Knowledge that Transforms

Reviews the book "Basic Accounting," by Ralph L. Boyd and Robert I. Dickey.

Reviews the book "Mine Accounting and Financial Administration," by Frank Willcox.

Accounting for reserves has received considerable authoritative comment in the last few years. The Reserve for Sinking Fund is an outstanding example of a reserve account requiring further discussion in order to make its true nature and effect clear. Viewing the account under unusual circumstances will permit a fresh approach to its problems; it is therefore proposed to consider first the Reserve for Sinking Fund in the records of a governmental utility. The equitable aim of a governmentally owned utility should be to have its rates cover the costs of rendering service to present users of its facilities. Operation at a profit with the profits being turned over to the municipal authorities for general use can only be justified by the assumption that the amount of utility service consumed is a reasonable basis for allocation of part of the burden of taxes. The problem of equity also extends to the charges assessed against successive generations of users of utility service. To build up a large surplus and retain it within the utility indicates that present rate payers are making it possible for future users of the service to pay less than the full cost of rendering that service to them.

Reviews the book "Principles of Accounting," 2ed., by John R. Bangs and George R. Hanselman.

During periods of comparatively stable prices, it is possible that the advantages of the standard pricing plan for materials, in terms of ease of costing, would outweigh the loss of a more current cost obtainable by a replacement cost method of pricing. However, if standard costs are utilized during a year of sharply rising or sharply declining prices, cost of materials used and sales will not be stated in terms of dollars of equivalent purchasing power. Cost, from a current cost standpoint, may be at variance with standard costs. It is probable that the advantage of having the replacement cost of goods at standard quantity usage both in the finished goods account and the cost of sales account would transcend the loss of keeping these accounts completely at standard cost. From the point of view of comparing cost of sales and profits, either on a product or period basis, ratios of cost to sales and profits to sales would be more readily comparable, since costs and sales will be expressed approximately in terms of dollars of the same purchasing power.

Reviews two books "Controllership in Modern Management," edited by Thornton F. Bradshaw and Charles C. Hull.

This paper is written in criticism of the usual textbook treatment of the amortization of prepaid leaseholds. The usual treatment violates theory in atleast three aspects: (1) It violates the accounting convention by recording book interest on costs incurred. (2) It mismatches costs with revenue. (3) It results in an improper valuation of the prepaid lease for balance sheet purposes. The accounting convention that no interest should be considered earned and recorded as such on the equipment would seem to apply to the prepaid lease as well. The amount of any cost incurred is, fundamentally, the present value of future service. It is sometimes argued that since interest was a consideration in determining the amount to be prepaid, that interest should therefore be considered earned and recorded on the prepayment. It is also true that interest is or should be a consideration in the determination whether one should purchase or lease. It is further true that interest is a consideration in the determination of whether one should engage his money in a business. But, after the determination is made and the cost incurred for assets of a business, it does not follow that interest should be a consideration to be recorded in the books of account.

The accepted principles of cost accounting may be applied to the transportation of property by motor trucks in such manner that the cost of hauling each class will be determined. At the present time motor freight carriers, both common and contract, are required by governmental regulatory commissions to maintain uniform systems of accounts and to submit annual reports. While these accounts are very detailed with minute divisions and subdivisions of both revenue and expense, they do not reveal the cost of transporting property, because there is no method of apportioning or allocating the expenses to the particular service being rendered. The statement of profit and loss by classes is only tentative, because there are many other relevant factors to be considered. The percentages of load will vary. Also, the percentages of expenses to be assigned to the various classes will change. However, when a sufficient number of actual studies have been made to supply factual data, standard percentages can be determined. When these standard percentages are applied to expenses, the cost of transporting merchandise over a line haul can be established.

The article focuses on accounting for fixed asset and their amortization. Accounting for the acquisition and construction of the fixed assets required in the production and distribution of goods and services is important to business managements and to the accounting profession. There have been changes in the past fifty years of kaleidoscopic economic and political events and social movements. Since the fixed assets and the related amortization accounts are continuing historical accounts, the present balances have obviously been affected by any changes made in accounting practice over the years resulting from changes in business conditions, in the purposes of the accounts and in mode of thought of various managements and their accounting advisors. The principal accounting points discussed regarding fixed assets and their amortization includes accounting entity, monetary basis for carrying fixed assets, cost, close relationship between tangible and intangible fixed assets and their amortization.

The article focuses on relationship between depreciation of assets and profit determination. In seeking guidance as to appropriate wage, price and allocation, and taxation policies, earnings reports in terms of individual firms, industries, and all business have taken an undisputed position of importance. There are widespread current expressions that the profit figures shown in these statements are inflated or overstated. The holders of this view contend that basing depreciation charges on original cost in periods of marked change in prices contributes to a distortion of the profits figure. There is general agreement among economists and accountants that business income is measured by the excess of revenues over the cost of producing those revenues. One of the costs of producing revenues is, of course, the gradual consumption of the service-rendering ability of capital assets that is described as depreciation. The central purpose of depreciation accounting is to allocate the cost of these long lasting assets to the periods of use in a reasonable and orderly fashion.