costs (cash outlay) are € 5,000 per period, in both periods.
• Loans bearing interest at 10 % each period. Interest paid is tax-deductible.
• In both periods € 10,000 repayment loans.
• Tax rate amounts to 50 %.
• Fiscally it holds FIFO (First In, First Out).  

Remember: at starting point t the proprietor owns:

• 0.80 of (new) fixed assets
• 0.65 of 10,000 products A
• 0.55 of 100,000 markers liquidities 

Total money value to be preserved (at t) is € 200,000.
This is NORMAL.  

Profit measurement is as easy as ABC; writing down the problem definition cost more time, space and effort than the complete elaboration. Anybody can measure profit exactly, whatever the various values and standards may be, by means of The Profit Formula^®. It is comprehensive, yet relatively simple to put into practice.

www.periodprofitmeasurement.com  presents The Profit Formula^®.  

It has been shown that numerous problems easily can be solved by means of this single formula; by repeatedly applying the same simple algorithm. Desired outcomes, the results from formerly used profit calculation systems, are up for grabs. Profit figures, no matter how defined in a reasonable way, can simply be determined by everyone using The Profit Formula^®; for instance in calculating the fiscal profit, or the profit to be published according to Dutch, French, German, or whatever laws and rules e.g. according to US-GAAP (General Accepted Accounting Principles adopted in the U.S.A.) or the one and only proven net period profit, which includes a certain reliability and a known margin of accuracy.