The exit-price approach to financial statement valuation has been criticized for the lack of a meaningful income statement. In this article, an income statement is designed that provides information about the resource flows which result in income generation. The proposed statement is divided into an operating section and a holding section. The traditional revenue recognition assumption is maintained in the operating section. Expenses are then matched with revenues based on a concept called "instantaneous matching." In the holding section of the statement, gains and losses are based on market price changes of assets held. The income statement uses both replacement costs and exit prices and yet reconciles with exit-price balance sheets. The result is that the strengths of a replacement cost income statement are combined with an exit-price oriented balance sheet.

Liability valuation in an exit-price accounting system is an unsettled issue even though the subject has been extensively debated. In this article, a theoretical structure, based on Sterling's wheat trader model, is developed to show that market prices should be used. The assumptions of the wheat trader model may be restrictive, but they will be later relaxed in this paper to show that the conclusions are more widely applicable. Chambers's arguments against the use of market prices are examined to show that they do not invalidate the conclusions. This paper concludes with the suggestion that, if market price valuations of liabilities were generally adopted, a ratio of current interest cost to equity could be used as an alternative performance measure to the traditional debt to equity ratio.

Reviews the book "Accounting for a Simplified Firm Owning Depreciable Assets: Seventeen Essays and a Synthesis Based on a Common Case," edited by Robert R. Sterling and Arthur L. Thomas.

Capital Budgeting, Investments, Opportunity costs, Decision making

Opportunity Costs, Investment choice, Managerial decision making