Knowledge that Transforms

Reviews the book "Budgeting, Principles and Practice," by Herman C. Heiser.

The article presents a survey accounting problems on accounting problems warranting additional research. In an attempt to provide a guide to prospective researchers as to which accounting and financial problems are of greatest current importance to industry, the writer surveyed the controllers or other chief financial officers of the eighty corporations which in 1957 derived at least half of their total revenues from manufacturing or mining and which had sales of more than $500 million. The most frequently mentioned problem was that of inflation and its effects on depreciation charges of companies. Many respondents believe that it is an extremely serious financial problem and one which adversely affects the overwhelming majority of businesses in the U.S. The statements on this subject were almost evenly distributed between the problem of how to obtain the legislative changes necessary to halt the taxation of business capital which is presently occurring and the problem of how to account for and present price level changes in financial statements.

Reviews the book "The Economics of Money and Banking," by Lester V. Chandler.

There is definite evidence in accounting periodicals of an increasing interest in the uses of statistics, especially statistical sampling techniques, in accounting. The proponents of the use of statistical techniques in accounting have presented their arguments so convincingly that many have accepted as a logical extension the idea that accounting and statistics should be merged or integrated. The courses offered as a result of such a merger are generally designed for presentation to students in the early stages of the business education. These courses seem to have as their objective the acquaintance of the student with accounting and statistical techniques so that he might apply these techniques in certain business situations. Probability, the normal curve, correlation and time-series analysis, and statistical forecasting are the statistical techniques usually included. As to having a separate statistics course for accounting students, there should not be much of a problem involved. Marketing people have their courses in marketing research, including a wealth of statistical applications. Economics departments have statistics courses for economists.

A recent article in "The Accounting Review" makes a commendable effort to simplify statistical sampling procedures for use by accountants and auditors. Unfortunately it contains a number of mistakes and misunderstandings which seriously limit its usefulness. The suggestion that the tolerances or acceptable amount of error should be increased is questionable. While the original determination of tolerances may have been unduly strict, one should not abandon them merely to make his work lighter. The passage just quoted makes no distinction between tolerance limits and limits of immateriality. Tolerance limits should be set by considerations of both risks due to sampling variability and materiality. Statisticians have developed several improvements in sampling technique which increase the accuracy of a sample of a given size or increase the efficiency of sampling in other ways such as reducing the cost of attaining a desired degree of accuracy. The article utilizes one such technique, stratification, but here again there are several flaws. The gains from stratification come from the reduction of variation within parts by grouping into each part accounts that are similar in size.

This article discusses the problem involved in allocating the various costs of manufacturing between the fixed and variable categories and to suggest a workable solution to this perplexing problem. This allocation is most commonly undertaken in connection with break-even analysis. Determination of fixed and variable expenses provides the basis for any type of cost-volume-profit analysis so it seems desirable to attack this problem first as a preliminary to any further study of such analysis. The allocation of manufacturing costs between the fixed and variable categories is often confused because, it is difficult to establish accounts which contain only one class of expense, that is fixed or variable. And secondly, many variable expenses do not maintain a constant relationship to the rate of operations. It is generally recognized that fixed costs are not truly fixed for all rates of activity or volume of production. They are fixed only for a given range of capacity and within a definite set of conditions. Yet, because of their nature and relationship to operations, they are identifiable and can be accounted for with accuracy. Consequently, their variability is predetermined to a high degree and is predictable, thus providing satisfactory data for analytical purposes.

The article presents a report on the trends in undergraduate accounting education in the U.S. In order to determine the curriculum changes during the past five years, a questionnaire survey was undertaken. Questionnaires were mailed to approximately 90 accounting department chairmen and 78 returns were received. The results of the survey indicate that the proportion of accounting degrees to total baccalaureate degrees in business has remained relatively constant during the past five years. there has been an increase in the number of MBA degrees with an accounting major or equivalent. There has been a slight reduction in required accounting and a slight increase in the number of required courses in business and liberal arts. The principal changes expected in the next five to ten year to managerial accounting and electronic data processing and a decline in accounting techniques within the existing allocation of total hours. A trend toward a five year program with consequent deemphasis on the four year accounting major is envisaged.

A simplified technique for price level adjustments should allow an analyst to determine the price level effect on reported income without a great deal of additional detailed work. Once obtained, this information may accompany the regular cost-based financial statements. A reported balance sheet reflecting current values will greatly assist management and external analysts in evaluating a company's financial position based upon current dollars. Several approaches to the task of adjusting reported revenue for the changing value of the dollar have been developed, and some of these have become successful in their acceptance. In general, they represent similar techniques to reduce the distortion in financial statements attributable to price level fluctuations. Current assets and liabilities fixed in dollar amount such as cash, receivables, payables, are not altered in most price level adjustment techniques because their values automatically rise and fall with changes in purchasing power. However, when fixed dollar assets are held during a period of rising prices, the owner sustains a real loss in purchasing power. Now more fixed dollar assets would be needed at the end of the period to just maintain the level of operating resources which existed before the rise in prices.

A student in an elementary accounting class was asked to record the transaction in which a donation had made to the Junior League. The problem of transmitting ideas clearly and accurately is so formidable and of such long standing that it is well-known to all. There are those who believe that its genuine solution would quickly lead to the end of wars. It is important and desirable to establish a uniform terminology, but it will take a long time and one must not hope for too much. The Committee has done much constructive work toward this long-term goal, and this writer relied often upon its work in making his own recommendations with regard to the terminology problem. A precise and uniform terminology will permit the effective accomplishment of this rather necessary service. It should not be necessary to prepare a separate glossary for each report. There should be many terms which will always be present and which can be set up in a standard glossary with which the work of firm members will always be consistent.

An important attribute of any group aspiring to professional status is the voluntary assumption of codes or standards of professional conduct. These standards are established as a means toward assuring competency in the performance of the services offered by the group, individually and collectively. Internal auditors currently stand on the threshold of full professional recognition. The writer believes that one of the major conditions precedent to full recognition is formalization and acceptance of a code of professional standards by organized internal auditors. Even a casual review of the current scene will reveal that internal auditors are operating under a potpourri of standards applicable to the practice of public accounting, "best practices" of individual large scale internal audit organizations, and divergent local rules and practices. This paper has presented a suggested approach toward the formulation of professional standards for internal auditors. The proposed standards embody some of the fundamentals with respect to personal qualifications and quality of field work postulated by the national organization of certified public accountants. For the most part, however, the suggested standards focus upon requirements for the broad knowledge, training, and experience essential to a competent examination and evaluation of the complex of management systems and controls built into a modern enterprise. The day has doubtless arrived for internal auditors to proceed with deliberate speed to consolidate ideas gained during the past two decades and commence the application of standardized measures of professional competency. It can be argued persuasively that a codification of standards will contribute significantly toward facilitating the forward planning of organized internal auditors with regard to training, research, and other long range objectives.