Current Cost and Present Value in Income Theory.

Abstract This article focuses on the accounting significance of current cost and present value in the measurement of a firm's economic income. Practical difficulties have led to a search for surrogate measures of income and this search is aimed to identify that information capable of providing users of accounting statements with the best means of estimating the firm's value and changes in that value. Current cost income has been suggested as a surrogate for economic income. In a perfectly competitive economy, this surrogate relationship is based on the equality of the components of replacement cost income to their corresponding counterparts within economic income. The marginal present value of a particular fixed asset depends upon a host of factors, such as, the discount rate, the length of time over which the asset is to be used, and the state of the firm's complementary equipment and capacity. Given these factors, the marginal present value of an asset changes with variations in the level of investment. The marginal present value of a one-unit increase in the number of assets purchased depends on: the marginal productivity of the additional asset; the marginal revenue the firm would obtain by selling this additional future output; and the marginal operating cost the firm would incur by utilizing the additional asset.