The article presents a reply to the comments made by authors S. Basu and J.R. Hanna (BH), on the author's article related to interindustry estimation of general price-level impact on financial information. The purpose of the present correspondence is to discuss the essential experimental and conceptual issues which seem to be at the center of the concern indicated by BH, and to add additional data and analysis to that now existing in the literature of general price-level research in accounting. The essence of the criticisms leveled at the author's earlier work is as follows, an "error" was committed in the presentation and analysis of the restated data which was caused by comparing restated and rolled forward with data measured on a basic historical cost basis. An error was committed in the calculation of the standard normal variates, and that the method employed to analyze the data was not the best selection in the circumstances. The issues of deciding the best way to prepare and present data to illustrate the effects of changing a measurement rule in accounting are subtle.

This article presents an extension of a research project being conducted by the author to study the impact of general price level restatements on published financial information. The parameters selected for analysis were: return on owner's equity, net income, and standard deviation of net income. The paper reported the impact on sequential ordering of the companies under examination as a result of general price level restatement of the underlying data. In the concluding comments of the paper it was stated that: "The financial parameters selected for analysis have not been proved relevant to decision models. The impact of changes in a measurement rule on financial data has been the basis of this analysis. It has been assumed that small relative changes could have relatively small effect on decisions in the absence of specification of an appropriate decision model." The article provides an analysis of the data using portfolio techniques and certain other theories drawn from the field of finance.

Reviews the book "Accounting Theory Illustrated," by David Norr.

The article comments on professor Joe J . Cramer's paper on the nature of bad debt expense. The classical treatment of bad debts as an operating expense is inconsistent with proper classification criteria for operating expired costs. This is so because no service is received in exchange for this cost expiration. It would seem reasonable for any treatment of the bad debts issue to include a careful statement of which aspect of the problem is being addressed. The Accounts Receivable adjustment is truly a transfer payment which should be treated as a correction of an error in revenue recognition. For those who believe that the matching convention has relevance in accounting theory, the selection between these methods has direct impact on the measure of performance for a time period. The implication of this assertion is that the selection between these methods has no impact on the information content of financial statement. The direct charge method is an example of no attempt to match. No assertion is made here regarding the appropriateness of the matching concept; however, if one accepts matching as an important accounting theory consideration (as Cramer apparently does), then the selection issue is of critical importance.

Reviews the book "Accounting Theory Illustrated--Vol. II, 1974 Reports," by David Norr.

This paper examines the marginal contribution of scores on the AICPA level I achievement test and aptitude test for predicting the performance of students in upper division courses. Three performance measures were studied: grades in all upper division courses, grades In upper division accounting courses, and a binary variable reflecting whether a student made a C or below on an upper division accounting course. Results for each of these measures indicated that the AICPA scores did not improve significantly the predictive ability of models that included lower division grades. Several limitations of the study are described.

Reviews the book "Comprehensive GAAP Guide, 1979," by Martin A. Miller.

The article reports that in the October, 1971 issue of "The Accounting Review," professor Harold Bierman presented a discussion of a situation in which the application of general price-level adjustments to basic historical cost data results in an adjusted historical cost number which is significantly different from "value." "Value" for purposes of the Bierman discussion is estimated using discounted cash flow analysis. Bierman examined two cases. In the first case, the company incorrectly forecasts changes in the general price level and subsequently determines that increases in the general price level have occurred and are anticipated to occur in the future. In the second case, the company correctly anticipates movements in the general price level and adjusts its acceptable rate of return criterion accordingly. In both, Bierman assumes that cash flows from the project under analysis are "perfectly positively" correlated with movements in the general price level. Bierman's analysis uses discounted cash flow and annuity depreciation methods. He demonstrates that a difference exists in the net value of an asset when the investor ignores price-level change in the estimate of cash flows and the discount rate, and when he properly estimates the effect on both variables.

Reviews the book "Financial Accounting: The Main Ideas," by Arthur L. Thomas.