Knowledge that Transforms

This article deals with conventional approach in the preparation of financial statements. The adoption of last in first out (LIFO) inventory methods and is now widely urging that the cost of fixed assets be abandoned as the basis for the computation of the allowable depreciation charge. Both of these innovations have been defended with the assertion that the conventional methods show "dollar" income, but that such income is misleading, and that the adoption of some other method will tend to show "economic" or "true" income. It might be well to inquire into the trend as now evidenced and into the desirability of that trend. Thus until all business transactions are by some means converted from the basis of monetary units to purchasing-power or some other method of reporting "economic income," it seems that accounting statements will best serve their purpose by adhering to the usual and accepted standard of measure, the dollar. This would involve the repudiation of the LIFO inventory method in order that all accounts would then reflect monetary income on an objective basis.

This article is concerned with the change in objectives and the expansion of activities described as internal auditing. So sweeping has been this change that current definitions of internal auditing bear little resemblance to those in vogue ten or fifteen years ago. Internal auditing fulfils an economic need quite separate and distinct from the services rendered by independent public accountants. Internal auditing is now regarded as an appraisal activity, employed to aid the top management of a large corporation in the efficient administration of the enterprise. It is characterized as a staff function, independent of accounting and operating processes, and responsible to a member of top management, most commonly the controller. Regardless of the size of the client's business, the certified public accountant must always bear a major responsibility to stockholders, creditors, bankers, government and to the general public which reads the financial reports he certifies. In fulfilling the strenuous requirements of his profession, he is automatically barred from performing the full time continuous research into the detailed operations of a single corporation which management needs in order to do its job with maximum effectiveness.

Tax officials in 1923, realized that an income tax law could not be administered in the courts. In succeeding years efforts were made asserted to take tax administration out of the courts. It is no mere coincidence that successive failures to reach goal in tax administration has been accompanied by increasing distrust of the taxing process and by tax evasion and avoidance bordering on a national scandal. It is insistence on litigation rather than settlement that has made evasion easier and sanctioned avoidance beyond the pale of responsible citizen ship. It was the incompatibility of two functions of the commissioner of Internal Revenue which gave rise in the first instance to a need for an independent reappraisal of his assessments. The commissioner must protect the revenue and simultaneously protect the taxpayer against the commissioner's own functionary, that is, the Income Tax Unit, which is busy protecting the revenue for the commissioner. After several months' work, the law having been interpreted and inscribed in regulations, the adviser body was disbanded. Business tax interpretations straightaway began their relentless march to the courts.

Although an individual with a certified public accountant's certificate and a license to practice law is very often a most useful citizen, it is not for the law schools with a small addition to their curriculum to train people to practice both professions. Nor is the law school's function to give their students sufficient low-level bookkeeping training so that they may personally keep the books and accounts of their offices or certain small enterprises with which they may be associated. The course in accounting should be a factor in broadening the student so he can collaborate with a Certified Public Accountant or industrial comptroller without encroaching on the latter's specialty. Lawyers have tended over the past to become refined specialists in the art of qualitative analysis of rights, ideas and social structures. A student of law who develops facility in this language will be better able to advise on legal problems and this, in itself, is sufficient reason for including accounting in the curriculum, even if we discard the more practical applications of his accounting training.

Reviews the book "Fundamental Accounting, Theory and Practice," by Stanley B. Tunick and Emanuel Saxe.

This article focuses on the problem of fixed charges in cost accounting. Fixed costs may be defined as those costs which remain practically unchanged in total amount when physical volume of output is varied. Such costs are not controllable by management, for their total amount is independent of circumstances which can be altered by executive decision. Most of these costs are fixed only within a certain range of output and become variable when greater ranges occur. To control costs, management needs information concerning controllable costs: which costs are controllable, what these costs should have been and what they actually were, as well as why the variances occurred. To determine the adequacy of selling prices, management needs to know total costs and product variable costs. Total costs will provide information as to the over-all adequacy of selling pikes. Variable product costs will provide information as to the adequacy of selling prices of individual products and, provide a guide for minimum selling prices. Thus management is concerned with both fixed and variable costs.

Reviews the book "Effects of Taxation: Inventory Accounting and Policies," by J. Keith Butters.

In conclusion, the following general principles may be drawn from the study of cases and rulings surveyed in this paper: 1. Costs of acquiring property, including payments of liabilities assumed upon acquisition, constitute capital expenditures. 2. Repairs should be capitalized if they increase the value of an asset, prolong its life, or make it adaptable to a different use. Otherwise, they represent proper deductions from gross income. 3. Expenditures made to protect the taxpayer's business or property are generally held to be deductible provided they do not result in the acquisition of an asset of a capital nature. However, the Commissioner usually contends that such expenditures are nondeductible either because they are not "ordinary" or because they represent payments for goodwill. 4. Lump sum investments in leaseholds may be amortized over the life of the lease. Leasehold improvements, on the other hand, are recoverable over the life of the improvement or the term of the lease, whichever is shorter. 5. In the earlier decisions regarding the deductibility of the cost of demolition as a loss, the intention of the taxpayer at the date of acquisition of the property was the determining factor. However, more recent decisions have shown that capitalization is in order where the demolition is merely one step in an uncompleted transaction which calls for the substitution of a more valuable asset for one of lesser value.

The article discusses interrelationships in governmental accounting theory. In governmental accounting, a fund is composed of a group of related assets and equities. The relationship between the items in the grouping is the common purpose for which the assets are destined. The fact that many of the assets which governmental units come into possession of can and must be used for various specific purposes makes it desirable to administer, expend and receive as revenue the assets dedicated to one purpose separately from the assets dedicated to all others. In governmental accounting, accrual accounting has made it possible to record and thereby report on liabilities and other assets in addition to cash. This was felt to be desirable in order to make it possible to administer and control in a more satisfactory manner such items as permanent property, inventories, taxes and other receivables and liabilities, particularly funded debt. The use of budgetary accounts makes this comparison automatic and almost inescapable. Also, due to the legal significance of the budgetary appropriations, budgetary controls necessary to prevent illegal acts as well as to help coordinate governmental operations and make them more efficient.

This article focuses on an investigative report on a specialized course in accountant's writing which was offered last year at Northwestern University. The questionnaire which is the core of this report was sent to 62 representative accounting firms located in all parts of the United States. Although the scope of the survey may seem to be limited by the small number of firms involved, a quick glance at their names would show that many of them are national firms with branch offices throughout the country. It is believed, therefore, that the replies are representative and that findings are based upon the thinking of the profession. Emerging from the replies to the questionnaire and from our experience in teaching the trial course, a distinct pattern for a specialized course in writing for accounting majors has been found out. Such a course must be designed to teach the student to do the following things: first, analyze accounting material and formulate ideas based on dear thinking and accurate objectives. Second, set up these thought patterns in simple, precise, concise, reader-adapted prose.