Executive Summary
-
Managers must recognize that accounting and economics have different objectives. Accounting and economic measures and objectives meet by accident.
-
Economic events and accounting events can differ greatly. Awareness of cross-firm, industry, and country differences is important to those making decisions.
-
Accounting “values” often differ from the opportunity cost of assets employed.
-
Accounting income is quite different from economic income.
-
Understanding a few key accounting concepts such as retained earnings is important in terms of decision-making and to avoid embarrassment.
-
Recognizing the fundamental issues of cash flow versus accrual income is essential.
-
Accounting is important for many reasons, but mixing accounting and economics together in an analysis is dangerous.
-
The analyst and manager should employ economic analysis to identify opportunities and to avoid peril. Separately, you should examine the impact of a decision on accounting variables of interest to investors.
Introduction
This article reveals some important differences between accounting and economics. It does not seek to explain the various arguments that prompt, support, or question such differences. The ultimate objectives are an awareness that accounting and economics differ, and that knowledge of the differences allows the manager to benefit from both. At the same time, this understanding helps to avoid errors in the application of accounting and economics.
- Page 1 of 7
- Next section Accounting versus Economics
www.qfinance.com