This article presents a study on the regulation, implied revenue requirements, and methods of depreciation in accounting in the U.S. The choice between flow-through and normalization accounting procedures, assuming accelerated depreciation is used for taxes, is not clear. The theory of accounting, if it is assumed that straight line depreciation is correct, points to increasing the early depreciation expense with the use of accelerated depreciation for taxes compared with the amount of expense if straight-line depreciation is used for taxes. However, in practice the issue is complicated by the fact that straight-line depreciation may not be correct, thus, the adjustment may actually be causing more errors.

This article presents a study on the implications to accounting of efficient markets and the capital asset pricing model in the U.S. If a proposed accounting procedure is theoretically superior to what is done in practice and if price observations indicate that the market is using it, then this can be used to support the contention that the superior practice should be used. With less than strong-form efficient markets and with the likelihood of a significant percentage of the market being fooled by faulty accounting practices, there is still a place for intrinsic value analysis.

The article discusses tax considerations in relation to accounting for capitalized leases. The example given in the article assumed that a capitalized lease was considered appropriate. A zero tax rate was generally assumed by the accounting entries for leasing. Eliminating such assumption would lead to a more complex analysis, but the before tax and after tax computations could be reconciled. The lease problem illustrated in the article was a good example of the fact that one could not always assume that the after tax accounting analysis of a situation was a simple extension of the no tax situation.

Presents a reply by Thomas R. Dyckman to the author's article on "Discounted Cash Flows, Price-Level Adjustments and Expectations." Information on price-level adjustments that have generally been defended as translations of cost information; Discussion on objective of accounting, which was not to maintain the real assets of the firm; Comparison of $317 income to a price-level adjusted income of $87.

This article considers the implications of using price-level adjusted financial data in situations where the inflation or price changes are both anticipated and unanticipated. It is a disconcerting fact that the application of price-level adjustment factors to the depreciated cost of an asset can lead to distorted value measures where the firm expected inflation to take place, and made its investment decisions based on this expectation. In a sense the adjustment for price level becomes a type of double counting. Even though the proponents of price-level adjustments do not claim that such adjustments will measure or report values, it is important to know the effect of the adjustments. Before the claim of more usefulness for price-level adjusted reports can be accepted, we have to consider the relationship of the resulting measures and the value of the investment. Price-level adjustments to be useful for decision making must consider the past expectations of decision makers since accountants must reconcile price-level adjustments to value accounting. It is not sufficient for the accountant to defend price-level adjusted cost as merely historical cost expressed in dollars of like purchasing power. If the criterion being applied is one of usefulness, the relationships of the measures being presented to value must be considered.

The article discusses the accounting treatment of accelerated depreciation and rate regulation. The Federal Communications Commission has recently been investigating whether or not American Telephone and Telegraph Company should be forced to use accelerated depreciation for tax purposes. There have been drastically different points of view presented as to the consequences that would result if the company were to use such procedures combined with a policy of continuing to use conventional depreciation for rate regulatory purposes. This article compares the "flow-through" and "normalization" accounting methods. The purchase of a long-lived asset gives rise to benefits extending over the future and that these benefits may be measured in terms of cash flows. At any moment in time the present value of all the future cash flows associated with an investment is a measure of the value of the asset. The taxes saved in the early years are likely to be paid in the later years. The advantage of using accelerated depreciation is that the firm may use the funds that are saved in the time periods before the additional taxes are assessed. The use of accelerated depreciation would result in a shift of benefits from the Treasury to the consumers of the services of the public utilities.

The article discusses implication of the term structure of interest rates on accounting with special attention to the accounting for liabilities. One must consider the term structure of interest rates in any situation where there are future benefits or costs and an attempt is being made to evaluate the economic impact of those benefits or costs. People frequently assume that the same time value of money applies to all time periods, but this may not be appropriate. It is generally assumed that if a .05 bond is sold to yield .05 then the interest of each period will be $50 on a $1,000 bond. Once people recognize that there is a term structure of interest rates it is no longer obvious that the interest expense of each period is equal to $50. In fact there is reason to think that people will have different interest charges in each period. If the term structure of interest rates has application in the recording of debt it obviously has application in recording the corresponding assets in the reports of the company holding the debt. In addition to the implications for the recording of transactions there are also implications for decision making. This article has not attempted to incorporate risk attitudes or changing probabilities of default. One can assume that rates of interest being used to accomplish the discounting are default free rates not reflecting fears of inability to collect.

This paper investigates the appropriateness of using market prices to value inventory, assuming different market and production conditions. If we assume that it is desirable to use "value" to measure inventory, the primary question asked in this paper is whether market prices are a good measure of value. The conclusion is that while market prices may be a good measure of value in some situations, in other situations they may lead to an over-statement of value. In considering the use of market prices, the article explores the relevance of average and marginal revenue and average and marginal costs for inventory valuation. In all the situations covered it assumes that the schedule of expected demand is known but that the exact number of units to be sold or that can be produced may be uncertain. The inventory consists of goods produced at time t to be sold at time t+1. The allocation of joint costs is a problem of continuing interest and importance both from the point of view of decision making and of recording economic events.

The article represents a continuation of a previous paper on depreciation, published in the October 1961 issue of the periodical The Accounting Review. The previous article suggested that the depreciation charge for a period is related to the expectations at the time of purchase and that the purchase of an asset is actually the purchase of future cash proceeds. These cash proceeds then become the basis for the depreciation calculation. The present article will refine the definition of cash proceeds with the objective of making the accounting for the events consistent with the decision-making procedures. The article shows that the use of cash proceeds in computing depreciation is correct only in the unlikely set of circumstances where the time-adjusted measures of revenues and expenses coincide with the cash flow computation. If the two are different for any period, then it is desirable to reconcile the two numbers. To avoid confusion with accounting practices that may not be accurate enough for the purposes of this article, it is desirable to use the terms time adjusted revenues and time adjusted expenses to describe items that appropriately take into consideration the time value of money.

This article has a negative point of view about the current state of the accounting art. While taking this negative position, the writer must admit to having an overall point of view, which is on balance favorable to the current state of accounting practice favorable in the sense that progress has been made through the years and that useful data can be obtained from published financial information. Researchers generally know the basis of recording the information and researchers know that the certified public accountant has reduced the possibility of fraudulent information to a reasonable minimum. The state of the art could be much worse. Taking a more optimistic position, there have been changes in accounting thought and practice through the years and there will be additional changes in the future. Accounting is an inexact art, primarily concerned with measuring financial position and income. Accountants have to a great extent established confidence in the honesty of the information presented. The next step is to broaden the accountant's mandate and encourage him to exercise more leeway in deciding which economic events are susceptible of measurement. Even assuming that the present form of financial information is retained, supplementary statements prepared on different bases could be presented jointly with the conventional information.