Knowledge that Transforms

Reviews the book "Proceedings of the Tenth Annual Institute on Accounting."

One of the accounting practices questioned today concerns the reporting of Federal income taxes. From the theoretical aspects of the nature of taxes, the matching principle, and the going concern concept, the arguments for tax allocation appear to be without adequate support. However, the arguments against a given accounting practice must be supported by empirical evidence as well as theoretical analysis. Empirical evidence relates to the existence of results from the practice of accounting that meets the basic objective of accounting information-fairness to all parties. A cursory review of a number of major corporate balance sheets indicates, as one would expect, that the deferred Federal income tax reserve account is becoming embarrassingly large. This reserve typically is disclosed on the right hand side of the balance sheet as a deferred credit or in the twilight zone under the caption reserves. It is not specifically classified as part of the interest of owners, creditors, employees, government or any other group. Those firms electing not to use tax allocation procedures do not reflect a reserve in their balance sheet. The reported earnings in their income statement, therefore, are higher than for the firms electing to normalize earnings. Since consistency does not exist on an inter-industry or intra-industry level, the problem of comparing financial statements is augmented.

The article presents a comment on the article related to matrix theory and cost allocation by professor Neil Churchill that appeared in the October 1964 issue of the journal "The Accounting Review." Churchill's article provided an expanded version of the cost allocation model and then suggested other applications of linear algebra to cost accounting analysis. This comment will be directed at the Williams-Griffin model. As the article explained, the techniques of linear analysis with a helping hand from computers make the solution of reciprocally related systems quite simple in theory. This phrase, in theory, suggests two lines of thought, neither of which is to be construed as a basic criticism of the Williams-Griffin-Churchill material. The first, very briefly, is that what is in theory so simple still presents problems in practice. A different Net Services model predicates its approach on the assumption that service departments exist only to fulfill needs of operating departments and that their costs to these operating departments can only be determined after they have been charged by other services and credited for work done for other services.

This article probes into the foundations of conventional accounting measurements in order to construct a relatively simple axiom system on which a purely mathematical measurement system can be erected and thus provide a consistent basis for examining pertinent aspects of conventional accounting practices. The mode of development-needs to be distinguished from other, prior, attempts to axiomatize accounting. Unlike the attempt by some economists the object of the analysis is to develop and elucidate a uniform approach to conventional accounting measurement as such. That is, one take conventional accounting measurement as given rather than, seeking to prescribe what one think accounting measurement should be. Conventional accounting is analyzed from a purely mathematical viewpoint of measurement. It consider any two accounting systems as being equal if the measures derived from the systems are equal for any set of inputs to the systems. An emphasis is placed on a double classification scheme in accounting distinctions are not made in analysis between an accounting system based upon double-entry book- keeping and an accounting system based upon single-entry bookkeeping as long as methods of recording do not affect the measure which is of primary interest.

This article discusses the differences in international accounting concepts and practices. International accounting is the producing, exchanging, using, and interpreting of accounting data across national borders. In an ideal state, international and domestic accounting would be indistinguishable, because under such a condition an international viewpoint would be applied to all accounting considerations. Until a transnational basis is achieved for accounting, international accounting will exist as an area of specialization in accounting in order to focus attention on problems of an international nature and in order to interject the broadest possible perspective into the development and application of accounting thought. It is not difficult to single out a number of specific factors as to why international accounting is important. In addition to the broadening effect of international studies, there are four direct reasons for this importance increasing international business and international investments, emergence of the international corporation, furthering accounting research and development and alignment with other disciplines.

The article discusses about some empirical bases of financial ratio analysis. Their statistical nature, as described in this article, suggests that they may not be so simple device as has been assumed but a more precise and larger body of knowledge about ratios will help surmount this difficulty. It would be extremely useful to explore the question of the predictive ability of financial ratios further. A sharper determination of their predictive ability should be possible because computers will allow for a greater usage of non-aggregate data and more sophisticated statistical techniques. Also, the development of funds flow ratios should be promising in this regard. An efficient predictor of financial difficulties would be a valuable device for screening out undesirable investments; indeed, it would be a useful device for selecting investments if one were interested in selling short. However, there is even a more fundamental reason for determining the utility of financial ratios. It is inconceivable that accounting data can be analyzed without transforming it into ratios, in one way or another; and thus, a justification of financial ratios would also be an important justification of financial accounting.