25% of '79 profits 'illusory'
While reported profits from corporate operations in the United States rose substantially last year, to $223 billion, at least 25 percent of this total was "illusory," the Conference Board reports in an analysis.
Illusory profits are the result of conventional accounting procedures which understate the cost of replacing fixed capital and inventories used up in production. Since costs are understated, profits are overstated. Illusory profits do not really constitute funds available either for dividend payments or for investment in new plants and equipment.
"Economic profits," which eliminate this undercosting, were $165 billion last year, the board says. This was up only 5 percent from 1978, while reported profits were up 14 percent.
It is only after the full costs of production are covered, and after dividends are paid, that companies' funds are available for new capital investment. These funds -- that is, retained economic profits after taxes and dividents -- totaled $25 billion in 1979, down 19 percent from 1978. In terms of their purchasing power, these after-tax, after-dividend economic profits last year were less than half as large as in the mid-1960s.