This article presents information on capital gains and losses in accounting. Capital gain has been defined as "profit upon realization of assets otherwise than in the ordinary course of business, this profit being the excess of the proceeds of realization over the cost of the property realized." Accounting makes a careful distinction between realized and unrealized capital increments, the latter generally being designated "appreciation." No matter how capital gain is defined the most significant feature of the transaction is that it does not occur in the ordinary course of business. Another peculiarity of capital gain from the accounting point of view is that it is not recognized until actually realized. The conditions and circumstances which bring about capital losses (realized or unrealized) are various. A change in price levels may be a cause. Obsolescence is frequently associated with capital losses. In the case of security investments, factors related solely to market conditions may be primarily influential. To say that capital losses are always non-recurring and outside the regular fulfillment of the particular function of a business enterprise is hardly accurate because obsolescence and many of the other risks which might result in loss of capital are always present and cannot be disassociated from the purposes of an enterprise.

Reviews the book "Zero-Base Budgeting: A Decision Package Manual," by L. Allan Austin and Logan M. Cheek.

Reviews the book 'Financial Accounting: Concepts, Valuation, Analysis,' by James B. Hobbs and Carl L. Moore.

One of the continuing unsolved problems of accounting is that of joint costs of production. Generations of accountants have struggled in the definitional morass of joint products, major products, co-products, minor products, by-products, and scrap, waste, spoiled or defective products. For their part, economists have been quick to point out that, in many cases, cost allocations to joint products are arbitrary and thus unjustified. Be that as it may, for a number of mundane reasons well known to accountants, such as the preparation of balance sheets and income statements, evaluation of inventories, preparation of tax returns and public regulation. Some allocations are required and must be made. It proposes to relate accounting to economic theory and in so doing to make a very limited advance on the problem. In a joint cost situation, one input serves to produce two or more products, these two or more outputs may issue from the production process either in fixed proportions or in variable proportions.

Using experiments with 58 corporate managers and 215 auditors, we examine whether managers attempt to reduce the perceived intentionality of their fraudulent misstatements by perpetrating fraud via omission, as opposed to a more active form of commission, and how auditors evaluate the resulting misstatements. We find that managers choose to omit a transaction from the financial statements rather than record a transaction inappropriately. They also choose to omit critical information from supporting documents rather than provide misleading information. However, auditors generally believe misstatements involving omissions are unintentional. Specifically, we find auditors are less skeptical of an omitted transaction compared to a misrecorded transaction. They are also less skeptical of a misstatement that results from management omitting information from a supporting document compared to misrepresenting information. Overall, our studies identify a method of fraud—omission—that managers are likely to use, but that auditors are unlikely to judge as being intentional.

Auditing standards recommend separate assessments of the likelihood and magnitude of risks (hereafter, LM decomposition). Prior research shows that decomposition can focus individuals on the components of a judgment and make them more sensitive to information. An experiment with 101 experienced auditors shows that LM decomposition leads auditors to be less concerned about high-risk fraud schemes relative to auditors who make holistic risk assessments. Our analyses also show that, relative to those making holistic risk assessments, the correlation between auditors' likelihood judgments and their overall fraud risk judgments and the coherence of their fraud risk judgments are higher for auditors who perform an LM decomposition. Two follow-up experiments with students replicate these findings for higher-risk events, and (unlike the auditor experiment) we also find that LM decomposition results in lower risk judgments for lower-risk issues. We also find that LM decomposition mitigates the influence of affective responses on high-risk judgments.

Internal auditors perform work that is relevant to their host entities' financial reporting processes; yet, little research attention has focused on the effects of internal auditing on companies' external financial reporting. Using a unique and previously unavailable data set, we investigate the relation between internal audit function (IAF) quality and earnings management. We measure IAF quality using a composite measure comprising six individual components of IAF quality based on SAS No. 65, which guides external auditors in assessing the quality of an IAF with respect to its role in financial reporting. Earnings management is measured using two separate proxies: (1) abnormal accruals and (2) the propensity to meet or barely beat analysts' earnings forecasts. We find evidence that IAF quality is associated with a moderation in the level of earnings management as measured by both proxies.