Knowledge that Transforms

Abstract The above theoretical considerations suggest that some revision in present depreciation practices may be appropriate. Wider application of depreciation based on output would approach measuring user cost more closely than the present methods in use. Most methods implicitly assume the absence of the business cycle or economic growth. Canadian-Pacific Railways, in basing depreciation on use, recognizes the importance of economic change. Since user cost is closely linked with changing economic conditions, perhaps more frequent revisions of depreciation schedules are called for. The California Public Utility Commission suggests that annual revisions be made. When technological innovation is accelerated, the life of assets is shortened by increased obsolescence. User cost is as variable as the underlying economic conditions which influence the value of fixed assets. Break-even analysis is generally not dear concerning the nature of depreciation. Depreciation is usually considered a fixed cost. Yet consideration must be given to the fact that present use affects the future value of fixed assets, as well as income. Thus in trying to determine the cost of an additional work shift, for example, one must include the additional wear and tear on plant and machinery. Often because this is not done, the additional shift appears profitable, but is in fact unprofitable. Accounting information should attempt to estimate user cost in order to avoid such errors. Businessmen are not indifferent to the erosion of assets resulting from changes in production and there is little reason why accountants should be. While straight-line computations of depreciation are precise, they are often irrelevant for making business decisions. An approximation of user cost would be preferable. It is true that "user cost is a concept widely known, little understood and almost never used." This should be rectified.

As has been pointed out by other authors, business accounting systems are similar in nature to social or macro-accounting systems. In this case, business accounting data were put into a Leontief input-output framework and changes in the accounts predicted by the system. It was found that the estimated changes were very close to actual changes for two accounts and somewhat variable for the other two accounts. The input-output system provides a method whereby management can predict changes in the level of the balance sheet accounts which arise from some level of operations, analyze the dollar flows into and out of accounts, or investigate the impact on the accounting system and level of accounts brought about by changes in operating levels and conditions. The framework, common to all firms, also provides a uniform procedure for aggregating firm data and thus is a method of consistently establishing an inter-firm analysis for an industry or an inter-industry analysis for the economy. In order to fully assess the value of the system for financial analysis and planning, a more detailed and expanded system is needed. This would require analysis of the individual accounts and their relationship to each other under normal operating conditions. Changes in operating or accounting procedure as well as technological changes would influence the applicability of the system and the specification of the coefficients.

The article presents the comments of authors on the article "Accelerated Depreciation and the Allocation of Income Taxes," by Sidney Davidson, a professor of accountancy published in the April 1958 issue of the journal "The Accounting Review." Davidson analyzed the income tax problem and presented a strong case against allocation. Davidson argues against allocation primarily on the grounds that a firm that is static or growing will never have to repay the liability. So long as the firm follows a regular investment policy, it will receive a gift of having its income tax payments permanently reduced. This approach to income measurement could result in a "cash flow" type of income statement. On grounds that a policy of regular investment in assets subject to depreciation maintained, all expenditures for plant could be charged against current operations. It seems doubtful if such a practice would ever be accepted by either businessmen or accountants. Yet, the firm may never have to repay the permanent trade credit and it seems that this situation is the income tax problem.

The most pervasive feature of "businessman's culture" atmosphere is change. Change, in a commercial culture equates to progress, something new, something different, is intrinsically valid. Change results in new markets, new jobs, new opportunities for investment and for profit. This enthusiasm for innovation, for obsolescence through social temperament rather than through physical necessity, is so much a part of conditioning that one hopefully embrace every new gadget, nostrum, or notion, whether social, medical, or managerial, without really critical examination. Computer systems have an important place to play in part of faculty education and ultimately in student education for management. The scope of these kinds of systems is so large that only high-speed processing systems can let one experiment with whatever ideas one dream up. One can fly businesses many times without the danger of getting hurt by crashing. One become more sophisticated in refining management games and process simulators, one will be able to deal more and more with the unpredictable's that affect business results. And will also be moving slowly toward discovering a real "science of management."