Knowledge that Transforms

Reviews the book "An Analysis of Business Income Concepts," by Allan D. Barton.

Reviews various books on accounting. "International Financial Reporting,"; "Comparative Glossary of Accounting Terms in Canada, the United Kingdom and the United States,"; "Accounting for Goodwill,"; "Interim Financial Reporting."

The article presents a comment on the interpretation of API. In "Interpreting the API," Ronald M. Marshall concludes that API does not always provide a proper measure of either the private value of accounting data or the association between unexpected accounting signals and unexpected market returns. In addition, Marshall concludes that an alternative formulation of API always produces measures of these attributes, which are at least as good as those obtained via API. On the basis of these conclusions, Marshall argues that API constitutes the more appropriate tool for use in accounting research. Authors do not disagree with Marshall's conclusions from a conceptual viewpoint, but they do question the desirability of using API in accounting research because of its inherent subjectivity and costliness in terms of time. Since API does not possess these defects, authors believe that it constitutes the better research technique when, conceptually speaking, it can be expected to yield results, which are equivalent to those that would be produced using API. One objective of the paper is to identify an important sufficient condition, under which the two API will produce equivalent results.

The impact of changes in reporting requirements for companies has long been a topic of interest for accountants and others involved in the evaluation of investment alternatives. Many recent papers have discussed the effect of different methods of determining earnings on the behavior of securities prices. For example, W.H. Beaver and R.E. Dukes have made inferences concerning the alternative accounting earnings model which the market appears to use for determining securities prices. Several authors have indicated that the market is not fooled in setting security prices when alternative accounting techniques are used. In each of these papers, the market was assumed to be able to adjust from one reporting method to another, thus, the market had both reported earnings and earnings under alternative reporting methods available to it for setting securities prices. There have been a few studies designed to assess the impact of changes in reporting requirements for a large number of companies, particularly when investors are unable to adjust from the prior method to the reporting method required under rules developed by some regulatory body. Such sweeping decisions that would be significant enough to impact on the behavior of securities prices in a manner that could be detected by statistical methods are rare.

Reviews the book "The Basic Accounting Cycle," by James Don Edwards, Roger H. Hermanson and Roland F. Salmonson.

This article presents and interprets findings of a study in which several current textbooks in cost and managerial accounting were examined to determine the extent of reference to and coverage of the reporting guidelines accepted as given. It is suggested that accountants should be concerned about effectiveness of internal and external accounting reporting. In the said study, researchers have accepted as given several guidelines relating to effective internal reporting systems; these were assembled from an examination of the current literature in the fields of organizational behavior and communication. The guidelines that were identified are classified into two groups: preparation and reporting or feedback. According to preparation guidelines: objectives should reflect goal congruence; participants should help set goals and agree to selected measures of goal achievement; standards should be set with freedom for failure and changes; accountants should educate report recipients; and accountants should recognize the tendency to over- or underestimate plans. According to reporting guidelines: reports should be relevant to user needs and responsibilities; reports should be on a personal level; reports should include supportive comments; reports should be consistent; and that reports should be timely and regular.

The article presents comments of the author on the article "Another Approach to Allocating Joint Costs," by Moriarity. The purpose of this note is to show that the allocation method proposed by Shane Moriarity contains a serious conceptual error. Because it fails to distinguish internal incremental costs from internal joint costs, the application of' his method in some situations will produce dysfunctional results. Another method is proposed that explicity considers the existence of incremental costs involved in providing a good or service internally, as well as joint costs. The mathematical form of the method to be presented here was derived from one proposed by scholar Arthur L. Thomas for allocating joint costs to joint products, although its details and rationale differ. Moriarity proposes that the savings from incurring joint costs be allocated to the goods or services obtained internally and that these savings be subtracted from the external cost of each good or service to determine the total cost.

In two recent articles in the periodical "The Accounting Review," Beaver and Dukes (B⁄D), have used market association tests to assess the relative information content of accounting earnings numbers under various tax allocation principles. This article is a brief comment on two of their measures of association, "Percent Correct" and "Composite Average Price Index (API)." Correct interpretation of these measures is important for policy makers who might rely on their results and for researchers who may want to use their research method. The reinterpretation of the ⁄D data does not change the conclusions they draw regarding the consistency of different earnings numbers with the set of information used in setting security prices. Rather, its significance lies in the added confidence a policy maker can put in these results. There seems to be no ex ante reason to expect negative composite APl's or especially that the proportion of times that positive forecast errors are associated with negative unexpected price changes should be statistically significant.

Knowledge of the coverage of Accounting Principles Board Opinions (APBs) in the Certified Public Accountant (CPA) examination is useful to the accounting educator in several ways. First, students often want to know the likelihood that questions and problems related to the most recently issued APBs will be included in the upcoming examination and the emphasis usually placed on APBs in each part of the examination. Second, financial accounting course content and examinations could be improved by being aware of how the Board of Examiners of the American Institute of Certified Public Accountants examines CPA candidates on APBs. The findings of the study of this article are that, the coverage of Opinions has been highly selective in both Auditing and Practice but has been more comprehensive in Theory; thirteen of the APBs covered have appeared within 6 months after their issuance and three of the others appeared less than 6 months after their issuance; the relative weight of Opinions, in terms of time, in the examination parts has been 19.0 percent in Theory, 8.8 percent in Practice and 2.0 percent in Auditing; wide variation of coverage has occurred from one examination to another in all three parts; and there has been extensive coverage in the Theory and Practice parts of the 1972-1974 examinations.

This article examines the financial reporting of the corporate income tax expense in annual reports to shareholders. Specifically, the research examines the extent to which the financial reporting of corporate income taxes is in accordance with pronouncements of the Accounting Principles Board (APB) and whether the extent of adherence to these pronouncements is related to corporate federal income tax rate incurred, corporate size and independent auditor. The implications of this study are many. First, a significant number of corporations did not adhere to selected APB Opinion income tax disclosure requirements. Since the sample was random, nonadherence can be projected to the population comprising the New York and American Stock Exchanges. The nonadherence to the presently required APB Opinion income tax disclosure requirements makes prediction of future net income more difficult. Without the "required" information, let alone additional needed information, the determination of the expected future income tax rate of a corporation becomes a near impossibility.