Reviews the book "Effects of Taxation--Investments by Individuals," by Keith Butters, Lawrence Thompson and Lynn Bollinger.

The article focuses on business-type statements in the budget of the U.S. Business-type statements are printed in the budget for Government-owned corporations and other revolving funds established by law or regulation. Accounting and budgeting for business type operations have definite characteristics not generally found in many of the ordinary government-type fiscal procedures. The statement of sources and application of funds in the business-type presentations is the counterpart to the schedule of amounts available for obligation used in the budget for funds subject to appropriation controls. The purpose of the statement is to show the amounts made available to the fund and how these amounts have been used. Funds applied to operations reflect amounts used for acquiring fixed and other long-term assets, expenses incurred that involve working capital items, and the net increase in working capital other than the U.S. Treasury cash for the fiscal period. The "funds applied to" and "funds provided by" financing show the changes in amounts of money relating to transactions with the treasury.

Efforts to induce accountants to give recognition to the distorting effect of inflation in the financial statements and reports that they prepare have met with little or no successs. Proponents of the inclusion of such information in financial reports might advance their cause more effectively if they joined in the advocacy of steps that do not digress very far from established and conventional practice. It is suggested that such a first step might be the inclusion in financial reports of a com- paratively non-technical, brief explanation of the extent to which inflation has distorted conventionally-calculated net income. Such an explanation might include mention of any loss from the depreciation of net working capital, and any gain from the liquidation of noncurrent liabilities. The source and application of funds statement (if properly amended) will serve to provide many of the figures that need to be adjusted in order to estimate the magnitude of the inflationary-caused distortions of reported operating results. A revision of the statement to exclude inventories and current prepayments from the definition of funds (net working capital is recommended. The results of the computations of the type suggested cannot be regarded as mote than reasonable estimates. Their credibility is less likely to be challenged if they are reported (in round amounts) are no more than this. Accountants who profess to pay allegiance to the principle of full disclosure can do, at least this much.

The present generation of taxpayers not only has practically all the forms of taxation known to the ancients but have to deal with new and spectacular taxes designed to produce the revenue necessary to carry on the greatest activities ever undertaken by any government. War and defense expenditures have required the imposition of taxes of dramatic proportions. The most important of these war-developed taxes has been the excess profits tax. This tax was used during the First World War and existed from 1917 to 1920. When peace returned to the country it was promptly repealed as an unnecessary peacetime tax and remained off the statute books until the imminence of war in 1940 brought it back. It remained apart of the U.S. Internal Revenue Code throughout the years 1940 to 1945. When peace again returned to the nation it was promptly repealed. The important principle of the excess profits tax is the exemption from excess profits taxation of the earning capacity of the corporation prior to the advent of the national emergency. It does not attempt to tax any profit, abnormal though it may be, so long as the profit is not due to the expanded economy as a result of the national defense effort.

The article discusses cost accounting for motor freight terminals. It is essential to the efficient operation of a motor freight terminal that management knows the cost of handling each shipment. Shipments may be divided into certain official freight classifications. In the strictly line haul operation no consideration was given to weight groups, because the cost of hauling a given load of ten shipments was the same as the cost of hauling one shipment of ten pieces, if all other things were the same. The same general outline used to develop line haul cost methods is employed to develop terminal cost, but pick-up and delivery, assembling, segregating, billing and loading freight at a terminal, involve many additional complications. In order to distribute the pick-up expenses, it is necessary to list those expenses, which are computed on a mileage basis separately from those, which are not affected, by the number of miles the truck operates. It is customary in motor transportation cost studies to divide shipments into certain weight groups, which conform to the weight groups of the tariff for the area and commodities or classes of property covered by the study.

The article discusses the disposition of special post-war reserves at the close of World War II. In the article, interest was centered primarily in only one of several types of reserves. What 134 large manufacturing corporations did with the special reserve created to cover post-war reconversion costs has been shown. In recent years there has been some criticism of methods and motives used in the creation of reserves, especially those set up for contingencies. Accountants are beginning to suggest that, because earned surplus is itself available for contingencies, there is no reason for creating a contingency reserve. While there was no need for the unused reserves and those created as a matter of conservatism, the post-war reserves that were used properly would not be subject to the above criticism. The purpose of the post-war reserve is quite different from that of contingency reserves. The purpose of the post-war reserve is the proper assignment of costs to periodic revenue. If costs are assigned properly to periodic revenue, there will be less distortion of annual income. A reserve created for such a purpose and used properly, is undoubtedly a necessary accounting procedure.

From a tax standpoint, the concept of business income as it exists as a part of the "generally accepted" principles of accounting has some notable weaknesses. The defects are associated primarily with the entity concept, the going concern postulate, and the period convention. To a lesser extent, there are faults connected with the manner in which the realization concept, the "rule of conservatism," and the "maintenance of dollar capital principle" are applied. Most of these deficiencies might be absent or minimal if taxable profit was conceived as an individual matter and considered to arise only after there had been a recovery of the money (or equivalent) that an individual had invested in a profit seeking venture of any sort. The manner of calculating profit, unrecovered investment, or loss would depend, in part, upon the type or nature of the investment. The concept embraces the idea that the tax on profits arising after a short recovery period should be larger than the levy on profits realized after an extended period of investment recovery. There is reason to suggest that a number of desirable consequences might attend the use of such a method of measuring profit for tax purposes. There might be greater equity in taxation in several respects, less risk to investors, and resulting stimulation to the national economy. The danger of inequity in certain other cases, and the possibility that the use of such a method might tend to impede the movement of capital funds are the major negative potentials. In spite of these defects, it is contended that the nation would benefit if means could be found to effect a transition to an investment-recovery-first basis of measuring profit for tax purposes. At the least, the concept might have value as a standard or viewpoint to use in the analysis of the prevailing tax requirements, and in the evaluation of proposed reforms in the tax system.

The justification for the adoption of standard cost should include the point that a proper or objective cost, however defined, can exist independent of subjective or incurred cost, at least temporarily. Standard cost for control purposes usually takes into account, or at least rationalizes, all expected expenditures and charges related to the manufacturing process. If competent factory engineers and superintendents are given a free hand in designing a factory for a stated rate of output of a product, there will be one combination of production factors which will be the most economical combination. Any deviation from this combination will yield a higher unit cost of output. Presumably the word objective can be used to describe such a unit cost. The isolation of this non-essential element from manufacturing cost, as ordinarily arrived at, might not be a difficult matter under all circumstances. If production is fairly standardized, it is likely that the rate of production is increased by exactly duplicating previously acquired combinations of factors of production, assuming stable conditions, and that it is decreased by ignoring similar combinations of factors of production.

In this article the author stimulates interest in a co-operative effort through the facilities of the American Institute of Accountants, of the American Accounting Association, to improve the manner of audit reporting. According to the author these organizations have had a profound influence in developing accounting and auditing standards and techniques. The author considers the questions such as how best to indicate clearly the auditor's responsibility, what information should be included in the report, and how should the information be presented? He states that the auditor should prepare his report so that no one need be deceived in any case. In any discussion of the accountant's responsibility it should not be assumed that the client has no responsibility for the representations in his own financial statements which have been audited by a certified public accountant. In order to clarify his responsibility the accountant may give a disclaimer of an opinion. This means that the scope of his work was not sufficient for him to express an over-all opinion on the financial statements taken as a whole, or that some other circumstance prevented the expression of such an opinion.

This article is concerned with the change in objectives and the expansion of activities described as internal auditing. So sweeping has been this change that current definitions of internal auditing bear little resemblance to those in vogue ten or fifteen years ago. Internal auditing fulfils an economic need quite separate and distinct from the services rendered by independent public accountants. Internal auditing is now regarded as an appraisal activity, employed to aid the top management of a large corporation in the efficient administration of the enterprise. It is characterized as a staff function, independent of accounting and operating processes, and responsible to a member of top management, most commonly the controller. Regardless of the size of the client's business, the certified public accountant must always bear a major responsibility to stockholders, creditors, bankers, government and to the general public which reads the financial reports he certifies. In fulfilling the strenuous requirements of his profession, he is automatically barred from performing the full time continuous research into the detailed operations of a single corporation which management needs in order to do its job with maximum effectiveness.