Abstract This article defines the ways in which accrual accounting earnings and cash flow types of measures can be used. Most importantly, accrual earnings are reconciled to the net present value calculation used to make investment decisions. A basic problem in measuring the results of operations for a given time period is that assets are used to service more than one time period, thus the cost of each asset must be allocated to expense somewhat arbitrarily over the periods of use. Also, revenues and other assets also require judgments as to allocations between time periods. An extreme example is research and development expenditures which may benefit many periods, but which are generally expensed in the period in which they are incurred. Cash flows are an invaluable tool for evaluating investment alternatives. The analysis is done by using the cash flows of each year of the asset's life, but the objective is to determine a single overall measure of the investment's acceptability. Several overall measures may be determined, but they all have the characteristic of being summary measures, and the year by year evaluation is generally avoided.
Harold Bierman Jr. (Thu,) studied this question.