Knowledge that Transforms

Reviews the book "Statistical Sampling for Audit and Control," by T.W. McRae.

This article focuses on an article which was published in the April 1974 issue of the journal "The Accounting Review," which discussed three methods of allocation in reporting controlling and minority earnings on the consolidated income statement by simultaneous equations. The article demonstrated that the traditional treasury stock method in reciprocal stockholding situations understates the minority interest and is not consistent with a true treasury stock approach, and suggested the inclusion of additional earnings per share figures in revealing the current per-share equity claim of two equity interests on current earnings. The purpose of this article is to demonstrate that the two alternative models of allocating total consolidated net income to controlling and minority interests, proposed in the article published earlier, were improperly constructed and were not valid, and to illustrate the inefficiency in communicating the effective earnings per share of minority interests of subsidiaries through consolidated financial statements of the parent company.

The article discusses the translation of foreign currency financial statements to make them directly comparable with the U.S. operations. The basic need for translated foreign financial statements arises from the inability to include multiple currency results in a consolidated statement. Management and investors are called upon to evaluate the profitability of foreign operations. The primary purpose of translated financial statements is to provide a means for evaluation and control of the operations being reported upon.

Reviews the book "Accounting & Financial Reporting: A Guide for United Ways and Not-for-Profit Human Service Organizations."

This article presents information on a study related to learning order and acceptance of accounting techniques. In the initial experiment 32 persons used the second learned method and 64 used the first learned method to resolve the income determination exercise. From these results, it appears that learning order is important. One possible explanation may be that the students have a better span of attention in the earlier part of a course. It also appears that the impact of the learning order is dependent on the existence of a stressful situation. It was shown that under stress the students responded with the accounting behavior that was learned first. Different tentative implications could be derived for accounting education on both the theoretical and applied level. The appraisal of the usefulness of an accounting technique cannot be ascertained when subjects are exposed to a stressful situation. Different accounting techniques pertaining to the same accounting problems should be presented at different sessions of the course to insure a similar span of attention in class.

The article discusses the users and uses of accounting information in the nonprofit organization environment, the measurement focus of nonprofit organization accounting and reporting and the appropriate entity focus of nonprofit organization reporting. The potential users of accounting information include managers, auditors, legislators and regulatory agencies. The objective of financial statements is to provide information useful for evaluating the effectiveness of the management of resources in achieving the organization's goals.

The article comments on the paper "Extending the Applicability of Probabilistic Management Planning and Control Models," by Stephen L. Buzby, which was published in the January 1974 issue of the journal "The Accounting Review." According to the authors, the use of Tchebycheff inequalities has been made obsolete by improvements in statistical techniques. Second, the tests that result from the use of Tchebycheff inequalities are extremely conservative, because they provide excessive protection against type I errors and, consequently, poorer protection against type II errors. Third, Buzby has made several statements relating to the distribution of products of variables which are contradictory to the nature of those distributions as reported in the statistics literature. Buzby states that the distribution of the product of a number of normally and identically distributed random variables is unknown except in the case where each has a mean of zero and where there is equality of variances. In that case, Buzby claims that the product will possess a chi-square distribution. However, this is in error. In the authors' opinion, it is important to keep in mind that the Tchebycheff inequalities are rather loose and inaccurate in calculating probabilities and that they should mostly be used in theoretical proofs.

Reviews the book "Organizing, Operating, and Terminating Subchapter S Corporations," by D. Larry Crumbley and P. Michael Davis.

This article reports on findings suggesting different accounting treatments and different amortization rates of promotional costs for firms in different industries. Based on the results reported in the article and on the results of some prior studies, a recommendation is made to consider adopting different accounting treatments for firms in different industries on the basis of the measured effectiveness of advertising and promotion efforts. From a pragmatic viewpoint, the accounting treatment of advertising costs does not appear to be as controversial as the treatment of research and development costs because few firms choose to capitalize advertising costs. Alternative accounting treatments could have significant impact on reported earnings per share. An issue at hand, therefore, is to establish whether or not the practice of expensing as incurred suffers from conceptual or methodological shortcomings. The article concludes, there is a strong evidence that the duration of the effectiveness of advertising and of promotional efforts vary considerably between firms in different industries.

The purpose of this article is to expand researcher Barry E. Cushing's discussion of the applicability of reliability engineering techniques to internal control systems analysis. In the January 1974 issue of journal "The Accounting Review," Cushing describes a means of modeling internal control systems using the concepts of reliability engineering. The basic methodology employed by Cushing involves mathematical techniques adapted from the field of reliability engineering. The first section of this article briefly traces the extension of reliability theory to problems involving a human element. The second section discusses some specific considerations in the application of reliability theory to internal control systems analysis. The last section discusses near-term implementation problems resulting from the use of such models. The straight forward extension of reliability techniques to human performance dates from the late 1950s. To ignore human performance in reliability estimates is to assume that operator performance is invariably perfect.