Knowledge that Transforms

The basic law governing accounting, auditing and financial reporting in the United States Government is the Budget and Accounting Act of 1921. This Act created the General Accounting Office under the Comptroller General, and the Bureau of the Budget. The Bureau of the Budget was originally placed in the Treasury Department under the Budget and Accounting Act, but in the reorganization Act of 1939 it was placed in the Office of the U.S. President which was a sensible change. The Comptroller General is also given the power to prescribe accounting procedures in the various departments. Responsibility for account-keeping was not placed upon him but was left in the various departments and agencies. The general account-keeping function, placed in the Treasury under previous Acts of 1789 and 1894, was left in that Department. The Act of 1921 does not place upon the Comptroller General the responsibility of either preparing or certifying financial statements. The principal requirement of the Act in this respect is placed upon the President, who, in connection with the transmittal of the budget, must submit a complete financial statement of the government.

The author in this article focuses on the need of control of detail in inventory valuation. He insists that there is an aspect of the inventory problem which has been very largely neglected in the literature of the subject, though in practice it must be faced every time a decision is made to change the method of valuation. The problem is that how can the entries in perpetual inventory accounts be handled so as to keep the book figures for control and for detail accounts in agreement with each other, and, at the end of the period, to bring them into agreement with the inventory as priced under the various suggested methods? To bring the problem into sharpest focus for the discussion, the author considers it as applying to the raw-materials inventory in manufacturing business which operates on a job-cost basis. In those rare instances in which all raw materials can be marked when purchased with their specific individual unit costs, and charged out to production at those specific costs, the control account will be a direct summarization of the entries on the detail cards.

Reviews two books "Principles of Cost Accounting," by J.F. Sherwood and Franklin T. Chase, "Essentials of Cost Accounting," John G. Blocker.

For a continuing enterprise having properties, the bulk of which must be replaced at one time, there is little doubt that funds roughly equivalent in amount to the recovered funds impounded by depreciation charges may be necessary for replacement. Nevertheless, as has been emphasized many times, replacement for a concern which continues indefinitely is done piece-meal and at no time in the future will all of the recovered funds represented by depreciation reserves on diversified properties be necessary for maintaining the same volume of output. A large volume of funds are, therefore, accumulated which are not only unnecessary in the intervals between individual replacements but are, in fact, never required by the firm unless it wishes to expand its productive capacity. With regard to public utilities one of the fundamental problems is the determination of the rate base. Except for considerations of working capital one shall assume that the rate base coincides with the accountants' book values. A minimum level of working capital is necessary and generally allowable.

Periodical examinations of the accounts of commercial and financial institutions, special examinations for prospective investors, investigations on behalf of creditors and trustees in bankruptcy, examinations to ascertain the cause of decreasing profits, exhaustive audits preparatory to installing improved systems of financial and cost accounts, and investigations of the accounts of public officials at the be best of dissatisfied citizens are but a few of the many purposes which clients have in mind when desiring to have the accounts of an undertaking audited. The object of the auditor should be, in the main, three folded. They are detection of fraud, discovery of errors of principle, verification of the mechanical accuracy of accounts. As has been pointed out by other writers, the attempted concealment of fraud must be accomplished by commission of either an error of principle or one in the mechanical work of the accounts; owing, however, to its importance and often its predominating importance, the detection of fraud is conceded a separate place among the objects of an audit.

The article focuses on the differential cost that occurs when the manufacturer changes the quantity of its production. A manufacturer may wholly or partly avoid spoiling the market by selling his increments in output abroad, or by appealing to a different domestic market from the one in which he has been disposing of his goods. According to some theories if additional production results in lower prices for all units, true differential cost must include the loss resulting from such price reduction. Since differential costs are anticipated costs, they do not enter into the accounts. The author in this article considers the theory which underlies differential costs. A brief outline of practical procedure suitable for the accumulation of available factual data is presented, including suggestions as to how statistical forecasts of costs at various anticipated levels of production can be made. Various assumptions are sometimes made relative to cost trends at stated levels of future production. One such assumption is that differential costs will be less with each increased level of production until full capacity production is reached.

Buying for the government is subject to a vast aggregate of statutes, Executive and administrative orders, legal interpretations by the General Accounting Office, and court decisions. Some rules, such as those relating to standardized specifications, have their parallel in private business enterprises. Others have, but only if one forgets that a rule-making power vested in Congress and a separate administrative responsibility vested in a department head are likely to afford much less flexibility of rules than exists where not only administrative responsibility but also a generous measure of rule-making power are vested in a single manager. The contrast is all the greater if the business concern which the manager runs is not itself a body of such great size as to have the sort of complexity which characterizes governmental organization. Funds for procurement or for non-procurement purposes are usually made available in and for a single fiscal year. In the enforcement of the laws with which Federal procurement is hedged about, the General Accounting Office figures much more largely than the courts. Infractions of those laws usually are less classifiable as criminality than as inept or culpable administration, or as an admirably motivated if indiscreet effort to get a job done even at the cost of scissoring some red tape.

The need for some form of profit limitation in wartime is generally recognized. Spending on an economy geared to peacetime production is such that excessive profits must inevitably arise at many points. The conversion of a peacetime economy into a wartime economy not only creates new scarcities, but it also requires businessmen to produce goods, which they have never produced before. Under these Circumstances costs cannot be accurately estimated and profits may prove to be excessive. Furthermore, higher prices may be needed to encourage production by marginal producers, thereby giving windfalls with aspect to output previously produced. On the other hand, it is the duty of the government to see that a few do not profit from the sacrifices of the many. Profits have a positive contribution to make even in a wartime economy. Profits have a positive contribution to make even in a wartime economy. In most sectors of the economy, the normal peacetime role played by profits in determining what and how much will be produced has been taken over by the government. But the profit motive still has an important part to play within this framework by providing incentives to control waste and inefficiency and to keep production costs from rising. The profit motive is not, of course, the only factor contributing to these ends, but its importance should not be underestimated.

Reviews the book "Federal Tax Accounting," 4th ed., by J.F. Sherwood and C.R. Niswonger.

This article talks about some reports, which has been published in the April 1943 issue of the accounting journal "The Accounting Review." As to committees, it seemed advisable to appoint territorial membership solicitors to use a printed statement of Association objectives in a persistent campaign. Opinion at the meeting of May 8, 1943 was favorable to attempting some research looking toward a statement of cost accounting principles to be formulated by a special committee. Other research projects, if any such appear, can be given to other special committees to study. After some experimentation along these lines for a while, it would be necessary to decide whether research should be continued by special committees, by designated standing committees, or by research directors. Other matters of Association policy will probably need to be studied later also, when orderly legislation is once more possible. The established election procedure could not be followed in 1942, and emergency action was taken as reported in "The Accounting Review," for January and April, 1943.