Knowledge that Transforms

Abstract Reviews the book "The Principles of Financial and Statistical Mathematics," by Maximilian Philip.

Abstract This article presents the questions and answers to the problems which were presented as the first half of the May 1942, Certified Professional Accountant examination in accounting theory in the U.S. The first problem stated that the Elgin Supply Company had acquired previously (December 31, 1939), 90 per cent of the $200,000 common stock of the Peoria Phonograph Company for $126,000. The candidates were required to prepare consolidated balance sheet of December 31, 1941. and statement of minority interests as well as statement of consolidation surplus and goodwill. The second problem started by stating that Morton and Norton were retail dry goods merchants and operated a cash store, with no credit being extended to customers. The business was conducted as a partnership in which Morton had a two-thirds and Norton a one-third interest (capital as well as profits). The candidates were asked to prepare a columnar worksheet, dearly showing the adjustment of the trial balance in accordance with the data given, the operating results in the month of January as distinct from the fire loss, the amount of the fire loss, and the final liquidation of assets and liabilities other than cash, thus leaving on the books only the cash and the two capital accounts.

Abstract Intelligent consideration of the variety of techniques available for the purpose of testing a person's understanding of a subject presupposes agreement with respect to the nature of the accomplishment expected from its study. Since it is the purpose to review the methods, which may be used to examine students in courses in advanced accounting, it is essential, therefore, that accounting teachers be clear about what they expect such students to have gained through their study. It seems obvious that a person who is pursuing an advanced course in any subject may be presumed to have successfully completed work that is not only preliminary but also prerequisite to it. Even in an elementary course there must be stages of progress, and it is doubtful if universal agreement could be obtained concerning the exact altitude of the plane that separates an advanced course in accounting from an elementary one. It is logical to expect more ground to be covered in a six-hour course than in a four-hour course; on the other hand, the coverage in the six-hour course may be no more extensive, but merely more thorough within a given range than in the four-hour course.

Abstract The revised statement of "Accounting Principles," prepared by the Executive Committee of the American Accounting Association and published in the June 1941 issue of "The Accounting Review," is a decided improvement over the statement of principles previously published in June 1936. Nevertheless, it still contains spots where further burnishing would appear to contribute both to desirable refinement and to greater harmony between the principles and the fundamental thesis upon which they are based. In the preparatory note the Committee states that "In the corporate field the most important use of accounting lies in the preparation of statements of financial position and of operating results." In the basic assumption the Committee also refers to the accounting statements as financial statements. The term financial position is equivocal. While it implies that it is the general monetary position of a firm that is being presented, or that a firm's status is being exhibited in monetary terms, the financial position presented in the balance sheet is a specific variety of financial position.

Abstract This article presents information on entity approach to consolidated statements. The central premise is that consolidated statements are exhibits in conventional accounting form of the status and the operations of a group of related companies. The substitution of the concept of economic entity for that of legal entity raises the problem of the scope of the consolidation. In principle the solution of the problem, is dear, namely, include all those companies whose policies are controlled by a dominant parent corporation. The entity concept requires the presentation of assets and liabilities at figures consistent with the viewpoint of a single operating unit. The stockholders of the parent company acting through a board of directors to whom power of administration is delegated constitute the controlling or dominant interest. Consequently, assets must be listed in terms of their relation to the dominant interest. Consolidated statements are not prepared for the purpose of informing minority interests of the status of their investments. For this information, minority interests must refer to the statements of the company in which they have an equity.

Abstract Reviews the book "Inventory Valuation and Periodic Income," by Carl Thomas Devine.

Abstract The great problem in the administration of the cost-plus contract program is the prevention of inflated and unnecessary costs. The fact that the government guarantees to reimburse the contractor for all necessary costs of performing the contract and in addition to pay a fixed fee, has often resulted in a let-down on the part of the contractor of his guard against high costs. It is the purpose of this article to draw attention to the merits and disadvantages of the cost-plus contract and to consider what devices and means can be used to make this type of contract function more efficiently as a method of producing goods. The production of goods under a cost-plus contract bears a similarity to monopolistic production, since the free market is abolished and all costs are recovered from the government. If the cost-plus program, therefore, is to become a vital and successful part of the American economic system, ways and means must be found for injecting efficiency into this type of production.

Abstract For many years accountants and credit men have used the current ratio as an index of the debt-paying ability of business enterprises. But the current ratio portrays only static conditions and it has been found necessary to use additional ratios in order to measure the dynamic aspects of business not shown by the balance sheet alone. The most common definition of the current ratio is that it is an expression of relationship between current assets and current liabilities. The criterion establishing the difference between a current asset and a fixed asset and a current liability and a fixed liability is respectively realization and liquidation within a period of one year from the date of the balance sheet. However, the maturities of current assets and current liabilities range through the year and no basis exists for the belief that the range of asset maturities averages out against the range of liability maturities with a resultant offsetting effect. A reliable measure of solvency should reveal the amount of funds that will be available to meet obligations as they fall due. To do this, all of the assets must be converted to cash value and expressed in relation to the liabilities as they mature.

Abstract The United States government is the largest, the most extensive, and the most diversified business enterprise in the world. Its financial operations involve practically every kind and type of situation found in private business and in other forms of government, and many conditions not elsewhere found. Hence no simple or direct statements of the problem or of its solution are possible. Yet the purposes of financial reporting in the Federal government are the same as in any other government or in any private enterprise in which the public is materially concerned. They are to compile and disseminate information concerning financial operations and condition, for the benefit and guidance of management, investors, and the public. To these ends, each phase of the accounting and reporting should be directed. To be of the most service, the reports should be based on uniform standards and terminology consistently followed, should be comprehensive and truly informative, and should be rendered promptly and regularly.

Abstract Reviews the book "Modern Corporation Finance," by William H. Husband and James C. Dockeray.