It is the responsibility of management to know what is happening to the investment with which it is entrusted. What the real economic investment is, what real earnings on it are, and what real rate of return it is producing for stockholders are matters management should know. When prices are rising, accounting reports on these three matters are not likely to be correct. Conventional reports can be seriously in error and thus produce an illusion, an inflation puff, that can lead management astray. Measurement of a company's real economic earnings has great practical usefulness. And it can be done. It cannot be done simply, as in the case of personal income, by dividing one single index number into the reported accounting earnings, instead it must take the form of restating each asset or each group of assets in terms of dollars of constant purchasing power. This can be done with tolerable accuracy and applied with economic and statistical sophistication.

This article attempts to examine from the managerial standpoint the major issues of profit-measurement on which economists and accountants have generally taken different positions. The focus is on the meaning of depreciation, the treatment of capital gains and losses, and the price level basis for valuation of assets. The role of futurity in economic values and in business decisions underlies all three of these issues in measuring profits. The estimation of income requires a forecast of all future changes in demand, changes in production processes, cash outlays to operate the business, and price changes. If this were available, a program could be planned for borrowing and investing cash so as to allow for an annual cash dividend payment that would be equivalent to the uniform consumption of real goods. A balance sheet occasionally contains intangible assets such as good will or patent protection, which nominally are anticipation of the future. But their valuation on the books is not closely related to expectations. An economist's balance sheet has quite a different interpretations since it is an attempt to aggregate the future earnings of the firm's properties now on hand.

This article focuses on research in cost-price relationships. In forwarding research in the field of cost-price relationships it is necessary first to determine what studies are most important from the standpoint of their practical usefulness to business and their significance to the science of economics. As hypotheses in studying cost-price relationships the recently developed neo- classical theoretical analysis of imperfect competition has been used as a means of organizing research problems, and bringing into sharp contrast the viewpoint of the theorist and the business man. Cost concepts are too restricted for many practical purposes. Marginal cost, for example, must for some purposes be expanded to a concept of opportunity costs of several alternatives, such as shutting down, selling other products, etc. Under conditions of multiple production, moreover, necessarily arbitrary allocations of some cost items make it difficult to determine costs of individual products. A realistic concept of price must be complex because pricing practices differ from firm to firm and industry to industry.

The analysis in this article applies in general to the investment credit. This tax measure was introduced even more emphatically than the guidelines to stimulate investment. Accounting requirements, which would reduce the attractiveness or the apparent attractiveness of the credit, would run counter to public policy. Companies will get the investment credit if they qualify; it is not a matter of choice; in this respect the credit differs from the guidelines. From the point of view of the public interest, a part of the problem is whether one or another method of reporting would be more effective in demonstrating to management the benefits from the credit. If the tax savings had to be set off in tax deferral accounts the near-money gains of the investment credit might seem smaller and the stimulus to investment somewhat reduced. The tax advantage for a profitable railroad comes when the qualifying investment is made. Of course, complications will arise in some cases. There are contingencies, which can lead to the loss of some of the credit received on investments in prior years. And there will be carryovers of unused credits. The effect of a credit received in one year on the tax-worth of depreciation deductions in the future will present difficult, often insuperable, valuation problems.