Knowledge that Transforms

The article presents a micro input-output model, based on some basic concept of input output theory, which can be used for planning the activities of divisionalized enterprises. The continuing growth of the business enterprise in size and complexity places steady pressure on business accounting to find more effective ways of planning and controlling business operations. The author states that there are three pure types of models, iconic, analog and symbolic. The micro input-output model proposed here is a mathematical model of the deterministic type. The accountant who wants to use mathematical models in solving practical business problems has two main tasks. The first is to formulate a description of a problem in terms of mathematical equations. The second is to solve and interpret the equations. The first of these, frequently referred to as the building of the mathematical model, is often the more difficult. The underlying assumptions involved in the model are also stated in the article in order to clarify the nature and structure of the micro input-output model.

The article focuses on evaluating alternative accounting measures. The evaluation of alternative accounting measures is one of the most difficult tasks facing the accounting profession. According to this method, alternative measures would be evaluated in terms of their ability to predict events of interest to users of accounting data. The measure with the greatest predictive ability with respect to a given event would be considered the "best" measure for that particular purpose. Although a variety of accounting measures have been offered as predictors, little is known empirically about their relative predictive power. The examination of this area can be described by summarizing earlier investigation. The purpose of the earlier study was to discover how well financial ratios could predict failure relative to random prediction. The findings of the study were: based solely upon a knowledge of the financial ratios, the failure status of firms can be correctly predicted to a much greater extent than would be expected from random prediction. This evidence, together with other tests conducted, suggested that financial ratios can be useful in the prediction of failure for at least five years prior to the event.

The use of matrices for cost allocation has been the subject of several articles in the accounting literature. The net services model postulates that service departments function solely to serve operating departments. Cost allocations to operating departments can only be determined after all reciprocal cost allocations between service departments have been made. Two mathematician have published a matrix model for allocating costs of reciprocally dependent service departments and operating departments.

The article focuses on the cash take-overs and accounting valuations. In the past decade the annual number of cash take-over bids has increased over five hundred per cent, and the rate of increase is accelerating. A take-over bid is generally defined as a bid to purchase some or all of a corporation's stock made by an outsider. It may be an offer to exchange stock for stock or it may be an offer to pay cash for stock. The bidder that offers stock for stock loses the important advantage of surprise, since the issuing shares must be registered with the Securities and Exchange Commission in advance. The disclosure requirements which accompany the registration are complex and may be difficult to execute without access to the offeree's records. Because of the element of surprise, the cash tender is generally used when the bidder takes a position adverse to incumbent management. The atmosphere of secrecy in which these bids are launched has left many legislators, financiers and academicians uncertain as to how and why they occur.

The question at issue is whether the addition of inventory-cost-of -sales accounting improves upon flow measurements of the success of business activities computed without knowledge of inventory balances. The most familiar concept of net asset flows is earnings for their use, earnings as reported to shareholders, after deducting dividends on preferred stock. Another pair of flow concepts that are similar, except that one requires inventory accounting, are current flows and quick flows. Current flow is equal to earnings plus depreciation, depletion and amortization of noncurrent assets; it is approximately equal to the accountants' concept of working capital flow from activities reported on the income statement, or the security analyst's "cash flow." Acquisition costs (purchases) of inventoriable goods are deducted in its computation. Depreciation, etc., affects neither current flow nor quick flow. When current flow is computed by adding depreciation, etc., to reported earnings, nonrecurring charges and credits are sometimes included.

The article proposes a refinement of standard cost, to be called "controlled cost," using statistical techniques to evaluate operating efficiency and degree of control. The primary usefulness of a standard cost system is to facilitate cost control through identification of situations and investigation of performance when actual cost deviates significantly from standard cost. A level of cost that should be attained under efficient operation is specified and then compared with actual cost to measure operating efficiency and degree of control. Present practices of standard costing are based primarily on an assumption that the expected value of an efficient operation is stability and that any significant deviation of the mean of actual cost from the expected value indicates abnormality of operation requiring managerial attention. Earlier works of cost accountants have extended the concept of standard cost from a single value comparison to a range of control limits. A range of costs is established by statistical control techniques, and when actual costs fall outside the control limits, managerial investigation is required.

The article focuses on the effects of alternative depreciation policies on reported profits. It also reports on the depreciation of a newly acquired asset by an accelerated method results in relatively low taxes early in the asset's life and higher taxes later on as the depreciation tax allowance declines. If operating revenues and all expenses other than depreciation are constant, and if the profits reported to stockholders are computed by using straight line depreciation, then after-tax earnings follow a reverse pattern. Depending on the rate and duration of asset growth, on debt policy, and in the case of regulated utilities, on how the benefits of the tax savings are distributed among ratepayers and stockholders, the different accounting treatments produce widely varied patterns of reported profits. The complicated interrelationships among these variables make it virtually impossible to study the problem algebraically, and the volume of calculations prevents one from working out the relationships manually. However, the problem is ideally suited for simulation analysis, and this is the principal analytic tool used in the study.

Budgetary disclosure has typically been considered from the standpoint of its possible immediate adoption in practice. Here a somewhat different course is followed in order to portray budgetary disclosure as a possible guiding concept which can help to illuminate, adjust and unify other proposals that have been advanced for altering or extending customary accounting reports. Continuation of the latter (i.e., the customary forms and bases of financial reporting) is then regarded as essential for the attainment of reliable and meaningful budgetary disclosures. A more comprehensive system of reporting --which an evolution toward budgetary disclosure will supply--can also eliminate supposed conflicts between customary practices and suitably modified versions of such proposals as accounting uses of index number adjustments, current costs, etc. These topics are dealt with and illustrated in early portions of this paper. Other parts of this paper deal with problems requiring attention in budgetary disclosure, including extensions of audit to reporting of budgetary changes as well as managerial explanations of deviations between budgetary projections and subsequent realizations. A program for research is also suggested which will include studies of the effects of different disclosure practices.

In this article, the author focuses on the use of accounting data by accountants, particularly on the use of financial ratio analysis, followed from its early origins to the present time. Only the broad outline of this development is presented and the discussions is centered upon general analytical approaches or individuals. According to the author the first causes of financial statement analysis can be traced back to the last stages of America's drive to industrial maturity in the last half of the nineteenth century. As the management of enterprises in the various industrial sectors transferred from the enterprising capitalists to the professional manager and as the financial sector became a more predominate force in the economy, the need for financial statements increased accordingly. Although there was much overlap, the development paths of ratio analysis for creditor purposes and for managerial purposes were different. After the turn of the century, some important developments in ratio analysis occurred during the period prior to and during World War I.

The article focuses on some of the most significant problems that have arisen in adapting laboratory experimentation to accounting research. Through the use of such systematic techniques, accountants are attempting to better understand many important problems in any laboratory experiment the selection of subjects is important. Selection of a group of subjects who are for some reason undesirable will invalidate the final results regardless of how elaborate and well conceived the remainder of the experimental design may be. Experience in studies to date suggests that the assumption about population homogeneity can not be made casually. A recent study in this area has shown that, in fact, students and businessmen do react differently to particular laboratory experiments. While a great deal of attention has been devoted to the selection of the proper subjects, not enough emphasis has been placed upon the selection of the experimental environment. It is in this area that accountants doing behavioral research ought to concentrate greater effort.