Knowledge that Transforms

There has been a complete transfiguration of the accountant of yesterday into the accountant of today, as of October 1943. No longer are there day-books, bound ledgers, stereotyped forms and reports and procedures. In their stead there has been substituted a streamlined system of well-defined, well-coordinated principles and practices as the foundation of the carefully studied technique used in our profession today. The accountant must be capable, honest, and honorable, for his entire stock in trade consists of his professional ability and his reputation for successful and honorable service in the past. His life is molded and designed to prepare him for occupational proficiency. Before he can attain this proficiency, he must devour a well-balanced and a well integrated program which emphasizes applied and practical knowledge in business training, together with the traditional academic background and respectability. As an accountant progresses in his profession, from an inexperienced to an experienced accountant, he becomes more fully aware of the vastness of the field of accountancy and the futility of hoping to understand it in detail. Yet, an accountant by his inborn nature is driven to know his place in the system of existing things, reasoning about and understanding, at least in general, the controlling procedures and practices that engender order in the apparent chaos of his profession.

This article presents information on recent publications on cost accounting by the U.S. Government. Some of the books published are "Statistical Cost Functions of a Hosiery Mill," "The Relation of Cost to Output for a Leather Belt Shop," and "The Long-Run Behavior of Costs in a Chain of Shoe Stores." Between economic theory and business practice there is a deep and as yet un-bridged gull. The economist evolved a theory of how the rational businessman maximizes his profits, but this theory, however unassailable it may be logically, does not fit the facts of business practice very well. For this shortcoming economists used to lay the blame on the businessman, saying either that his behavior was not rational, or that he did not aim at maximizing profits. Only recently has it begun to be realized, since businessmen failed to reform themselves, that the economist may be the one to be blamed. He may have oversimplified his theory, and that he should learn something of the businessman's trade before theorizing about it.

The problems asked in the first half of the May, 1943 C.P.A. examination in accounting practice prepared by the Board of Examiners of the American Institute of Accountants. The examinee was given four and one-hall hours to solve all problems. The problems were weighted as follows, problem 1, 10 points; problem 2, 20 points; and problem 3, 20 points. The solution to the problem 1 interprets, it is obvious that the reported earned surplus arose as a result of charging the opening inventory to cost of sales at the reduced price or by a write-up of the inventory to the contract price. While the original investment in inventory, 100,000.00 dollar, did represent the cost of those goods this special price was given because of other considerations, and good reporting would require disclosure of the special conditions surrounding this transaction. The solution of the problem 2 explains, the balance sheet should carry a footnote keyed to the capital surplus item reciting the fact that the company is contractually obligated to buy its raw material from one source at a fixed price and that the inventory must be maintained at an amount not less than 200,000.00 dollar. Further this note should explain that the capital surplus arose as a result of this contract by which the Black Corporation acquired its original inventory at a special price.

Budgeting involves both planning and estimating processes which present problems even during peace time. During a period of war these problems are magnified by rapid changes in conditions which make accurate forecasting difficult, if not impossible. However, many of the conditions and the budget problems to which they give rise can be anticipated. Not all municipalities will fare alike and allowance will therefore have to be made for individual circumstances. Decreases in revenues from property taxes, licenses and permits, some state shared taxes and grants-in-aid can be expected. The assessed valuation of both real and personal property will decrease. Real property assessed values will decrease because the depreciation of property as a result of wear and tear, its destruction by fire or other causes, and the reduction in its value caused by obsolescence are not being offset by new building construction. Again, increased holdings of property by the Federal government mean increased exemptions.

The difficulty presented by a circuit of intercom any ownership relations is familiar to those who are conversant with the preparation of consolidated statements. If Co. A owns 4/5 of the stock of Co. B and B owns 3/4 of the stock of C while C in turn owns 1/10 of A's stock, we have a situation which leads us into an infinite series when we apply the usual process of preparing a consolidated balance sheet. The equity of each company is dependent upon the equities of all of the other companies within the circuit. The standard method for the solution of problems of this type is the use of simultaneous equations. Each company has title to its own assets but of course those assets are subject to the claims of creditors so that the equity of stockholders in them is their net value. The profits earned after consolidation could be carried round and round the circuit until the remaining portion did not exceed one cent. Usually the fractional part of the stock of the major holding company in the group, which is owned by a subsidiary company, is small. As a result the amount carried forward to succeeding rounds of the circuit is rapidly reduced. But in spite of this fact the application of such a method would be very cumbersome indeed. However, it suggests a simple process, which obviates the necessity of using simultaneous equations.

According to an old adage, competition is the life of trade. Exchange of ideas provides a surplus to improvement of educational processes. It is hoped that material dealing with the broader aspects of accounting education may be forthcoming for use in this department. Opinions might be exchanged on a variety of matters in connection with educational policy, curriculum alterations, course content, and the like. There are very few people who would favor a highly specialized education in accountancy to the exclusion of all general subjects. In some cases necessity rather than choice produces that unfortunate result. Public accountants, as customers of the colleges supplying graduates, are mud like other customers. They know what they like. They are not sure just why they hesitate to make suggestions for improvement. Manufacturers often try to learn to serve better by stirring customers to analyze the basis of their choices. Accounting teachers could do likewise. One of the advantages of work in a foreign language is the enforced contact with the mechanics of language structure. In addition, in many courses frequent papers and reports are expected which give further practice in the use of language.

The basic law governing accounting, auditing and financial reporting in the United States Government is the Budget and Accounting Act of 1921. This Act created the General Accounting Office under the Comptroller General, and the Bureau of the Budget. The Bureau of the Budget was originally placed in the Treasury Department under the Budget and Accounting Act, but in the reorganization Act of 1939 it was placed in the Office of the U.S. President which was a sensible change. The Comptroller General is also given the power to prescribe accounting procedures in the various departments. Responsibility for account-keeping was not placed upon him but was left in the various departments and agencies. The general account-keeping function, placed in the Treasury under previous Acts of 1789 and 1894, was left in that Department. The Act of 1921 does not place upon the Comptroller General the responsibility of either preparing or certifying financial statements. The principal requirement of the Act in this respect is placed upon the President, who, in connection with the transmittal of the budget, must submit a complete financial statement of the government.

The author in this article focuses on the need of control of detail in inventory valuation. He insists that there is an aspect of the inventory problem which has been very largely neglected in the literature of the subject, though in practice it must be faced every time a decision is made to change the method of valuation. The problem is that how can the entries in perpetual inventory accounts be handled so as to keep the book figures for control and for detail accounts in agreement with each other, and, at the end of the period, to bring them into agreement with the inventory as priced under the various suggested methods? To bring the problem into sharpest focus for the discussion, the author considers it as applying to the raw-materials inventory in manufacturing business which operates on a job-cost basis. In those rare instances in which all raw materials can be marked when purchased with their specific individual unit costs, and charged out to production at those specific costs, the control account will be a direct summarization of the entries on the detail cards.

Reviews two books "Principles of Cost Accounting," by J.F. Sherwood and Franklin T. Chase, "Essentials of Cost Accounting," John G. Blocker.

For a continuing enterprise having properties, the bulk of which must be replaced at one time, there is little doubt that funds roughly equivalent in amount to the recovered funds impounded by depreciation charges may be necessary for replacement. Nevertheless, as has been emphasized many times, replacement for a concern which continues indefinitely is done piece-meal and at no time in the future will all of the recovered funds represented by depreciation reserves on diversified properties be necessary for maintaining the same volume of output. A large volume of funds are, therefore, accumulated which are not only unnecessary in the intervals between individual replacements but are, in fact, never required by the firm unless it wishes to expand its productive capacity. With regard to public utilities one of the fundamental problems is the determination of the rate base. Except for considerations of working capital one shall assume that the rate base coincides with the accountants' book values. A minimum level of working capital is necessary and generally allowable.