Knowledge that Transforms

The phase of inventory reserves consideration should be given to the application of inventory reserves to two other areas namely, the valuation reserves, and reserves for replacement of inventories involuntarily liquidated applicable to inventories priced on the basis of last-in, first-out. Valuation reserves are provided to cover the adjustment of inventory pricing to the lower of cost or market, adjustments that be necessitated by physical deterioration, obsolescence, or price change. Generally, however, the use of such reserves for pricing purposes is not widespread in as much as valuation adjustments. Inventory reserves are provided for estimated future losses, losses measured not in their entirety by strict adherence to a rigidly fixed base price of the past but by objectively applying the experience of the past with reasoned judgment as to the future. It is better objectively to approach such a situation through the means of an inventory reserve than to be compelled to follow either a technical "fifo" or "lifo" form in the face of a compelling conviction that something else is right.

As a result of a recent discussion between members of the Executive Committee of the American Accounting Association and the Chairman of the Education Committee of the Institute of Internal Auditors in the United States, the editor to this department was asked to conduct a limited survey in order to determine the present status of the course in internal auditing. The Institute of Internal Auditors has been active in the field of education for several years, and its several committees wish to cooperate in every way possible to further tile adequate preparation of students for careers in internal auditing. Some case and text materials have already been prepared, these teaching aids are rapidly being augmented as more universities become interested in the subject matter. In carrying out the survey 36 questionnaires were sent to specific persons in the same number of selected institutions. Most of the prominent schools of commerce and business administration were included in the group and thirty replies were received.

The article presents problems which were prepared by the Board of Examiners of the American Institute of Accountants and were presented as the first half of the C.P.A. examination in accounting practice in May, 1948. The candidates were allowed four and a half hours to solve both problems. Each problem was given a weight of 25 points. The question was on the Hear Telephone Company, which operated two departments - "Communications" and "Manufacturing." The "Manufacturing" division kept a complete set of accounts, which were controlled by the general ledger of the "Communications" division. As of November 30, 1947, the Hear Telephone Company sold to the Wan Manufacturing Company the current and plant assets, except cash, of the Manufacturing division, the purchaser assuming all of the department's liabilities to outsiders. On the date of sale the Watt Manufacturing Company issued to the hear Telephone Company, in full payment of the purchase price, 5,000 shares of common stock. In addition to that, the article provides all the required information on which the questions are based.

Reviews the book "Business Finance and Banking," by Neil H. Jacoby and R.J. Saulnier.

Reviews the book "Internal Control Standards and Related Auditing Procedures," by Walter H. Kamp and James A. Cashin.

Reviews the book "Intermediate Accounting," by Arnold W. Johnson.

Reviews the book "Design of Accounts," by F. Sewell Bray and H. Basil Sheasby.

Reviews the book "Practical Controllership," by David R. Anderson.

Even the most convincing advocates of the cost basis of valuation and income determination in accounting are impelled to approve an exception in the case of donated fixed assets. Most of the writers agree that donated fixed assets should be recorded at appraisal figures by an entry debiting fixed assets. There are those who see no objection to crediting paid-in surplus or capital surplus, depending upon the sources of the donation and tim suggested breakdown of the surplus accounts. Most sources concede that the admission of donated fixed assets to the accounts at appraisal figures is inconsistent with the cost basis of accounting. But, instead of recommending that the donated assets be recorded at the nominal figure of one dollar, the booking of the asset at appraisal figures is not only recommended but preferred. Those who profess the cost basis of accounting not only advocate the booking of donated fixed assets at appraisal figures, but frequently acquiesce in the charging of depreciation on donated fixed assets to revenue. The recording of donated fixed assets at appraisal figures is not consistent with the cost basis of accounting.

Present federal income taxes are based on the Sixteenth Amendment to the Constitution giving the U.S. Congress the power "to lay and collect taxes on incomes from whatever source derived, without apportionment among the several States and without regard to any census or enumeration." Simple as the amendment appears to be, the question of "what is income" has become the subject of limitless disagreement among Congressmen, taxpayers, accountants, lawyers, and representatives of the Bureau of Internal Revenue. The very term "income tax" implies that the tax is to be on income and that receipts which are not income are not to be taxed. There is also ample evidence to indicate that it has been the intention of Congress to levy the tax, with minor statutory exceptions, on only true net income as determined by the application of sound accounting procedure. Nevertheless, a gap has always existed between net income as computed for federal tax purposes and as determined according to generally accepted accounting principles for business purposes. That breach appears to be gradually widening and has already reached such proportions that business is experiencing considerable difficulty in keeping records that arc adequate for both needs. The goal of business accounting is to arrive at as nearly correct an approximation of the results of operations for each business unit as is possible.