Knowledge that Transforms

Reviews the book "Professional Accounting Training in Collegiate Schools of Business," by Mervin Isaacs.

The article focuses on valuation of fixed assets. The values of assets might be determined from the equities. Stock exchange quotations provide current values of stocks and of bonds. The total value of all capital stock in the hands of the public plus the face value of bonds and other liabilities would give a figure which might be called the value of the corporation. Another approach to the determination of asset values would be through the process of capitalizing normal earnings. This is a valuation method of ultimate importance in the field of unregulated industry. Still another possible approach to the valuation of a corporation's assets is the one ordinarily taken; an appraisal is made of the assets themselves. Cost is the logical and preferable basis for balance-sheet valuation of plant and equipment. Deviation from cost results in distortion of future income and earned surplus. The belief that asset values of plant and equipment as shown on the balance sheet indicate market value or any other value should be discouraged. They should represent legitimate unrecovered costs, long-term prepaid expenses, and in this way display the financial condition of the individual enterprise in question.

The article focuses on accountants' role in determining standards. It has come to a matter of general agreement that one of the primary purposes of accounting is to measure performance and promptly inform management when this performance is such as to merit special consideration. To measure either individual or group performance requires certain standards like collect and analyze statistical data which will be useful to those who must pass judgment on what constitutes good performance. Counsel with various executives upon whom these responsibilities fall. Record the standards set and their continuous revision. Inform those who set standards as to apparent discrepancies or errors. Promptly report variations between the actual performance and the standards, collecting and analyzing all data which tend to explain such variations. Translate the variations between actual and standard performance into such terms as will clearly and forcibly inform both executives and workers as to the ultimate results of such variations. Accumulate a story of individual or group performance in terms of the standards set.

This article discusses the topic of dividends on non-cumulative preferred stock. The development of the corporation into a dominant form of business organization, has added new complications to capital structures such that the problem of preserving a proper balance between the holders of various classes of securities in their competition for income is becoming more and more difficult to solve. The preservation of this balance by the adjustment of relationships among the groups owning corporate shares is an extremely delicate and arduous task for the courts. So far as dividends are concerned, preferred stock may be classified as cumulative and non-cumulative. On the other hand, the holders of non-cumulative preferred stock are entitled to no dividends for any particular year if there are no earnings for that period. A problem arises when profits are sufficient to pay a dividend to this class of shareholders but the board of directors refuses to make a distribution for that year and invests the earnings in fixed improvements or retains them as working capital.

This article presents information on the equity method and intercorporate relationships. In a series of articles on "Intercorporate Relationships" appearing in the journal "American Accountant" from April-July 1982, economist Lewis A. Carman presented the "equity method" for preparing consolidated balance sheets. The equity method eliminates the necessity of making all adjustments, which are solely and entirely between the investment accounts and the surplus accounts. Consolidation on a cost basis is complex and is subject to errors, which are not patent. Hence, the usual procedure involved in this method is, to adjust the investment account for changes in net worth since date of acquisition. The equity method does not invalidate the computation of goodwill on the conventional basis that is the excess of cost over book value at date of acquisition. Either total or partial goodwill may be set up on the work sheet. The equity method does not introduce algebra except where intercorporate relationships are exceedingly complex.

Reviews the book "A Survey of a Retail Trade Area," by Fred M. Jones.

The article focuses on taxation and the business year. The inequality of titration resulting from a difference in accounting periods may be illustrated by a simple although somewhat extreme example adapted from actual practice. Income tax regulations make no specific mention of the matter, but applications for change supported by the plea that the corporate taxpayer wanted to bring its books into agreement with its natural business year have been approved by the Commissioner of the U.S. Internal Revenue Service. The theoretical limits of the natural business year may now be examined from the viewpoint of taxation. The last old closing date will evidently be defined as that point in time, at which the present value of all future income tax payments is a minimum. In order to single out the problem of seasonal fluctuations, it is necessary to disregard changes in profit due to the business cycle, the general long-term trend and the individual trend of the business under consideration. To obtain the amount saved per annum, all that is necessary is to multiply the present value of the total savings by the interest rate.

This article presents information on the methods of calculating inventory turnover and the inventory markdowns. In calculating turnover by the cost method, it is essential that numerator and denominator should be on the same price level otherwise a distortion would result. The prevailing practice of taking inventory at cost or market and deducting this inventory from purchases at cost, cause an error that gives a Cost of Goods Sold figure containing part of the cost of goods unsold and also results in a double distortion of the turnover. The ratio of sales to net worth or "turnover of owned capital" is sometimes suggested as a test of the efficiency with which the investor's dollar is being used. Since efficiency of utilization of assets is a factor quite independent of the borrowing policy, the two can be measured separately, the borrowing policy by the ratio of net worth to debt and the efficiency of asset utilization by the ratio of sales to total assets.

Reviews the book "Principles of Auditing," by F.R.M. de Paula.

Reviews the book "Accounting Principles and Procedure," vol 1., by Charles S. Langer.