Economic Versus Accounting Measures of Cost and Profit

The discipline of accounting provides guidelines for the measurement of revenue, cost, and profit. Having analyses based on generally accepted principles is important for making exchanges in our economy. For example, corporations must produce financial statements to help investors and creditors assess the health of the corporation. Individuals and businesses must produce tax returns to determine a fair measurement of income for taxation purposes.

Costs as measured according to accounting principles are not necessarily the relevant measurements for decisions related to operating or acquiring a business. For example, accounting standards dictate that businesses depreciate long-lived assets, ...

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