Analysis of economic activity

Because prices change from year to year, a firm’s profit in different years cannot be compared directly. Profit calculated at current prices is nominal profit; profit with the change in prices taken into account is real profit. The price-change index I is the ratio of the average price of the current year to the price of the base year chosen for comparison; real profit is found by P_r = P_n : I. The efficiency (profitability) of a firm’s activity is the ratio of profit to total costs spent in that period: R = P : TC · 100%. The faster and more steadily working capital turns over, the more profit the firm gets, while a shortage of it may stop production. If a firm cannot pay its debts it is declared bankrupt: its property is put up for auction and the money obtained goes to pay the debts. A firm can be wound up by a decision of its founders or because of bankruptcy; after debts are paid, the remaining property is shared among founders as the charter says.