Knowledge that Transforms

Abstract The article discusses how an accounting policy maker can use evidence from empirical research based on security prices to revise his prior beliefs about the relative desirability of accounting alternatives. The authors here show that, it is entirely plausible to expect different equilibrium prices to result from different accounting measurement and disclosure systems. According to the authors, to realize the full value of some alternative kinds of accounting information, an individual or group of individuals might have to produce the same information for many different firms. But the costs to such individuals may exceed the sum of the costs of having the separate firms include those alternative outputs in their total disclosure policies. The article concludes that the association between accounting numbers and extant market prices cannot be accepted out of hand as a surrogate for the expected benefit to society from the accounting policies producing those numbers. Costs of producing and impounding information by accounting sources compared to costs via competing sources must be analyzed.

Abstract Reviews the book "Managerial Accounting," 2nd ed., by James H. Rossell and William W. Frasure.

Abstract The article investigates the properties of the reciprocal service department cost allocation model. The first and most important investigation assumes that all service department costs are variable and determines how to compute the marginal cost of supplying additional units of output from each service department. First, when allocating variable costs, the final costs should be useful for management decisions by representing the incremental costs of supplying given levels of outputs from the service departments. Second, when service departments also provide some service to themselves, it seems that the allocations to other departments should not be affected by the treatment of the self-service cost. Therefore it might prove useful for organizations with limited access to computational facilities or with an extremely large number of interacting service departments where the matrix inversion on a computer might be time consuming and subject to considerable round-off error. In conclusion, it is awkward to have allocation methods yield different results depending on the treatment of self-service costs. The allocations should depend upon the properties of the interaction terms in the matrices and not on the treatment of the self-service cost.

Abstract The article presents information on the development of stochastic process costing models in accounting. In a deterministic production system, all units would pass in a common sequence through the processes and exit the system as final product. However, many mass production systems cannot be classified as deterministic. The process costing models developed in this article are based on the premise that product flows within a mass production system can be described stochastically. Time is handled in two ways resulting in two models. Standard costs is integrated into the models for the purpose of costing output and inventories. The costing phase of the model has only been designed for a single entry system. In a multiple entry system, different transfer and output costs would be required for each entry point. Output and inventories would be coasted based on the expected entry point. The possibility of non-sequential transfers is another condition that would complicate the allocation of costs. Non-sequential transfers will be considered in a later section of this paper.

Abstract The article analyzes whether interim data for a seasonal business provide useful information to investors or not. To the foregoing schools of thought related to interim reporting theories, could also be added a nondisclosure approach where the user is not provided with interim information. There is general agreement that the primary objective of the interim report should be to present information with the expressed purpose of enabling the user to predict the annual results of the firm. To establish which interim theory was most useful, a business game was developed in which participants made sequential decisions with respect to investment in firm using different interim reporting methods. Participants worked at their own pace. The two separate economic conditions for each interim reporting method covered a wide spectrum of real reporting conditions. Another possible set of conditions would have included another rising historical earnings trend set followed by a continuation of the rise, and another falling historical earnings trend set followed by a continuation of the fall.

Abstract The article discusses a study on the measurement of the attitudes of students towards selected financial reporting practices. Results indicated that students are more familiar with concepts such as generally accepted accounting principles, comparability, consistency and uniformity. This is because of the students' academic preparation and exposure to the professional literature. However, the findings of the study raised doubt with regard to the effectiveness of the use of students as surrogates for businessmen in research.

Abstract This article presents information on cognitive factors in accounting. Of particular interest to accountants is the possibility that the cognitive characteristics of an information user may affect his perception of what information is important and, hence, may affect how information influences his ultimate behavior. There is considerable support in the psychological literature on human information processing for the existence of such relationships. This paper describes a field study in which the applicability of some of these findings to the administrative information system domain was investigated. The objective of the study was to determine if the cognitive characteristics of a manager affect his perceptions of what information is important to performing his job role. The cognitive characteristic selected for investigation in this study was the level of an individual's intolerance of ambiguity. Its selection was motivated by the fact that it is conceptually related to both dogmatism and integrative complexity, which were the cognitive variables employed in the psychological studies of information processing cited above, and also is a variable of potential significance to accountants in its own right.

Abstract We have interpreted accounting theory as providing a complete and transitive ranking of accounting alternatives at the individual level. It was then proven that no set of standards (applied to the accounting alternatives per se) exists that will always rank accounting alternatives in relation to consistent individual preferences and beliefs. The major import of the result is to raise a number of questions. We know that standards do not always work. When, then, do they work? Under what types of conditions will various types of standards work; when they fail, how badly do they fail? We know that criteria systems, as in information theory, ASOBAT, or cost-allocation guides cannot be relied upon to provide the desired result in every situation. This does not, however, necessarily imply that they never provide the desired result. Hence, a major question in accounting theory must be conditions under which standards do work.

Abstract The article discusses the role of the firm's management in the smoothing of reported earnings based on sound accounting and management principles. The case for smoothing reported earnings rests primarily with those for whom accounting earnings are calculated and reported. From the standpoint of an investor, the relevant cash flows are dividends and capital gains. The defense for smoothing reported income that arises from external uses is rooted in the theory of capital asset values. Effective smoothing requires specification of the magnitude of the desired adjustment with some precision and knowledge of techniques used to accomplish the desired adjustment. The test results strongly suggest that firms employ certain devices over which they have discretion to normalize reported earnings. The evidence cannot prove that intentional or premeditated smoothing took place, but the results suggest that firms employ certain devices to counter short run movements in earnings that deviate from their time trend. A tendency to normalize reported data also supports the oft-used argument that past observations are desirable ingredients in the formulation of a firm's budgets and forecasts.

Abstract This article presents information on an empirical study using factor analysis to analyze the relationship between budgetary slack and managerial behavioral variables. The magnitude of slack over time depends on the profitability of the firm, its sales growth, and many other behavioral factors that will be explored later. It is assumed that the costs of a firm that is successful in the market place will, tend to rise because of the existence of budgetary slack. The existence of budgetary slack causes corporate profits to be less than optimum, since the estimated cost function is not minimum, in classical economic theory. Budgetary slack also functions as a mechanism to stabilize the organization's system response to wide variability in its environment. It is assumed that top management is not in a good position to determine and control the amount of slack due to the different technologies and peculiarities of each division and the submission of divisional budgets in total aggregates. The size of the organization and the centralization or decentralization of decision-making are two factors that may affect the validity of this assumption.