Knowledge that Transforms

Reviews the book "Public Finance," 2nd ed., by Alfred G. Buehler.

The article focuses on stock and other dividend as income. The question concerning types of stock dividends, which are income and types, which is not income has assumed importance chiefly in relation to Federal income taxation. Beginning with its decision in one case, the Supreme Court of the U.S. has laid down and applied a general rule for determining the taxability as income of any given type of stock dividend. This rule is frequently referred to as the "different interest" rule or test. It is not the primary purpose of the discussion to attempt an appraisal of the general soundness of the Supreme Court's position with reference to the taxability of stock dividends as income under the Sixteenth Amendment. The question of whether a specific type of stock dividend constitutes income to the recipient or not, is of interest apart from the taxation of income. It is a part of the general accounting problem of the proper determination of periodical income for general business purposes and also bears on the law with respect to dividend declarations. It is, therefore, proposed to examine the question mainly from general business point of view.

It may be said that accountants are not in accord as to the content and arrangement of funds statements. The form suggested here is an attempt to improve that situation. As indicated it is first necessary to decide what is wanted from the statement before a determination can be made on what to put into it. The point of view adopted in this article is that the statement of funds is in reality a statement of the values, which came into the current section of the balance sheet and what was done with these values. Changes in other sections of the balance sheet are brought into the statement only to the extent that they involved the working capital of the company. By showing the gross profit-and-loss figures which affect the net current assets, the statement is made more significant, and the awkward and confusing method of starting with the net profit and adding back depreciation and similar charges is avoided. To treat the net change in working capital simply as a difference between increases and decreases is much clearer than the treatment of the net change found in the balanced form of report. Finally, the heading of the statement should give the ordinary reader a good idea of what to expect in the body of the statement.

This paper deals with one class of property, which, under certain conditions, involves an important accounting problem. This special class, referred to as "idle equipment," comprises those assets becoming temporarily idle because operating capacity has fallen below estimated normal requirements. Idle equipment does not entail accounting treatment in the case of a plant using all of its fixed assets under normal circumstances or operating at full service capacity; manifestly there is no idle equipment. It is only when operations temporarily fall below normal capacity output that the problem of idle equipment arises. Idle equipment is not necessarily the result of obsolescence. The industry may be a stable one, the product new, and the equipment of the most recent and modern type; yet the plant may be operating at an exceptionally low capacity output. Idle equipment can be kept in first-class condition by constant trial, maintenance, and repair, and brought into use immediately whenever production returns to normal or full service capacity. Although the expense of maintenance of this nature can be capitalized, and later amortized when the equipment is brought into productive use, there still remains the problem of obsolescence.

The article focuses on corporate surplus policy as a function of monopoly. Two primary conditions prompt inquiry into the problem of corporate surplus policy in its relation to monopoly: the nature of antimonopoly attacks on corporate surplus policy and practice and the recent singular lack of progressive and constructive literature on corporate financing. In general the antimonopoly offensive has not been focused on corporate surplus entrenchment; in particular instances, however, the attack has precisely sought out corporate practice with respect to retention of earnings or surplus accumulation as its objective. The social reform role has been a principal factor inducing the criticism of earnings retention by corporations. The second condition, which prompts inquiry into this subject, is related, perhaps closely, to the social-reform nature of objections to surplus retention. Corporate surplus arises primarily by retention rather than disbursement of earnings; from an accounting view it constitutes the excess of corporate assets over corporate liabilities and capital stock.

College teachers and administrators everywhere are very sensitive to real or imaginary inequalities in their teaching loads. Among them probably none is more justified in expressing concern over this matter than the teacher of accounting. He is keenly aware that his elementary courses are the backbone of most business administration programs, while the advanced offerings in his field are perhaps more truly professional than any other single group of business college courses. The almost universal practice is to measure faculty loads in terms of the semester hour, or, a modification of the student credit hour in combination with clock hours for the non-teaching load. In search of a successful method of teacher load evaluation for accounting and other subjects, the writers first reviewed the literature in the field and then turned to an examination of industry's techniques for applying scientific methods to problems of personnel. Authors appreciate that many readers may feel that the scientific advantages of this proposed method of teacher load evaluation suggested here are more than offset by the demands on both time and care required for its successful use.

Reviews the book "Illinois Tax Problems."

The recent history of the Centrifugal Pipe Corp. includes some interesting points in connection with accounting for patents as wasting assets, as well as the effect of the present war in curtailing the scope of the operations of some American companies. The Centrifugal Pipe Corp. is a Delaware corporation, organized in 1923 for the purpose of holding and licensing certain patented processes for casting iron pipe by a centrifugal process. The Centrifugal Pipe Corp. holds the United States patents, while a wholly owned Canadian subsidiary, International De Lavaud Manufacturing Corporation Limited owns the patents for most of the rest of the world. The stockholders on December 20, 1939, approved the two structural changes in capital stock, and the writing down of investments and the declaration of a partially liquidating dividend followed this action. The nature of patents as wasting assets, and the similarity of experience of the Centrifugal Pipe Corp. to a mining company which does not replace its property as it is exploited, is quite evident. This parallel extends to the distribution of liquidating dividends and the gradual contraction of the scope of operations as the stage of exhaustion is approached.

In its study of accounting problems the United States Securities and Exchange Commission has a much broader objective than many other governmental agencies whose work requires the use of financial data and the proper application of accounting principles. The primary responsibility of the Commission under the Securities Act of 1933 and the Securities Exchange Act of 1934, in respect to the financial data required to be filed with the Commission and made available to the public in accordance with the provisions of these Acts, is to insure that such information constitutes a disclosure fully adequate for the protection of investors." Accounting research in the Securities and Exchange Commission is guided by the very practical purpose of insuring that financial statements supplied to investors shall be presented on a consistent basis and in accordance with sound accounting principles. Optional accounting treatment of business transactions may be accepted only so long as the results obtained by such methods result in clear and unambiguous financial statements. The law requires this and the rules, regulations, and opinions of the Commission have been and will continue to be dictated by the necessity for disclosure fully adequate for the protection of investors.

The article focuses on the definition and measurement of income. There has long been need for a greater degree of agreement among economists, accountants and statisticians regarding problems of defining and measuring income. Although some differences are probably inevitable, because of various problems in the three fields, the amount of overlapping of subject matter is large and a common approach would add clarity to each discipline as well as strengthening the interrelationships between them. The accountant is interested primarily in the business unit and his chief function may be held to be the accurate measurement of periodic income as it accrues to the firm. As is well known, complete accuracy in the measurement of business income may be realized only upon the expiration of the firm's life, at which time the entire income, for the whole life of the enterprise, may be determined without error, assuming complete and accurate accounting records. But the practical problem is that of measuring the income of a going concern for short periods with speed, precision, and minimum expense. The economist may be led to the problem of defining income by many paths.