Knowledge that Transforms

Abstract During an inflationary period, changes to the last in, first out (LIFO) method of inventory valuation generally result in reduction of reported earnings and in deferment of tax payments. If the investors rely on the reported earnings, the stock price of the firms which change to the LIFO method will decrease and if they rely on the economic value of the firms, the stock price will increase. Several studies of the relationship between accounting changes and stock price behavior have been conducted by using a research design, as of April 1975. The design involves the use of the market model to isolate the stock price changes associated with specific events from the market-wide price changes. The article attempts to measure the association between the accounting and price changes by abstracting the effect of risk changes. This is accomplished by estimating the time path of the relative risk of stocks during the months surrounding the date of accounting change. The problem of estimating the relative risk of stocks when it is not constant is considered in another section of the article. Conclusions of the study about the relationship between stock price behavior and accounting changes are presented in the last section.

Abstract Reviews the book 'Security, Accuracy, and Privacy in Computer Systems,' by James Martin.

Abstract Reviews the book "Human Resource Accounting," by Eric Flamholtz.

Abstract Presents a letter to the editor about the use of discriminant analysis as an aid to employee selection.

Abstract The fundamental importance and relevance of the behavioral sciences to accounting is exemplified by the number of recent behaviorally oriented accounting research studies, as of April 1975. A subset of these studies has been concerned with organizational and social psychological aspects of accounting firms. These studies seem to have the potential for contributing to both the accounting profession and the behavioral sciences. Within this trend, the purpose of this article is to explore the organization of public accounting firms using a behavioral science theory of organization. An organization can be modeled as a cycle consisting of three basic units, namely, an input unit, a transformation process, and lastly, an output unit. An audit engagement is not a completely standardized input. Different client organizations have different accounting systems. Accounting systems either are tailored to an organization or they evolve as the organization evolves. Consequently, each accounting system has some idiosyncracies representing the particular characteristics and information requirements of the organization.

Abstract This article deals with the expansion of the predictive ability criterion to consider the effects of information on decision-maker's (DM) behavior. The analysis involves two parts. In the first part, an information relevance criterion that simultaneously considers both the information and the DM's interpretation and use of it is developed. Under this relevance standard called prediction achievement, information alternatives are evaluated based upon the accuracy of the predictions made by the DM. Efficient implementation of this relevance measure requires that the effects of different information alternatives on the DM's behavior be predicted based upon descriptive mathematical models. The second part of this research consists of a field experiment designed to test three necessary conditions for the use of one particular model in the prediction of two-group classification decisions. E. Brunswik's Lens Model brings the relationship between predictive ability and information utilization into bold relief.

Abstract A typical problem in cost-volume-profit analysis involves the comparison of alternative methods of production, where the methods have different ratios of fixed to variable costs. The computation of the break-even points and the examination of the relative sensitivity of each method to changes of volume at a fixed sales price are standard procedures. Consideration is frequently given also to possible changes in sales price, coupled with corresponding changes of volume, and to their resulting effect on segment profit or net income. The purpose of this article is to show that the direction of the change in net income can be predicted in terms of the contribution margin ratio and the market elasticity of demand for the product. The coupling of the elasticity concept with cost-volume-profit analysis also provides a decision rule which indicates whether a company, having a particular cost structure, should raise or lower its prices in order to increase net income. The author says that the decision rule can provide an unambiguous indication of the direction in which net income will change as the result of a price change, so long as that change is small.

Abstract Reviews the book "Governmental Accounting," 5th ed., by Leon E. Hay and R.M. Mikesell.

Abstract Reviews the book "CPA Examination Review: A Complete Guide," by John Grant Rhode and Edward H. Murphy.

Abstract Presents a letter to the editor regarding the role of behavioral measures in accounting for human resources.