Knowledge that Transforms

It is a great pleasure to meet with a group such as this, devoted to-or at least interested in-the study of what is actually going on in the real world, with the object of drawing useful conclusions from the facts. In my opinion, as a useful way of spending one's time this compares favorably with the popular pastime of arm-chair pontification with total reliance on a sort of mystic inner guidance developed during a lifetime of defending the indefensible from assaults of change. Simulated cases studied in the classroom and business games on the computer are certainly good fun and, up to a point, are perhaps instructive. But I welcome the evidence of a growing concern with studying the actual facts, rather than even the most ingenious simulations thereof. In such areas as financial communication, we cannot (and I am sure will never be able to) match the controlled conditions which the chemist or physicist can often create in his lab for experimentation. This may be illustrated, in a simple-minded sort of way, by contrasting the control of heat in a lab experiment with the control of inflation in the economy. Presumably by controlling the flow of fuel, temperatures can be raised in a lab experiment absolutely predictably. However, while inflation is certainly closely related to money supply, the effect on prices of a given increase in money supply is nothing like so predictable. The price rise depends on many noneconomic factors-for in dealing with people, all sorts of political considerations inevitably enter the picture-and I sometimes wonder whether our difficulties in controlling inflation do not stem from the fact that we tend to think of inflation as an economic rather than as a political problem. Certainly in Canada, during World War II, we virtually halted inflation by appointing a Prices Czar who announced it was not to take place. A special case of course, but one which dramatically illustrates the principle. But if we cannot hope to match the controlled observations of the

That hereafter, whenever practicable and reasonable, and where the aggregate amount of notes and accounts receivable represents a significant portion of the current assets or of the total assets of a concern, confirmation of notes and accounts receivable by direct communication with the debtors shall be regarded as generally accepted auditing procedure in the examination of the accounts of a concern whose financial statements are accompanied by an independent certified public accountant's report, and that the method, extent, and time of confirming receivables or a part thereof, be determined by the independent certified public accountant as in other phases of procedure requiring the exercise of his judgmentl

A major purpose of the Estes study was to determine, by using questionnaires, the expected usefulness of current cost information for various classes of assets, both current and long term.2 Two assumptions were made in conducting the study: (1) current costs were objectively measurable, and (2) the current cost information would be of a supplementary nature only. The sample was selected from three organizations: the Institute of Chartered Financial Analysts, the National Association of Bank Loan Officers and Credit Men (Robert Morris Associates), and the Financial Executives Institute. These groups were chosen because Estes believed they closely paralleled two major financial statement user groups: (1) investors, both current and potential, and (2) lenders. Questionnaires were sent to 300 members from each group. A total of 338 or 37.8% responded. The results of the study were that 81 percent of the item responses

Amortization, Advertising expenses, Financial Statements, Goodwill

Human resources, Input prices, Financial reporting, Accounting Choices

J. Rose, W. Beaver, S. Becker, G. Sorter, Toward an Empirical Measure of Materiality, Journal of Accounting Research, Vol. 8, Empirical Research in Accounting: Selected Studies 1970 (1970), pp. 138-148

Tax allocation, Taxation, Opinion No. 11, Investment credit

Net realizable value as a basis for inventory valuation has been advocated and adopted in practice under the following circumstances: 1. When estimates of cost are arbitrary and a ready market exists for the goods, as is typically the case in the extractive industries; 2. When joint products are prevalent, as in the meat packing industry, and 3. When the expected proceeds from the sale of the inventory items are below historical costs because of price changes, damage, or obsolescence. These circumstances represent cases in which valuation on a historical cost basis breaks down either because of the infeasibility of determining meaningful cost estimates or because historical cost overstates expected value. However, beginning with Canning,1 many have advocated using net realizable value for inventory valuation on its own merits and not just because of the shortcomings of the historical cost basis. When future cash flows could be estimated or approximated, Canning favored direct valuation of inventories, his terminology for net realizable value. According to Canning:

John Leslie Livingstone, Gerald L. Salamon, Relationship between the Accounting and the Internal Rate of Return Measures: A Synthesis and an Analysis, Journal of Accounting Research, Vol. 8, No. 2 (Autumn, 1970), pp. 199-216