Knowledge that Transforms

Abstract The article presents questions and solutions for auditing paper of the May 1966 uniform certified public accountants examination. The examination was scheduled for May 19, 1966 from 8:30 to 12:00 noon. The first section of the examination consisted of six questions and the candidates were supposed to solve all the questions. The second section contained two questions of which the candidates were instructed to answer any one of their choice. Section 1 presents question on audit procedures. Section 2 required students to discuss, what disclosures, if any, of the sale and repurchase of the securities would the CPA recommend for the financial statements. Section 4 required students to distinguish between accounting controls and administrative controls in a properly coordinated system of internal control. It also required students to list features of a sound system of accounting control. It sought explanation about why certified public accountant is concerned about the separation of responsibilities for operating custodianship, financial custodianship, and controllership.

The article reviews the book "Accounting Flows: Income, Funds, and Cash," by Robert K. Jaedicke and Robert T. Sprouse.

Abstract The article represents a continuation of a previous paper on depreciation, published in the October 1961 issue of the periodical The Accounting Review. The previous article suggested that the depreciation charge for a period is related to the expectations at the time of purchase and that the purchase of an asset is actually the purchase of future cash proceeds. These cash proceeds then become the basis for the depreciation calculation. The present article will refine the definition of cash proceeds with the objective of making the accounting for the events consistent with the decision-making procedures. The article shows that the use of cash proceeds in computing depreciation is correct only in the unlikely set of circumstances where the time-adjusted measures of revenues and expenses coincide with the cash flow computation. If the two are different for any period, then it is desirable to reconcile the two numbers. To avoid confusion with accounting practices that may not be accurate enough for the purposes of this article, it is desirable to use the terms time adjusted revenues and time adjusted expenses to describe items that appropriately take into consideration the time value of money.

Abstract With rapid advances in knowledge, there have been corresponding pressures to accelerate instruction. The theory and teaching of accounting have not been immune from these pressures. One basic difficulty observed in teaching the first course in accounting is the student confusion in learning contradictory meanings applied to operational terms "debit" and "credit" when these terms are used to interpret the effect of transactions on accounts. Characterizations "source" and "use" of funds, when applied to accounts, are similarly contradictory depending on whether the balance of an asset or liability account has decreased or increased. The two-way cross-classification or matrix systems do not remedy this difficulty, because all accounts are listed on each of two dimensional axes. However, the difficulty may be overcome by conceiving of accounting as a system for interpreting, cross-classifying and measuring transactions in terms of attributes "asset" and "claim." The article proposes this matrix system that will assist in eradicating the confusion among accounting students.

Reviews the book "Accounting and Analytical Methods," by Richard Mattessich.

Abstract The article focuses on the significant advances in accounting for income models, book yield and the rate of return of companies. The author considers the characteristics of the compound-interest investment model. He also explains the apparent differences between book yield and the project rate of return. The underlying difference is that the project rate and the book yield are calculated under two different sets of conditions, and with two purposes in mind. In addition, the author observes that many of the problems that arise in the use of book yields stem from the attempt to oversimplify the given situation.

Abstract The reliability of accounting measurements was defined as the degree of objectivity plus a bias factor. This relationship shows that the degree of objectivity can be measured without regard for the use of the measure but reliability cannot because the bias depends on the alleged value which in turn is related to the particular use of the measure. This conceptual relationship, which depends on the variance of measurement observations from their mean and the distance of this mean from the alleged value, gives valuable insights into some of the possible steps which can be taken by the members of the accounting profession to improve the reliability of accounting measurements. First, accountants ought to cooperate to the fullest possible extent with the users of accounting data to search for and define those factors or quantities which will be useful in decision processes. These factors were designated as y's. Accountants must then undertake to develop measurements which will produce accounting measurements (x's) that will give good predictions of these decision variables (y's). Both of these research efforts should help to reduce the bias, B. Accountants should also at- tempt to educate the users of the accounting data as well as be educated in the manner described above. If users of accounting data can be more effectively educated, they might change their function for relating x and y and this change can also result in decreasing the bias and improving reliability. Hence, reliability is definitely a two-way street. It may be that the reliability of a measurement can be improved by changing the measurement system; on the other hand, the reliability of the system may also be improved by changing the manner in which the output from the system is used. Another way to improve the degree of reliability may be to sacrifice objectivity, if the bias can be made much smaller as a result of sacrificing the objectivity.