Record High Box Office Receipts + Accounting = Net Loss? you hear that a movie has broken all records for box office receipts, do you automatically assume that everyone connected with the movie received a share of the profits? That may not be the case. The answer depends on how those profits are calculated. It is well known that some movies that have broken records for box office receipts have never shown a profit. How could this happen? For any company, revenues minus expenses equal net income. How those revenues and expenses are calculated has a dramatic effect on the calculation of net income. There are three controversial costs involved in the making of a movie. (1) The cost of producing the movie. (2) The cost of distributing the movie. (3) The cost of advertising. Each of these costs includes the concept of overhead. Overhead costs are the costs of running the business. Overhead may include the cost WHY ACCOUNTING? of the administrative offices, electricity, heat, and payroll. Calculating the overhead costs of a movie usually involves estimating what percentage of the total cost should be applied to the specific movie. The higher the overhead estimate, the lower the net profit. Actors are more often refusing to accept a percentage of net profits as part of their compen sation. Instead, they negotiate for a flat fee in place of a percentage of net profits. The next time you watch a movie, read through the credits at the end of the movie. In the listing of the crew, you will see the names of the accountants or controller for the movie. Then ask yourself if you think the movie will ever report a net profit. CRITICAL THINKING List three costs that would be included in the cost of advertising 2. Use the Internet to search for the accountants for a recent movie. List the title of the movie and the name(s) of the accountants/controller