Knowledge that Transforms

This article discusses the accounting practice for repossession and trade-ins in automobile industries. It describes that in automobile accounting the used-car traded in and the possession require special consideration if operating statements and balance-sheet accounts are to mean anything. Car dealers find it necessary to borrow heavily on their inventory of cars. The usual procedure is to arrange with some finance company to advance up to 100% of the "blue-book" value of each car placed on the floor of the dealers showroom or on his lot. Used-car advances will probably be limited to 80% of "blue-book" value. The dealer signs what is known in the trade as a "flooring note," securing this note with title to the car, and receiving a trust receipt for the car. Under this arrangement the dealer may sell the car, but the finance company does not transfer title until the flooring note is paid, usually from the proceeds of the sale. It sometimes happens that the contract will not cover the flooring note since price reductions must sometimes be effected to move cars which have remained on the floor too long. Based on these consequences of second-hand cars, their reconditioning, and responsiveness, it is assumed that the used car presents accounting problems peculiar to automobile merchandising.

This article presents four questions, prepared by the Board of Examiners of the American Institute of Accountants, for accounting students which were asked in the Certified Public Accountant (CPA) examination in accounting theory and practice held in May 1939. It also provides explanatory answers to these problems. Candidates who appeared in the examination were required to solve all problems in six hours. The first question described here is concerned with the topic of stock and investment accounting and decisions; while the second one is concerning sales and purchase in retail trade accounting. The other two questions are concerned with accounting problems of property lease and real estate businesses. Answers are detailed with special comments for clarifying the statements prepared in answers. Proper scheduling of time for each question individually by the student is also suggested to effectively solve these questions.

The most extensive treatment of depreciation by the U.S. courts has been in the field of public-utility rate regulation; but depreciation has also been considered in other types of cases, including: income tax cases, the determination of corporate income which can be distributed as dividends, the settlement of partnership agreements when the amount of income is in dispute, the life-tenant remainderman situations, master-and-servant cases when a part of the servant's compensation is a share of net income, patent cases when the royalty is a portion of net income, and eminent domain cases in the determination of the value of the confiscated property. In building up an interpretation of depreciation provisions over the years, the courts have proceeded much as the same way; that is, they have attempted to interpret the laws according to accepted practices and standards. Although there is an occasional cross citation, the cases on public-utility rate regulation, in which depredation is involved, seem to constitute a separate group, unrelated to income tax and other types of cases. In the opinion of the author there has been a definite trend in recent years toward the acceptance of complete, systematic depreciation accounting and the recognition of the inevitably close relationship which exists between the periodic allowance and the deduction made in rate-base valuations.

Reviews the book "Depreciation, Principles and Application," 3rd ed., by E.A.Saliers.

This article provides guidelines for improving the standard for accountancy laboratories in collegiate schools of business in the U.S. There is frequent and often justified complaint from businessmen that graduates of professional business departments in some of our universities and colleges do not possess the ability to keep a simple set of books. After spending from two to five years in one of these business departments, a graduate may experience a serious setback in confidence if he fails on his first job. No matter where a man finds himself located in the business field, a knowledge of accounting theory will be valuable. However, it requires more than mere "book learning" to understand accounting. In this work one must learn to do by doing. Such is the purpose behind the accounting laboratory method as used in most of our professional schools of business. Equipment is an important element of an efficient accounting laboratory. The present study shows that tables are most satisfactory for problem and practice-set work. A properly equipped laboratory should contain enough steel files or lockers for the purpose of filing completed problems and working materials. In a compulsory system no work is accepted if done away from the workroom, and both finished and unfinished problem material is filed under each student's name.

Reviews the book "Theory and Mechanics of Accounting," by Leo A. Schmidt.

This article presents information on capital gains and losses in accounting. Capital gain has been defined as "profit upon realization of assets otherwise than in the ordinary course of business, this profit being the excess of the proceeds of realization over the cost of the property realized." Accounting makes a careful distinction between realized and unrealized capital increments, the latter generally being designated "appreciation." No matter how capital gain is defined the most significant feature of the transaction is that it does not occur in the ordinary course of business. Another peculiarity of capital gain from the accounting point of view is that it is not recognized until actually realized. The conditions and circumstances which bring about capital losses (realized or unrealized) are various. A change in price levels may be a cause. Obsolescence is frequently associated with capital losses. In the case of security investments, factors related solely to market conditions may be primarily influential. To say that capital losses are always non-recurring and outside the regular fulfillment of the particular function of a business enterprise is hardly accurate because obsolescence and many of the other risks which might result in loss of capital are always present and cannot be disassociated from the purposes of an enterprise.

This article points out the features of "Manual of Water Works Accounting," prepared jointly by the Municipal Finance Officer's Association and the American Water Works Association. Budgetary statements are an essential part of any municipal report That municipal officers have a duty to inform the public that they have complied with the provisions of the budget is now unques- tioned. Finally statistical statements are in some respects as important if not more important for the public than balance sheets or income statements for several reasons: They are easy to understand; they present a mass of valuable information in concise form; they present some evidence of the efficiency with which officials are carrying on operations; and they show trends. Many of the journal entries will be useful to officials who have a good knowledge of accounting but who are not familiar with utility accounting. It is for the benefit of the latter class of officials that some of the more complicated aspects of water works accounting were presented.

Reviews the book "Financial Statement Analysis: Principles and Technique," by John N. Meyer.

A cursory survey of accounting literature reveals that the word "expense" has been given many divergent meanings. Sometimes it is used as though synonymous with cost, that is, as a generic term which has no technical meaning without the addition of qualifying words. More often it is used to refer to cost of services or specifically to those service costs which are incidental to the selling, administrative, and financial aspects of business operation. Another use of the term includes costs assignable to a particular quantity of revenue. In this last sense expense becomes a limiting factor by which gross revenue is reduced to net revenue. It is a determinant of the mount of profit or the element of equity increase. Perhaps in the minds of a majority of accountants the traditional and pragmatic idea of expense as service cost or cost of selling and general administration has been pretty well built up. But as an accounting concept many would agree that expense in the sense of over-all cost of revenue or profit determinant is much more significant than any other usage of the term noted above. It is the concern of this paper to examine the major controversies about the nature, scope, and technical significance of the term as so understood, its relation to other accounting concepts such as costs, losses, revenue charges, surplus charges, etc., and to inquire whether expense, as revenue-cost, is the broadest and the most significant grouping of items affecting profit or income.