Knowledge that Transforms

This article presents information on a decision matrix which has been designed to assist accounting students to determine which factor is to be used in lower-of-cost or market valuations. The U.S. Committee on Accounting Procedure has said that a departure from the cost basis of assigning amounts to stock-in-trade inventory is required when the utility of any given inventory is not as great as the cost. Utility may be less than cost when the net realizable value of any given inventory, when reduced by an approximately normal profit margin, is an amount less than cost, however determined. The amount of loss to be recognized when such utility has been impaired is found by pricing inventory at lower-of-cost or market. The matrix is applicable only for conditions under which lower-of-cost or market decisions can be applied. That is, where net realizable value less normal profit margin equals or exceeds cost, lower-of-cost or market is not applicable and the decision matrix should not be consulted.

This article focuses on illustrations of procedures which have been used to develop instructional material for applications of regression analysis for auditing classes. The misleading propensities of ratio analysis and the effectiveness of regression analysis have been demonstrated with the problem material. Thus the attention of student is captured. The procedures, which have been summarized, encourage almost immediate student involvement which is sustained because the problem data require no tedious calculations. The suggested method of data preparation avoids this calculation problem. The material is presented in three parts: first, the procedures which are used for the introduction of regression analysis; second, the worksheet used for developing problem data and eliminating the long, involved calculations; third, some suggestions are made for applications and for modifications. Regression analysis, however, indicates that either labor hours are excessive or that equivalent units are short. This point is underscored by having the students do the computations which have been structured so that they are not time consuming.

Reviews the book "Computer Augmented Accounting: CompuGuide Three: FORTRAN IV Programming With Business Applications," by Wilbur F. Pillsbury.

This article presents information on the relationship between accounting and financial management. A potential problem of duplication of course content exists in courses in accounting and financial management, particularly when these classes are staffed by faculty from separate departments. This duplication may be classified into three categories: different subjects covered in one course only, subjects covered in both courses with different emphasis and perspective and outright duplication. The first category poses no problem. The third category is undesirable and requires coordination for allocating the teaching of the subject matter in a manner that serves the best interests of the students and the learning process. The second category, that of subjects covered in both courses with different emphasis, may pose a problem unless it is recognized and dealt with. By interprofessorial visits it could be shown that these courses are designed to contribute toward the overall development of the students.

This article presents a comment on the study of the audit staff assignment problem in the U.S. The use of quantitative models in the solution of accounting problems has been criticized for their simplistic objective functions, e.g. maximize profit, minimize cost. Goal programming provides an obvious improvement for those problems previously solved via other linear optimizing models. One would expect it to replace linear programming formulations in a short time as it will accommodate each of the prior formulations with the added potential of multiple ranked goals.

This article comments on the article "Behavioral Implications of Taxation," D. Larry Crumbley, published in the October 1973 issue of the journal "The Accounting Review." Crumbley considers some behavioral aspects of income taxation. He makes two major points. First, he suggests that research should be undertaken into the effects of tax laws on behavior. Second, he suggests that accountants should become involved. With respect to the first point, the purpose of this article is to indicate that Crumbley is recommending two distinctly different types of research. He does not always maintain a clear distinction between these two types in his discussion of behavioral tax research. With respect to the second point, the purpose of this article is to examine Crumbley's reasoning for his suggestion that accountants become involved in behavioral tax research. It has been suggested that the primary aim of behavioral science is to identify underlying regularities in human behavior and to determine what antecedent conditions give rise to them and what consequences follow from them. However, research which focuses primarily upon antecedent conditions and human behavior in an effort to predict consequences is very different from research which focuses primarily upon consequences and tries to infer the behavior that led to those consequences.

The article informs that the purpose of this research was to obtain empirical insight into the concept of materiality in external reporting by constructing a mathematical model to describe the way in which a sample of knowledgeable individuals believed materiality judgments ought to be made. A set of 30 hypothetical cases was developed as an experimental instrument. Each case involved either a gain or loss on a noncurrent asset, a change in accounting principle or an uncertainty. In order to insure face validity the cases were developed to conform with parameters estimated from 103 actual financial reporting situations. The 30 cases were administered in a field experiment to 18 partners in national public accounting firms and 15 securities analysts. These subjects were instructed to categorize each case as requiring three alternative types of disclosure. By using the subjects' evaluations as a criterion and the 8 materiality variables as predictors, a multiple discriminate model was developed and validated that replicated the judgmental process of the subjects with 63% accuracy. The model was 84% accurate in discriminating between immaterial cases and material cases.

Reviews the book "Decision Strategies in Financial Management," by Donald Hart Shuckett and Edward J. Mock.

Comments on a study by R. Kinney Jr. on ex post accounting measure of diversification. Criticisms on Kinney's measure of diversification process; Portfolio theory of diversification policies; Ex post evaluation of diversification policies.

Presents information on a study which analyzed the traditional treasury stock method in reciprocal stock holding situations. Explanation on the concept of reciprocal stock holding; Analysis of conventional treatment of mutual stock investments; Methods of allocation by simultaneous equations; Description of an equitable approach to allocation.