Knowledge that Transforms

Reviews the book "Between the Lines of the Balance Sheet," by Michael Greener.

The purpose of this article is to note some of the problems the authors faced in their recently completed study of financial reporting for diversified companies. This was their first substantial experience with empirical research and in the completion of that experience they met a number of problems which were new to them. As empirical studies in accountancy are somewhat rare, they have the impression that perhaps others will find these problems novel also and may find some benefit in an explanation of their solutions to them. Thus they seek to share their research experience and hope that others will do the same. Combining a controversial subject, a matter of such sensitivity as the extent of external financial reporting, and a wide participation on the part of financial executives and financial analysts in answering questionnaires, assured them of substantial active interest in the progress and conclusions of this study. Another term for this is "pressure," and they felt this on a number of occasions. However, there is no defense against pressures quite as effective as confidence that one's own position is soundly supported by adequate evidence, the kind of evidence that `an empirical study supplies. Finally, and this may be more closely related to the topic of investigation than to the nature of the research itself, this study included far more variables than they were accustomed to working with at one time. They do not, in any sense, intend to leave the impression that they feel they have the final answers to such problems, rather their thought is that free exchange of experiences and opinions may help each of them to better undertake future studies.

This article discusses a plausible method of valuing individual durable assets, not valuing those of the whole firm, for internal, managerial purposes; that is, for decisions and control. In this paper a method of valuation is explored that is appropriate for an accounting system when its primary purpose is to provide data for managerial decision-making. Three basic approaches to the valuation of individual assets are available. They are: the first one is past transactions, second is future earning power, and the third one is present market price. These approaches can be stated in terms of the costs which are used as a basis for valuing the assets. They are original cost, internal opportunity cost, and external opportunity cost. External opportunity cost is defined as a market price of an asset that is to be used in production rather than bought or sold. Internal opportunity cost is the present value of the incremental cash flow an asset or a set of assets can earn in its feasible use within the firm.

Reviews the book, "Systems and Procedures: A Handbook for Business and Industry," edited by Victor Lazzaro.

Reviews the book "Introductory Accounting: A Management Approach," by Robert E. Walden and L. Vann Seawell.

This article focuses on capital maintenance rule and the net asset valuation rule. Coming to a consensus concerning the best method of measuring the periodic income of a firm has been found very difficult by accounting theorists. No one has been able to offer compelling evidence that his concept of income measurement is superior to competing proposals. One of the important preoccupations of accountants and users of accounting information is whether the capital of the entity, however defined, has been maintained. Income for a period is generally considered to be a residual earned only if the initial capital of the period has been maintained. The net asset valuation rule determines the timing of income recognition and, therefore, is equivalent to the matching and realization rule. For example, replacement cost accounting can be viewed either as a method of measuring the net assets of the firm or alternatively as a method of recognizing income, holding gains and losses are recognized earlier than under historical cost accounting, and revenue-expense matching, revenues are matched with current costs.

The purpose of this article is to explore the applicability or non-applicability of tax allocation procedures to financial statements prepared on the basis of either current cost or price-level adjusted figures. Both current cost and price-level adjusted financial statements offer the balance sheet a position of more prominence than does the present-day historical cost approach. In the area of tax allocation, present practice and present theory are in basic agreement. Tax allocation can and should be rationally applied to historical cost statements, current cost statements or price-level adjusted statements. One weakness of the tax deferral approach is that it does not cover enough situations. For example, take the fairly common situation where a partnership incorporates, bringing in new investors at the same time. The books will often show assets at agreed-upon values at the date of incorporation, and these may differ sharply from the tax basis of the same assets. One type of objection to present practice points out that historic costs relate to the time periods in which assets were acquired, but are not meaningful expressions of value at later points in time. In contrast to historical cost, "the current cost of an asset is the sum of the current costs of the contained inputs."