Knowledge that Transforms

This article presents an account of problems prepared by the Board of Examiners of the American Institute of Certified Public Accountants and that were presented as the first hail of the Certified Public Accountants examination in accounting practice on November 7, 1962. The candidates were required to solve all problems. One of the problem stated that Bessie Smith, age 65, is the widow of Alan Smith, who died in 1960 at the age of 72. Mrs. Smith has never worked; however, she collects social security benefits based upon her husband's 15 years of covered earnings. She has no dependents. Further details regarding the income for the year 1961 were giver and the examinees were required to fide total dividends to be included in adjusted gross income of the widow, rates at which Smith's income tax is computed and Smith's retirement income credit. Question were also based on taxable interest, cost depletion, percentage depletion, installment method, gross income and depreciation. Time limits information has also been provided.

To stimulate economic growth by the encouragement of investment in productive facilities, the 1962 tax law gives a credit against the tax liability of a company. Broadly speaking, the deduction is 7 per cent of qualified investment in new, and to a limited extent used, depreciable property. The 1.3 billion annual tax break has been hailed as a major aid to the U. S. industry in its battle with foreign producers, but it presents some significant accounting problems. The investment credit is not elective. If the business qualifies for the credit, the basis of the property will reduced by the credit which was due. This is true regardless of whether the business claims or does not claim the credit or was unable to use the credit because of operating at a loss. Property qualifies in the year that it is put in service even though depreciation under the taxpayers method of depreciation does not start until the following year. There is no proration required of the credit. For tax purposes all of the investment in facilities and related investment credit is taken into account in the year of initial service even though the property is put into service the last day of the taxable year.

Reviews the book "The Cost Minded Manager," by John D. Stanley.

In view of the American price level problems, which are currently much debated within the accounting profession, the attempted solutions of a similar problem in France should be of interest to American accountants. Following each of the two World Wars France experienced inflations far more severe than the slight inflationary price trends of the United States during the last twenty years. During the two decades following the First World War France went through a gradual but persistent inflation. In the years following the Second World War the inflationary trends assumed alarming proportions mainly because the several short-lived French governments of that time did not succeed in enforcing a sufficient degree of monetary discipline. French methods of revaluing assets attempted the elimination of price level effects from the financial statements by using price level coefficients, which were based on wholesale price indices of commodities, which largely determine the cost of most fixed assets. The French method, therefore, attempted to eliminate only inflationary price level effects of the selected commodities reflected in the revaluation coefficients. Price changes caused by shifts in demand or changes in technology are eliminated only when reflected in the combined index.

Reviews the book "Classification in Accounting," by A.A. Fitzgerald and L.A. Schumer.

The shift in emphasis by the accounting profession from the statement of financial condition to the income statement, and more recently to a management approach has been associated with a rise in the relative importance of investor and manager groups and an increasing realization of the usefulness of quantitative data in making executive decisions. Accounting for the consumption of long-lived assets has been influenced by these changes in emphasis and this has led to considerable disagreement and confusion regarding certain problems related to depreciation. Many schemes have been advanced for transferring the expired cost of depreciable assets to operations. At one extreme a few businessmen have been influenced by the payout technique for budgeting capital items and advocate the immediate transferal of the entire cost upon incurrence to expense. The article laid the foundation for the development of a theory of depreciation with objectives reflecting the current emphasis in accounting. The theory is based upon recommended principles of economics and accounting and it satisfies the decision-making requirements of management.

The Australian Association of University Teachers of Accounting held its first Conference at the University of Sydney on August 17, 1962. Professor R. Mathews of the University of Adelaide was president. The Federal Government Accountants Association held its twelfth annual national symposium in Washington D.C. on June 3, 4 and 5, 1963. The symposium included plenary and technical sessions and workshop seminars, the latter being restricted to groups of 30 persons each. The workshop seminar subjects were accrual accounting, cost-based budgeting and statistical sampling. Non-members as well as members were invited to register. The University of Adelaide, South Australia, has established a program leading to the Master's degree in Business Management. It comprises background courses dealing with the social, political and economic environment of business, core courses in economic and accounting analysis, statistics and human relations, and a capstone course in case analysis. The National Association of Accountants has announced a program of financial aid for research in management accounting and publication of the results. Grants will be made for preparation of dissertations by doctoral candidates in member schools of the National Association of Collegiate Schools of Business.

Readers of current accounting literature may have noticed of late the reappearance of a malady which seems to spring up every so often. Past experience indicates that it is contagious and may develop into an epidemic. For want of a better name it will be called "Value-ITIS" because it causes its victims to become enthralled with the importance of objective proof of subjective values. For example, it causes an investor to pay an unwarranted price for a share of stock because others with the same disease have purchased enough of the same stock to force the market price up. In the accountant, and particularly the academic theorist, this condition seems to be brought on by overexposure, malnutrition and neglect, exposure to economic theory, malnutrition from a diet lacking in economic realities, and neglect of the lessons taught by history. It seems to be most virulent among the relatively young, but will also attack the oldsters who have lost the immunity they developed in the early 1930's.

When computing state and federal income taxes for small corporations, a problem arises concerning the actual amount on which the tax is to be calculated. On the forms distributed by the federal and state governments the net income for federal tax purposes and the net income for state tax purposes is computed. However, the taxes are not actually calculated on these amounts, since one may first deduct from the net federal income the tax paid to the state, and from the net state income, the amount of! tax paid to the federal government. On these reduced amounts, called the net taxable income, the actual tax is calculated. Here the problem arises. Before the federal tax may be computed, the state tax must be known; before the state tax may be computed, the federal tax must be known. This fact has caused accountants who are unfamiliar with algebra to become virtual jugglers with numbers until they finally arrive at a solution. In this article the problem has been readily solved with the use of an appropriate formula.

Reviews the book "Reporting of Leases in Financial Statements," by John H. Myers.