Knowledge that Transforms

Abstract The article presents the effect of implicit interest rates and the depreciation method used in evaluating lease versus buy decisions. Defining and measuring the cost of capital for use in the investment decision are regarded as separate problems. It is assumed to be given and does not enter the analysis. A basic assumption of this paper is that the lease is a financial lease and, therefore, is similar to long-term debt from an analysis standpoint. If the firm leases, the periodic lease payments are tax deductible, whereas if the firm buys, the acquisition cost is tax deductible through time in the form of depreciation. The approach presented in this paper highlights two factors that must be considered in every lease vs. buy decision. One is the implicit interest rate in the lease payments as compared to the firm's borrowing rate. If the implicit interest rate in the lease exceeds the rate at which the firm could borrow, borrowing and buying would be preferred. The second factor is the tax shield effects of the non-interest deduction in the lease payments as compared to permissible depreciation patterns under buying.

Abstract Reviews the book "The Accounting Primer: An Introduction to Financial Accounting," by Thomas J. Burns and Harvey S. Hendrickson.

Abstract This article presents information on several developments in the various universities and colleges in the U.S. One of the development was in Claremont Men's College, California. Commencing this year the masters and doctor degrees in Business Administration are now being offered as well as degrees in Business Economics. Another development was at Florida Atlantic University. Dennis Gaffney from University of Illinois joins the faculty as an Assistant Professor. George Baker, formerly the national tax partner for Ernst and Ernst, joins the faculty as a Visiting Professor in January 1973. Yet another development was related to Kansas State University. William J. Clark, Professor of Accounting, will retire from September 1, 1973. Kenneth L. Fox will be promoted to Professor effective September 1, 1973. Louis W. Petro from University of Michigan will be joining University of Detroit as faculty in September 1973 as an Assistant Professor of Accounting. Professor Fred Henningsen from University of Montana has been granted a two-year leave of absence to teach at Victoria University in New Zealand. Richard M. Peters will join the accounting faculty in September as Assistant Professor.

Abstract The article presents a report of the Committee on Tax Information Service of the American Accounting Association as of October 1973, which aimed to help faculty members and school administrators with regards to the benefits of tax planning. There is reason to believe that much of the financial support of study and research by faculties of universities and colleges could be freed from taxes and that this result is not being accomplished to a sufficient extent at the present time. It is preferable that scholarship and fellowship grants be received from an organization other than the employing educational institution where there could be any question concerning the compensatory nature of payments received by the grantee. Administrative rulings have helped to define further the situations in which awards received by professors may be excluded. Exclusion was permitted where a teacher received an award in recognition of past overall services to a college and seniors and alumni without the winner's knowledge made the nomination.

Abstract The article discusses the use of a numerical problem calling for comparative income statements and the teaching of the conceptual difference between direct and absorption costing models. It is often difficult to find a parsimonious way to introduce the student to the conceptual differences between direct and absorption costing. This is particularly true when the student is introduced first to absorption costing where the fixed overhead rate and the variable overhead rate are subsumed in the total overhead rate. Where the students have been accustomed to thinking symbolically, it is much easier to introduce these two models simultaneously. Mathematically the two components in the volume variance are not independent, and the fact that the dollar measure of the volume variance is meaningless without further analysis is clearly highlighted. This approach has been useful where the students have had a minimal introduction to algebraic logic. Its sole purpose is to clarify two relatively simple models and their impacts upon income.

Abstract The article proves that a version of the matrix cost allocation model is equivalent to the input-output model. When the general input-output model is applied to the interdepartmental cost allocation problem, it becomes equivalent to the matrix allocation model known as the gross service model. Moreover, if one of the two models does not have a unique solution for a particular problem, it follows that the other model cannot have a unique solution as well. The cost allocation model should be regarded as a special case of the input-output model. This is mainly because the two models yield equivalent cost allocations, and the input-output model can be used for many various purposes and in different contexts.

Abstract Reviews the book "Business and Personal Taxes," by Catherine E. Miles and Joseph E. Lane.

Abstract The article discusses a study on the relation of a firm's performance to the sophistication of capital investment procedures and standards. The findings of the study did not indicate a consistent association between performance and capital budgeting techniques despite an increasing adoption of sophisticated capital budgeting methods. This states that the mere adoption of different analytical tools is not enough to being about superior performance. Moreover, factors such as marketing, product development, executive recruitment and training, and labor relations may have a greater impact on profitability.

Abstract The article comments on a comparative analysis of net realizable value (NRV) and replacement costing, in reference to the article written by Norton M. Bedford and James C. McKeown for the April 1972 issue of the periodical "The Accounting Review." The author agrees that goal congruence aspects of alternative accounting procedures should be considered in evaluating their effectiveness. He also emphasizes the overstatement of the NRV model. However, this should not be interpreted as a criticism of the NRV model.

Abstract The article examines the limitation of the application of the internal rate of return (IRR) model in the multi-asset problem. Virtually all applications of the IRR have been structured in the context of a single-asset situation, thereby avoiding the "multi-asset problem" which has two dimensions. The application of the IRR in a single-asset situation requires information about the asset's cost and future cash flows. This limitation of the IRR in the multi-asset situation is the subject of this paper. The first section establishes the relationship between the IRR and estimation theory which offers a direct way to study the problem. Thus, when cash flows are arbitrarily assigned to completely joint assets and the IRR is used to determine the amortization scheme for individual assets, the data for the firm cannot be interpreted in terms of the IRR. Consequently, the justification for the use of the IRR in the single-asset situation does not apply to the multi-asset situation, even in the case of separable assets. The conclusion, therefore, is that the IRR is essentially a firm model, not a single-asset model.