Knowledge that Transforms

Reviews the book "Careers in Accounting," by John Ashworth.

The article focuses on the desirability of reporting the difference between movements of the general price level and movements in the "value" of specific assets, particularly as related to fixed assets. This difference is identified in Accounting Research Study No. 3 as "holding gains and losses" and defined as "the amount attributable to acquisition of goods or services prior to their utilization." It also presents the concept of income, which includes changes in replacement cost of fixed assets as a part of business income, even though a separately reported part, fails to serve these purposes. The failure of replacement cost as a measure of economic value of specific assets, the failure of fortuitous movements of replacement cost to qualify as an element of a useful figure to report as business income, and the possibility of substantially distorted reported income due to the leverage caused by the size of the stock of assets compared to income, coupled with the impossibility of objective measurement of replacement cost effectively condemn any concept of income proposed to date that would include holding gains or losses on fixed assets.

Reviews the book "An Income Approach to Accounting Theory: Readings and Questions," edited by Sidney Davidson, David Green, Charles T. Horngren and George H. Sorter.

In general, we must conclude that Dr. Marple simply has not demonstrated his case. His arguments either do not apply very well to any type of current value approach, or apply to only a few of them, or apply with equal force to the historical-cost accounting that he wishes to defend. There may well be grave objections to the use of current values in financial reports, but if so, they are unlikely to be uncovered without going to the considerable trouble of determining the fundamental assumptions, postulates, purposes, standards, and ways of looking at things that underlie historical-cost accounting, on the one hand, and the various current value approaches, on the other. It is this very difficult task which accountants must eventually perform. To perform it, to move beyond superficial discussion of the complex issues involved, accountants are going to need all the help that logical analysis can provide. To belittle this tool, as Dr. Marple does, is to hinder and belittle the eventual development of a reasoned accounting theory and a fully responsible accounting practice.

It might seem that auditing and accounting systems would be relatively unsuited for marriage, but consider these points of compatibility that suggest the possibility of wedded bliss. Firstly, both subjects are peripheral to the central core of accounting theory and practice. Secondly, the study of auditing presently includes, in most instances, the question of internal control, which is a key aspect in the consideration of accounting systems. Thirdly, auditing involves in large measure the audit of the accounting system that produces the figures that appear in the financial statements. Fourthly, the concept of constructive auditing is especially dependent on a knowledge of accounting systems and management advisory services that frequently result from constructive auditing recommendations similarly require a knowledge of accounting systems. Fifthly, audit trial considerations are a part in the design of accounting systems. The study of both these subjects can be covered together in less time than they can be covered separately.

To summarize, we have initially examined the implications and short-comings of two important deterministic models, that of the classical theory of the firm and Taylor's model of rationalization of operations. We have shown that under theft assumptions, neither one necessitates any internal control systems, because the individuals are unconsciously influenced to allocate their efforts optimally. Then we have examined an alternative model that emphasizes conscious co-ordination of activities for the accomplishment of common objectives. The firm according to this model is viewed as a group of resources (people usually) that are brought together for the accomplishment of a common goal or an array of goals. These people are considered as willful agents with different degrees of rationality and capable of making value judgments. Consequently one cannot automatically assume that theft behavior is "optimizing," but must find ways of guaranteeing that the behavior of each and every one of these willful agents is consistent with the overall objective or objectives. That is one important place where the necessity of conscious co-ordination and control of activities enters. If people are left alone they will attempt to maximize what they perceive to be in their own best interest. If this happened to coincide with the interests of the firm well and good, otherwise the objectives of the firm are superseded by the interests of the individuals which may in themselves be conflicting. No one can honestly claim that a firm will succeed in enforcing an absolute identity between its goals and those of its employees. This problem is not unlike the one that has been plaguing the economists in their efforts toward maximizing social welfare. There is no doubt, however, that the firm can influence the direction as well as the magnitude of its employee's efforts. It would be quite disappointing, not only to managers but also to us as educators of managers, if we were to find out that managerial skills as well as complicated control systems can do nothing to change the particular behavior and range of rationality of an individual.

During recent years a problem involving the statement of affairs has appeared on the uniform CPA examination approximately once every three years. The customary approach and final form of the statement are such that they require memory rather than logic for satisfactory performance. Most textbooks in advanced accounting present a problem and a final statement of affairs, but do not furnish a path by which one can venture from one to arrive at the other. The statement has no natural flow. The disorganization present in the statement is emphasized by the constant cross referencing necessary to give it even a semblance of cohesion. The approach explained in the article has proved extremely beneficial. Once mastered, it will cut in half the time necessary to reach completion. There is a logical procedure by which one goes from one step to the next. The statement of affairs is presented in columnar form in two parts, one for the asset accounts, the other for the liability and ownership equity accounts, similar in form to the presentation of the account form of the balance sheet.

The article presents questions which appeared in the May, 1964, Uniform Certified Public Accountants (CPA) Examination. It was held on Friday, May 15, from 1:30 p.m. to 5:00 p.m. There were seven questions in all. The article also presents solution to the problems given in the question paper. Answers which follow are intended to typify those submitted by well-prepared candidates writing within the time limits prescribed. They do not necessarily include all elements for which credit might be given by the Advisory Grading Service of the American Institute of CPA or by the various state accountancy boards charged with the responsibility of issuing CPA certificates. One of the questions was related to expenditure. The candidates were asked to distinguish between capital expenditures and revenue expenditures, and their treatments in the accounts. They were also asked to distinguish between these two categories of expenditures and between their treatments in the accounts. The candidates were to discuss the impact on both present and future balance sheets and income statements.

The article informs that profit motive has frequently been described as the "driving force" of capitalistic society, and some of the more ardent supporters of this belief hold the profit motive in the same high esteem as their most sacred beliefs. The profit motive is assumed to be the implicit expression of society's goal for the firm. Further more, the profit motive is ascribed as being the objective of enterprise management, and this objective is assumed to be explicitly stated by the stockholders for the corporate management. The changes in the socio-economic environment, since the concept of a profit motive was first advanced, do not mean, analogously, that the profit motive is no longer a reasonable assumption regarding corporate management's goal. This paper re-examines the "profit motive" in modem society and relates the "modified profit motive" assumption to accounting practice. Thus, the paper consists of two parts. The first part describes, compares, and contrasts three viewpoints on how the motivational assumption for accounting theory can be re-interpreted in the current socioeconomic environment. The second part suggests specific extensions, from the foregoing analysis, to accounting practice.

Reviews the book "Accounting: An Analysis of Its Problems," vol. 1, by Maurice Moonitz and Louis H. Jordan.