Solomon and others' have examined the relationship between the book yield on assets using conventional depreciation method and the cash-flow yield or internal rate of return of the assets. A substantial discrepancy between these two yields is often observed. Of course, if firms used the internal rate of return method of depreciation recommended by Anton2 and Reynolds,3 there would be no discrepancy between the expected book yield and the expected cash-flow yield. Unfortunately, these are practical and institutional considerations which often prevent the accountant from implementing an internal rate of return method of depreciation. Bierman4 and Shwayder5 (hereinafter referred to as the previous papers) explored the effect of price-level adjustments on the book rate of

The article deals with the changes in the American Institute of Certified Public Accountants' recommended procedures for implementing general price level adjustments. Three assumptions were made during the analysis. Assets and liabilities are amortized so that the book value of the asset or liability is equal to its expected imputed value. This amortization approach results in an anticipated book yield, which in every period is equal to the anticipated internal rate of return. The imputed value of non-monetary assets and liabilities at the end of the period and the cash flow from non-monetary assets and liabilities during the period are proportional to the general price level at the end of the period. The price level does not affect the imputed value of monetary assets and liabilities and the cash flow from monetary assets and liabilities. There are no changes in expectations except for unexpected changes in the proposal, which is free from such limitations. Price level adjusted can be used to compute the "real" internal rate of return of the firm.

The article discusses some of the limitations of residual income in internal reporting and then describes interest-adjusted income, a modification of residual income, which mitigates some of these limitations. The residual income of a division is the net income of the division less the product of the capital of the division times a required rate of return. Despite its many advantages there are at some limitations of residual income. This can be that residual income is subject to all the imperfections of historical cost net asset valuation. There are some pitfalls in using residual income in conjunction with generally accepted accounting rules for performance evaluation. However, residual income can be used in conjunction with other accounting rules, eliminating some of the problems associated with it. Moreover, the allocation of imputed interest to accounting periods is arbitrary under residual income in that all imputed interest is expensed. But some imputed interest may have future service potential and therefore should be capitalized.

The article focuses on the analysis of capacity utilization. There is no evident consensus among cost accountants as to the usefulness of computing the fixed overhead efficiency variance. The efficiency variance is based on the assumption that a real loss in the use of fixed facilities occurs as a consequence of labor inefficiency. This would only occur under the rare circumstances where a plant operates at maximum capacity. Although currently the fixed overhead efficiency variances may not be an economic cost to the firm, at some future time when the master sales budget is closer to practical capacity, the fixed overhead efficiency variance may act as a constraint on the firm's output and thus reduce the sales volume available to the firm. Unused capacity is dichotomized into expected idle capacity used for evaluating the effectiveness of the master budget as a plan for the coming year and a volume variance used for evaluating the performance of the organization relative to the master budget. The capacity efficiency variance is a use of expected idle capacity. To the extent the capacity efficiency variance exceeds the expected idle capacity variance, the difference is a component of the volume variance.

The article focuses on a proposal for the accounting measurement and/or the measurement of foreign exchange exposure for a domestic parent with foreign subsidiaries. The proposed method differs from other recommendations in the accounting literature in the explicit treatment of fluctuations in the domestic price level, the foreign price level, and the exchange rate. In the other methods examined, there were difficulties in accounting for at least one of those changes. Such separate treatment of each factor results in an economic and an accounting model which is viable--not only under today's international monetary environment--but which should also hold true under other international monetary arrangements. As a measure of exposure, the proposed method assists in hedging decisions. When incorporated in the financial statements, the proposed method assists in intercompany comparisons by effectively measuring the economic effects of price and exchange-rate movements. Finally, as indicated in the last section, the approach can be extended beyond the simplifying assumptions used in the article.