Knowledge that Transforms

Reviews the book 'An Introduction to Accounting for Decision Making and Control,' by Edward L. Summers.

Reviews the book 'Financial Accounting Concepts,' Second Edition, by James H. Rossell and William W. Frasure.

In the extractive petroleum industry two basic methods of accounting for exploration expenditures have evolved namely, field or successful efforts costing and full costing. The two methods differ in two important ways. First, the geographical size of the cost center within which exploration costs are collected and, second, in the treatment of unproductive exploration expenditures. Under field costing, a cost center consists of a single lease or producing field and under full costing a cost center is often as large as an entire country or continent. Considerable controversy has arisen within the extractive petroleum industry and the accounting profession over the effect that the adoption of one or the other of these methods could have on the economic circumstances of the adopting firm, as of April 1975. The first part of this article utilizes two groups of comparable extractive petroleum firms to examine the relative effect of the two methods on the expense and profit streams. The results of the intergroup comparisons suggest the formulation of a hypothesis regarding the market response to the accounting earnings streams. Second, the hypothesis is tested once by using the sample means and a second time using estimates of the association between accounting data and share price data.

Reviews the book 'Accounting for Social Goals: Budgeting and Analysis of Nonmarket Projects,' by John Leslie Livingstone and Sanford C. Gunn.

Reviews the book 'Accounting for Managerial Decision Making,' edited by Don T. DeCoster, Kavasseri V. Ramanathan and Gary L. Sundem.

Reviews the book "Fundamentals of Management Accounting," by Robert N. Anthony and Glenn A. Welsch.

This article focuses on a framework within which accountants may examine a set of assumptions about human behavior and attitudes concerning organized business activity. The American Accounting Association's Committee on Foundations of Accounting Measurement stresses a need to account "for social and organizational equity." It sees "equity accounting" as focusing on the reconciliation of the equities of various interested parties of the organization rather than on prediction. There is, of course, the predictive aspect relating to the need to prepare for the reconciliation of equities at future points in time. At the moment the accountant is in an unsatisfactory position in that he can do no more than "to accept the results of negotiation or the choice of the dominant party among contending interests." To this end two models are developed in outline. The first is a general interactive model of relationships among the firm's participants from a broad stewardship perspective. The second is an external reporting model which might be used to make the theoretical bias of the general model operational.

Reviews the book 'Contemporary Accounting Theory,' edited by Eldon S. Hendriksen and Bruce P. Budge.

This article explains the rationale of controlling the risk of a type II error for substantive tests in auditing. The risk of attesting to a materially misstated amount is defined in one of two ways depending on the combination of decision strategy and sampling plan in use. When employing difference estimation, the auditor makes an interval estimate of the amount of error in an account balance. If the upper precision limit is less than the amount considered material, the book value is accepted. Here the risk to be controlled is one minus the confidence level employed, i.e., the probability of a Type I error. The more popular strategy, at least as far as textual treatments are concerned, involves making an interval estimate of the audited value of an account balance and accepting the book value if it falls within the interval. The audit examination is quite analogous to the quality control example. If an auditor accepts a book value only if it falls within his interval estimate of the "true" value, the adverse consequences of a Type I error are primarily the costs of extended audit procedures.

This article presents the results of a field experiment conducted to determine the effects on investment analysis of the presence of segmental data in financial statements of diversified firms, as of April 1975. In theory the price of a share of common stock should represent the present value of its future income, which might be in the form of capital gains and/or dividends. A firm's expected income depends on its growth, profitability, and stability potentials. Since each industry has different potentials in these areas, analysts believe that they must know the extent to which a diversified firm is involved in each type of industry in order to evaluate intelligently a diversified firm's stock. Since there is theoretical support for including segmental data in reports of diversified firms, it appears that if the presence of such data in financial reports would result in a significantly different allocation of resources than that determined without segmental data, the U.S. Financial Accounting Standards Board must certainly conclude that diversified firms should include segmental data in their financial statements.