Abstract

This article illustrates what can happen if traditional accounting methods are relied upon by a firm, and how a method that takes the cost of capital into consideration can yield more reliable information for managerial decisions. The traditional accounting practices of California Stores Inc. are examined. The company president's focus was on decentralization of responsibility, organizing four fully owned subsidiaries to operate the stores. Time, methods of financing and the legalities of ownership of plant assets, combined with conventional accounting methods, can play not-so-funny tricks on managers in firms relying heavily upon return on investment as an indicator of divisional performance.