Knowledge that Transforms

Reviews the book "Principles of Engineering Economy," by 3rd ed., by Eugene L. Grant.

This article focuses on the relationship of accountants and lawyers in Tax practice. The American Bar Association's committee on unauthorized practice of law first turned its attention to the activities of accountants in connection with tax matters about 1932. From that time there has been some reference to accountants in almost every annual report of the committee. The first meeting of representatives of the American Institute of Accountants and the American Bar Association took place in 1932. The principal question at issue at that time was whether certified public accountants should be permitted to continue to practice before the U.S. Board of Tax Appeals. In the spirit which these words exemplify it should be possible for the two professions of law and accounting to adjust any and all differences by friendly negotiation, provided that the most enlightened and objective minds in the two professions will address themselves to the task. Many of these minds will be found in the faculties of the law schools and the accounting faculties of the schools of business. The author believes that they have an opportunity to make a great contribution to an enduring solution of a problem which is of vital importance, not only to their own professions, but to the taxpayers of the nation and to the Federal government, which depends upon income taxes for so large a proportion of its revenues.

The accounting for depreciation is important to the economist as well as to the accountant because of the possible effects of miscalculated depredation rates on national income and employment. Since it is necessary to use accounting data or statistics derived from accounting data in the study of the relationships of depreciation to national income and gross national product, it is important that there be complete understanding of the accounting and economic uses of the term "depreciation." Current accounting methods produce depreciation rates which are quite rigid over time because they are based on the cost of depreciable assets and the most widely used methods allocate these costs uniformly over time rather than according to use. It is quite often assumed that this rigidity produces excessive depreciation rates during periods of low activity and inadequate depreciation rates during periods of expanding or high activity. It is probable that these depreciation rates are excessive or inadequate in an economic sense more than in an accounting sense. This excess or inadequacy becomes important to national welfare if it has an unfavorable effect on the general level of business activity. An investigation of the consequences of excessive or inadequate depreciation rates must involve an investigation of direct or indirect effects on consumption and investment. It is claimed that during periods of low activity, excessive depreciation rates prevent the payment of dividends and thus curtail consumption. This would be true if it can be assumed that by decreasing depreciation rates, dividends would be increased. This does not seem likely since many corporations report no profit or a loss during depression periods. Furthermore, it is probable that dividends would not be increased during such periods because of a desire to increase safety margins and because of tighter credit markets and falling income. Rather, there is a tendency to maintain dividends because of a desire to enforce a rigid dividend policy irrespective of the business cycle. It is more probable that depreciation rates may have an effect on investment through profit expectations. That is, excessive depreciation rates during a period of contraction might cause greater pessimism as to profit expectations and inadequate depreciation rates during periods of expansion might lead to over-optimism. Thus, it would cause less investment when it is needed most and too much investment when inflation is already in process. This however, is not conclusive nor does it appear to be of a very large magnitude. This does seem to provide some argument in favor of depreciation methods which would provide for greater charges during high activity and smaller charges during low activity. The most practical method would seem to be that which bases the amount of depreciation or a part of it (the "user cost") on the amount of production. Proposed methods which would base the depreciation charge on replacement cost or purchasing power indexes would also further increase the economic significance of accounting depreciation.

The Standards Rating Committee was appointed in 1949 for a period of five years upon authorization of The Executive Committee, meeting in Columbus, Ohio in May 1948. This committee continued the work of similar committees appointed and serving during the calendar years 1947 and 1948. A portion of the program of study by the committee has now been tentatively completed. This report is therefore submitted with the hope that it will be given full publicity to the members of this Association and generally to all interested persons. The primary objectives of the Committee were agreed upon at the first meeting. These objectives may be suggested by the needs expressed in the following statements adopted unanimously by the Committee. The Committee has therefore attempted to bring out a suggested program of acceptable standards. It is important that proposals herein be accepted generally and put into effect as quickly as feasible in the framework of educational institutional procedure or that objections, criticisms and suggestions be made for the purpose of restatement and revision.

In the study of standard costs, the learner usually has difficulty in determining variances in the accounting for the elements of cost and in setting up entries to record these variances. Generally, less difficulty is encountered in computing and recording variances for direct materials and direct labor, where variances are usually considered to arise from two sources, price variations and quantity variations, than is encountered in computing and recording variances for manufacturing expenses, where variances are usually considered to arise from three sources, budget excess variation, idle capacity variation, and efficiency variation. This discussion will disregard the problems arising out of the handling of variances for direct materials and direct labor, it will present a method which has been used successfully by students in learning to determine and to record the three variances that arise in the handling of the manufacturing expenses. Since manufacturing expenses are entered at an applied rate, a difference will usually exist between the actual and the applied expenses at the end of the period. This difference is classified as over-or under-applied manufacturing expenses and is, in reality, a price variation.

Reviews the book "Case Studies in Auditing Procedure" and "Case Studies in Internal Control."

Reviews the book "Guide Book to New York State Income Taxes of Individuals and Fiduciaries," by Samuel M. Monatt.

This article focuses on the nature of reserve for "self-insurance." It is generally recognized that the term self-insurance is a misnomer. By its nature insurance involves a contract by which one party, for a consideration known as the premium, assumes designated risks of the other party, and promises to pay a definite or determinable amount on a specified happening. However, the term self-insurance does have some significance in that it distinguishes the policy of consciously bearing rather than transferring a calculated risk from the negligent failure to insure or in some manner provide for the risk. Montgomery is more specific in concluding that these reserves constitute segregated surplus because loss or damage is merely a possibility, the eventuality of which cannot be foreseen. Summarizing, it is the author's opinion that insurable risks can be estimated with sufficient accuracy to warrant current recognition, and that the possibility of a casualty should be considered in determining depreciation rates unless the risk is transferred to an insurer. Further, the estimated risk assumed should be matched against the revenue of the periods benefiting from the asset, and the resulting credit is properly shown as a contra to the asset.

Reviews the book "The Successful Practice of Accountancy," by Paul E. Bacas.

Reviews several books about auditing. "Cases and Problems in Audits and Examinations," by Christian Oehler; "Case Problems in Auditing," by Arnold W.Johnson; "Basic Audit Case," by Harvey G.Meyer and "Short Audit Case," by Robert Dinman.