Knowledge that Transforms

Not long ago the author's college chose for a first year accounting textbook one of those modern versions whose publishers make life easier for the busy teacher by providing standardized objective type tests at no extra cost. Faced with one of the busiest years in history and with graders or readers obtainable only at premium, it is needless to add that all instructors used the tests. Nevertheless, some of the older teachers used them with a sense of misgiving. In probably no field is the belief more ingrained, both in student and faculty, that the objective test and the problem test differ in their measurement of a student's accounting ability. The latter test, it is believed, really measures true accounting ability while the former may merely measure general intelligence, familiarity with English, etc. Many teachers, therefore, rely exclusively on problem tests for measuring purposes, although they are willing occasionally to use the objective test for study motivation purposes. The reliability and validity of each question needs to be determined by statistical methods rather than psychical ones, and there are many pitfalls for those who attempt haphazardly to construct a reliable objective type test. Publishers spend a great deal of time and money in the development of their tests, and even in these many questions prove to be so ambiguously worded as to impair their value as a measuring device. However, whereas this is true of only a comparatively few questions in the printed forms, it may be true of the majority in a privately developed test, which accordingly may or may not be a reliable measuring instrument.

Consistency in accounting usually is considered the policy of adhering to procedures which are identical with procedures used in the past. The definition gives little suggestion of the problems that might arise in an effort to follow the policy. Most accountants would agree that the doctrine should be pursued with a limitation. It should applied only is so far as there is no desirable need for a change of accounting procedure, for making such a change seems to violate the doctrine. It is this area that appears to deserve attention, since the limitation may at times be overlooked. Where consistency is wrongly applied, it becomes a fault rather than a virtue of accounting. The major weakness of unlimited application of the doctrine is glaring when admitted errors are repeated. To omit an asset once from the balance sheet through error does not mean that future balance sheets should exclude the asset just because it would be consistent to do so. This idea seems well accepted and appears to call for a certain amount of inconsistency, thus providing an example of the limitation of the policy.

The article presents a brief description of a graduate curriculum in accounting. It begins at the introductory level and extends over a period of two years. It includes the very interesting and important problem of providing accounting instruction for nontechnical students. As liberal arts graduates the students will have had a minimum of two years' additional instruction at the university level and, as liberal arts go these days, they will have had something in the way of a background in such areas as economics, banking, statistics, etc. The program of the first semester is designed to lay a foundation. The student is to be acquainted with economic resources and activities. In the second semester the student continues his study of accounting and law while he explores the administrative problems in the three basic fields of production, distribution, and finance. The second year is wholly one of accounting study in the basic areas of principles, costs, verification, taxation and research.

This article presents problems which were prepared by the Board of Examiners of the American Institute of Accountants and were presented as the second half of the certified public accountants' examination in accounting practice on May, 1948.

Fundamentally, present price movements create a serious accounting problem because the precise significance of these movements is not known. Ultimately, the extent to which the present inflation was composed of temporary cyclical elements and of more permanent secular trends will be known. But no one should be overly-sanguine as to the derivation of a satisfactory solution on the accounting level until the more basic economic problems arc rendered more manageable.

Reviews the book "Commercial Law Questions," by Wallace D. Cathcart.

Reviews the book "Business Law," by Dwight A. Pomeroy.

The article presents information on the presentation of long term lease liabilities in the balance sheets. The balance sheet is an important statement in its own right, even granting such inadequacies in satisfying certain purposes as recording different fixed assets at different price level. For one thing it is useful in studying the financial condition of a company. A most important point in a study of short-term condition is a consideration of the current-asset and current-liability sections. In a study of long-term financial condition the entire liability side is important in that it represents claims against the company and indicates the source of the funds with which the assets were obtained. All of the information presented on the income statement and balance sheet could he presented in text form. In recent years a new business procedure has been evolving which requires a reappraisal of today's body of conventions and principles. It is the acquisition of plant and equipment through use of a long-term lease rather than through the more traditional method of outright purchase frequently coupled with a long-term mortgage loan.

The article presents information on income statement and it's significance in financial reporting. The development of the corporate form of organization continues to emphasize the primary importance of the income statement in financial reporting. A few years ago the balance sheet was considered to be of primary importance. Even now some think that the submission of a balance sheet is adequate. Those versed in accounting know that both the balance sheet and the income statement are needed in order reasonably to appraise the financial condition of an enterprise at a given moment. Since 1939 thirty-three Accounting Research Bulletins have been issued by the Committee on Accounting Procedure of the American Institute of Accountants and, indicative of the recognition of the importance of the income statement in financial reporting, with a few exceptions they treat primarily of the income statement. The objective has been to narrow the area of difference in practice and to establish a basis of greater uniformity with respect not only to the composition of items included in the income statement, but also as to their presentation. In attaining these objectives, people must recognize that the income statement should be informative and it should reflect the facts in accordance with accepted accounting practice.

The article presents information on the use of two words, surplus and reserve, in accounting. If the word "reserve," now used on both sides of the balance sheet in a number senses, is made to disappear except as the descriptive caption for retained earnings in the net worth section. In this capacity it regains more of its dictionary meaning, shaking off the sundry technical connotations involved in the miscellaneous use to which it has been put. At the same time the word "surplus" disappears from accounting vocabulary, relieved of a use which has long troubled accountants and misled lay readers. It is true that introduction of a new accounting convention calling for descriptive analysis in financial statements of earnings kept for corporate purposes might operate to expose situations in which such retentions were unnecessarily large. In these cases the attempt to assign reserve labels to parts or to the whole amount might prove a give-away to the condition. The suggested new terminology and related technique and convention would doubtless be unwelcome under such circumstances.