Knowledge that Transforms

The article discusses the problem of financial reporting of changing price levels in corporate statements. The major concern is depreciation accounting. Fixed assets are being depreciated on a cost basis while replacement of such assets on retirement may be at higher replacement costs. With high dollar profits appearing on profit and loss statements, corporations have been subject to demands from all sides: labor, stockholders, price reductionists, and tax-minded public officials have sought to lay claim to part of these profits. The cause of all the difficulty is that financial reporting has traditionally been done in terms of the accounting dollar, because it is the common denominator and representative of value, which value it has been hoped would not vary. Money is just a medium of exchange and inspite of its shortcomings, money is the only practical unit of accounting and should continue as the term in which operations are reported. Presumably the securities investor is comparable to the investor in physical goods or commodities, although the security holder owns his property indirectly through the share of stock or jointly with other stockholders. He expects to have an indirect interest in physical goods, which goods he hopes will have a purchasing power that rises proportionately with the rising price level. Management must therefore conserve not only the same amount of accounting dollars but they must conserve the same amount of economic dollars. The dispute between those who believe that accounting should be in terms of the dollar bill and those who would have it in terms of the economic dollar is most often directed at depreciation accounting.

The primary case for the uniform achievement tests of the American Institute's Committee on Selection of Personnel has been argued in these columns. A secondary use to which they may be put has been developed at the University of Michigan and may well find useful adoption elsewhere. One of the most difficult judgments which a college admissions officer, or department head, is called upon to make is the evaluation of credits brought in by students transferring after one or more years at some other college. There is always a human desire to be as generous as possible, for the sake of the transferee as well as for reasons of inter school policy. This desire must be balanced by the need to protect the school's own. reputation when it is staked upon the eventual graduate. The fundamental welfare of the transferee himself as well as the welfare of the advanced. classes into which he will go also demands the accurate appraisal of his achievement to date. The problem is especially pressing in subjects such as accounting where each course in the "accounting major" sequence so directly relies upon the mastery of the accounting courses which have preceded it.

Reviews the book "Studies in Income and Wealth."

Committee of Accounting procedure of the American Institute of Accountants in Bulletin No. 35, dealing with the method of presentation of income and earned surplus, makes the recommendation that the net income for the period be shown henceforth without deductions or additions of items which are properly excluded from the determination of net income. These items consist primarily of charges and credits with respect to the following general purpose contingency reserves, discussed in Bulletin No. 28, inventory reserves, discussed in Bulletin No. 31, extraordinary items which, if included, would impair the significance of net income, discussed in Bulletin No. 32 and excessive costs of fixed assets and appropriations in contemplation of replacement of facilities at higher price levels, discussed in Bulletin No. 33. There is no argument with respect to items mentioned in Bulletins 28, 31 and 32 and it is gratifying that the committee recommends the exclusion of such items in the determination of corporate net income.

The primary problem in the determination and interpretation of income during a period of rapidly increasing prices is caused by the matching of revenues at current price levels with costs which represent the expiration of assets acquired at materially lower price levels. Expenses or costs chargeable against revenue during an accounting period may be divided into two categories: those which arise from a current disbursement of cash or the incurrence of a liability, and those which represent the using up of assets which were acquired in a previous period. When the benefits derived from a particular item of expense, such as sales salaries, are deemed to be realized at about the same time the expenditure is incurred, the purchasing power of the dollars of revenue and of the dollars of expense may, for practical purposes, be considered to be the same. When, however, the benefits derived from the consumption of an asset acquired in a previous period are matched against revenues of the current year the dollars of revenue and of expense which are being compared do not have the same values.

A meeting of the American Accounting Association is a particularly good place for the Chairman of the Board of Examiners of the American Institute of Accountants to discuss the Uniform CPA Examination. It is here that the author would expect to find the sort of constructive criticism that can be most helpful in the continuing efforts of the board to supply an examination which will, if possible, better satisfy and more fairly serve the public, the profession, and the candidates, as well as the examining boards of forty-six states, four territories and the District of Columbia. There would be no law, and certainly not fifty-three of them requiring examination to prove the qualifications of those who would hold themselves out as capable of serving the public as certified public accountants, if the only purpose of such legislation was to serve the special interests of a favored few whose vanity had prompted them to secure for themselves a special designation placing them above their fellows.

The article presents information about last-in-first-out (LIFO) as a method of determining depreciation. The present problem of depreciation that is facing the accounting profession provides a vivid illustration of difficulties that arise only because of the variance between economic and accounting concepts. The problem is a result of the rapidly changing price level, but the inability of the accounting profession to supply an adequate procedure to cope with the situation stems, in the main, from its insistence upon using the historical cost concept in spite of the fact that cost determined by this method bears little or no relation to economic cost. An instance of the inadequacy of the present concept of accounting in this matter can be found in the recent action of the United States Steel Corp. in shifting to the LIFO method for handling long term inventories. In discussing short-term inventories, the United States Steel Corp. made the following statement in its 46th Annual Report, "an accepted procedure for determining the cost of short-term inventories is the LIFO." Commenting further on this procedure, the report states that this method is a generally accepted accounting practice.

Reviews the book "Accountants Reports," 4th ed., by William H. Bell.

The completion of the hypothetical audit, the initial study of text material, and three examinations require about thirty-five class periods. The last ten to fifteen periods are devoted to a review of text material, the case studies, and the tentative statement of auditing standards recently published by the American Institute. The writer also regards the time spent on review as the most valuable learning time in the quarter. Students comprehend the technical problems and questions better after they have completed the hypothetical audit and studied the text. Students often begin their study of auditing after they have learned a number of accounting fundamentals and before they have grasped many of the relationships among these fundamentals. This course enables them to grasp more of these relationships, because they use many of the fundamentals in completing a hypothetical audit. Prior to their study of auditing, most students learn to prepare financial statements by sorting and listing ledger balances, but in completing their hypothetical audit they weigh the significance of their data.

A recent survey by the Controllership Foundation to ascertain the public's acceptance of the facts and figures of business accounting disclosed several facts. The accountant is also confronted with the possibility that over-simplification of financial statements might easily result in confusion rather than clarity. The top managements, the controllers, the public accountants, the educators, the American Institute of Accountants, and the Controller's Institute of America have tremendous responsibility and an opportunity during the next five years to make the corporate annual report the keystone or media of communication to correct public and employee concepts of American business. Hence, improvements in financial statements and annual reports may well be the result of trial and error and certainly requires the exercise of good judgment and knowledge if continued improvement is to be had; innovations for innovation's sake are not satisfactory. Therefore, the controller and the public accountant are presented with a continuous challenge and grave responsibility to make the annual report more valuable and informative by their influence on its content and preparation; only through these combined efforts will the annual report gain the confidence of the public, labor unions, the investors and top management.