Reviews the book "Inflation and Company Finance," by Russell Mathews and John McB. Grant.

Abstract This article presents the price-level study of the American Accounting Association. The rate of return on the total investment is probably the most important single calculation which can be made from financial statements. The second set of percentages shows the rates of return for 1941, for 1951, and the average for the period 1941-1951. In general, the rate of return on the total investment on a constant-dollar basis was about half of the reported rate. One of the common complaints about income taxes is that they make no allowance for the changing value of the dollar. They tax reported income without taking into account that the amount needed to maintain capital in terms of its purchasing power has substantially increased. Also, firms having a relatively large investment in depreciable assets are discriminated against as compared with other industries whose costs are much dozer to current figures. It is important to note, however, that neither the company as a business entity nor the common stock interest was worse off than if the issuance of the preferred stock had been postponed until the very day on which the funds were needed.

Abstract The third attempt of a committee of the American Accounting Association to prepare a systematic statement of accounting concepts and standards deserves much praise and those who are responsible for the drafting of the material should feel that it has made a real contribution. Most of the propositions can be accepted as valid and as contributing toward more effective corporate financial statements. The organization of the material has been improved, particularly by grouping separately the standards to be applied in the preparation of financial statements so that they can be distinguished from the more basic concepts of asset valuation, income determination and the classification and measurement of the equities. It is hoped, however, that an early revision will be published which will incorporate the changes, few though they may be, which seem to have general support. Also, it would be helpful and interesting if the policy were adopted of presenting minority reports. Surely the statement as it stands must be the result of many compromises of differences of opinion. It is doubtful if the time has arrived when one can subscribe without dissent and exception to as many propositions as appear in this statement.

Abstract The article presents an overview of the problems which arise in connection with the lecture method in accounting. The University of California has for some time been noted for an extensive use of large lectures in many courses, including some of the courses in accounting. The men in charge of the laboratory work in the advanced courses have the rank of Associate, have a master's degree and are working towards the doctorate. Those in charge of the sections in the elementary course ordinarily are graduate students working towards the MBA degree, and they are given the title of Teaching Assistant. There are five lecture sections in elementary accounting, including both semesters of the course. Correlation of the lecture and laboratory sessions is another problem. Attempts are made to work out an approximately uniform procedure for handling the lectures and laboratory work, particularly as to the emphasis which is to be placed upon certain points. Lectures alone without the laboratory would certainly be very ineffective. A group of good graduate students can often do a better job for the beginning students than a group of part-time instructors drawn from accounting practice.

Abstract Reviews the book "Federal Taxes—Estates, Trusts, and Gifts," by H. Montgomery and James O. Wynn.

Abstract The most extensive treatment of depreciation by the U.S. courts has been in the field of public-utility rate regulation; but depreciation has also been considered in other types of cases, including: income tax cases, the determination of corporate income which can be distributed as dividends, the settlement of partnership agreements when the amount of income is in dispute, the life-tenant remainderman situations, master-and-servant cases when a part of the servant's compensation is a share of net income, patent cases when the royalty is a portion of net income, and eminent domain cases in the determination of the value of the confiscated property. In building up an interpretation of depreciation provisions over the years, the courts have proceeded much as the same way; that is, they have attempted to interpret the laws according to accepted practices and standards. Although there is an occasional cross citation, the cases on public-utility rate regulation, in which depredation is involved, seem to constitute a separate group, unrelated to income tax and other types of cases. In the opinion of the author there has been a definite trend in recent years toward the acceptance of complete, systematic depreciation accounting and the recognition of the inevitably close relationship which exists between the periodic allowance and the deduction made in rate-base valuations.

Abstract The article focuses on opinions expressed by the justices of the Supreme Court of the United States on depreciation that had a marked influence upon the subsequent decisions of the state and the Federal public utility commissions. In no case prior to the Knoxville Water Company case in 1909 has there been more than an incidental reference to depreciation, or a brief discussion which indicates an entirely inadequate knowledge of its nature and problems. Definite recognition was given of the necessity of a utility keeping its property in good service condition, but little or no appreciation was evidenced of the function of depreciation accounting methods. A statement was made in the case of United States v. Kansas Pacific Railway that only such expenditures are actually made, can with any propriety be claimed as a deduction from earnings, and the creation of an unspent reserve through periodic charges to operations was prohibited.

Abstract The belief that it is the principal if not the sole purpose of depreciation accounting to provide for the financing of the replacement of plant and equipment with units of the same type or capacity when the individual items have to be retired from service is widely accepted and frequently expressed. This opinion is now seldom found in technical accounting publications but it is still frequently present in general business, engineering and legal literature. The early publications on bookkeeping and accounting are largely manuals of technical procedure with little to indicate the underlying philosophy or principles. In 1764 John Smeaton, an English engineer, worked out an elaborate schedule for the operation of a canal which provided for an annual income which would cover the "common annual expenses" and would provide a fund accumulated at compound interest by equal annual installments which would "preserve the work to perpetuity" by financing the replacement of parts of the canal as they wore out, although he indicated in a comment at the end of the schedule that the increased trade which could be expected would take care of these irregular repairs without the creation of such a fund out of income.

Abstract A more complete survey of legal opinion on the subject of corporate dividends indicates that while certain judges may be incompletely trained in the theory of accounts, there are few instances in which a clearly presented problem, upon the solution of which accountants themselves could agree, would be decided in a way which would violate the accounting principles involved in the case. Many of the apparently meaningless and erroneous statements are merely dicta, and much of the difficulty is due to a misuse of accounting terms rather than a confusion of ideas. Nevertheless, in order to avoid ambiguity and misunderstanding, it must be clearly understood that the terms "profit" and "surplus" do not refer to a fund of available cash waiting to be spent, that there is no relationship between profits or surplus and any particular asset so that an overdraft at the bank and the existence of a large surplus are not incompatible, that profits are usually "invested" before they are even determined, that surplus cannot be reduced by paying debts or purchasing assets, or, in other words, that profits and surplus are merely terms which refer to the excess of assets in general over the sum of the formal capital stock and the liabilities to outside creditors.

Abstract Depreciation may be defined as that inevitable disappearance of the value of certain items of physical property which can normally be expected in the course of the conduct of business enterprises. The reason why the unit is no longer of value to the owner may be actual physical deterioration, or it may be that changes in demand for the product of a machine or technical improvements of one kind or another have made the unit obsolete. The accounting problem in connection with depreciation, is to record in some way the amount of depreciation which should be taken in each accounting period and this amount in turn may have to be spread over several products or services which were produced or were in process during the period. Much of the disagreement in the discussions of depreciation reserves has undoubtedly been partially caused by the use of only one reserve for depreciation for the entire property instead of one reserve for each type of property. A great deal of confusion concerning depreciation arises from the interpretation of the depreciation policy as a means of providing for or facilitating the making of replacements.