Two apparent problems in accounting theory remain relatively untouched--interim measurements of enterprise income for public reporting and internal income measurement for segments of the enterprise. This research paper is directed to the second of these neglected areas, i.e. the measurement of divisional income. In divisional income determination the purpose of theory is certainly not, to provide the basis for annual auditors certificates. Rather the objective of theory is to provide a basis for designing the measurement systems in the first place, and then for revising them as conditions change. Such a theory needs to be based on postulates as to the nature of the firm and of the division and their objectives. These postulates should be tested empirically, if possible. In the previously mentioned context, the objective of this paper, specifically is to take the first steps toward a theory of divisional income determination, employing a structure similar to that used for the theory of enterprise annual financial reporting.

Any financial statement provides a partial basis for evaluating the results of current operations and current financial position. Financial statements relating to periods of less than one year have the same evaluation and forecasting objectives as annual statements. However they differ in a manner that they are also used by outside investors in forecasting the results that will be shown on the annual statements. But interim statements have never received the professional attention that has been devoted to annual statements. The purpose of this research paper is to explore the objectives of interim reporting and to make a tentative statement of concepts to be applied in the development of interim financial statements. Through this exploration it suggests that the usefulness of published interim income statements in predicting annual profit is likely to be impaired if these statements do not include adjustments for fluctuations in the timing of cost releases and concludes that the management has a responsibility for anticipating in income statements for the first three quarters the annual total of a wide variety of business expenses.

In recent years the lease has grown in popularity as a device lot financing the acquisition of productive property. The lease is a form of debt that does not appear on the balance sheet under current accounting practices. The omission from the balance sheet of the lessee's liability under long-term leases results in an understatement of the debt position of the firm and makes it more difficult to compare the financial position of firms that choose different means of asset financing. There is, fortunately, a sound basis for capitalizing the lease on the balance sheet. When the lessee enters into a lease, he obtains an asset and assumes a liability. The amount of the liability is the present worth of lessee's future payments under the lease, discounted at a rate of interest equal to the effective percentage yield-to-maturity cost of the lease financing device. The full value of the asset depends on how effectively the lessee puts the property to work during the period of the lease, but its cost is the sum that is given up in exchange for user rights. This cost can be approximated by subtracting from the alternative purchase price of the property the present worth of the end-of- lease ownership value. This net amount is also equal to the capitalized amount of the lessee's liability under the lease, so that the accounting entry to record the negotiation of a lease fits logically and neatly into the double entry bookkeeping system. These asset and liability values can then be amortized over the term of the lease in such a way as to leave net reported profit unchanged, but with a portion of the annul rental payment diverted to interest expense from the operating cost section of the income statement. It is maintained in this paper that this method of lease capitalization and amortization is entirely consistent with existing accounting principles for the valuation of assets and liabilities.

Reviews the book "Management Accounting for Profit Control," by Wayne Keller.

Reviews the book "The Art of Reckoning: Analysis of Performance Criteria," by Samuel Eilon.

Reviews the book "The Impact of Leases on Financial Analysis," by A. Tom Nelson.

The article focuses on several books related to accounting. Some of the books mentioned are, "Management Accounting Principles," by Robert N. Anthony, is identical in organization and presents several accounting problems and cases; "The Theory of Profit Determination on Long Term Contracts and an Appraisal of Australian Practice," by G.W. Beck, states that the percentage-of-completion method is the proper one for the determination of periodic profit on long-term contracts; "The Valuation of Property," by James C. Bonbright is a contribution in the field of applied and Institutional economics; "Management Information and Accounting," by R. Warwick focuses on cost accounting, which for a number of years has been a phenomena in transition; "SEC Accounting Practice and Procedure," second ed., by Louis H. Rappaport, presents information on current accounting practices and SEC policies in the U.S.; "Essentials of Financial Management," by Ernest W. Walker, covers the range of topics usually found in the popular finance texts, and at the same time presents a concise statement on managerial finance.