Commodity Stocks and the Trade Cycle

WHILST appreciating the usefulness of his putting a case before economists in relation to stock valuation and accounting usage, I think it proper for another accountant to comment on Mr. Lacey's criticisms of existing practice.1 There is more logic in this practice than he would have us think. Mr. Lacey advocates Lifo valuation, a method not unknown but infrequently used in this country. It contrasts with the more popular first-in-first-out basis. In relation to National Income statistics, the Lifo method gives figures of profits which need only a simple cost-of-living index deflation to give national real income , whilst the commoner method involves preliminary adjustments to exclude from income any accretion in stock values not related to an increase in quantities held (conversely for a decrease).2 But whilst real income and real capital have meaning in national statistics, it seems doubtful if they have any useful significance in relation to a particular business. National statistics lead up to real income because only in terms of commodity flow can comparisons (international or temporal) be mademoney is a mere comparative unit of expression in deflated income figures. But the accounts of a business undertaking are designed to reveal the money fruition which has arisen from operations during a period. This fruition, or profit, is the surplus of money revenue from the sale of goods (or supply of services) over the cost of supplying those goods (or services). And since the gross revenue could still have been earned if purchases had been curtailed by so much as to allow the stock to run down to nil (i.e., without cutting into the business's ability to meet orders placed by customers) then the expenditure to be eliminated (in the form of stock inventory, i.e., purchases carried forward) from chargeable costs is simply that comprised in these curtailable purchases-which correspond to physical stocks on hand. This is exactly what the first-in-first-out method achieves. The basis of the accountant's method of profit measurement is the linking of revenues with relevant costs. Profit is the surplus of earnings over costs incurred and is not based on maintenance of capital either in a real or a financial sense. In this, I differ from the view expressed by Mr. Lacey at the foot of page 13. Whilst concepts of real capital and real income are useful in certain contexts, they are connected with physical volumes, not with money; I do not see that real value and real worth are admissible expressions. Mr. Lacey's attempt to translate the physical notions real capital and real income into monetary equivalents (thus, real value of business capital ) is, I suggest, invalid. If, owing to rising prices, it costs more in one year to maintain the stock of article A at 1,000 units than it did to acquire the original 1,000, then the accounts must recognise this fact. The castigation of the businessman and/or his accountant for financial self-deception in r-ecording an increase in the figure of replaced stock is unmerited. Harking back to the days when trading consisted of discrete ventures, let us suppose that we wished to ascertain a trader's profit for a year ending on a date at which he had a shipment of spices and carpets en route from Venice to London. To do this we should aggregate the profits on all the ventures completed during the year (of course we are dealing with the days when account-keeping did not go beyond the separate-venture viewpoint). No account would, or should, be taken of any increases or decreases in the cost prices of the carpets and spices in transit as compared with those of a similar shipment on the high seas a year ago. We may think of the transactions of a present-day business simply as a large number of discrete venfures. The circumstance that multitudinous transactions overlap and that

Economics · Economy · FIFO and LIFO accounting · GDP deflator · Goods and services · Macroeconomics · Measures of national income and output · Microeconomics · Monetary economics · National accounts · National Income and Product Accounts · Profit (economics) · Real gross domestic product · Revenue · Valuation (finance) · Accounting · Economic Theory and Policy