Knowledge that Transforms

The article illustrates through an example in a coaching class the fallacies of assumptions in problem solving demonstrations by teachers of accounting. An experience of many years as an accounting teacher plus an experience of some years as an examiner for the licensing of accountants has convinced the author that the fallacy of assumption is one of the things responsible for the heavy toll exacted of the candidates who attempt professional examinations. Apparently, assumption is believed to provide an easy, or lazy person's way out of what seems to be at least at first glance a perplexing situation. A trial balance given in a problem does not balance. This fact alone affords no reason for the student or candidate assuming that the difference must be adjusted through some account like notes or accounts payable, or through some other account as far fetched. Perhaps a careful study of the situation will show that the requirements may be met almost completely by ignoring the discrepancy.

The accountant of today must be particularly firm in his contention that costs incurred in a given year must be charged to that year and carried forward only in those cases where they will definitely benefit the future. This applies to cost of idleness and would prohibit its deferral by any such process as omitting the charge for depreciation because the equipment was not productive. It is also inadvisable to charge the costs of idle equipment direct to surplus on the grounds that such costs were not an element in the production of that particular period's income. One of the principal features of the current order of things which raises accounting problems is the lowered price level. Accounting involves both the establishment of a correct income estimate and the periodic showing of the financial condition of the concern for which those earnings are estimated. For such purposes, replacement values have a place unless the statement is to be merely historical in character. In a period of rising prices the use of a depreciation charge based upon cost leads to an overly optimistic attitude by the persons relying upon our estimates whether they be managers, investors or creditors. In periods of falling prices the effect is undue pessimism.

Reviews the book "The Bank for International Settlements at Work," by Eleanor Lansing Dulles.

Reviews the book "Kalkulation und Kostengestaltung im Warenhandel," by Erich Kosiol.

In attempting to relate what is being done for the general business student in the field of accountancy or to hazard an opinion as to what should be done, one's first problem is probably that of discovering the amount of time usually available for the work that is to be undertaken. In the case of the four-year commerce course, it is customary for all students, regardless of special interests, to register for courses in accountancy during the freshman and sophomore years. Usually this amounts to three hours per semester or its equivalent. A few institutions require five hours per semester for either three or four semesters. After the general business student has completed his first year of accounting work he can be described as being "one up and one to go." For either the accounting major or the general business student, the principles of accounting must have as a major division, the principles of cost accounting. The fourth semester of the course of the general business student should be his and his alone, designed to meet his needs, taught in such manner as to make it of greatest advantage to him. It should not be a part of the work of the accounting major.

Reviews the book "Financial Policies of Public Utility Holding Companies," by Mervin H. Waterman.

Reviews the book "Money," by D.H. Robertson.

Reviews the book "The New York Money Market ," vol. 1, "Origin and Development," by Margaret G. Myers, vol. 2, "Sources and Movements of Funds," by Benjamin Haggott Beckhart and James G. Smith, vol. 3, "Uses of Funds," by Benjamin Haggott Beckhart and vol. 4, "External and Internal Relations," by Benjamin Haggott Beckhart, James G. Smith and William Adams Brown.

The statutory laws governing corporate dividends are significant to accountants and teachers of accounting. The directors of a corporation have power, in their discretion, to determine what, if any, dividends shall be declared and paid to stockholders. This is the general statutory rule which applies in all states and territories of the United States and which also prevails in England. The variations from it are few and slight. The rule applies in New Jersey unless otherwise provided in the certificate of incorporation or in by-laws adopted by at least a majority of the stockholders. In England, a company in general meeting may declare dividends, but the amount must not exceed the amount recommended by the directors. The statutes of several jurisdictions give the stockholders power to exert a limited degree of pressure upon the directors in the matter of dividend declaration. In New Mexico and Puerto Rico in United States, unless otherwise provided in the certificate of incorporation, the directors must declare a dividend of the whole of the company's profits exceeding the reserve and pay it to the stockholders on demand.

The article focuses on the failure of the city of the Glasgow bank. Recent bank closings recall the history of the City of Glasgow Bank, which closed its doors a little over half a century ago. The last balance sheet published before the closing was dated June 5, 1878, and indicated capital reserves and undistributed profits totaling £1,600,000. The accountants' examination, made immediately after the closing of the bank, three months later, revealed that the capital and reserves were entirely wiped out, and that there was a deficiency of capital estimated at the astounding figure of £5,190,000. The immediate arrest of the bank's directors was ordered. During the five years preceding the dosing of the bank, between fifty and sixty percent of the total of advances on credits, discounts and overdrafts represented the debt of eight firms and the bank's directors. The City Bank failure once more brought up the question of the desirability of the acceptance by the Scotch bank of the principle of limited liability to stockholders as a measure of protection against disastrous situations comparable to that resulting from the City Bank failure.