Knowledge that Transforms

Abstract Recently in the accounting literature two different directions have been taken toward research into the theory of accounting and information systems. One approach seeks to modify conventional accounting to take advantage of increasing computer capabilities, while the second approach advocates including more diversified types of information in accounting reports. Although different, both attempts reflect the accountant's desire to serve users of accounting data better and in a more efficient manner. Toward this end the objective of this paper has been to develop a new approach to accounting and information systems which both generalizes and unifies these two directions of research. The approach presents a framework within which one can work on both the theoretical issues concerned with extending accounting to provide more types of information and the practical issues surrounding the efficient implementation of an accounting system on modern computer equipment. In order to accomplish our objective, a very general definition of accounting was assumed, one which concentrated on the concepts of "communication" and "economic event . The accounting system could then be constructed around a "data base" which consists of descriptions of economic events, ( K + 1)-tuples of the form (c, x 1 , x 2 , &haelip;x k ) where c denotes a binary event code and x 1 , x 2 , &haelip;x k are values of the characteristic used to describe the event. In this multidimensional system, we are not restricted to a single valuation scheme and efficiencies are gained in storage by using a description space of variable dimension. Also because the data base in any company is likely to become quite complex, a generalized concept of an account was introduced. The method described would permit economic events to be classified, sorted, and sequenced in a variety of ways to handle flexible needs of the users.

Abstract In this paper we have devised methods for allocating overhead, charges on the basis of mathematical programming models of the firm's production and sales possibilities. The basic scheme was to charge products on the basis of their utilization of the scarce resources of the firm. The prices for use of these resources were obtained from the dual variables associated with the constraints of profit-maximizing programming models. Special attention was given to traceable and avoidable overhead and overhead subsidies that arise because of sales and production interdependencies or managerial constraints. Our objective, in all of these procedures, has been to devise a method for allocating overhead that does not distort the relative profitability of products so that managers would make identical product related decisions both before and after the overhead allocation. As such, the method captures a principal benefit of direct costing analysis while significantly extending this benefit to recognize scarce resource utilization and interaction with other products in reporting profitability. At the same time, the method avoids a difficulty of direct costing systems in that it is a full costing system with all overhead being allocated to products. Also the availability of the original programming model (before any overhead allocations) facilitates marginal analysis for short term product related decisions and expansion of scarce resources.

Abstract The article focuses on an optimum switch from double declining balance to sum-of-the-years digits depreciation. Economists Bernhard Schwab and Robert E.G. Nicol developed this optimum switching rule. Such a switch in the method of tax depreciation was made available by the issuance of Revenue Procedure 67-40, effective October 23, 1967. Schwab and Nicol demonstrated that the present value of the tax savings can be increased by a timely switch from double-declining balance to sum-of-the-years digits depreciation. The optimum year to switch depends on the useful life of the asset, the salvage value taken into account for tax purposes, and the discount rate. This paper simplifies the mathematics presented by Schwab and Nicol, corrects and extends the results, and indicates the percentage increase in the present value of the tax savings which may be obtained by a timely change in the method of depreciation. The Internal Revenue Code authorizes the straight-line, the double-declining balance, and the sum-of-the-year digits methods of depreciation. Under the straight-line method, the depreciable basis is distributed evenly over the life of the asset.

Abstract This article aims to examine how relative differences in key financial variables among buyers and sellers affect the valuation of aggregate and hence the benefits arising from the merger to buyer's and seller's stockholders as well as the implications for merger strategy which buyer and seller might adopt. It also aims to carry out the foregoing analyses as of the time the merger transaction takes place and also over a specified planning horizon. A major conclusion of this article is that when two firms, experiencing unequal growth rates, merge on the basis of an exchange of shares, their combined value in the market will be less than the sum of the market values of the individual companies, as a result of a bias in the valuation models commonly used in security analysis. The specific source of this bias is the underestimate of the growth rate in combined earnings that results from typical forecasting methods. Another major conclusion is that although there is a valuation loss in total, the stockholders of the firm with the smaller of the two growth rates can experience valuation gains over a period of time at the expense of the other firm's stockholders. It would follow from this that a firm will always find it to the advantage of its stockholders to acquire or merge with firms experiencing higher growth rates than its own, provided these stockholders are willing to hold their stocks for a period of time, the minimum length of which would depend upon the relative sizes and growth rates of the merging firms.

Abstract The article deals with the problem of measuring the value of people to formal organizations, and presents a normative model for the economic valuation of individuals. It also examines the practical difficulties involved in operationalizing the normative valuation model as well as certain measurement approaches, which hold potential for surmounting the difficulties. The findings of some preliminary empirical research to develop a reliable and valid method of measuring an individual's value are also briefly reviewed. The implications of measuring an individual's value are explored in terms of the expected costs to be incurred or value to be lost from liquidating human assets as well as in terms of the cost-savings expected to be derived. An assessment of the project in these terms might lead to a decision to reject such a program. Similarly, once undertaken, the results of cost control programs should be evaluated in terms of the real net benefits derived and not merely in terms of the conventional accounting representations of these benefits.

Abstract The dichotomy in accounting between human and nonhuman capital is fundamental, the latter is recognized as an asset and therefore is recorded in the books and reported in the financial statement, whereas the former is totally ignored by accountants. Most economists, on the other hand, have a different view on this issue. The definition of wealth as a source of in come inevitably leads to the recognition of human capital as one of several forms of holding wealth, such as money, securities, and physical, nonhuman, capital. This attitude toward human capital has a broad range of applications in economics. The objective of this article is to provide a practical measurement procedure by which some of the contradictory views given be economists on this issue could be clarified. Specifically, the possibility of using the economic concept and measurement of human capital in financial statements is explored. It is also shown that the suggested method provides decision makers with information about organizational matters hitherto not reported by accountants.

Abstract The article focuses on readability as a measure of the performance of the communication function of financial reporting. Financial reports are prepared for a specific purpose. The premise adopted in this article is that the function of financial reporting is to communicate selected financial information. If this communication function is not performed, then financial reporting is nonutilitarian. Communication has been long recognized as a function of financial reporting. Communication occurs in financial reporting only if the meanings intended by the information source are assigned to the financial statement messages by the destination. Proper meaning assignment necessitates that the information source encode and transmit the selected messages such that the destination is capable of assigning the intended meanings. Ideally, the information source should be able to objectively measure the degree to which the intended meanings will be assigned to the selected financial statement messages. No such objective measure exists that can be applied to the entire financial statements. However, an objective measure does exist that can be applied to the footnotes to the financial statements. This measure is termed readability.

Abstract In a free enterprise system, variations in corporate disclosure practices are likely to result since corporations are managed by groups which have varying managerial philosophies and wide discretion in connection with disclosing information to the investing public. The quality of corporate disclosure influences to a great extent the quality of investment decisions made by investors. This study attempts to identify some of the characteristics of corporations in the U.S. which are associated with, and the probable implications of, the quality of corporate disclosure. Corporate disclosure of information can take several forms and the annual report to stockholders is a very important form of periodical corporate disclosure. This study demonstrates that the corporations which disclose inadequate information are likely to be small in size as measured by total assets, small in size as measured by number of stockholders, free from listing requirements, audited by a small accounting firm, less profitable as measured by rate of return, and less profitable as measured by earnings margin.