Knowledge that Transforms

Reviews the book "Toward a Basic Accounting Philosophy," by Raymond P. Marple.

Reviews the book "A Practical Manual on the Appraisal of Capital Expenditure," vol. 1, by C.G. Edge.

Reviews the book "Accounting in England and Scotland: 1543-1800; Double Entry in Exposition and Practice," by B.S. Yamey, H.C. Edey and Hugh W. Thomson.

The article presents various accounting problems prepared by the Board of Examiners of the American Institute of Certified Public Accountants. These problems were presented as the second half of the Certified Public Accountant examination in accounting practice on November 5, 1964. The candidates were required to solve problems one through four and either five or six in limited time. One series of questions pertains to John Brown, who is employed by Clairemont Manufacturing Corp. as a salesman, and his wife Irma. John Brown is also the proprietor of Brown Manufacturing Co. which employs two people and employs his wife as bookkeeper. Another series of questions relates to three attorneys who agreed to consolidate their individual practices as of January 1, 1963.

The article discusses the needs of financial disclosure which are made to security holders and other interested parties. Disclosure that may mislead one financial analyst may result in misleading thousands of other people in the economy. The article presents results of interviews with financial analysts in specific areas of criticism of disclosure and proposed solution by them. For example, in leasing, the current amount to be paid under the leases is not always stated, nor is the total amount contracted for payment over the years. Property under the leases is not described, nor are real and personal property segregated. According to the analysts, a disclosure should be made in a manner permitting facts about long-term leases to be readily obtainable from published statements. A specific determinable liability, both long-term and current portion, does in fact exist as created by the contract and should be recognized, the asset should be capitalized, and both the asset and liability should be placed in the body of the balance sheet. Others felt that capitalization is not essential, but that expansion of the footnote to include all pertinent information is needed.

It is becoming increasingly difficult to discuss the concept of realization intelligibly. The Concepts and Standards Research Study Committee report does not conform to current practice. Current practice recognizes some unrealized elements and rejects other unrealized elements that can be measured with equal objectivity. In practice realization may be a rather imprecise descriptive term that is generally understood, but clearly it is not a crucial criterion in the recognition of changes in assets and liabilities. The author's own view is that in establishing criteria for the recognition of revenues the concept of realization is awkward, causing confusion rather than creating clarity. It is doubtful that the concept can be described to include all the revenues that belong in the measurement of periodic income and to exclude all others. The concept may be useful in reference to nor revenue changes in assets and liabilities, that are, in distinguishing between realized and unrealized holding gains and loss In this regard, however, perhaps an exchange transaction involving objectively measurable assets would suffice.

The article focuses on the report of the Committee on Teacher Development which provides a formidable list of attributes of the "excellent" teacher, but nowhere defines the "superior" teacher. A superior teacher might be someone who possesses a considerable number of the attributes of an excellent teacher, that is, he might be good at the job. Alternatively, by a superior teacher the committee might mean a senior teacher. It is likely that graduate assistants will be expected to attend the classes of senior teachers. The committee rightly points out that judging classroom performance is important and controversial. Student evaluations of teachers are in most cases unreliable and in some cases positively misleading. Particularly where salary raises have a relationship to teaching effectiveness, the knowledge that the teacher is subject to student evaluations might have unfortunate psychological effects on young teachers. Most obviously, teachers might be tempted to orient courses not towards maximum student benefit, but towards maximum student approval, and there is no reason why the two objectives should be coincident.

This article focuses on investment decisions. Economists pontificate with the calm assurance of authority. The objective of the corporation is stated flatly to be maximization of the present value of the firm's common shares, although that depends upon market reaction, which is largely beyond the control of the firm. Or, alternatively and with different effect on decisions, the objective is asserted to be maximized present worth of future cash flows, discounted at a stipulated and unique "interest" rate on which economists insist and disagree. Or, is to maximize long-run capital. Accountants feel that the diversity of practice allowed defies meaningful comparisons, and indeed that alternative techniques are essential. Over-whelming success of the free-enterprise system stems from its utilization of financial incentives to the benefit of all. Optimized return automatically connotes minimized pricing of goods and services. Because the interaction is automatic, it is poorly appreciated. There are two ways to increase profitability. One is to lower costs, costs of both production and of capital. The other is to increase the prices charged for goods and services produced, regardless of the costs of production and of capital.

Reviews the book "Cost Justification: Thomasville Chair Company," by Herbert F. Taggart.

This article discusses the concept of internal control in auditing. The basic purposes of internal control are to bring reliability into the financial information system and to safeguard assets. The true nature of internal control can be identified and observed in the setting of the financial information system. It is generally accepted that a financial information system can exist with little or no internal control. Nevertheless, it is often stated that the financial information system can be strengthened by the addition of internal control. What must be done to strengthen a system in a situation in which internal control has not previously existed? The strengthening of a system is the direct result of adding internal control duties. Internal control duties are prescribed to safeguard assets and to make the system more reliable. Such duties reduce the opportunities for people to make errors or to perpetrate various types of fraud and other improper actions. Internal control duties are necessary because of the mental, moral, and physical weaknesses inherent in people.