Knowledge that Transforms

Reviews the book "The Philosophy of Auditing," by R.K. Mautz and Hussein A. Sharaf.

The article discusses the revolution in the area of accounting which gives the beginners a firm foundation upon which to build a consistent, meaningful structure of accounting theory. Primarily, the "revolution" involves a willingness, whenever necessary, to modify the orthodox historical cost and realization "principles" of accounting. In addition to emphasizing the forward-looking aspects of accounting, a complete revolution will emphasize the importance of economic theory, historical accounting development, and a consistent theoretical construct. The utility of using the economists' forward-looking approach, when prices rise as well as when they fall, must be compared with the difficulties and possible errors of so-doing. Bases for a rational choice of methods, however, will have been developed. Choice will no longer have to be made solely on the basis of custom or reference to authority. The accountant, hopefully, will be prepared with an independent, analytical, approach to solving important accounting problems. A host of decisions, not just managerial decisions, may then be made by various groups in society, based on relevant data and sound, consistent accounting theory.

In the January 1961 number of this journal, there appeared an article by Charles T. Horngren and George H. Sorter arguing in favor of the use of variable, or direct costing in financial reporting to stockholders and other interested outside parties. While the format of the present paper is in the nature of a criticism of that article, it is intended as a more general argument against the use of variable costing in the accounting income determination process. It is the present paper's contention that variable costing is a fallacious and incorrect approach to the determination of periodic net income. Absorption costing must be employed for this purpose, and the fact that the two techniques will yield the same net income figures where inventory levels remain unchanged is only coincidental. For inventory levels are not wont to remain stable; they are, in fact, typically very volatile. The invalidity of the variable costing technique for external reporting does not impair its importance and unique usefulness as a tool of analysis for management. This paper is in full agreement with the advocates of variable costing in so far as that procedure is proposed as an analytical tool in the managerial decision-making process. In view of the fairly general agreement on the value of variable costing for internal reporting, that aspect of the technique will not be treated specifically in this paper.

This article presents an instruction report on income tax. The basic income tax course is intended to provide the accounting or other business student with a knowledge of the underlying principles of income tax law and a sufficient knowledge of the technical aspects thereof to enable him, to understand the relationships of the concepts of taxable net income to accounting and economic concepts of income, to understand the impact of taxes on business and business decision making, and to appreciate the availability of, and the proper utilization of, professional tax guidance. The course should provide a base for further tax study, but should go as far as possible to accomplish these goals for the many students who take but the single course in income taxation. The course should assist the student in becoming a better, more informed, citizen in an area that is of increasing importance to every individual, and should contribute toward a better understanding of political issues and provide a better basis for an evaluation of candidates for public office. In teaching the relationships between taxable income and the accounting and economic concepts of income it is important to teach the reason or rationale behind the tax laws whenever possible. On the other hand, where the tax law has developed from arbitrary or political reasons only, this also should be disclosed to the student.

The ultimate objectives in the Reports of the Standards Committee and reaffirmed by the Committee on the Scope of the Four Year Accounting Major may be useful as setting the limits of the Business School Honors program. These objectives are: (1) Education of the Citizen; (2) Education of the Business Man; (3) Education of the Accountant. Most honors programs which have been established in Colleges of Business Administration have emphasized the first and second objectives and have provided various means to accomplish these objectives. Seminars, lectures by outstanding authorities in their respective fields, sectionalizing of students for certain subject matter, all help to accomplish these objectives. It is however, the third objective which should command our attention and more specifically, the establishment of means and methods to educate and challenge the superior accounting student more than has been done in the past. It appears that most of the criticism leveled at the accounting graduate falls into three categories: (1) poor communication habits, (2) poor or no research ability, and (3) lack of knowledge of other business fields. Some of these criticisms are not restricted to the accounting student, for many educators deplore the lack of good research habits and the poor writing and oral abilities of all students. This does not lessen the responsibility of the accounting teacher to remedy the situation if possible. It is expected that the superior accounting student of today will be the outstanding researcher or practitioner in years to come. Is it not desirable, then, to recognize these problem areas in the development of programs for the exceptional accounting student so that he will be better prepared to lead in the development of better accounting theory, principles, and practice?

The article discusses the implications of programming for accounting education. The importance of automated teaching, teaching machines, and self-instructional devices in the field of accounting are discussed. Programmed instruction permits each student to proceed at his own rate. This will enable the student to master one set of skills before being permitted to move to new areas of study of increasing complexity. It will also enable the instructor to escape from the old problem of aiming his presentation at the "average" student, thereby putting pressure on the slower students to master the required skills and usually boring the brighter students. Programmed instruction can also be used very effectively with proficiency examinations. Programmed instruction and teaching machines make excellent research tools. They enable the instructor to acquire an insight into the learning process, thereby permitting more efficient use of available resources. Programming, if properly developed and used, may provide accounting educators with a real opportunity to continue to improve their educational practices and classroom techniques.

Reviews the book "Pricing Power and the Public Interest," by Gardiner Means.

Reviews the book "Planning Production, Inventories, and Work Force," by C.C. Holt, F. Modigliani, J.F. Muth and H.A.Simon.

The primary concern in advising students of business should be to steer them toward a choice of program which has the respect of the profession to which they aspire, whether it be law or accountancy. It is a sad commentary on the state of relations between the professions that the so-called dual practitioner cannot command this respect. Perhaps it is well to state the basis on which one arrives at such a flat statement. In the case of the legal profession, there are ethical rules which prohibit a person who is a lawyer from holding himself out to the public as both a lawyer and an accountant. This discussion relates solely to the interprofessional relationship problem as it affects the student choosing a professional career. It must readily be admitted that the general public would be better served if there were a direct resolution of professional legal and accounting advice to the business and financial world. However, the prospect is not bright for an early resolution of this question, and one can hardly advise students to take the gamble that the question will be resolved in favor of dual qualification. There is ample justification for advancing the profession of accountancy on its own merits, without the necessity for coupling it with the practice of law.

Use of employee stock options by large American corporations is widespread. The Courts and the Congress have pondered long and produced complexity in their tax treatment. Financial analysts have been baffled by their possible effects. The accounting profession has once reversed itself as to the effect of issuance of stock options on income, and even yet is far from agreeing that present practice is satisfactory. At least five points of view may be distinguished relative to the accounting aspects of employee stock options: (a) Tax accounting; (b) "Generally accepted" accounting, as reflected by pronouncements of the American Institute of CPAs and the SEC; (c) "Cash value of services" concept; (d) "Accrual of value" concept; (e) Option value concept. This paper initially will look at the effect of the method involved on the reported net earnings of the employer, both in terms of amount and timing. It will then try to set forth a definition of accounting purpose, and test each of the five approaches against that definition. This paper will conclude with its own proposal, based on tax deductions foregone.