Knowledge that Transforms

Reviews the book "The Development of Economics," by William A. Scott.

Abstract The British were the first to face the problem of finding a way to control unsocial individualism without resorting to absolute prohibitions. Early in the nineteenth century the government was under pressure to relax the prohibition of company promotion which dated from 1720 and to make the incorporation of joint stock companies somewhat easier. But the thought of simple repeal of the Bubble Act brought visions of another disastrous era of unrestrained stockjobbing and wild speculation. The problem was to find a way to yield to the pressure for free incorporation without opening the way for former excesses. The answer was found in breaking the privacy of accounting information. This was the British approach in the early nineteenth century to a control over private business affairs through semi-public accounts. Attempts at control in the United States came later and seem in comparison rather unorganized. The U.S. have had nothing quite as effective as the British registration of proposed incorporations.

Abstract The fault of having two bases for dividend is that they may be considered identical when that is not the case. With two bases in existence the way is opened for creating an excess of assets by revaluation and for paying dividends out of prior profits while allowing revaluation surplus to take the place of the profits withdrawn. Recent experiences have suggested the need for some measure of enlarged control in the public interest over corporation finance and operation. For the most part these control measures have been aimed at the issue of securities, that is, aimed at controlling promotion. But promotion is secondary to the expectation of profits and expectations of future profits rests very largely upon the current and recent past experience in producing profits. It is clear therefore that a sound legal and accounting determination of real profits has much more significance than has the theoretical preservation of a margin for the protection of creditors of a limited liability corporation.

Reviews the book "The Book of the Stock Exchange," by F.E. Armstrong.

Reviews the book "Practical Credit Analysis," Eugene S. Benjamin.

Abstract This article focuses on the sources of capital surplus. Capital surplus may be defined as an excess of contributed capital over legal capital. American courts have developed many theories, among them the "trust fund," "the fraud," and the "holding-out" doctrines, to support the established rule that the legal capital of a corporation may not be reduced except through formal amendment of the corporate charter or as a result of operating losses in excess of accumulated surplus. In the eyes of the law any net worth in excess of legal capital is surplus, and in the absence of statutory provisions to the contrary, may be used by the board of directors for any desired purpose. These concepts of contributed capital and legal capital are of fundamental importance to the accountant. It seems hardly necessary to emphasize before a group of accountants the importance of distinguishing between contributed capital and earned capital. But to the lawyer and the courts, legal capital is the important fact, and no matter how much the accountant disapproves of certain legal definitions of capital he must recognize that the force of law makes them facts, and that these facts should be shown on his financial statements.

Abstract The article presents a discussion on the Retail Method of Inventory. The purpose of this method is to provide a simple, practical control over the merchandising activities of a business. It may be called a modern method of accounting in the sense that its primary purpose is not to record what has happened, but to provide an effective control over what is going to happen. The basic idea is to gain control of the element of profit in an article at the time it is bought and to retain control until the profit is realized by the sale of the article. Another purpose of the Retail Method is to arrive at the true value of merchandise inventories. The two purposes mentioned are today generally regarded as the most important. It appears, however, that the Retail Method originated solely for the purpose of providing a perpetual book inventory. This it does, of course. In fact the simplicity of a running inventory record on the retail basis is alone a sufficient reason for using the retail method.

Abstract When the National Industrial Recovery Act (NIRA) gave the U.S. President power to impose requirements for the making of reports and the keeping of accounts, when it banned unfair competitive practices and indicated that destructive price cutting was one of them, and when the codes of fair competition almost from the first provided for uniform systems of accounting for industries and specified that selling products or services below cost was destructive price cutting, accountants began to sit up and take notice. The NIRA does not, of course, constitute the first time that accounting has been given recognition as a means of facilitating the relations of government to private industry. One needs only to point to the uniform accounting systems devised by the Interstate Commerce Commission and the several state utilities commissions for railroads and utilities. The several Revenue Acts enacted since 1913 have in effect required all taxpayers and potential taxpayers to keep such records as would make possible an accurate determination of the liability for income taxes.

Reviews the book "The Economics of Recovery," by Leonard P. Ayres.

Abstract This article discusses some aspects of standard costs. There are many kinds of industry which readily lend themselves to the use of standards and some in which the use of standards is the only practical way by which cost accounting data can be assembled without increasing the cost of production to a prohibitive figure or delaying the production procedure by endless weighings, or counting. This has been recognized for many years and the practical accountant used formulas, or bills of material, or normal averages for years before the present publicity was so brilliantly focused on so-called "Standard Costs." It is unfortunate that profession has used so much salesmanship and so little common sense in amplifying the possibilities of comparison which the use of standards makes possible. The installation of cost methods which will be successful in a given plant must first of all, irrespective of accounting theories, be designed for the use of the particular executives associated with the plant in question.