Knowledge that Transforms

Abstract In this article the author stimulates interest in a co-operative effort through the facilities of the American Institute of Accountants, of the American Accounting Association, to improve the manner of audit reporting. According to the author these organizations have had a profound influence in developing accounting and auditing standards and techniques. The author considers the questions such as how best to indicate clearly the auditor's responsibility, what information should be included in the report, and how should the information be presented? He states that the auditor should prepare his report so that no one need be deceived in any case. In any discussion of the accountant's responsibility it should not be assumed that the client has no responsibility for the representations in his own financial statements which have been audited by a certified public accountant. In order to clarify his responsibility the accountant may give a disclaimer of an opinion. This means that the scope of his work was not sufficient for him to express an over-all opinion on the financial statements taken as a whole, or that some other circumstance prevented the expression of such an opinion.

Abstract One must finally conclude that the problem of allocating joint costs per se is unsolvable from a theoretical point of view. It is impossible to determine what costs should be matched against the income resulting from the manufacture of by-products and joint products. Procedures for allocating joint costs are based on certain standards of reasonableness; and the results are justified in the light of present-day market values, productive technology, and business experience. The techniques for the allocation of joint costs must be improved; otherwise, the conclusions obtained from various methods of joint cost distribution have no foundation of proof. Accountants will then have to resort to the basic criterion of all successful business enterprise, namely, that total revenue of the organization-in the long run-must cover the total costs of production.

Reviews the book "Punched Card Accounting and The Professional Accountant," by J. Standford Smith.

Abstract This article presents questions, prepared by the Board of Examiners of the American Institute of Accountants and were presented as the second half of the November, 1950 Certified Public Accountant. One of the question is, Adams, Baker, Charles and Day are partners. Their interests in the capital and their profit and loss ratios are as follows: Adams's is 40 percent, Baker's is 30 percent, Charles's is 20 percent, Day's is 10 percent. To provide a means whereby the remaining partners might purchase a deceased partner's interest from his estate, a life insurance program was inaugurated whereby life insurance proceeds would be paid to the remaining partners in proportion to their percentage ownership in the partnership. Since each partner was in effect insuring the life of each of the other partners, it was agreed that no partner would pay any part of the premiums on policies covering his own life. One are to prepare the correcting entry that should be made to the partners' capital accounts in order to reflect properly the agreement as to the insurance. Give supporting computations in good form.

Abstract The article analyses and interprets the discussions of the American Accounting Association's Committee on Concepts and Standards on corporate financial statements. The committee proposed that it be authorized to issue a numbered series of supplementary statements. Some of the recommendations on reserves and retained income confirm current practice, while others recommend ways in which published financial statement practices could be improved. The discussions of the Committee in the general area of reserves is analyzed in terms of the six major questions. These questions include, is "reserve" a useful tool in published financial statements? The statements by the committee recommends that the term reserve be eliminated from published statements. According to the author the Committee could find no reasons to justify a recommendation that the profession seek to standardize a definition which would be in permanent conflict with the dictionary meaning. A spirited discussion took place with respect to so-called self-insurance reserves. The author remarks that there is no unanimity in the Committee as to whether casualty losses accrue, statistically or otherwise.

Abstract This article attempts to examine from the managerial standpoint the major issues of profit-measurement on which economists and accountants have generally taken different positions. The focus is on the meaning of depreciation, the treatment of capital gains and losses, and the price level basis for valuation of assets. The role of futurity in economic values and in business decisions underlies all three of these issues in measuring profits. The estimation of income requires a forecast of all future changes in demand, changes in production processes, cash outlays to operate the business, and price changes. If this were available, a program could be planned for borrowing and investing cash so as to allow for an annual cash dividend payment that would be equivalent to the uniform consumption of real goods. A balance sheet occasionally contains intangible assets such as good will or patent protection, which nominally are anticipation of the future. But their valuation on the books is not closely related to expectations. An economist's balance sheet has quite a different interpretations since it is an attempt to aggregate the future earnings of the firm's properties now on hand.

Reviews the book "Graphic Budgets," by W.J. Eiteman.

Reviews the book "Marginal Costing," by F.C. Lawrence and E.N. Humphreys.

Abstract The article focuses on how managerial concepts and views are reflected in the accounting principles, quasi-principles, and conventions which are implicit in the term, current accounting standards. The responsibility of accounting to management is a primary one, and in fact is considered by most accounting authorities to be paramount. The objectives of management are, first, to conserve the capital of the enterprise and second, to add to such capital by earning income. These two objectives govern the data with which accounting deals. Accounting is fundamentally concerned with the distinctions between capital and income, as these elements are expressed in the balance sheet and the income statement as accounting end-products. The distinction between capital and income is preserved even in accounting for that which is basically capital. Accounting has recognized the significance of earnings as the second primary managerial objective. In striving to attain the dual objectives of preserving capital and maximizing earnings, management makes use of certain assumptions and modes of thinking which profoundly affect the accounting.

Reviews the book "Scientific Method for Auditing," Lawrence L. Vance.