Accounting research theory

Canning's book "The Economics of Accountancy-After 50 Years," is the result of a "comprehensive study of accounting theory and practice," even though from the viewpoint of "the professional student of economics." Accounting is necessarily aggregative. Canning found that its literature and practice abounded with examples of different competing formulas or techniques of valuing. Little attention had been given to the effects of this on the meaning of financial statements and almost nothing had been done "to discover to what extent a common, general method might be expected to enhance the usefulness of the principal statements." This condition needed rectifying. The time-schedule of the money valuations of "successive desirable events proceeding from a wealth source" constitutes a measure of gross realized income. Direct valuation is possible only when "a realized money income exists and is statistically determinable." Realized money income is here used of calculated present value, which entails setting off the series of expected money outflows against the series of expected money inflows and discounting the net inflows to a present date.

Accountants have been attempting to establish accounting standards for more than 30 years. However, now one is told, on the basis of what purports to be tight demonstration, that it is impossible to set up normative accounting standards. If the proof stands up, then in all honesty one should abandon for all time the pretense that accounting is a reasoned discipline. For discipline implies a firm body of doctrine and technique which its scholars and practitioners uphold as technically proficient at least and ideal, at best. If it can be shown that there can be no such body of doctrine and technique, accounting should forthwith be struck from the curricula of all institutions of higher learning and the practice of accounting should be removed from the company of learned professions. Certainly there is, as yet, no consensus on what is ideal or technically proficient. But neither was there, just over 200 years ago, any consensus among chemists on the nature and process of combustion. The present confusion in accounting may be resolved in due course, just as the crisis-situations in chemistry, physics, biology and other fields have been resolved. However, the crises will not be resolved if scholar Joel S. Demski's impossibility theorem holds.

The author thinks that he can fairly claim to have introduced the term "current cash equivalent (CCE)" into the literature, but he disavows any responsibility for the confusion with which some have surrounded it. Larson and Schattke claimed to have demolished his contention that current cash equivalents were additive. Professor Vickrey now contends that their arguments fail "if CCE is defined as the numerosity of a set of homogeneous monetary units which can be obtained for a severable mean (sic) in the market." "Cash equivalent" was chosen as a general term to describe the common property of sums of money and resale prices of non-monetary assets. But the cash held at any point of time and the prices of goods at any point of time have particular significance at that point of time only. If aggregative statements are to be serviceable, for retrospective analysis up to a point of time or for the analysis of prospects from that point of time forward, their components always should be up-to-date, contemporary or "current." Hence, current cash equivalent. The cash equivalent of any asset at any time, being its realizable price, is expressed in a number of dollars. CCE hasn't really suffered from the assaults of fallacious logic and its consistency with the views of classical writers on measurement has not been demolished. In fact, it is alive and doing well in the company of all who buy and sell and who borrow and lend on the security of assets.

In this article the author comments on the critical review of one of his articles by George J. Staubus. He states that he has been at some pains to point out that more than one kind of information is necessary to every choice, and that monetary magnitudes of quite different types are necessary. According to him there are the monetary magnitudes of the assets and equities a firm has at any time. Then there are the monetary magnitudes obtained by discounting the expected cash inflows and outflows from proceeding in the same way as up to the point of choice, and from every alternative course which seems to be feasible at the point of choice. There is no problem of dealing in money and goods in a deliberate and informed manner for which both types of magnitudes are not necessary. Among the things an investor might expect to know are the rates of return earned by the two companies, their liquidities or degrees of solvency, and their leverages. The author concludes that for any choice between holding an asset and acquiring another, whether by managers or investors, current cash equivalents of the assets held enter into the statement of conditions for informed choice.

It is beyond dispute that financial statements have reference, in some sense, to the financial outcomes of past actions: to the net change in the residual equity and to the change in the composition of assets and equities. They relate only to financial consequences and characteristics. They say nothing about purely technical or purely mercantile outcomes of possibilities or positions. They do not indicate the age, the technical capacity, the spatial distribution or any similar characteristic of assets; they say nothing about the numbers and types of customers, suppliers, or workers of firms. For information on all such matters as these, business managers turn to other sources. The capacity of accounting to represent the aggregative consequences of actions taken, in terms of the current monetary unit and the value of aggregative statements of results and positions from time to time as indicators of possibilities and constraints (for the present command of resources constitutes the constraints of future actions), are the reasons for the widespread use of financial statements and the sources of the usefulness of accounting.

This article focuses on the prospective adventures in Accounting ideas. Almost the whole of the development of accounting ideas as they are today relevant has occurred within the lifetime of the Association and in that development members of the Association have played a prominent and honored part. Without belittling the record or the massive endeavors of many, one cannot here name, we can usefully look at a few ideas, a few cases in which men have thought greatly of accounting. These fifty years have seen quite a few potentially fruitful ideas, with wide implications, brought to notice, noticed scarcely at all and almost abandoned. This was an adventurous exercise, novel in the literature. At the same time he roundly criticized some of them. This too was rather bold. But though the intervening years have provided outstanding illustrations of the inadequacy of these assumptions, substantially the same assumptions underlie today's accounting. According to the author, accounting could become a real language of business finance instead of a mass of only vaguely understood and only vaguely understandable symbols.

Certain developments inspired the Accounting Principles Board to approve the preparation of the "Inventory of Generally Accepted Accounting principles for Business Enterprises," ARS No. 7. It was long wished for an inventory of generally accepted accounting principles; for whether one wishes to adopt, to rebut, or even simply to think about these principles, it would be useful to know what they are. But the inventory is not a simple listing. A great deal of ARS No. 7 is devoted to the justification of the listed propositions and to the rebuttal of objections to them. The study presented in the article is argumentative and as such invites cross-arguments. The study is unquestionably valuable. It makes very clear the massive difficulties with which the users of financial statements have to contend. The inventory, at least by implication, makes it abundantly clear that great changes are necessary to put contemporary practices on the footing of the requirements of the statutory principle, and even greater changes to establish practice on the ethical footing which have been suggested and is ideally more solid and dependable than a statutory specification.

The article examines the work of researchers Edgar O. Edwards and Philip W. Bell for the measurement of business income. According to the author, income is the result of a calculation, an inference, and it seems hardly correct to apply the term realized or realizable to it. It is unrealistic to attempt to find the specific impacts of price changes and price-level changes item by item, and then to add all tile pieces together to get a total effect. The complex of assets and obligations is a complex in which changes, in respect of some items, in one direction are automatically accompanied by changes, in respect of other items. It is not therefore reasonable to dissect the effects as if they were the consequences of quite separate decisions. It seems quite sufficient to discover the gross effects. The author disagrees with the argument of Edwards and Bell in so far as it relates to the underlying incidents affecting the investments of firms and the necessity of bringing into account the effects of events other than transactions.

The article focuses on the measurement and objectivity in accounting. The awakening interest in metrological aspects of accounting provides opportunities for critical examination of quite a few contemporary dogmas. Harold Bierman, accountant speaks of it as a step towards "a long awaited revolution in accounting." The first is the proposition that different descriptions or measurements may be used for different purposes. "Different measurements for different purposes" may mean measurements of different characteristics, either by use of the same scale of measurements or by the use of different scales. There is one set of measurements, which results in a representation of financial position, which is serviceable to all users, managers, investors and creditors alike. This is a set of measurements, in the scale of monetary units, of the contemporary realizable prices of all the seeable assets and of the obligations of a firm. This set of measurements is subject to errors of estimation, but these errors are measurable.