Knowledge that Transforms

Under the title "Toward Uniform Inventory Pricing," the American Management Association has recently published the report on a panel session which formed a part of the Association's Financial Management Conference in New York City in November 1951. The leading Article therein is a paper read by Mr. H. T. McAnlyon "How Uniformity in Inventory Pricing can be Accomplished." The main object of the said paper is a proposed amendment to the laws to "remove the last obstacle to the immediate adoption of LIFO and to the establishment of substantiated uniformity in inventory valuations, preventing further inflation of profits if prices continue to rise." That "last obstacle" to an immediate and general adoption of LIFO is seen in the provision of the present Internal Revenue Code which requires that once a company goes on LIFO, the beginning cost values assigned to the inventory remain a floor for all future income determination. Present law does not admit a write-down of inventory values to cost if prices go below those applied in a company's LIFO inventory. In other words, if the companies adopting LIFO were permitted to adjust their cost basis to the lower price level which may prevail at the end of a year when prices have declined, most now hesitant would adopt LIFO, uniformity of inventory pricing would be reached, and the overstatement of profits generally avoided.

The Mutual Security Agency (successor to the Marshall Plan-Economic Cooperation Administration) is a mammoth organization financially with activities and offices in most Western European countries and in a number of countries in Asia. As of March 31, 1952, total expenditures under the Marshall Plan had exceeded twelve billion dollars. The Controller in this agency is responsible for the operation of financial controls over dollars, local currencies, and commodities furnished; his job to determine that funds spent actually accomplish the purposes of the Act. In the disbursement of public funds, close scrutiny is always a "must." In programs involving expenditures for assistance to foreign countries, this is especially important. It is essential that accounting and auditing controls be maintained of such caliber as to not only fully protect the assets but of a type to inspire and maintain public confidence. The successful continuation of the foreign aid program depends to a large degree on such trust. Each participating country, by the terms of its bilateral agreement with the U. S., has agreed to adopt or maintain the measures necessary to assure efficient and practical use of all resources made available to it and to permit the observation and review of the use of such resources. MSA Controllers in the various countries are careful to avoid any approach to dictating the type of records to be maintained. Instead, they indicate the information which must be available and permit the country full latitude in establishing their own methods and systems for obtaining the needed facts.

This article presents questions and answers related to the problems, which were prepared by the Board of Examiners of the American Institute of Accountants and were presented as the first half of the November, 1952 C.P.A. examination in accounting practice. The candidates were required to solve problems 1 and 2 and one of the remaining three problems. The weights assigned were: problem 1, 20 points; problem 2, 18 points; problems 3, 4 or 5, 12 points. A suggested time schedule is given as: Problem 1: 100 minutes; Problem 2: 80 minutes; Problem 3: 60 minutes; Problem 4: 40 minutes; Problem 5: 30 minutes. The C Company is planning a pension system for certain of its employees. It wishes to provide funds for meeting the payments under the pension plan and asks you for assistance. The company does not contemplate making any pension payments under the plan until January 1963. Starting on January 1, 1953 and continuing for ten years, the company will deposit $10,000 a year in a special fund. On January 1, 1952, the company wishes to make a lump sum deposit of an amount sufficient to provide the remaining funds needed for meeting the pensions. It is expected that all the above funds will earn 3% interest compounded annually during the entire life of the fund. The question is to compute the amount of payment which should be made on January 1, 1952. In response to this question, the article presents a balance sheet.

Reviews the book "Effects of Taxation--Corporate Financial Policy," by Dan Throop Smith.

The development of financial reporting in the U.S. has been closely related to the development of business corporations as means of carrying on much of the industrial activity of the nation. Both of these developments have taken place largely since 1900. It appear that a definite need exists at the present time for another examination of the old idea that disclosure, which includes the presentation of all significant accounting information as accurately and informatively as possible, is the guiding objective of financial statements. The article is concerned with this idea as it relates to recent discussions regarding the purpose and scope of published income reports of corporations whose shares are widely held. The unsettled controversy between accountants favoring all-inclusive income reports and those favoring selective income reports, which exclude certain special items of gain and loss, cannot be fully understood, unless related to the question of whether disclosure is an underlying objective of corporate reporting.

Accountants have long been accustomed to the multiple use of accounting data presented in the annual statements issued by American business firms. These statements were originally prepared primarily for the management, and secondarily for the banker. The accountant has long realized the problems raised by the multiple use of accounting data because the information needed by one group may be different than that needed by a second. As a result of these confusing situations, some accountants have favored the use of single-purpose statements. Accountants must now realize that the results of their efforts are used for purposes that may be entirely foreign to the internal affairs of the particular business organization. Most widespread of these at the present time is the combination of the accounting figures reported by each of the firms in the U.S. in the national income estimates by the Department of Commerce. This work has been done by statisticians and economists rather than by accountants, but the accounting profession should be grateful to the intelligent way that these groups have used the product of accounting.

The article discusses the present outlook of accounting students in accountancy. The article asserts that accounting practitioners are ever on the alert for promising neophytes, hence graduates of collegiate schools of business are reasonably certain of positions, and, the immediate monetary reward is considerably higher to a beginner than it was in the decade next preceding the Second World War. Chances for promotion, too, are better than heretofore because of the internal growth of accounting firms, and the diversification of clientele activities that offers chances for specialization. As always, advancement depends upon the aptitude of, and the interest displayed by, the employee. Interest may be shown by close observation while auditing, and later offering suggestions to the staff leader for improvements in clients' accounting systems, and for procedural changes in the audit programs to conform with altered conditions in the concerns under audit. Also, the acquisition of the certified public accountant certificate is an indication of sincerity in the decision to make public accounting a career.

Reviews the book "Financial Statement Analysis, Principles and Techniques," 2nd ed., by John N. Myer.

The most important underlying assumption of accounting is the unit for which accounting has responsibility. The accounting unit, generally referred to as the accounting entity, forms the basis for the accounting records. It determines the boundaries of relevant and irrelevant data, and it has a direct effect upon the theory of accounting used in recording the activities of the entity. Despite the importance of this basic concept, there has been a definite lack of clear and concise determination of the exact nature of an accounting entity once the entity has been selected, and a seemingly endless controversy has ensued over the entirely irrelevant question of whether the corporate accounting entity is based on fact or whether it is based on fiction. The factual basis of the accounting entity is also attacked on legal grounds. It is pointed out that the courts do not regard an unincorporated entity as being separate and distinct from its owners, and it is charged that the courts frequently pierce the veil of the corporate entity.

Accounting and legal authorities insist that the law has materially influenced the development of accounting principles and practices, and that this influence has had profound and far reaching effects. Conversely, it has been asserted that accounting practice has done much, by developing the concept of the single entity of the group of affiliated companies, through the consolidated statement, in bringing about some legal recognition of these separate entities as a single operating unit. In conducting the legal investigation, the argument as to whether there are indeed any true principles of accounting is ignored, and an authoritative group of principles affecting the consolidated state merits is used, the acceptance of each by the profession as a recognized principle of accounting being individually shown. The treatment of each principle is then followed by a discussion of the court decisions that involve the application of each of the accounting tenets studied. This article does not generally attempt to analyze critically each of the cases cited to decide whether it enunciated what might be called good or bad law, in the light of the basic legal or accounting theories, rather the study accepts the decisions as it finds them, and merely attempts to determine the extent to which they approve or disapprove of the accounting principles involved in the particular cases.