1.   The difference in reported earnings is solely attributable to the difference in inventory accounting.

2.   Its reported net earnings are therefore lower than the reported nil earnings of firm A even though its taxable earnings are the same.

3.   But it may not be the same as the system of depreciation used by firms in arriving at their reported earnings.

4.   So two identical firms can end up with different reported earnings purely as a result of the way in which they elect to treat their capital assets.

5.   So the reported earnings of two otherwise identical firms can differ as a result of different accounting conventions.

6.   To avoid any inconsistency, it is economic earnings and not reported earnings that is the appropriate measure of earnings for share valuation.

7.   Economic earnings are therefore equal to reported earnings plus new external funds less net investment.

8.   Most firms appear to have a target payout ratio of dividends to long-run reported earnings.