Knowledge that Transforms

The article focuses on the use of joint-venture corporations which are described as corporations, the capital stocks of which are wholly owned by two or more other corporations. Although the emergence of the joint-venture corporation has been gradual and in several types of business, there is evidence of concentration in a few industries, like, the chemical, steel, and petroleum industries. The impact of joint-venture corporations on the financial positions of their parent companies is approached by first determining the types of relationship often existing between joint-venture corporations and their parents. It was found that in many cases joint-venture corporations depend on their parents for financial assistance, the parents actively manage the ventures, the products of many ventures are homogeneous with those of their parent companies, and contractual obligations often assure continuity of control by the parents. The article recommends that current accounting standards be revised to require that each parent's share of all its joint-venture corporations be combined with that parent's balance sheet.

An attempt has been made to show that income taxes are properly classified as expenses. Under theoretically normal economic conditions, tax disbursements to the government would be normal expenditures. From a practical point of view, adjustments must be made for the imperfections of the economic system as administered by the government. These imperfections are best measured by the accounting concept of matching costs and revenues. As such, researchers are able to determine the true tax liability and should allocate amounts different from the actual cash assessments to other accounting periods. There seems to be little controversy as to the alternative ways of reflecting to management the amount of before tax income. The usual procedure is to calculate this amount according to accounting depreciation, a practice that is followed in accordance with the principle of matching costs and revenues. The difficulty concerns the amount of tax to deduct in obtaining a net-income figure. One alternative is to deduct the tax as determined by the accounting depreciation figure and the other is to deduct only the legal tax liability figure the amount to be paid to the government.

The combining of business enterprises has probably gone on almost as long as business entities have existed. In the United States, one can distinguish three distinct merger movements since the emergence of the modern corporation. The first movement occurred around the beginning of this century, highlighted by the formation of the first billion-dollar American enterprise, the United States Steel Corporation, in 1901. Unusual economic growth and the lack of substantial antitrust restrictions permitted the creation of huge companies during this early period. The second wave of mergers came in the 1920's; however, these combinations affected the business community to a lesser degree than those earlier in the twentieth century. The third period of mergers began after World War II and has continued up to the present. This merger momentum has been sustained by the desires of management to obtain the benefits of diversification, the tax-free status of certain mergers, and the apparent economies of large-scale operation. The best method of handling business combinations would be, (1) to treat all combination transactions as purchases, except mergers between companies of like size. (2) To write off goodwill against retained earnings immediately. (3) To show revenue and expense as though the purchase were made at the beginning of the year. The preacquisition earnings of the purchased company should be deducted at the bottom of the consolidated income statement.

Reviews the book "Guide to Record Retention Requirements."

The article focuses on the fund-flow problems which cause the student to think about the interrelationships existing between balance-sheet accounts and income-statement accounts. As a result of this thinking, the student develops a workable understanding of the whole process of accrual accounting. Problems requiring a statement of working-capital flow or a statement of cash flow are excellent devices for teaching accounting. There is a method applicable to solving fund-flow problems which provides some of the advantages of both the worksheet approach and the T-account approach. This method requires the construction of a form which may be thought of as a quasi worksheet or working paper. Through the use of this form the student can see the intermediate steps necessary to solve the whole problem, and he can sense the advantages of a well-organized solution. A completed working paper includes a well-designed working copy of the fund-flow statement. A formal fund-flow statement can be copied directly from the working paper without extensive interpretation of the data.

This article discusses the matching concept in accounting as defined by the 1964 Concepts and Standards Research Study Committee of the American Accounting Association. The committee first considered whether the matching convention is still a useful concept to guide financial reporting practices. Since the fundamental long-term objective of a business entity is to earn a profit, this financial data, to be most meaningful, should include information about profit determinants, including costs and revenues. Only by including these data can the reasons for and the extent of progress of the entity toward its primary objective be disclosed. Following this thought a bit further, one's judgment regarding the effectiveness of a specific effort is improved if it can be related to its contribution toward the recognized objective of the entity. In business operations, costs, defined as resources given up or economic sacrifices made are incurred with the anticipation that they will produce revenue in excess of the outlay. Within this frame of reference, one can then say that costs constitute one measure of business effort, and revenues represent accomplishments coming from those efforts.

Reviews the book "What the Executive Should Know About the Accountant's Statements," by John N. Myer.

The article examines the work of researchers Edgar O. Edwards and Philip W. Bell for the measurement of business income. According to the author, income is the result of a calculation, an inference, and it seems hardly correct to apply the term realized or realizable to it. It is unrealistic to attempt to find the specific impacts of price changes and price-level changes item by item, and then to add all tile pieces together to get a total effect. The complex of assets and obligations is a complex in which changes, in respect of some items, in one direction are automatically accompanied by changes, in respect of other items. It is not therefore reasonable to dissect the effects as if they were the consequences of quite separate decisions. It seems quite sufficient to discover the gross effects. The author disagrees with the argument of Edwards and Bell in so far as it relates to the underlying incidents affecting the investments of firms and the necessity of bringing into account the effects of events other than transactions.

This article discusses the challenges in accounting in European countries. A survey of the literature of recent years indicates that leaders have long recognized that the profession should strive toward greater uniformity in accounting standards throughout the world. National backgrounds have had, and it appears will continue to have, a definite bearing on the development of the profession in different countries. Reporting practices, standards of training, and the status, which the profession has achieved, all reflect the effects of variations in the development of the nation's economy. The formation of the European Economic Community, formalized on March 25, 1957, when the six nations signed the Treaty of Rome, marked the beginning of a powerful economic union. Along with the many far-reaching effects on international trade and economic growth, its development is sure to have very definite effects on the accounting profession both within and beyond its borders. Training requirements for those seeking to enter the profession, as well as for continuing study for those already practicing, must take into consideration these broadening horizons.

The article presents a worksheet related to preparation of funds and cash flow statements. In preparing funds and cash flow statements it is customary for accountants to employ two separate worksheets--one for the funds statement and a second for the cash flow statement. The worksheet described in this article eliminates unnecessary duplication of effort by combining both funds and cash flow worksheets. The purpose of the combined worksheet is to facilitate simultaneous preparation of the statement of sources and applications of funds and the statement of cash flow. The initial two columns of the combined worksheet contain measures of changes in the balances of each asset and equity account that have occurred during the period in question. The acquisition of assets with expected useful lives exceeding one year are displayed separately on the cash flow statement. The acquisition of assets with expected lives of less than one year are shown on the cash basis profit and loss statement. A variety of statements may be prepared from the combined worksheet.