itfitzme
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- Jan 29, 2012
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People can define these words anyway they want to. What happens in business is people agree to define these words according to generally accepted accounting principles (GAAP), and that means the word "earnings" means "net income" and a typical standard income statement shows net income with taxes already subtracted.BTW , taxes are not a cost. Taxes are a percentage of earnings (for businesses). Earnings are after costs. Hence ther terms EBT and EBIT...This is what's great about Macroeconomics-- the idea is that when costs (=taxes) are lowered, not only do consumers have more money to buy, but producers see lower costs and respond by producing more products at lower prices. It's a positive feedback loop AKA "virtuous circle".
None of that matters, it's just stuff I've used in the market place where continued participation depends on good faith. This conversation however appears to have wandered into political squabbling where success depends instead on an increasingly emotional fervor needed maintain the devotion of its followers.
That stuff's way over my head and I try to leave it to the experienced professionals
It is critical to use the same definitions when communicating. Otherwise we have no communication at all. I use the definitions that are employed by the professionals in the field because they know bettwr than I. And, in most cases, those definitions have been defined by some measure and mathematics so they are unmistakable in their meanings.
The problem arises when people of a political or emotional bend manipulate the definitions to their own devices. They do so to attach an emotional meaning that doesn't actually exist or to pretend the world is the way they want it to be rather than the way it really is.
Whatever my opinion may be, I make sure it is at least drawn from the correct definitions. Then, at least, it falls out from the assembly of facts that can be updated based on real experience, even experience that I may not like, rather than being based on how I want to feel, a perception that can be isolated from reality.
Sure, I can call coffee "orange juice" and then pretend I am getting vitamine C. But when it comes to ordering orange juice at McDonald's, I'm going to get what I asked for, not what I'm pretending.
When the convo gets a bit confounded, I do present the measures as best I know them. "Earnings", alone, takes on numerous meanings. "Earning per Share", "EBIT: Earninings Before Interest And Taxes", "EBT: Earnings Before Taxes", "EAT: Earnings After Taxes", ... Are all different measures with specific formulas.
Net Profit and gross profit, expences and cost, are distinctly different measures And worse yet is that accounting and economics may use the same terms with slightly different meaning.
To the best that I can find, simply "cost" is best applied as "cost of goods sold" while taxes are applied to earnings which is revenues - costs. And If I have to simplify from "gross" and "net profit", I find that "net profit" is the better choice.
My only definitive point is that costs are specifically not taxes though taxes are expences. The distinction is significant and I am reluctant to confuse people by implying that taxes are in any way like costs. Different from our personal home finances where we really don't have costs that are subtracted from revenues before the tax rate is applied, businesses pay zero taxes if they are selling at cost. I consider this as significant. And, no matter what the tax rate may be, taxes cannot consume all net profit as it is a percentage of EBT. Taxes do not, in any manner, act like costs.
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