Knowledge that Transforms

The article presents a question paper prepared by the Board of Examiners of the American Institute of Certified Public Accountants which was presented in the 1st half of the Certified Public Accountants (CPA) examination in accounting practice on May 18, 1966. The candidates were required to solve all the problems. All the questions were grouped into five sections. The suggested time allowances for each section was fixed at 40 to 50 and 50 to 60 minutes. Section 1 comprised of 20 multiple choice questions. Section 2 presented a question which required students to prepare a financial statement and to compute income-tax liability. Section 3 required the students to prepare a schedule to compute minimum bid i.e., the bid that would neither increase nor decrease total profits. Section 4 asked of students to prepare a formal consolidated statement of source and application of funds for a company and its subsidiary and a formal schedule of changes in consolidated working capital. Questions in section 5 required students to compute gross profit margin.

The article focuses on the theory of explanation in financial accounting. Observations in this article are a product of screening several articles on the explanation theory, or the theory of valuation, made in the journal "The Accounting review," over the last thirty years. The development of this article begins with that hard core of reliance upon matters of experience which continues to characterize accounting practice. Several species of explanation move in the direction of establishing "fundamental truths" or "first principles." This family of explanations is described in this article as a source explanation. In sharp contrast those types of explanations that base acceptability of propositions on outcomes from the operational employment of one or more propositions as valid. Also, a number of variants of the search for well-springs or foundations of accounting principles have been described. A following section of the article directs attention to a modern emphasis in a segment of accounting writings on a need to orient accounting research toward operational meanings for sentences, and toward prediction qualities for sets of propositions.

From the above comments it might be concluded that in 72 cases, grades in accounting could have been predicted within one grade plus or minus if disrupting personal factors had not been present. In only three cases did the accounting teacher feel that the high school grade overrated the students' abilities. In all fairness it should be pointed out that in the cases of the three students who had high school averages of C but who made unexplained E's in accounting, the aptitude and entrance tests gave both students an E on each test. The third student received a C and a D respectively on the two tests. Based on this study, it appears that high school grades are superior to the scores from the aptitude test and the college entrance test for advising, evaluating a group, and predicting grades for accounting students. The old argument appears to be overworked - "there is a great difference in grading practices between small and large high schools." Three misses in seventy-five cases might seem excessive when decisions affecting careers are being made. However, in all three cases in which the college record was not as good as the high school record, the more serious error of underrating the student would not have been made. Capable students such as the "late comers" would not have been overlooked. It should be noted that no high school D student earned either an A or B in accounting. Four students with low aptitude test scores and seven with low college entrance scores earned B's or A's. The odds of passing over an outstanding student because of a low test score are too high when the aptitude or college entrance tests are used as evaluators.

Reviews the book "Principles of Accounting: Intermediate," 6th ed., by H.A. Finney and Herbert E. Miller.

The article evaluates the importance of two academic works, textbook writing and research, done by accounting teachers during their teaching profession in the U.S. Textbook writing and research activity are generally associated with such adjectives as good, worthwhile, constructive, commendable, and wholesome. It is obvious that both activities are held in high regard within the academic community, but in practice one of the alternative should be favored. However, the terms also bring to mind such connotations as work, frustration, and disappointment. Because research and textbooks are so well regarded by some college administrators, there is the temptation to try to offset such exaggeration with counter exaggeration, that is, to come out with a denunciation of both activities. Possibly another reason for the differences of opinion surrounding the writing part of the academic accountant's job can be attributed to a belief by professors that publication records are often unfairly evaluated. Pressure to publish is and will continue to be a part of the academic environment.

The article focuses on the myths associated with accountancy. The myths associated with accountancy prevents one from seeing the reality which in turn produces gaps between perception and fact. The study presented in this article considers some of these divergencies. The first is what the author describes as the "gap in generally accepted accounting principles (GAAP)," whereby generally accepted accounting principles, fails to serve as an effective medium for common understanding. The linguistic gap precludes the comprehension of the message being communicated to those who require this understanding as an incident to their decision making in a great many areas of the economic existence. The second such contrast between perception and fact can be discerned in the presuppositions on the part of even the sophisticated members of the financial community regarding the nature and extent of the auditor's involvement in the determination of the statements of financial condition and operations.

This paper has proposed that life insurance companies adopt an accrual basis of accounting for revenues and expenses as contrasted to the present modified cash basis. If the principles discussed above were followed, the published financial reports would provide a more meaningful "profit" figure for the period under consideration as well as other significant information for the use of stock analysts and investors. To round out the discussion, Exhibit A presents comparative Income Statements for the hypothetical New Life Insurance Company. This exhibit compares the income statement as it is presented today with the income statement that might appear if a full accrual program were in operation. These statements are based on some oversimplified assumptions as to type of policy, duration of sales activity, and age composition of the policyholders. Despite the simplicity, the statements significantly demonstrate the differences and highlight the magnitude of the differences over time.

The article focuses on the relationship between several asset flow concepts and their potential uses. The concepts discussed in this article are earnings, the working capital concept of funds flow from operations, the net quick asset version of funds flow from operations, and a literal cash flow from operations. From the study conducted, it is concluded that the value of an asset flow concept depends upon its relevance to the problems facing decision makers and on the accuracy and uniformity with which it is applied. Accounting practices include many examples of rejection of a relevant concept in favor of a less relevant one for the sake of accuracy and objectivity in the necessary measurements. The "cost principle" is the most prominent example of this priority arrangement. Similarly, when choosing an asset flow concept for reporting to investors, or for reporting to management, the accountant may not choose the most relevant concept if it is too difficult to apply. It is found that no one asset flow concept is most relevant to all decisions commonly made by readers of financial statements.