Knowledge that Transforms

The impact of a large volume of war contracts has made imperative the preparation of statements of accounting policies to govern the manner of their terminations, as of January 1946. This article concerning the full content of statements of accounting policies, related accounting surveys and the method of processing them by the Eastern Audit District of the U.S. Army Air Force may be of timely interest to the many professional accountants and company executives engaged in contract terminations. This article may also be of interest to accountants not involved in war contract terminations. Statements of accounting policies prepared during the past year contain items concerning peacetime activities and are for most companies the only clearcut statements available at the present time. It is the government accountant's general function to serve the contracting officer by reporting upon the data submitted by contractors for use by contracting officer in effecting termination settlements fairly and quickly. To provide uniformity in requests to contractors for statements of accounting policies and procedures, a suggested outline of accounting matters to be incorporated in such statements was prepared by the staff of the Eastern Audit District Office of the Army Air Force and sent to contractors in May 1945. It was suggested to regional and other staffs that all such requests addressed to contractors by these staffs be drawn up to embody the points in the numerical sequence of the outline and to the extent practicable.

This article focuses on the prudent investment theory in public utility rate making. It is author's opinion that successful regulation of public utility rates cannot be accomplished under the fair-value doctrine and that the investment method must be sanctioned if justice is to be done to the consumer, the utility, and the general public as well. Stated somewhat differently the author believes the fair-value basis of rate making altogether impracticable and unworkable, that it is basically wrong in its economic concept, that the circumstances which gave birth to the principle have long since ceased to exist, and that is a reasonably good job of public utility rate regulation is to be achieved it is through investment approach. No review of rate regulatory procedures in this country would be complete without a brief reference to leading decisions of the Supreme Court of the U.S. on the subject. Not only did the fair-value doctrine, which plagued regulation for many years, have its real genesis in a decision of that Court, but the decisions of that body have greatly influenced the thinking and pretty well dominated the practices in respect to public utility rate regulation.

Since the termination of the emergency period as of September 30, 1945, there has been a series of debates going on in public and private circles as to the propriety of, and mechanism for, restoring to corporate records any value that may be remaining for facilities which have been fully amortized for tax purposes, and which still have remaining usefulness. It seems to the writer that most of the arguments that have been published in connection with this October 1946 issue of the journal The Accounting Review, have been in regard to the accounting mechanism for recording in corporate books of account such adjustments as may be necessary to reflect the remaining usefulness of fully amortized emergency facilities. Many of the debaters have seemed to confine their concept of this problem to a rigid verbatim application of stated accounting practices. Others express opinions that any warranted adjustment should be against earned surplus, unqualifiedly, whereas some urge in an equally convincing manner that such adjustments should be specially earmarked in some different manner.

In this article the author comments on a series of three articles entitled "Power Price Fixing," written by James L. Dohr, which were published in earlier issues of "Journal of Accountancy," as of January 1946. The articles discuss at some length the U.S. Federal Power Commission's decisions and those of the Montana and Arkansas utility commissions on the accounting practices of Montana Power Co. and Arkansas Power & Light Co. Each year the Federal Power Commission has published in a single volume the financial statements of the principal privately owned electric utilities of the U.S. An epitome of these statements was published for the year 1943 which brought out the striking changes that had taken place in the industry since January 1937, the date when the Uniform System of Accounts became effective. In the broad areas embraced by financial and business controls, accounting principles and policies have played a role that has increased greatly in importance during the past ten years. Accounting has become firmly entrenched as the language of business and of businessmen. Total assets, gross volume, net income are among the many terms that accountants have been able to keep within the confines of their art.

This article presents information regarding internal control in industrial organizations. Since the question of internal control has lately attained a great deal of prominence, the impression seems to be that its importance has arisen as a result of comparatively recent events. However, internal control was not pushed upon the accounting world by the Securities and Exchange Commission, nor did its importance arise as a result of the numerous investigations of auditing and auditing procedure which came as a result of the so-called McKesson & Robbins case. The establishment of proper accounting organizations embracing adequate systems of internal check and control became of particularly early interest to the public accountant. Internal control is nothing in the world but proper accounting organization. It is that distribution of duties and organization of routine which produces accurate, timely, and informative reports and statements in the ordinary course of events, rather than as a result of a turbulent and sustained effort on the part of supervisory accounting personnel as the deadline nears, as so often happens.

This article focuses on statistical controls applied to financial statements. Most top executives, except controllers, are not specifically trained in accountancy. Yet the top executive spends much of his time on the financial aspects of his business and in the interpretation of accounting records. Sometimes he finds himself studying detailed and massive accounting reports, trying to find in them the clues to his problems. When the analysis of past data has been completed, top management can use the charts for setting goals or objectives in the future, and can follow month by month the progress made toward each goal. It might be argued that these effects of the end of the war would have been realized by top management without the aid of the chart. That is undoubtedly true, but the strength of action charts is found in a number of factors, in their graphic appeal to understanding through the eves, in the power they have to sell all levels of supervision on the necessity and wisdom of management policies, and in the completeness and clarity with which they enable the men at the top of a business to trace the effects of such external events as war, peace, price changes, booms, and depressions.

Reviews the book "Practical Financial Statement Analysis," by Roy A. Foulke.

Modern internal auditing has been developed to provide the protection management needs, in the same sense that external auditing (public accounting) has developed to provide the protection investors need. Internal auditing is not new. Internal auditing staffs were maintained by a considerable number of concerns prior to 1900. Internal auditing functions have been carried on in one way or another down through the ages. Modern management is finding that modern internal auditing is not just a means of checking up on the petty cash funds and payroll bank accounts to see that the system of internal control of cash and receivables and merchandise is functioning. It is finding that the techniques of auditing, verification by test check, physical inspection, record analysis, and common sense appraisal in the light of the facts developed afford a means of doing something more than keeping the cashier honest. It is finding that sales managers, branch managers, and construction engineers, being human, all give a better performance and give more factual report.

This article says that income in general, is a variable concept concerning which there has been considerable debate without a great deal of final agreement. Within the framework of historical accrual accounting, however, if allowance is made for variations in procedure and for different methods of computation, the concept of income appears to be accepted as indicative of something fairly specific. There is ground for believing, nevertheless, that this is not an entirely satisfactory concept of the income situation. In economics and in the vernacular the term "income" usually refers to goods and services. The emphasis is upon assets, often more specifically upon cash, rather than upon the resulting technical accounting increase of a specific equity. Expense and revenue items, in their deeper meaning, have reference to cash effects. From the standpoint of historical accounting, gross income, in this sense, is the amount of cash received and to be received as a result of the period's sales.

Reviews the book " Tangible Fixed Assets," by William D. Cranstoun.