Knowledge that Transforms

The recording part of elementary accounting is a record of the flow of assets through a business enterprise. That is the asset history recorded in the general ledger in summarized and conventionalized form. The accounts tell four things about the assets, namely: the sources of all assets received by the business: the kinds of assets received by the business; the conversion of some assets into other assets; and finally, the reasons why some assets passed out of the business. Assets are the things being accounted for, and all accounts reflect some aspect of the above life history of assets as they pass through the business for which the accounting system has been designed. That is complete accounting for assets: that (not "all assets are owned by someone") is the basis of double entry bookkeeping. The legal relationship between the proprietor and the revenue sources (sales to customers) and between the proprietor and certain dispositions of assets (expenses, cost of sales, and losses) which leads to an income calculation is another story. It is an interpretative calculation based upon the laws of contracts and private property. It should be delayed until the flow story is understood. The flow story exists without the income calculation; as it does in simple estate and fund accounting. To mix the two at the start of accounting instruction is considered to be an undesirable complication.

Reviews the book "Introductory Accounting," by Ralph Dale Kennedy and Frederick Charles Kurtz.

The purpose of this paper is to present a classification of all logically possible accounting phenomena that is neat, tight, rigorously symmetrical, and equally applicable to a private enterprise, an endowed institution, a governmental unit, or any other accounting entity. The classes established are few and broad, as they must be to be universally relevant. A full analysis of the economic affairs of any particular accounting entity would, of course, require subclasses that are important for that kind of entity. Many of the categories in this classification scheme embody concepts whose boundaries are different from those usually employed in accounting discussions. This creates a problem in terminology. In some cases the problem has been met by use of terms with heretofore no very definite connotations in accounting, but in others the paper has adopted the common accounting term that most closely approximates the concept it best wishes to describe. In the latter cases these terms are used, once they have been introduced, to convey the special meanings given them here rather than their usual meanings. The classification itself is quite neutral so far as the really difficult problems of accounting theory are concerned. It implies no particular formula for the determination of income or the valuation of assets. It simply provides a framework for arraying the accounting events and decisions that do occur or might occur.

The purpose of this report is to crystallize the conceptual differences between management accounting and other fields of accounting in order to clarify professional thinking. The major assignment given to the 1961 Management Accounting Committee by the Executive Committee of the American Accounting Association was to investigate the distinction between concepts underlying financial reports for management decision making and control and those used for external public reporting. The objective of the assignment was to discover the basis for making a distinction between the two groups of concepts rather than to develop a comprehensive statement of the concepts themselves. In preparation for its study, the committee carefully reviewed the Management Accounting Committee reports of previous years; studied available literature in the management accounting field; and consisted with colleagues in industry, public practice and teaching. This was done in order that the members of the committee would incorporate in their thinking as broad and well-based a point of view as possible. Not only are the concepts underlying internal management reporting different from those of external public reporting, but also the framework upon which to build such concepts also must be different.

The statement of financial position describes the ship and its hardware, the amount of fuel on board, and a measure of the weight to be supported in flight. It gives no run down on management skill, but it does indicate the readiness of the vehicle which they will pilot. Management's primary task in an enterprise is to make optimum use of the funds at their disposal. This activity is most readily understood when it is thought of as a process of spending cash for something which ultimately brings back a greater amount of cash. The cash-to-cash cycle is the pattern against which all transaction cycle variations are referred. The fact that some cash investments, or expenditures, are not directly reconverted to cash is common experience. Everybody recognizes cash owned, cash expected, and cash owed. The dynamic nature of the statement of financial position has been obscured by a lethargic perpetuation of an inherited format and name. Liquidation cycles have priority to investment cycles on realized cash because of contracted or legal obligations. Hence, amounts of cash required to liquidate liabilities are reported in order of maturity.

Reviews the book "Administrative Control and Executive Action," edited by B.C. Lmre and James Don Edwards.

An interesting concept regarding depreciation was presented by Professor Robert Dixon in his article, "Decreasing Charge Depreciation-a Search for Logic" which appeared in the October, 1960 issue of The Accounting Review. He argued that decreasing charge depreciation is appropriate and straight-line procedure correspondingly inappropriate even if the asset in question produces the same level of service in each period of its life. The argument presented may seem logical, but further thought raises some disturbing questions. It is true that in purchasing a bundle of services, the utilization of which will extend over some years, less should be paid for those which are postponed (i.e., their future value should be discounted to determine their present worth); and the longer the postponement, the less the unit price which should be paid. But does this really warrant following a declining curve depreciation policy? Are the services to be received in subsequent years any less valuable or useful at the time of utilization than those used in the first year? In other words, is there not an increase in the value of the services (reflected in the cost of carrying the investment in future services) as their time for use approaches which would offset the discount? This paper focuses on these questions.

Reviews the book "Expulsion or Oppression of Business Associates: "Squeeze-Outs" in Small Enterprises," by F. Hodge O'Neal and Jordan Derwin.

Accountants and economists have placed a great deal of emphasis on researching elemental factors of our dynamic economy. It is the purpose of this report to reflect upon the various methods of intangible cost recovery most commonly used in selected industries. Three hundred and twenty-six firms were selected from a population of 2,141 firms representing thirteen industries. The three hundred corporations had an aggregate intangible asset and expense valuation of $1,370,000,000. Those companies cooperating with the survey had a comparable aggregate of $852,800,000. The total intangible costs subject to ultimate recovery from long run revenues, by all national businesses in 1957 would well exceed the figure of $5,000,000,000. This is, of course, equivalent to nearly 1.4 per cent of the National Income of that year. The findings clearly show that company policy, which is selectively discretionary, can affect reported net income by well above $2,000,000,000 annually. These estimates clearly impart the importance and significance of study and research into the area of intangible cost recovery methods. Such method selection can greatly affect the reported profit position of a firm, industry, or our whole economy.

The article presents problems prepared by the Board of Examiners of the American Institute of Certified Public Accountants that were presented as the second half of the CPA examination in accounting practice on May 17, 1962. The first problem presents a case in which Lewis Co., a manufacturer of heavy machinery, grants a four year warranty on its products. The estimated liability for product warranty account transactions are provided. Additional information from the company's records at the end of the current year are also provided. The students are required to prepare the necessary adjusting journal entries giving effect to the proper accounting treatment of product warranty and federal income taxes. Another problem provided in the paper presents the audit of Lauren Corp. which has been completed and the preparation of federal income tax return for 1961 is in progress. Information and data developed during the audit are provided. The students are required to prepare a schedule showing the computation of taxable income for 1961.