Knowledge that Transforms

It is the responsibility of management to know what is happening to the investment with which it is entrusted. What the real economic investment is, what real earnings on it are, and what real rate of return it is producing for stockholders are matters management should know. When prices are rising, accounting reports on these three matters are not likely to be correct. Conventional reports can be seriously in error and thus produce an illusion, an inflation puff, that can lead management astray. Measurement of a company's real economic earnings has great practical usefulness. And it can be done. It cannot be done simply, as in the case of personal income, by dividing one single index number into the reported accounting earnings, instead it must take the form of restating each asset or each group of assets in terms of dollars of constant purchasing power. This can be done with tolerable accuracy and applied with economic and statistical sophistication.

The article focuses on the problems in experimenting with the application of statistical techniques in auditing. Before statistical sampling techniques can be applied to any area, a clear statement of the purpose of sampling has to be developed. This statement of purpose is essential for the determination of the alternative decisions from which is to be made, of the criteria according to which the appropriate decision is to be chosen, and of the relevant statistical model for the population under study. Problems which arise in this initial stage may be extremely difficult ones. This paper discusses some of the problems of this initial stage in introducing statistical techniques in auditing, which must be solved before the more technical statistical problems, such as determination of the optimum sampling procedure, necessary sample size, and the like can be studied. Sampling is used extensively in auditing, for instance, in verifying transactions and in confirming balances of accounts receivable. It is important to distinguish between sampling in auditing and sampling of accounting records in general. In the latter area, some interesting results of the usefulness of statistical sampling techniques have been reported.

The article presents problem prepared by the Board of Examiners of the American Institute of Accountants and presented as the first half of the Certified Public Accountants examination in accounting practice on May 12, 1954. The candidates were required to solve problem 1 and 2 and any three of the remaining four problems in 50 points. The first problem is related to review of tax return. Candidates are required to prepare a schedule showing computation of the amount of the apparent discrepancy by using the given information. The second problem requires the examinee to prepare a formal balance-sheet and income statement of a manufacturing firm from the given records of transaction provided in the problem. The third question requires the examinee to compute the gross profit percentages, reproduce the ledger accounts for installment contracts receivable in T-account form and calculate net loss on defaulted accounts. In addition to this the examinee is required to prepare a schedule showing the realized gross profit.

The article focuses on business-type statements in the budget of the U.S. Business-type statements are printed in the budget for Government-owned corporations and other revolving funds established by law or regulation. Accounting and budgeting for business type operations have definite characteristics not generally found in many of the ordinary government-type fiscal procedures. The statement of sources and application of funds in the business-type presentations is the counterpart to the schedule of amounts available for obligation used in the budget for funds subject to appropriation controls. The purpose of the statement is to show the amounts made available to the fund and how these amounts have been used. Funds applied to operations reflect amounts used for acquiring fixed and other long-term assets, expenses incurred that involve working capital items, and the net increase in working capital other than the U.S. Treasury cash for the fiscal period. The "funds applied to" and "funds provided by" financing show the changes in amounts of money relating to transactions with the treasury.

The article focuses on new developments and simplified approaches to municipal accounting. Around the turn of the century only a few cities along the Atlantic sea board attempted to publish financial statements concerning their activities. These were only partially complete and lacked a lot of presenting uniform fiscal information that the tax payer and public really needed. Most reports of that time were merely descriptive activities of the departmental operations with much time given to minor details of little value to any one. About 1910-15, municipal accounting research under the Metz Fund, Bureau of Municipal Research of the City of New York, produced the first organized materials that could be called a treatise in municipal accounting. Other treatments followed, such as Eggleston, Oakey, Cleveland, Bruere, and with the aid of the municipal leagues that were beginning to take an interest, there soon began a very serious development of the specialized field of municipal accounting.

Reviews the book "Principles of Accounting--Introductory," 4th ed., by H.A. Finney and Herbert E. Miller.

Reviews the book "Politics, Economics and Welfare," by Robert A. Dahl and Charles E. Lindblom.

Extensive use is made of the double entry method in national income accounting. National income accounts usually cover two broad phases of economic activity. The first of these is the production of the entire economy. The second covers the disposition of production among final users. For these purposes, the accounting system requires one or more accounts to record production and one or more accounts to record the disposition of production among final users. The production account shows unduplicated costs of output as debits and unduplicated output of commodities and services as credits. Each of the accounts used to record disposition of production among final users is essentially a receipts and expenditure type of account. In general, the mechanics of double entry recording in national income accounting are relatively simple. A cost item in the production account is an income item for some expenditure type account. Conversely, an income item in the production account is an expense or cost item for some expenditure type account. In addition, there are flows between the expenditure type accounts themselves. Any open balances remaining in the accounts are transferred to the capital account.

The article focuses on the income statement approach in auditing. It is not a complete abandonment of the audit of the balance sheet but only a shift in the direction of the emphasis. Instead of auditing the balance sheet with the income statement as a by-product, the process is reversed, that is, the income statement should be audited with the balance sheet as a by-product. Much has been written about the income statement. A survey of contemporary accounting literature indicates that this subject is a central feature dominating the writings of practitioners as well as teachers of accounting. Perhaps, this is a belated recognition of the fact that the value of a business is dependent mainly upon its capacity to generate income. But this concern over profits seems to be as old as the art of bookkeeping itself. Even the earliest financial statements of Florentine merchants in the 14th century were used to determine profits of the then flourishing partnerships. In the 16th century, a so-called balancing account was developed, wherein real accounts were closed in a manner similar to the closing of revenue and expense into a profit and loss account.

The article focuses on various problems of professional examinations in accounting. The following problems 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 13, 1954. The candidates were required to solve all problems in four and a half hours. The total weight assigned to the three problems is 50 points. Weights were not assigned to the individual problems but a suggested time for each problem was given. In one of the problems details of a hypothetical company, Reese Extract Company which produces flavoring extracts and spices for food products has been given. The Company has been successfully operated for many years and carries an extensive line, but vanilla extract is its major product. The details of periodic inventories and other financial details has been given. The examinees are required to prepare manufacturing statement showing costs, units, and prices by processes and computations showing the rebate to be claimed from the federal government for the period and the amount of deferable tax applicable to the inventories which have not gone to the packaging department.