Accounting Numbers and Economic Values

• DOI: 10.1177/0003603X8202700106
• Published date: 01 March 1982
• Date: 01 March 1982
• Author: George J. Benston
• Subject Matter: Article

The Antitrust Bulletin/Spring

1982

Accounting numbers and

economic values

BY GEORGE J. BENSTON*

161

The accounting data produced by companies, either for internal

managerial purposes or for published financial statements, have

often been presented in legal cases involving antitrust issues or

other economic questions. Unfortunately, many lawyers and

economists seem unaware of the inherent limitations of numbers

produced by a company's accounting system. These limitations

are so severe that, in general, these data do not provide valid

measurements that can be used for answering or gaining insights

into most economic questions.

In the paragraphs that follow, I give my reasons for this

conclusion and provide illustrative examples. I can summarize the

reasoning, as follows. The economic concepts

of

assets, liabili-

ties, income and expense necessarily are subjectively determined.

Accounting, however, is concerned primarily with recording data

to meet the requirements and peculiarities

of

specific business

organization and managers. Their familiarity with the business

• Professor of Accounting, Economics and Finance in the Graduate

School of Management, University of Rochester.

AUTHOR'S NOTE:

An

earlier version

of

this paper was prepared as an

affidavit before the Federal Trade Commission in the matter

of

the

Omnibus Automobile Industry Investigation, File No.

761-0083

(Octo-

ber 1979), at the request

of

GeneralMotors Corporation.

©1982by Federal Legal Publications, Inc.

162

:The antitrust bulletin

and the accounting system allows them to use the numbers

effectively. But, for others who are not in this position, the

internal accounting numbers generated by an enterprise's ac-

counting system often provide measures that can be very inac-

curate and misleading.

Section A presents a more complete analysis of the reasons

for the profound difference between accounting measurements

and economic concepts. Next, section B provides some important

examples of these differences. Section C gives examples

of

ac-

counting inconsistencies among different companies (such as

inventory and depreciation accounting). Section D illustrates and

discusses examples of inconsistencies among and within compa-

nies of methods used to assign and allocate costs to specific

products or enterprise segments. These include the pricing

of

intracompany transfers and the allocation

of

joint and common

company costs. Section E briefly delineates examples

of

some

important inconsistencies between U.S. and foreign accounting

practices. Section F presents some estimates

of

the magnitude and

significance of the differences between accounting measurements

and economic concepts. Finally, section G discusses why, in

consideration of the overwhelming prevalence and magnitude

of

these differences, companies incur the expense of keeping ac-

counting records. As is pointed out above, the reason is that the

accounting data are useful for internal control, but are not

designed or often useful for the measurements demanded by

economists and lawyers.

A. Economic

compared

to accounting definitions

The economic determination

of

asset values and income

The value of an asset is determined by its usefulness to its

owner in comparison with alternative means

of

providing the

owner with desired services (called "utility" by economists). Since

the utility of any asset depends on the particular desires

of

individuals, a common unit

of

measure is required. Economists

Accounting numbers :163

measure utility in terms

of

cash because, being the medium

of

exchange, it can be exchanged at a very low transactions cost for

other goods and services. Thus, the value

of

an asset is measured

in terms of the net cash flow (the monetary value

of

utility) it is

expected to yield its owner as long as the owner expects to keep it.

The word "net" in the phrase "net cash flow" refers to the

cash that the asset yields, less the cash outflows required to bring

about the inflows. The cash flow may be derived from several

sources. For example, the coupons on a bond provide its owner

with a periodic (e.g., semiannual) cash flow offset only by the

expense

of

mailing the coupons and receiving the interest check.

A machine produces a product that yields a cash flow when the

product is sold. But this inflow is reduced by the outflow

of

cash

expended for the power and labor needed to run the machine and

the materials used to produce the product. Or, the cash flow

derived from an asset may be measured by the net savings it

allows the owner to achieve, as when an owned building permits

the owner to save rent (but necessitates cash outflows for taxes

and other expenditures that the landlord would have made).

Finally, an asset may yield its owner utility in the form

of

nonpecuniary benefits, such as the aesthetic pleasure or pride of

owning a famous painting. In these instances, the net cash flow

may be approximated by the amount

of

cash the owner gives up

by not selling the painting. These and similar net cash flows are

derived from the "use value"

of

an asset. Another value is its

"exchange value," the net cash amount that could be obtained

were the asset sold. In general, the net cash flow used to measure

the value

of

an asset is the next best alternative use

of

the asset to

the owner, including sale

of

the asset if its value in exchange is

greater than its value in use. Therefore, the value in use

of

an

asset is generally higher than its value in exchange, because

otherwise it would be sold.

Determining the rfet cash flows that are expected to be derived

from an asset (from use or exchange) is necessary

but

not

sufficient for determining its economic value. The timing

of

the

net cash flows also is a required datum, since cash that can be