The Accounting Review Vol. 42 No. 4 1967
Current Cash Equivalent for Assets: A Dissent.
Abstract
The accounting function must ultimately be judged by its contribution to social welfare. Accounting information affects the probability of but not the benefits from making correct decisions. The greater the dispersion of measures the more likely are incorrect decisions based on them because of the sampling errors they contain. The greater the displacement the more likely are incorrect decisions because the expected value of the measure is not equal to a more true measure of the attribute. The lower the correlation of predictions, the more likely are incorrect decisions based on the predictions. Dispersion, displacement, and low correlation are undesirable to the extent that wrong decisions have a high cost, whether out-of-pocket or opportunity cost. To the extent that resources must be consumed in reducing dispersion and displacement and increasing correlation, poor measures can be accepted as long as the costs of improving them are greater than the cost of wrong decisions arising from using them. The benefit function, which includes the benefit of correct decisions and the costs of incorrect decisions, is unique to each decision maker. Each decision maker must therefore make his own cost-benefit analysis. To do this he must have information concerning the dispersion, displacement, or correlation of the measures he uses. Each of these has a bearing on the probability of making a correct decision. For those decision makers in a position to devote more resources to obtaining better measures the cost of obtaining such measures is relevant. The dispersion criterion is applicable to both assessments and predictors. It is particularly useful in comparing the feasibility of measuring different attributes.
- DOI
- 10.2308/tar-4511750
- Volume
- 42
- Issue
- 4
- Pages
- 650-661
- Language
- en
- Sources
- openalex crossref