Knowledge that Transforms

Reviews the book "The Tax Exemption of Cooperatives," by Robert T. Patterson.

Reviews the book "The Audit and the Punched Card--An Introduction," by Wayne Corcoran and Donald F. Istvan.

This article presents an analysis of the auditing section of the Certified Public Accountants (CPA) examinations, for the session of May 1951-1961. Twenty-one auditing examinations were analyzed for the purpose of ascertaining the scope, nature, and content of the problems and questions set for CPA candidates. The project was undertaken in the hope of offering conclusions to assist candidates, potential candidates, and instructors in the Auditing area. For instruction, the examinations are an excellent source of materials for enriching course content. Some of the observations are, "the questions covered a wide range of topics on a professional level, with frequent reference to the professional pronouncements contained in the "Accounting Research Bulletins" and the "Statements on Auditing Procedure," as well as in "Generally Accepted Auditing Standards," and the CPA "Rules of Professional Conduct." "Case studies and situations were used to offer to candidates opportunities to demonstrate ability in the use of professional judgment, the effective use of English, the evaluation of internal control, and full application of the rules of ethical conduct."

The concepts of taxable income have been shifted largely by social and economic considerations that are incompatible with the objectives of private accounting in properly matching costs and revenues. Any attempt to legislate private accounting methods in this respect would tend to debase accounting standards and greatly impair confidence in published financial reports. Although last in first out inventory accounting, for example, may properly measure ability to pay income taxes, it may not be the most appropriate method of accounting for changes in the general price levels. Taxable income is a statutory concept that is governed by many provisions of the Internal Revenue Code, Treasury regulations and Court decisions. In general, the code provides that "Taxable income shall be computed under the method of accounting on the basis of which the taxpayer regularly computes his income in keeping his books." Taxpayers accordingly are authorized to se either the accrual or cash receipts and disbursement method. The accrual method is prescribed in accounting for inventories but it may be used in combination with the cash method if income and expenses are correctly reflected. The Code also authorizes the election of certain methods of accounting for specific items which may differ from those regularly employed.

The purpose of this paper is to relate the accumulation and presentation of costs and revenues, both historical and projected, to three basic managerial functions: planning, motivation of employees, and control. Two major problems arise in this connection. First, accounting information must be presented according to the management function which it is to assist. Thus the accountant may find himself confronted with the necessity of compiling cost and revenue data in several different classifications. Secondly, the budgeted figures must be set at the level appropriate to each function: expected costs and revenues for planning, desired goals for motivation, and ideals for control. This problem indicates the use of separate budgets for separate purposes. Both of these problems are discussed in this paper in relation to planning, motivation, and control. Each of the three functions of management discussed requires cost and revenue data compiled and presented according to the purpose for which it is to be used. Correspondingly, each function requires budgets set at different levels of costs and revenues. The planning function is served by a coordinated master budget, which is composed of a number of subsidiary budgets, all set at the level of expected results. Incentives to employee performance indicate the use of fragmentary budgets set at the level of short-range goals. Flexible departmental budgets which compare ideal and incurred costs serve the purpose of control.

The Revco method of amortization is not acceptable. If an imputed interest rate is suitable for determining asset amounts indirectly through the determination of expense, it is suitable for measuring assets as independent values. The traditional annuity method of depreciation makes appropriate use of an imputed interest rate in the measurement of assets. Before adopting the annuity method, however, one must be fully aware that its use with an imputed interest rate involves the acceptance of the corresponding set of future service values. The asset value under the annuity method of amortization is the discounted value of an assumed set of future service flows. This means that the use of the annuity method of depreciation involves a reliance on future service flows rather than historical cost for asset measurement. The cost based amortization method that yields asset values conceptually nearest to those of the annuity method with an imputed interest rate is the annuity method with an actual interest cost rate, or estimated future interest cost rate. If there is no interest cost, one cannot use it in accounting for the cost of assets. If there is an interest cost of holding assets, the total of it and the other costs should be spread evenly over the units of service received.

The public accountant sells his services to a client and these services usually resulting a product, the accountant's opinion. The client, as the accountant knows and expects, passes this opinion on to the ultimate consumer. Admittedly, there is no specific consideration flowing from the ultimate consumer to the public accountant. Certainly, however, there is an implied consideration and its nature is evident in the actions against public accountants that have come to trial. In many of the cases, the third party refused to extend credit or to make investments in client companies until such time as he had received the accountant's opinion on the client's financial statements. An illustration of the type of defense that would be available against an allegation of negligence can be found by referring again to the law governing a manufacturer's responsibility. In a fairly recent case, a manufacturer was held not liable for his failure to discover certain defects in an airplane motor part because he could prove that he had adhered to the generally accepted method of testing these parts as required by the Civil Aeronautics Administration. Thus, the public accountant could rebut the allegation of negligence by showing that he had adhered to generally accepted standards of conduct as enunciated by a recognized authority.

Reviews the book "Price-Level Adjustments of Financial Statements," by Eldon S. Hendriksen.

Reviews the book " Foundations of Accounting for Managerial Control," by Lawrence H. Malchman and Albert Slavin.

When treasury shares are acquired, the transaction results in the reduction of contributed capital, legal capital remains the same, and the restriction of retained earnings. If legal aspects are to be demphasized, it appears that the "direct adjustment to capital stock" is the best solution. But even though legal requirements are not ranked first in importance, they should not be forgotten. In this case, perhaps the "indirect adjustment to capital stock" is a better alternative. Accounting recognition must also include balance sheet classification as to Stockholders' equity. Differences in state laws would require a different arrangement. However, in both cases total invested capital remains the same. If a temporary restriction of retained earnings is needed, it can be shown in a footnote or as an appropriation of retained earnings. In a state which requires a permanent reduction of retained earnings, the nature of the transaction is a dividend rather than a "retirement." And so it must be recorded as a dividend. The nature of the transaction must be given first priority in recording treasury stock. Then, any legal aspects may also be satisfied in statement presentation.