Knowledge that Transforms

Reviews the book "Directors and Their Functions," by John Calhoun Baker.

This article presents several problems prepared by the Board of Examiners of the American Institute of Accountants in the U.S. and were presented as the second half of the Certified Public Accountants examination in accounting practice in May, 1946. The candidates were required to solve both problems. The weights assigned against each problems were specified. The time allowed was four and a half hours. A suggested time schedule was also provided. One of the questions is related to the preparation of a corrected balance-sheet of the Acme Trading Company as at December 31, 1944. Another question is related to taxable net income of Mart Co. Inc. for purposes of the 1945 corporation income tax return in the U.S. Mart Co. Inc. is a dealer in personal property and, for purposes of the U.S. income tax, reports gross profit on sales on the installment basis. Accordingly, gross profit realized and reportable each year is X dollars Worthless accounts are deducted in the year of default, a provision to a reserve for bad debts may not be deducted. With respect to repossessions, a deduction may be taken to the extent of the excess of the unrecovered cost over the salvage value of the repossessed merchandise.

The relationships between costs and volume of output have long constituted an important segment of business policy, accounting, and economic theory, specially in the U.S. Analyses of these relationships are utilized in value, price, and distribution theory as well as in business policy development and economic planning. In spite of the importance of these relationships, few actual data are publicly available for studying them since the materials must be derived from a detailed analysis of the books of account of industry. In a world of private business, such data are not commonly available for publication. The Agricultural Adjustment Administration, in 1933, obtained under oath and in sufficient detail for cost and output analysis, the balance sheets and operating cost statements of a representative group of milk pasteurizers and distributors operating in thirty-five important milk markets. These financial statements, which were obtained in view of the preparation of milk-marketing agreements, were audited and expressed in a standard form by the accountants of the Administration.

During World War II the United States Office of Education authorized many of our leading universities to conduct intensive courses in connection with the Engineering, Science, and Management War Training Program. Air Transportation Management was one of the selected subjects. The students eligible to take this course were, for the most part, employees of various airlines who were selected by university registrars as most likely to benefit from a course of this type. Through this undertaking, our government endeavored to promote the usefulness of airline employees at a time when the airlines were handling numerous war contracts. Air transportation is carried out today through the operation of approximately fifteen major airlines. Yet this type of transportation is relatively small in comparison with transportation by land, or water. Airlines are subject to a greater degree of control than most private business corporations. The control lodged in the Civil Aeronautics Board over air carriers is similar in many respects to tile control vested in the Interstate Commerce Commission over railroads and other common carriers by land.

The impact of a large volume of war contracts has made imperative the preparation of statements of accounting policies to govern the manner of their terminations, as of January 1946. This article concerning the full content of statements of accounting policies, related accounting surveys and the method of processing them by the Eastern Audit District of the U.S. Army Air Force may be of timely interest to the many professional accountants and company executives engaged in contract terminations. This article may also be of interest to accountants not involved in war contract terminations. Statements of accounting policies prepared during the past year contain items concerning peacetime activities and are for most companies the only clearcut statements available at the present time. It is the government accountant's general function to serve the contracting officer by reporting upon the data submitted by contractors for use by contracting officer in effecting termination settlements fairly and quickly. To provide uniformity in requests to contractors for statements of accounting policies and procedures, a suggested outline of accounting matters to be incorporated in such statements was prepared by the staff of the Eastern Audit District Office of the Army Air Force and sent to contractors in May 1945. It was suggested to regional and other staffs that all such requests addressed to contractors by these staffs be drawn up to embody the points in the numerical sequence of the outline and to the extent practicable.

This article focuses on the prudent investment theory in public utility rate making. It is author's opinion that successful regulation of public utility rates cannot be accomplished under the fair-value doctrine and that the investment method must be sanctioned if justice is to be done to the consumer, the utility, and the general public as well. Stated somewhat differently the author believes the fair-value basis of rate making altogether impracticable and unworkable, that it is basically wrong in its economic concept, that the circumstances which gave birth to the principle have long since ceased to exist, and that is a reasonably good job of public utility rate regulation is to be achieved it is through investment approach. No review of rate regulatory procedures in this country would be complete without a brief reference to leading decisions of the Supreme Court of the U.S. on the subject. Not only did the fair-value doctrine, which plagued regulation for many years, have its real genesis in a decision of that Court, but the decisions of that body have greatly influenced the thinking and pretty well dominated the practices in respect to public utility rate regulation.

Since the termination of the emergency period as of September 30, 1945, there has been a series of debates going on in public and private circles as to the propriety of, and mechanism for, restoring to corporate records any value that may be remaining for facilities which have been fully amortized for tax purposes, and which still have remaining usefulness. It seems to the writer that most of the arguments that have been published in connection with this October 1946 issue of the journal The Accounting Review, have been in regard to the accounting mechanism for recording in corporate books of account such adjustments as may be necessary to reflect the remaining usefulness of fully amortized emergency facilities. Many of the debaters have seemed to confine their concept of this problem to a rigid verbatim application of stated accounting practices. Others express opinions that any warranted adjustment should be against earned surplus, unqualifiedly, whereas some urge in an equally convincing manner that such adjustments should be specially earmarked in some different manner.

In this article the author comments on a series of three articles entitled "Power Price Fixing," written by James L. Dohr, which were published in earlier issues of "Journal of Accountancy," as of January 1946. The articles discuss at some length the U.S. Federal Power Commission's decisions and those of the Montana and Arkansas utility commissions on the accounting practices of Montana Power Co. and Arkansas Power & Light Co. Each year the Federal Power Commission has published in a single volume the financial statements of the principal privately owned electric utilities of the U.S. An epitome of these statements was published for the year 1943 which brought out the striking changes that had taken place in the industry since January 1937, the date when the Uniform System of Accounts became effective. In the broad areas embraced by financial and business controls, accounting principles and policies have played a role that has increased greatly in importance during the past ten years. Accounting has become firmly entrenched as the language of business and of businessmen. Total assets, gross volume, net income are among the many terms that accountants have been able to keep within the confines of their art.

This article presents information regarding internal control in industrial organizations. Since the question of internal control has lately attained a great deal of prominence, the impression seems to be that its importance has arisen as a result of comparatively recent events. However, internal control was not pushed upon the accounting world by the Securities and Exchange Commission, nor did its importance arise as a result of the numerous investigations of auditing and auditing procedure which came as a result of the so-called McKesson & Robbins case. The establishment of proper accounting organizations embracing adequate systems of internal check and control became of particularly early interest to the public accountant. Internal control is nothing in the world but proper accounting organization. It is that distribution of duties and organization of routine which produces accurate, timely, and informative reports and statements in the ordinary course of events, rather than as a result of a turbulent and sustained effort on the part of supervisory accounting personnel as the deadline nears, as so often happens.

This article focuses on statistical controls applied to financial statements. Most top executives, except controllers, are not specifically trained in accountancy. Yet the top executive spends much of his time on the financial aspects of his business and in the interpretation of accounting records. Sometimes he finds himself studying detailed and massive accounting reports, trying to find in them the clues to his problems. When the analysis of past data has been completed, top management can use the charts for setting goals or objectives in the future, and can follow month by month the progress made toward each goal. It might be argued that these effects of the end of the war would have been realized by top management without the aid of the chart. That is undoubtedly true, but the strength of action charts is found in a number of factors, in their graphic appeal to understanding through the eves, in the power they have to sell all levels of supervision on the necessity and wisdom of management policies, and in the completeness and clarity with which they enable the men at the top of a business to trace the effects of such external events as war, peace, price changes, booms, and depressions.