Knowledge that Transforms

The 1955 American Accounting Association Committee assigned to the task of revising the 1948 Statement of Corporate Accounting Standards undoubtedly spent much time and effort in making this revision, and the bulk of their achievement is to be highly commended. However, there is one conclusion that is most surprising and disappointing, and could only cause confusion in the minds of the readers of corporate accounting statements. This is the statement with regard to Part IV, Income Determination, as follows: Interest charges, income taxes, and true profit sharing distributions are not determinants of enterprise net income. The profession is now faced with this surprising and really confusing recommendation of the Committee that corporate net income should not take into consideration interest charges, income taxes or profitsharing distributions. However to argue that interest charges and income taxes are not costs of carrying on a business enterprise and determinants of net income, is to propose a concept of corporate net income which is illogical, contrary to common sense and contrary to universal business practice.

Reviews the book "Sampling Techniques in Accounting," by Robert M. Trueblood and Richard M. Cyert.

Reviews the book "Economic and Social Security: Public and Private Measures against Economic Insecurity," by John G. Turnbull, C. Arthur Williams and Earl F. Cheit.

The great risks which are inherent in the oil exploration effort make desirable some organization which will spread these risks. Also conservation requirements often dictate organizations which extend beyond existing ownership patterns in a given field development. These factors give the oil venture a characteristic not found in most other ventures. The parties to the oil venture are often very unequal in terms of economic size. The great giants of the industry are found joined in ventures with small corporations, partnerships, and even individuals. This is the primary reasons that there is almost no standardization between ventures, for each situation is different from every other. This tends to create some interesting problems for the accountant who has to maintain proper records of the many, and often complicated transactions arising from the venture. However, cost is difficult to define, especially when one is dealing with used materials, so that its value is almost lost in some cases. Also, there is no uniformity of depreciation rates in the industry, so that "net book value" is meaningless. And probably most important, any effort to utilize cost would make auditing extremely difficult, since it would require the maintenance of original detail long after most companies would dispose of it.

Patterns of teaching in many areas of education today seem to emphasize learning by memorization. This often is initiated by the presentation of certain data in lecture form. The student is then expected to return the same data to the teacher in written form at examination time. Since almost all students are likely to be subjected to this type of learning process during a large portion of their high school and some of their college courses, the accounting teacher usually faces the difficult task of remolding the student's learning habits to encourage him to develop the reasoning and thinking abilities so necessary to the accountant. The teacher has to develop his presentation and examinations in such a way that the student is forced into the new pattern of learning. One means of aiding this development is to organize class data into a logical, related body of knowledge. Points which need to be memorized or learned out of relationship with any other material should be set out clearly and designated as such. The elementary accounting student needs to master certain definitions and the accounting equation at the outset. The student can be shown how these terms relate to business operations. This establishes a common basis for communication relative to the information to be presented.

As cost accounting is closely related to cost control and the planning of business enterprises, other academic disciplines have shown more interest in the problem in recent years. There have been many special research bulletins of the National Association of Cost Accountants, there is a special committee of the American Accounting Association and the English magazine Accounting Research has had several articles bearing on the subject and the Journal of Accountancy has devoted space to the subject. The present article discusses the application of cost accounting to manufacturing functions, but the concepts are similarly applicable, in differing degrees, to distribution, selling and other functions of business as well as to government to nonprofit organizations. The main purposes of cost accounting is summarized as income determination, with the cost of goods sold and the inventory valuations being the main results of cost accounting, balance sheet presentation, with the inventory items, the balances in the prepaid and accrued expense accounts and the residual value of fixed assets being related to cost accounting and control of cost by management made possible by having available adequate data to judge performance quickly and also having data for future planning.

In the sporadic references to accountancy and the accountant in literature one can glean only one particular impression of the living image that they are little men in the clutches of the computer, the over ambitious, scheming executive, or the men with a kink are rather pathetic. Though one can perceive their actions, they are not calculated to bestow on them any sort of fulfillment in the larger purpose of life those, which euphemistically, or otherwise, one may refer to as "daring" or "noble." Yet, the most ordinary and ephemeral can invoke sympathy and fire the imagination if their roots are in the living matrix. Thus, literature has not ennobled the accountant so far, not one should add, because it looks upon him as perverse, but because it considers him dull. It is this very respectability that swept the profession, individually and collectively, into that category which makes its adherents so unlikely a people for the title roles of romance. At least, such are outward appearances. They are the result not so much of design but of circumstance.

When the income tax treatment of any sort of income or expense differs from conventional accounting, problems of various types arise. The more complex the situation, the harder the teaching job involved. A case in point is the matter of accounting for deferred income tax liability resulting from accelerated amortization of emergency facilities for income tax purpose coupled with conventional depredations for other purposes. The treatment and illustrations that follow have been found to be effective in the classroom. If the installment method of accounting is used on tax returns and the accrual method is used for financial statements, a deferred tax liability on unrealized profits should be provided by debiting income tax expense with the estimated tax that will be paid on unrealized profits accumulated during each year when they ultimately were realized. In any other situation where profits reported in income statements are deferred on income tax returns the same practices should be applied.

In recent years there has arisen a new challenge to accountants' determination of profits, and this has come from a more sophisticated group-that of the investment analysts. Prominent in many company analyses emanating from brokerage houses and investment advisory firms has been the term "cash flow." If a common stock is analyzed in terms of cash flow, it can be made to look absurdly cheap in terms of market price to cash flow ratio; when examined in terms of profits reached by accepted accounting standards, the stock may represent no more than average value. The term "cash flow earnings" is a misnomer. Because of variations in accounting practices, the consensus among security analysts is that reported earnings do not in every case provide a true picture of operations. In seeking a lamp of Diogenes to illumine the truth, security analysts have been forced to develop their own concepts of "correct" earnings. Thus has been born the term, "cash flow earnings." As yet, security analysts themselves have developed no hard and fast definition of "cash flow" earnings.

Reviews the book "Principles of Accounting-- Introductory," by H.A. Finney and Herbert E. Miller.