Knowledge that Transforms

The article suggests that matching revenue and expense should be defined as assigning revenue earned and expense incurred to the accounting period in which these events occur. The absence of revenue should not be used as justification for capitalizing expenses. Fixed relationships between revenue and expense should not be assumed. Where such a relationship is established by contract, such as on cost-plus contracts, it is acceptable to measure revenue in relation to cost incurred. Cost should be written off over the periods of expected contribution to revenue. It is futile and unnecessary to try to apportion these costs in relation to assumed amounts of periodic revenue. The decision to capitalize expenditures for amortization in future periods should be based on the probability that such costs will produce additional revenue in those periods. Thus, the use of the accrual basis does not and should not include an estimate of the amount of future revenue to be received. In the unusual case where both revenue and expense can be accurately predicted, then and only then should a fixed relationship be used.

Reviews the book "The American Accounting Association-Sponsored Statements of Standards for Corporate Financial Reports: A Perspective," vol. 3, by Harvey T. Deinzer.

Experts have long debated the theoretical problem of defining business income and the much greater difficulties of translating any definition into an operationally feasible system of accounts. That is to say, a set of accounts that will consistently and unambiguously reveal what has occurred to net worth during a series of selected time periods. As it is, the same data can be organized according to "generally accepted accounting principles" and be made to show radically different net profits available for stockholders. Many factors are contributing to the confusion, including a variety of acceptable methods for spreading period charges. For example, the ways in which inventory or fixed assets are handled can have a significant impact upon reported profits. These profits in their turn play a key role in influencing a wide range of important private and public policy decisions. In 1954 the government permitted firms to elect accelerated depreciation, for new fixed assets as an alternative to the straight-line method.

Reviews the book "Selected Papers: Nineteenth Annual Institute on Hospital Accounting and Finance."

Reviews the book "Accounting Trends & Techniques."

The purpose of this article is to evaluate the two Korean laws of 1958 and 1962 relating to price-level adjustments, to explore their background; and to suggest the importance of voluntary interest by accountants in price level procedures to meet the problems of inflation. As long as inflation remains unchecked, it appears that further government laws dealing with revaluation may be necessary. If accountants were well acquainted with the calculations to apply to each account, it might eventually be unnecessary for the government, in this case, Korea to fix multipliers, which are neither flexible nor reasonable. The Korean experiences suggest several general recommendations. It would seem important to stress broad accounting education on price level problems, to urge more active participation by the accounting profession in solving these problems, and to continue to speak for freedom in the selecting of accounting procedures such as depreciation methods. Moreover, the application of price level adjustments should not await the time consuming legal maneuvers that are usually too late in being applied.

The article discusses a method of calculating the income accruals to the parent and to the subsidiary. Whenever mutual holdings exist between a parent and a subsidiary, a problem arises as how to account for these holdings. The author's proposed method of calculation finds its basis in the mathematics of infinite series--since in actuality the "accrual-vibration" is in the form of an infinite series. If the subsidiary holds a portion of the parent's stock, theoretically, it is entitled to an accrual from the parent. This accrual must consist not only of the subsidiary's share of the parent's income but also the subsidiary's share of that portion of the subsidiary's income that accrued to the parent. This then is the start of the "accrual-vibration." To carry this example one step further, on the second vibration the amount accruing to the parent is its share of that amount just accrued to the subsidiary. It is observed that the summation of a geometric series is a possible solution in determining the summation of accruals to the parent and to the subsidiary when mutual holdings are involved.

The article examines the way in which antitrust matters are handled in financial reporting. The reports of two major companies, General Electric Co. and Westinghouse Corp., are chosen. Examination is limited to the published annual reports of the companies. Since disclosures were similar up until the time that losses were actually recorded, both companies are treated together in 1939, 1960, and 1961. After that, reporting diverged so both companies are dealt with separately in 1962, 1963, and 1964. In 1960 both companies had already pleaded guilty on the various actions in the antitrust suits. The record of their approach to the problem should lead one to certain conclusions as to the adequacy of their response to this reporting challenge. The differences in treatment are considerable and indicate clearly the possible diversity in present accounting practice. The way in which the reporting challenge was met by these two companies indicates a wide diversity in accounting practice and suggests a lack of imagination in dealing with a problem that involves some complex questions of disclosure and reporting.

Reviews the book "Accounting for the Cost of Pension Plans: Accounting Research Study No. 8," by Ernest L. Hicks.

The public's formulation of its interests will not automatically respond to new problems or changed environments. Thus, something or someone must act as catalyst in this process. A clear example of how political leaders have caused a shift in the public interest can be found in the shift from "isolationism" to "internationalism" from the late 1930's to the present. Most persons now consider that the interests of peoples throughout the world are related to their own and evaluate foreign and domestic policies on that basis. Even closer to day-to-day activities, the generally accepted idea that certain information about business progress and position of publicly owned companies should be revealed to all has come to be accepted as in the public interest only in relatively recent times. It is the position taken here that both these changes came about in large measure because of the political education activities of "far-sighted" individuals who were simultaneously trying to act as an interpreter of the public interest in a capacity of decision maker.