Accounting for the West Explosion

Time to pull out a posting from two years ago — nothing changes sometimes. In that old posting, I tell how I used to rant to my accounting students about the stupidity of government accounting, which fails to distinguish spending on today versus spending on tomorrow. We call the latter investing and it is what we do to make tomorrow possible. Sound investments pay for themselves by making a better future. So now in 2014 comes another example of silly decision making.

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Zero marginal – not average

I listened to an interview with Jeremy Rifkin on the subject of zero marginal costs in which he steered dangerously close to saying that average costs were tending to zero. That latter is simply not true and quite misleading. The problem that newspapers have faced is that they have very high fixed costs but the actual cost of delivering a newspaper, especially in digital form, is essentially zero. People appear to be willing to pay for the marginal cost only. In other words, they treat news as a free good. The average cost of delivering good news is high; the marginal cost is negligible. They are not the same. Continue reading

Zero marginal costs

I taught managerial accounting for many years and complained for all those years that economists simply did not understand fixed costs. I also complained that we accountants liked talking about variable costs even though there were none. Now comes Jeremy Rifkin, talking in a NY Times article about what happens to capitalism, as we know it, when all costs become fixed and variable costs (marginal costs in economic lingo) tend to zero. Continue reading

Conceptual Framework

With two chapters of the proposed common framework now official, it was time for me to revise Chapter 5. You can find the result  at http::// (254kb). I have not hesitated to throw my opinion in the chapter on grounds that we make accounting seem to sterile and to encourage readers to ponder a little more on accounting. Please don’t hesitate to let me know if you think I sound to harsh. I am in search of newer references for this chapter so if you know of any — or have written something yourself — please let me know.

Balacing the (operating) budget

My opening shot (!) in an ongoing series that I plan on the federal deficit:

All the talk about a balanced budget ignores the fact that the government is on a cash basis in which all expenditures are treated as outflows of the period. In regular for-profit accounting, the payment of a salary is treated as an expense while the acquisition of a building, say, is treated as an investment. Government does not make this distinction. Were businesses to keep their books the way that the government does, a large number of them would be running a deficit. Yes we desperately need a balanced budget but it needs to be a balanced operating budget. Anything else is nonsensical and shows a sad misunderstanding of government accounting. Continue reading

Enron: Guilty as charged

So Messrs. Lay and Skilling are guilty. The frustrating part of this case and others of its ilk is that the original charge has never been addressed. This, like WorldCom and many others, was described as a case involving accounting fraud. Yet, nothing about accounting was said at any of these trials. Was Jedi legal? We never heard anything about that. The case came down to whether they were overblowing the results of the company. Call it a disclosure case. Nothing, though about accounting. Continue reading