Knowledge that Transforms

Abstract The article focuses on funds flow. Recent accounting literature has produced two articles on mathematizing funds flow. One of the approaches undertaken shows algebraically that the net change in working capital is explained by the changes in non current assets and equities. This article attempts to analyze algebraically the individual changes in non current accounts and thereby provide a means to calculate directly through equations the individual sources and uses of working capital needed for a funds statement. In addition, an algebraic system for cash-flow analysis is also discussed. The algebraic approach provides a flexible means to adapt to different concepts of funds, such as net working capital, cash flow, and net quick assets. The algebraic expression of funds flow is consistent with the trend towards computerized accounting. The equations can be programmed readily and used to generate funds statements. This article uses a complete set of equations to tie together the funds flow from the income statement and balance sheet items, to show the elimination of non fund items, and to show the individual sources and uses of funds in the non current accounts.

Abstract The objective of any control system is to reduce to a minimum the difference between actual conditions and desired conditions. The conventional concept of the budgeting control system emphasizes the process whereby management's attention is directed mainly to differences which have arisen. This concept, however, fails to give express recognition to the intangible and self-governing elements which serve to reduce the number and the magnitude of these differences. The budget itself controls as soon as it achieves its authoritative characteristics through approval by high management and communication to subordinates. All factors which increase employee identification with budget goals are control elements. These include a participative budgeting process, advance knowledge of performance evaluations, hiring and training programs, involvement in extra-organizational activities, and a system of sanctions. Attainability is a third attribute of good control by budgetary means. For this purpose, flexible budgets, multi-goal performance levels, and responsibility accounting are leading methods of implementation. To the extent that authority, identification, and attainability are properly applied, the effectiveness of budget control should be increased.

Abstract This article brings into perspective the three major questions involved in allocation of income tax within the financial statements of non-regulated businesses in the U.S. in 1966. The first is the nature of Federal income taxes. The second question is derived from the first, the desirability of allocation. The third question is about what to do with the balance-sheet element resulting from allocation procedures. The author concludes that to match income tax with the related items, the expense and the amount payable will frequently differ.

Abstract In this article the author discusses the criteria considered by business executives in initiating make-or-buy decisions. The author enumerates the major categories of the essential data needed in making make-or-buy decisions. The first general category would include both quantitative and qualitative factors. The error committed by companies by making decision that run contrary to the long-range growth pattern of the company is also explored in this article. Moreover, the author observes that most companies never attempt their manufacturing program under make or buy without sufficiently evaluating the availability of the required number of trained employees.

Abstract The measurement of net income is a perplexing problem because it is hard to find a single acceptable meaning that will form the basis for the development of a theory of income measurement. But accountants themselves are partly to blame for confusion. They are often distracted in their practice by preconceived notions of income, taxable income, economic income, and cash flow. It is not surprising those interpretations of accounting reports by the investing public are varied and confusing. The purpose of this article is to present a case for a new approach to corporate reports of income. This approach will be tested by observations of its' impact on depreciation accounting and by its' implications in the resolution of certain important practical accounting problems. Certain accounting principles will be developed for the purpose of measuring prospective income, but their final significance rests on their validity in the measurement of income on a historical basis. This approach permits the use of the present structure of accounting theory for all those expenses and revenues that would be matched the same way in the dimension of expectations as in the dimension of fact.

Abstract The accounting requirements of Medicare are more rigorous than appears obvious on the surface. Many of the providers, particularly in the nursing home sector, lack adequate accounting systems in the present circumstances--without the added requirements of Medicare. Many of these institutions will find it necessary to convert from their present cash method of accounting to an accrual basis that includes a costing, standard costing, and periodic reporting capability. The resources of the individual institutions, monetarily and technically, are insufficient to cope with the changes that are needed. The intermediaries recognized in Public Law 89-97 will be able to provide some of the assistance these institutions need to meet their new accounting requirements. But there is also an opportunity for the accounting profession to make a valuable contribution to sound accounting practice in this field of interest by sponsoring institutes, offering courses in institutional accounting, and establishing and maintaining the necessary accounting systems through consultation and the audit function.

Abstract This article considers the conceptual problem of allocating general and administrative expenses. It seems clear that a production-related base is more acceptable to government auditors than any other. This is justified where a significant portion of the general and administrative expenses are production-generated. However, where the pool includes little, if any, production-generated expenses any base which is representative of the year's activity should be acceptable. In addition, the article includes recommendations which may help in solving practical problems in allocating administrative expenses.

The article reviews the book "Program Budgeting: Program Analysis and the Federal Budget," edited by David Novick.

Abstract Certain developments inspired the Accounting Principles Board to approve the preparation of the "Inventory of Generally Accepted Accounting principles for Business Enterprises," ARS No. 7. It was long wished for an inventory of generally accepted accounting principles; for whether one wishes to adopt, to rebut, or even simply to think about these principles, it would be useful to know what they are. But the inventory is not a simple listing. A great deal of ARS No. 7 is devoted to the justification of the listed propositions and to the rebuttal of objections to them. The study presented in the article is argumentative and as such invites cross-arguments. The study is unquestionably valuable. It makes very clear the massive difficulties with which the users of financial statements have to contend. The inventory, at least by implication, makes it abundantly clear that great changes are necessary to put contemporary practices on the footing of the requirements of the statutory principle, and even greater changes to establish practice on the ethical footing which have been suggested and is ideally more solid and dependable than a statutory specification.