Knowledge that Transforms

In this article the author illustrates the possibility of preparing different measures of income by application of the previously proposed concept of realization and to examine the uses and the conceptual nature of each measure. A scheme of financial statements expressing different concepts of income measured from different points of realization and serving different, though often related, purposes is presented. The author argues that the interest in dividends is well founded. Dividends are the only truly final stage of income from operations of the enterprise. The ultimate fate of retained earnings is indeterminate but the distribution by the firm of earnings as dividends is final. Conventional income computations for vertically integrated firms measure the net income attributable to the firm's entire sequence of processes. According to the present generally accepted income concept, income is viewed as realized at the point of sale. It is often said that a completely definite report of income for an enterprise is not possible prior to final liquidation and that all interim reports are of a tentative nature.

The article focuses on the importance of information measurement for decision making in corporate. To perform this function effectively, accountants must understand the close bond between information and decision-making, for example, information systems should be subject to much the same type of cost-benefit evaluation as are other segments or aspects of organizational activity. The theoretical basis for such measurements is contained in information economics, a subject of recent vintage closely related to statistical decision theory. It is analyses in article that how reliable the prediction must be before it has some value for the decision-maker, and how its value and the cost of obtaining it can be jointly considered in the attempt to choose the best among several potentially available predictions of different reliability. The illustrative problem is described briefly in the article, which state the objectives of the analysis contained in further argument. The problem is thoroughly discussed with illustrative tables and calculations by the author.

Reviews the book "Public Reporting by Conglomerates," edited by Alfred Rappaport, Peter A. Firmin and Stephen A. Zeff.

Narrative writing is neglected in the usual undergraduate accounting program. The general emphasis on objective tests encourages students to consider theoretical discussions of secondary importance or even to equate accounting proficiency with problem solving ability. To meet this problem, a number of universities have introduced writing programs into their undergraduate accounting courses. Usually these include research paper assignments or class essay quizzes. Each quiz relates to the major subject area most recently covered in the text and class discussion, with students given about twice the writing time allowed Certified Public Accountant (CPA) aspirants suggested by the examiners. The use of essay questions from the CPA exam does not anticipate that every student in the program will become a professional accountant. But more importantly, CPA exams provide an unlimited supply of pretested theory questions which are often more realistic than the usual textbook situations. While the program's success is hard to judge objectively, the average quality of papers, as measured by number of points awarded, improves throughout the quarter, with the largest increase coming between the first two quizzes.

The simplistic assumptions underlying the classical breakeven chart have long been recognized as unsatisfactory. Many of those who have felt this dissatisfaction have been content to apologize for the shortcomings of breakeven analysis. Failure to grasp the implications of the direct cost philosophy for breakeven analysis leads to misunderstandings. For instance, it is commonly said that the classical breakeven chart assumes an identity of sales and production quantities. In fact, no such assumption is necessary, for under direct costing, all fixed costs are to be covered out of current revenue; no fixed costs are inventoriable. Although, under direct costing, changes in inventory during a period do not affect the breakeven point, it does turn out that, under absorption costing, a firm can break even while achieving an identity of production and sales only at the traditional breakeven sales level. The analysis above is quite symmetrical as between increases and decreases in inventory so long as there is no change in cost conditions from period to period.

Reviews the book "Governmental Accounting, Auditing, and Financial Reporting."

Reviews the book "The Financial Executive and The New Accounting," by Maurice E. Peloubet.

The article represents a study of one effect on issuers of financial statements in the airline industry which the use of alternative reporting practices has had. A discussion of the results of the study briefly considers the consequences of being able to observe this effect for organized public accounting practice and authority. Capitalists, in such economy in which both good and bad financial statements circulate, face investment decisions in which the results of selecting given alternatives are known with more or less certainty depending on whether the related financial statements are good or bad. The degree of uncertainty can be affected by the form and content management chooses for the financial statements. The author states that firms with bad financial statements would be penalized because capitalists would require a higher return from their equities than from the equities of firms with good financial statements. Financial statements are surely among the devices available for the firm to minimize its purchase of capitalist ignorance within the meaning of the profit-maximization constraint.

The article focuses on the use of diagrammatical outline method in examining process cost accounting. When studied in any reasonable depth, process cost is among the most difficult topics covered in cost accounting courses. This seeming contradiction may be traced to the student's almost universal inability to: separate relevant from irrelevant data; and to organize a maze of interrelated data into usable form. Process costing presupposes a processing-type manufacturing situation, and this type of situation is frequently complex. It is this complexity, the processing operation, not the concepts of process cost accounting that often causes difficulty for the student. One device too often overlooked by the student is the diagrammatical outline, which is really nothing more than an application of the concepts of flow charting and block diagramming used in computer programming. Because of the complexity of the manufacturing process situation and because the facts applicable to the process situation are often presented in an order which is not suitable for solution, the student should consider use of a diagram and outline combined as a method of examining the process and organizing the relevant data into usable form.

The outlines an accounting theory approach to the problem of determining the appropriate times to record the employer's pension expense. In the proposed approach, the expense timing problem becomes a problem of asset and liability measurement. "Pension liability" can be defined as the value of the employer's obligation to make future pension payments to current and retired employees. This includes the obligation to make future payments based on or "related to" services yet to be performed but excludes anticipated pension payments to those to be employed in the future. "Pension asset" can be defined as the value of the expected future employee services for which part of the pension liability has been incurred. When an individual is employed, a pension liability arises immediately. There arises at the same time a pension asset, which may normally be supposed to equal the pension liability. At the time when an employee retires, the pension liability will have grown larger because of the time value of money, but the pension asset will have decreased to zero.