Knowledge that Transforms

Reviews the book "Canadian Accounting Practice," by W.G. Leonard and Frank W. Beard.

Reviews the book "Government Budgeting," by Jesse Burkhead.

Reviews the book "Determinants of Capital Expenditures: An Interview Study," by Robert Eisner.

Reviews the book "Price Level Changes and Financial Statements--Basic Concepts and Methods," by Perry Mason.

Reviews the book "Cost Accounting," 2nd ed., by Adolph Matz, Othel J. Curry and George W. Frank.

The article presents the author's view on accounting in general and price inflation in particular in the U.S. Every semester when he reviews with a class of students the impact of price inflation on accounting, and every time he reads a published article on this subject in an accounting or business publication, he becomes more aghast at the complete and universal uncritical acceptance of statisticians' superficial findings on this subject. Students particularly seem to be unhappy about the privations which they attribute to high prices. In his opinion, such sadness is fallacious. It is based on views which are biased because those who hold those views have not considered circumstances that are ignored by the statisticians. Great ability is needed to contest unanimous fallacies. The task probably is beyond his abilities, nevertheless he does not remain silent in the presence of neglected truth and unwarranted sadness. He hopes to bring some joys to saddened hearts through this article where he discusses the topics mentioned above.

In sum, under Lifo, inventories no longer perform the function of taking up the slack between production and sales. Rather, inventory management policies are determined in the main by the artificial relationships developed above. The end result is a situation that accents, rather than mitigates, the undesired effects of business fluctuations by creating inflationary pressures that would other- wise be absent. The expansion and contraction stages of the inventory cycle are exaggerated, and inventory investment becomes an even more volatile component of private gross capital formation than has been in the past In the case of copper at least, the greater stability of reported earnings under Lifo does not appear to have resulted in the hoped for effect of reducing investment during the boom. Most industries that use Lifo do not have an institutional pricing structure and complete substitutability of product such as that found in copper. However, in these other industries, Formula (1) can be employed to determine the "grey" or "black" market price that a Lifo company can afford to pay for each unit of a commodity in order to improve its marginal cash position. For example, a steel company can use Formula (1), adjusted for smelt charges and technological factors, to arrive at the limit price that it can afford to pay for scrap. Or, if smelter capacity is not available and the Lifo base stock is seriously depleted, Formula (1) can be used as a guide in determining the price to be paid for scrap metal to be used to build up a processed metal inventory if permitted by the Bureau of Internal Revenue. Both Table 1 and Formula (1) are based on the simplifying assumption that the Lifo base stock is homogeneous in composition with respect to the cost of each unit of inventory.

When costs are incurred for purposes of generating revenue, useful information can be obtained by a measurement of such costs and a consequent matching with revenue. As investment purposes shift to social benefit, either in part or in whole, a crucial question as to the relevancy of costs and revenue arises. A portion of total costs incurred may be considered as related to the ensuing revenue, but the problem of prorating such costs between the two ends, revenue and social benefit, is insurmountable. The problem of allocating joint costs to products seems relatively simple by comparison. No such allocation need be made however, for an absence of revenue indicates a greater deficit to be covered by groups other than patients. Inasmuch as the residual of such matching would be affected by many elements other than revenue, it is believed that the term "net income" is grossly misleading, particularly so if identified as that of a fund rather than the economic unit. It is further believed that a measurement of total costs matched with asset in- flows can contribute to an important question-the cost-shares to be bone by various groups. The usefulness of the fund structure is such that no attempt should be made to impose depreciation upon the Statement of Revenue and Expenditures. It is suggested instead that in addition to other statements, a new statement be prepared designed to show costs of operations and how the burden of such was distributed. This suggestion is illustrated in the following statement.

Great changes are taking place in accounting. A rapidly changing business community is demanding that accountants recognize the new "facts." Meanwhile leading accountants are attempting to meet the demands within the same old framework of double-entry bookkeeping. The time has come to evaluate present day accounting in its entirety. It is true that some attempts are being made to modify "accepted practice." The recent and numerous bulletins of the American Institute of Accountants illustrate this clearly. Such areas as income tax treatment, composition of current assets, contingency reserves, and net profit are far different than they were a decade ago. Even now tremendous pressure is building up to change original cost and depreciation accounting. Most of the pressure is coming from the business community. Accounting statements are expected to indicate the economic realities of a business unit. It no longer satisfies the accountants' audience to say that things are in accordance with certain principles, consistently applied, etc. People want balance sheets and profit and loss statements to tell the real story.

The article discusses the differences between the profession of accounting and the profession of accountancy. It lists the definitions of the terms which brings one to the conclusion that there is no profession of accountancy but there is a profession of accounting, namely public accounting. The article suggests that a profession should exist if practitioners are to receive full professional recognition and status. It defines the profession of accounting, a controller's obligation to judge, measure and disclose which extends through the internal and external fibre of the organization. It discusses the question of whether a controller can obtain true professional status and enumerates the four specific requisites against which the professional status of a controller can be measured, which are, special training for a degree distinct from the usual degrees in Arts and Science, principally mental rather than manual or artistic skill, recognizing the duty of public service and the compliance to a code of ethics for controllership.