Knowledge that Transforms

The article focuses on management representation as the first step towards independent audits of management. Economist Robert W. Clarke developed a rational case for extension of the Certified Public Accountant (CPA's) attest function in corporate annual reports' and economists Harold Q. Langenderfer and Jack C. Robertson presented a theoretical structure for independent audits of management. These authors pointed out the demand for additional information about management and managerial activities and suggested forms of attest extension and management auditing as potential approaches for satisfying this demand. Langenderfer-Robertson perceived management auditing in the context of independent audits of management representations in relation to the widely accepted use of the term management audit to describe evaluations or audits for management. According to Clarke, the term independent audits of management representations was used to connote an attestation context of auditing whereby credibility is added to the representations made by one party to another through the expert opinion of an independent third party.

This paper focuses on the use of double entry bookkeeping by one of the leading merchants and financial advisors of Tudor England, Sir Thomas Gresham. Gresham's double entry journal for the period, 26 April 1546 to 10 July 1352, is doubly interesting. It is a valuable example of the early use of double entry bookkeeping by a successful merchant, and it is the earliest known extant English account book in double entry. The extant journal reveals Gresham's activities as a young merchant in the London, England-Antwerp, Belgium trade between 1546 and 1552. Throughout the period he engaged actively in both export and import activities. As a merchant adventurer he exported large quantities of English broad cloths and kersies to Antwerp. As a member of the Mercers' Company he imported, with the aid of his factor Robert Berney in Antwerp, merceries such as silk, velvet and satin. The journal also reveals his participation in a large number of exchange transactions during this period, an activity in which he was to become even more interested in subsequent years.

The article deals with the changes in the American Institute of Certified Public Accountants' recommended procedures for implementing general price level adjustments. Three assumptions were made during the analysis. Assets and liabilities are amortized so that the book value of the asset or liability is equal to its expected imputed value. This amortization approach results in an anticipated book yield, which in every period is equal to the anticipated internal rate of return. The imputed value of non-monetary assets and liabilities at the end of the period and the cash flow from non-monetary assets and liabilities during the period are proportional to the general price level at the end of the period. The price level does not affect the imputed value of monetary assets and liabilities and the cash flow from monetary assets and liabilities. There are no changes in expectations except for unexpected changes in the proposal, which is free from such limitations. Price level adjusted can be used to compute the "real" internal rate of return of the firm.

The article focuses on considering the value of conversion rights attached to the security for purposes of determining the fair value of the security. The decision of the Accounting Principles Board (APB) to compare cash yields on risky securities with an essentially riskless rate not only creates the relative bias but also tends to reduce absolutely the probability that any convertible issue will be classified as equivalent of common stock. A reduction in the absolute probability that any given convertible issue would be classified as a common stock equivalent could be compensated for by an appropriate choice of a cut-off level for the cash yield /price ratio index. Short-run effects can distort the picture such that bonds, which were attractive, originally go unconverted and vice-versa. It was suggested that the APB should not have any real responsibility for predicting these types of movements, and therefore it would be better for the APB to develop an index that is relatively highly correlated with ultimate conversion, assuming some normal long-term upward movement in stock prices.

This article presents a response to comments on the proposed a model of transfer pricing in a socialist economy setting. Over the years an enormous body of literature has accumulated on the limitations of market determined prices as an instrument for the administration of an economic system. There are problems when perfect competition and/or government intervention are present in addition to the problems that arise when these conditions do not exist. Considering the brevity of Kenneth Most's comment, it is remarkable for its coverage of the literature on the subject. Furthermore, it may be useful to be reminded of the fact that these problems do not disappear when a socialist government employs transfer prices to facilitate the administration of its economy. How such a system would deal with these problems and whether these solutions would be more or less effective than the solutions available to a regulated capitalist economy is a subject for further research. A. Rashad Abdel-khalik argues that under the conditions specified, it appears that the proposed transfer price system will augment the employees' bonus for any period as compared to the preceding period by a function of the unfavorable deviation in fixed costs in period. If this statement were correct, the transfer price system would be less than useless, since a firm's management could maximize its income by maximizing costs. Abdel-khalik's argument is incorrect, but his concern with the control of organization costs is well placed.

The article focuses on predictive ability, market prices, and operating flows. One normative function of external accounting reports is to provide information which will be useful to decision makers in generating estimates of the future levels of relevant variables. The reporting objective which follows from this belief is commonly called the predictive ability criterion. Predictive ability claims have been advanced in the past as support for the adoption of replacement cost income measurements. As knowledge of users' decision models is limited, the basic issue of precisely what the appropriate object of prediction should be has received little explicit attention. In the case of the current operating profit component of replacement cost income, there has been general acceptance for the a priori notion that this concept aids in the prediction of future operating income. Since income from operations and holding gains or losses result from different causes, they can be expected to have different patterns of recurrence. Effective prediction of future income is facilitated by reporting them separately.

Reviews the book "A Framework for Financial Reporting by Diversified Companies," by Alfred Rappaport and Eugene M. Lerner.

Reviews the book "The Behavioral Aspects of Accounting Data for Performance Evaluation," edited by Thomas J. Burns.

A professional paper recently examined some of the economic considerations of a statement prepared by the American Accounting Association's Committee on Basic Accounting Theory. It represented the accounting function by an information economic model embodying a utility function of a user. The article examines this Committee's statement from a more fundamental perspective with a focus on the particular statement that accounting is an information system. Specifically, the analysis consists of four parts. First, an overview of information theory is presented. Second, a concept of formal information systems is developed. This will include a differentiation between information theory and information systems and the identification of the critical elements in formal information systems. Third, two generalized models of accounting theory are presented which culminate with a model embodying the critical elements in formal information systems. Finally, the insights gained from the latter model are used to indicate research areas in accounting theory.

Reviews the book "A Statement of Australian Accounting Principles," by W.J. Kenley.