Profit figures in income statements don't tell the whole story

AS MOST investors are aware, the profit figure reported in a company's income statement is very subjective. It depends on how revenue, expenses, gains and losses are measured and recognised. Despite the subjectivity and controversy, we do have accounting standards that govern how these income statement items are measured and recognised, and we also have experts (for examples, accountants, auditors and valuers) to ensure that these items are properly accounted for in accordance with the requirements of the accounting standards. There is, however, one very major cost item that is not covered by extant accounting standards and therefore has not been accounted for in determining the profit figure.

The item is "cost of equity financing". As a consequence, the reported profit figure may not be a good reflection of the wealth created by companies. To illustrate, assume the following case:

Mr ABC has $100, and he has two investment alternatives: