Knowledge that Transforms

Reviews the book "Essentials of Accounting," by W.A. Paton.

Abstract Not much has been said about goodwill upon financial statements. Of three books on goodwill and its treatment in the accounts no mention was made of goodwill upon the balance sheet or profit-and-loss statement. A few writers have given their views as to its position in the balance sheet or have stated its proper position without giving reasons for their point of view. Again, but few writers have considered the question of whether amortized goodwill should be charged to current profit and loss or to surplus directly. In this paper, an attempt has been made to give a fairly complete discussion of these theoretical questions. In addition, the practical side of these questions is considered through the introduction and analysis of a number of recent financial statements of outstanding industrial concerns. The first question discussed in this article, and probably the most important, regards the placement of goodwill on the balance sheet. The Federal Reserve Board bulletin of 1917 recommended that the amount of goodwill be shown as a subtraction from the surplus and capital stock of the corporation.

Abstract The article focuses on accounting. The author recalls the six years spent largely in asking questions of accountants in the utilities investigation at the Federal Trade Commission. The investigation was largely an accounting investigation. In the light of later experience the author regrets that more attention was not given to the matter of accountants' certificates. Many accountants of the days covered by that investigation acted competently and ethically according to the standards of those days. But there were instances of phony intercompany profits, of write-ups used to create income or to relieve the income accounts of important charges, of profits computed on the sale of securities without even bothering to deduct the cost of the securities, where the accountants certified the statements without exceptions. The author recalls the advent of the Securities Act of 1933, the Securities Exchange Act of 1934, the creation of the Securities and Exchange Commission in 1924, and the Public Utility Holding Company Act in 1935.

Abstract During recent years, when many businesses have reported heavy losses, some economists have accused accountants of erring in so generally charging depreciation on the straight-line basis. That accountants tend to overstate profits in periods of prosperity and to exaggerate losses during depressions is the opinion of those who maintain this viewpoint. These alternate overstatements of profits and losses, it is asserted, lead business managers and investors to assume respective attitudes of over- and under-confidence regarding prospects of business conditions. Therefore, accountants have been urged to forsake the straight-line method of making depreciation charges and, instead, to vary them with business activity. At times, some members of the accounting profession have advanced views of a similar, if not identical nature. From the economic viewpoint a capital asset is primarily a bundle of services receivable in the future and depreciation of the asset may be considered to be the conversion of these services into product values.