Knowledge that Transforms

The article presents problems presented in the second part of the November 1940, C.P.A. examination prepared by the Board of Examiners of the American Institute of Accountants. One of the problems asked was, the will of E. M. Dodd, who died on December 31, 1933, provided cash bequests of $40,000 to Mrs. Dodd and $15 ,000 each to two children, the residuary estate to be divided equally among the three beneficiaries. Mrs. Dodd was appointed executrix and trustee without fees or other emoluments. By court order Mrs. Dodd was to receive a family allowance of $4,000 a month, commencing January 1, 1934, payable from income or from any cash principal available if the income should be inadequate. The estate never had enough cash available to pay up the full allowance nor could any part of the cash bequests be paid. Accordingly a considerable liability to Mrs. Dodd had accumulated toward the end of 1939 for the unpaid portion of the family allowance. The students were asked to prepare adjustments to the trail balance, columnar worksheet showing the trial balance before and after adjustment.

In the face of all the exciting and absorbing economic, military, and political aspects of the defense program, it is difficult to confine a talk to the prosaic and humdrum affairs which are supposed to be of interest to accountants. One of the obvious effects of the defense program of interest to accountants is the increased demand for accounting services. One of the important questions faced by those who are charged with making defense expenditures is how to contract for the necessary commodities and services. The traditional governmental purchasing technique is by competitive bidding, with very few exceptions. This method is intended to give the government the lowest possible price and to eliminate favoritism and collusion in the award of government business. However, it is slow and cumbersome, and it works best when the quantities of goods ordered are small enough to fit into production programs without too much of an upset. The advantages of negotiation are speed and flexibility. Work on many contracts can actually be gotten under way before all plans, specifications, quantities, delivery dates, and other features of the deal are completely worked out. Also the negotiated contract makes it possible for the contracting officers to take into consideration many matters other than price which have seemed important to the Defense Commission.

With acquisition and disposition prices measuring both the efforts to produce results and the results produced, the principal concern of accounting is the periodic matching of costs and revenues as a test reading by which to gauge the effects of the efforts expended. This concept of "matched costs and revenues" is the main concept discussed here. The standard is simple indeed in its nature: to get a true picture of periodic results of operations, there must be charged against revenues received the actual cost incurred in the process of receiving these revenues. Before the two elements can be "matched," they must be put in some common form so that they will be comparable. The elements are both expressed, therefore, as "price-aggregates." But although costs are handled as price-aggregates it is not just to speak of them as merely price-aggregates. Costs are in reality a measure of efforts expended to produce a product. In the same way it is not enough to speak of revenues as mere price-aggregates; but they must be viewed as a measure of business accomplishment.

The article presents the importance of a common terminology in languages. The author was discussing the handling of municipal expenditures in the operating statements with an official of a large city. Complete agreement was not reached until the official was asked to define "expenditures" and the author discovered that they had been talking about the same thing. This incident illustrates the value of a common terminology, particularly its importance in written communication. For in conversation, if it is not clear what the speaker means, one can question him, but a reader cannot do this. Not only has the value of uniform terminology long been recognized but even the necessity of preparing concise definitions and presenting them in a compilation as one of the means of achieving uniformity is well established. There are two principal classes of terminologies: those prepared for general use and those related to a particular publication. General dictionaries like the Webster's New International Dictionary and the terminologies of the American Institute of Accountants and the Dominion Society of Chartered Accountants are examples of the first class.

Reviews the book "Speed Methods of Statistics," by Donald E. Church.

Time and again the prosperity malpractices of corporate management were the subjects of erudite discussions. Moreover, the courts have always had a tendency toward setting up rules of law which they felt would protect the small absentee owner. Perhaps this depression philosophy may be said to be accountable for the desire to limit the capital raising activities of those large corporate entities in future prosperity periods, who had demonstrated themselves to be given to faulty procedures during the prosperity era of the twenties. But it must be emphasized that there was a trend toward such financial regulations even during the preceding prosperity period. Furthermore, during this period there were evidences indicating that the accountants responsibility would likewise expand and increase under this financial control philosophy. Perhaps the first forecast of accountants' increasing responsibility was the Ultra Mares case which began early in 1924. After 1922, however, corporate management turned to selling securities in order to secure the capital needed.

Since accounting is the method and means of recording, measuring and interpreting business and economic events, it is evident that accounting like statistics, is a technique and tool of social science, applicable particularly to business enterprises and other accounting entities. The accounting procedure must be used in a scientific manner in order to obtain results, which present true and impartial pictures of economic and business facts. In other words, if accounting is really to fill the role assigned to it as a means of economic control, it must grow out of its traditional, rule of thumb procedures and assume the stature of an objective, impersonal social science. There is considerable evidence today of a growing recognition among accountants that such a development is not only possible but also very necessary and that the time has now come when the practice of accounting ought to be placed on a genuinely objective basis, so that the special desires and interests of individual accountants and business managers will not unduly influence findings of accountants.

Reviews the book "Accountants' Index."

Since the Tentative Statement of Accounting Principles was published in 1936, a considerable critical and explanatory literature has developed on the general subject. No doubt the time will come when this discussion will inspire a reexamination and perhaps a revision of the original statement. With this in mind, the article reviews the Tentative Statement. Several general conclusions may be drawn from an examination of the published criticisms of the Tentative Statement. First, several of the propositions are considered by the critics as being applications of principles rather than principles in themselves. Second, the critics seem to offer no objection to the inclusion of what are essentially definitions and rules. Third, the implication is made that the Statement would have been better constructed, not as a series of equally important propositions, but as principles and corollaries. Fourth, some of the propositions, although challenged, are left in rather an uncertain state because the critics disagree as to whether there is sufficient reason to reject them. Fifth, the wording in many cases has been described as vague, ambiguous, and inconsistent proposals are made for new and additional principles not included in the Tentative Statement.

The article focuses on a court case involving Metropolitan Edison Co. related to restriction on dividends on common stock. A recent release of the U.S. Securities and Exchange Commission under the Holding Company Act raises several significant issues with respect to the reclassification of surplus and the legality and financial advisability of dividends on common stock. The Metropolitan Edison Co. is a Pennsylvania corporation and a public utility operating company doing business in eastern Pennsylvania. It is a direct subsidiary of NY PA NJ Utilities Co., which is controlled by the Associated Gas and Electric Corp., which in turn is controlled by the Associated Gas and Electric Co. A series of resolutions adopted by the board of directors of the Metropolitan Edison Company resulted in the transfer of $6,111,333.00 from earned surplus to stated value of common stock between 1925 and 1931. The Securities and Exchange Commission on December 1, 1939, issued an order to the Metropolitan Edison Co. to show cause why an order should not be entered to prevent the declaration and payment of dividends on its capital stock.