Knowledge that Transforms

Abstract The article responds to a comment presented by professor G. B. Mitchell regarding the methods used in evaluating financial leases. Mitchell's basic objection to the author's method of analysis is that he did not allow for the tax deductibility of interest and therefore did not obtain a correct after-tax implicit interest rate. It is because the method gives a before-tax rate which is directly comparable to the before-tax marginal cost of borrowing; it was never intended to yield an after-tax rate on the belief that managers are more accustomed to dealing with before-tax rates. Therefore the gross amount of the interest is allowed to flow through to the final cash flow, yielding a before-tax interest calculation. Unfortunately, it works exactly right only when the lease payments are identical to the equivalent loan repayments. If it were, then a simple investment involving a cash outflow in the first year followed by inflows for the rest of the project's life should be evaluated by discounting as a form of financing. Therefore it seems that, although Mitchell's objections to the internal rate of return are technically correct, they are substantially irrelevant to the problem of lease evaluation.

Abstract A subtle confusion seems to have arisen in some recent attempts to apply the technique of input-output analysis to the activities of the individual enterprise. This is because the analysis was developed originally as an econometric technique for macro-economic purposes. Essentially, econometrics views a system as a black box whose real workings can only be approximated. Thus, national input-output accounts are prepared by dividing the economy into meaningful sectors and attempting to reconstruct the income and expenditure of each sector, in currency terms, analyzed amongst all sectors of the economy. Expressing this data in matrix form and then dividing the various inputs by the total output at selling price of the relevant sector then arrive at so-called technical coefficients. Standard costs are built upwards from the lowest basic operations, while econometric parameters are broken downwards from aggregated material; standard-cost data do purport to illustrate the operation of the system, while econometric parameters are just weightings which happen to explain the right-hand side of the equations in terms of the selected variables.

Abstract The article presents information on the economic foundation of transfer pricing system. When there is a market price for intermediate goods, they are transferred according to such a price, assuming that the goods transferred are produced in a competitive market where the supplying center cannot influence the sales price in the open market by its own output decision. Pricing intermediate goods according to market price has the advantage of motivating the supplying center to reduce its cost as much as possible and emphasize innovation and research and development, since it will be to its advantage. Inventory level and asks for an explanation if it exceeds a certain level. Another solution is that the buying division commits itself to acquire a certain volume. These methods are partial solutions to the problem. Approximating marginal costs, to price transfer goods has several limitations since this approach ignores several strategic factors. Arriving at an optimal solution based on opportunity costs from the company's point of view, accepted by profit centers, is feasible.

Abstract During the preparation of a capital budgeting study the decision-maker frequently encounters a situation where the timing of an important economic event is subject to uncertainty. Most typical of this class of problem is one in which doubt exists as to the useful life of a proposed machine. The analyst is aware that the associated revenue stream will come to an end at some future time, but it is not often that this time can be specified exactly. Similar characteristics are present in the uncertain timing of a research and development project's pay-off period and in the time lag between an advertising expenditure and the resulting increase in revenue. Several different approaches are now taken in facing the problem of uncertain timing. One common method is to treat the decision-maker's estimate of the most likely time as though it were certain. This estimate may be derived through a careful subjective probability analysis or simply from an intuitive feeling. If, greater precision is needed for some special application, there are two alternatives to the laborious task of computing the probabilities by hand. Those who have access to a digital computer will find it well worth while to write or otherwise obtain a program to produce probabilities.

Abstract The article presents an analysis of the nature of empirical theories for the purpose of providing a relief for some current and proposed theories of accounting. The process of theory construction is imperfectly understood. Even though it is not clear how theories are constructed, however, one can note that a new theory usually arises as a result of "anomalies" in the old theory. The purpose of the new theory or the modified theory is to make the unexpected expected, to convert the anomalous occurrence into an expected and explained occurrence. Theories are expressed in a language, and therefore the study of language is pertinent to the study of theories. A theory of empirical science may be divided into two parts, first, a Formal System which is composed of abstract symbols and a set of syntactical rules for manipulating those symbols; and second, an Interpretation of the formal system which connects certain symbols to observations via semantical rules. One of the difficulties encountered in accounting theory construction and verification is that different accounting theories are often theories about different subject matters.

Abstract The article determines the functioning of double-entry bookkeeping during the Age of Stagnation of accounting. Most studies in accounting history have focused on tracing the evolution of accounting techniques and methodology; little effort has been devoted to a consideration of what accounting's role in the historical process has been. The early double entry authors enumerated the advantages of double entry, presenting a series of benefits to be derived from its use ranging from peace of mind and freedom from illness to the profitable employment of assets. One aspect of capital is its balancing function in the initial inventory or ending balance sheet; the role it plays in expressing, in one compact figure, the investment of the owner. This lack of interest in periodic calculations of total profits was mitigated by the practice of venture accounting. The treatises and account books of this period reveal an emphasis on individual activities, whether temporary partnerships, factorage activities, trade in specific commodities or to specific ports, or investments in lands, ships, or securities. Accounting

Abstract In this paper we have reexamined the relationship between the controller and the controlled within the organization. We have argued that this relationship revolves around the budget process and that the "controlled" exercise significant influence on the outcome of their budgets. This influence manifests itself in the amount of slack which managers (and all other participants) can incorporate into their budgets. The theoretical rationale for such dysfunctional behavior has been previously stated by a number of writers. However, except for the exploratory studies by Schiff and Lewin and Lowe and Shaw, there exist no observations or empirical evidence on how and why managers create slack. Decentralized control was expected to increase organization effectiveness due to the increased participation in decision making created on the local level and because the divisional controller was formally responsible to the corporate controller. Assuming, however, as we did, that financial budgets are no more than a mutually agreed upon control device, then the whole notion of control needs to be reexamined, particularly the role of the decentralized controller who appears to act as the divisional slack manager. Finally, if managerial desire for slack and the attendant dysfunctional consequences must be taken as given then the implications for top management actions must be reconsidered. We have suggested a pragmatic approach aimed at increasing the participation of top management in the budget process on a selective basis. Specifically we have discussed the problem of how top management could impose reasonable goals 23 through constructive reviewing of the budget at critical points during the budget preparation process. We have also recognized that top management is severely limited in its ability to undertake on such a task.

Abstract Creating and implementing an overall research strategy for behavioral accounting will be a difficult task, and one, which runs counter to intellectual history. The autonomy of inquiry syndrome is deeply ingrained, particularly in researchers susceptible to what has been labeled the usual over differentiation of product that is the trademark of original thinkers. Many branches of behavioral science are bemoaning their own lack of replication and helter-skelter leaps forward. The point is that the behavioral accounting movement is new enough and malleable enough to proceed in a concerted fashion. Recent articles summing up the state of the research art in accounting are indicative of this formative stage. The problems are quite evident. The phenomena under study are complex. Reliable effects may be demonstrated in controlled laboratory situations, and yet their application to uncontrolled practice fails to show the desired results. Either the interactions present in practice must be understood and controlled or else field experiments must be specifically designed to test and extend lab findings. The behavioral accounting researcher need not worry that he is displacing the worker in the more behavioral disciplines.

Reviews the book "Theory of the Measurement of Enterprise Income," by Robert R. Sterling.

Abstract The article examines the relationship between the accounting determined and market determined measures of risk. Previous research would suggest that financial statement ratios can be used as measures of default risk, but little is known of their association with the concept of risk as defined in portfolio theory. The variance of a portfolio's return is the sum of two terms. Empirically, there may be positive association between a security's variance and its average covariance with other securities. In sum, portfolio theory provides a measure of security risk that has both a priori and empirical support. In particular, the accounting risk measures can be viewed as surrogates for the total variability of return of a firm's common equity securities. Computing an average of the payout ratios over several years does not adequately deal with this problem, because one extreme year will still dominate the average. Accounting data provided superior forecasts of the market determined risk measure for the time periods studied. In summary, this study will provide some additional insight into the interaction between accounting data and market price variables and will help to provide a foundation for structuring the accounting system in a way that will facilitate decisions by investors.