Also referred to as illusory profits. Occurs because accountants use past costs rather than replacement costs. For example, in computing the cost of goods sold accountants often use the FIFO cost flow assumption. This results in the oldest costs being matched with sales. Economists prefer that the replacement cost of the inventory be matched with sales. The difference in profits from using FIFO instead of the replacement cost is referred to as phantom or illusory profits. Similarly, accountants depreciate the original cost of buildings and equipment. Economists prefer that the replacement cost be depreciated. With inflation the accounting profits are higher than the economists would report using replacement cost.
Featured Review
"Becoming a member of AccountingCoach was hands down a great decision for me. I have been in bookkeeping for over 16 years and all the training I had was from the CPA that I worked for. While I felt I had a good foundation and years of experience, once I took the leap and branched out with my own bookkeeping practice I felt the need to brush up on my skills. AccountingCoach actually not only helped me brush up on my knowledge, but has helped me pinpoint my strengths and weaknesses which allowed me to focus on those areas that I was lacking knowledge. It was also a great boost to see how much knowledge I already had. I think it was a great investment and I love knowing that when I second-guess myself I can easily log in and review the information needed. Worth every penny!" - Judith G.
Join PRO or PRO Plus and Get Lifetime Access to Our Premium Materials
Read all 2,645 reviewsWe now offer 10 Certificates of Achievement for Introductory Accounting and Bookkeeping: