Review of Value and Profit

Abstract

In Chapter 1 the relationship was established between measurement of value and the calculation of profit for a firm. The initial model used in that chapter was:

$$$$

where V₀ is the value at a particular point in time and V₁ the value one period later, and p is the profit. This of course ignores the possibility of the introduction of new capital and distribution of profit (see Sect. 3.4). Various alternative approaches to measurement were considered in Chapter 1, and in Chapter 2 the conceptual framework adopted by accountants in presenting financial statements was discussed. It was stated in these chapters that the objective of presenting accounting information should be to give to interested parties evidence of the economic health of the firm and that the concepts of value and profit may be useful in this context. In Chapters 3–8 we were concerned chiefly with an explanation and analysis of accounting methods of measurement and recording of particular assets and liabilities. In this chapter we return to the problems of the measurement of an overall value of the firm and the needs of the users of this information. The accountants’ concept of value based on original cost is reviewed and analysed together with the alternatives, replacement cost, selling price and future utility introduced in Chapter 1.