Knowledge that Transforms

Income can be measured properly only when every attempt is made to segregate and allocate overhead costs to units of output so that costs of products may be matched or associated with the revenues derived from the sale of merchandise. To accomplish this task the generally accepted fixed-variable cost breakdown should be discarded for income measurement purposes. The straight-line amortization of costs associated with fixed assets should also be discarded. In place of straight-line amortization, a unit-of-output amortization plan or an approximation thereto should be used. The approximation would be the cycle overhead concept. The fixed cost portion of semi-variable cost inputs should be reassociated with their variable counterparts and then allocated to the output for which they were absolutely necessary elements of production. Finally, unit costs should be allowed to fluctuate with volume within the range for which semi-variable cost inputs are absolutely necessary costs of production.

Reviews the book "Municipal and Governmental Accounting," 4th ed., by Irving Tenner and Edward S. Lynn.

Reviews the book "Linear Programming and the Theory of the Firm," by Kenneth E. Boulding and W. Allen Spivey.

Reviews the book "National Income and Flow-of-Funds Analysis," by John P. Powelson.

Any financial statement provides a partial basis for evaluating the results of current operations and current financial position. Financial statements relating to periods of less than one year have the same evaluation and forecasting objectives as annual statements. However they differ in a manner that they are also used by outside investors in forecasting the results that will be shown on the annual statements. But interim statements have never received the professional attention that has been devoted to annual statements. The purpose of this research paper is to explore the objectives of interim reporting and to make a tentative statement of concepts to be applied in the development of interim financial statements. Through this exploration it suggests that the usefulness of published interim income statements in predicting annual profit is likely to be impaired if these statements do not include adjustments for fluctuations in the timing of cost releases and concludes that the management has a responsibility for anticipating in income statements for the first three quarters the annual total of a wide variety of business expenses.

Reviews the book "Readings in Cost Accounting, Budgeting, and Control," 2nd ed., by William E.Thomas.

It is generally agreed that depreciation accounting attempts to allocate the cost of an asset to expense so that each year of the asset's useful life bears a reasonable portion of the expense of using the asset. It is the argument of this article that the choice of the method of cost allocation should not be left to whim or chance, but rather should be the result of a logical theory of depreciation. To implement the theory of depreciation, it's necessary to view the purchase of a long-lived asset as the acquisition of a series of revenue producing services rather than the purchase of a physical unit. It can be assumed that two of the most important measures of performance used by investors, management, social scientists, and others are the income figure, and the return on investment. Conventional depreciation accounting procedures generally make both of these computational subject to severe criticisms. The depreciation charge is based on the expectations at the time of purchase. If after acquisition management changes the method of operation, or economic conditions are not as forecasted, the depreciation schedule is not changed. However, the reported income and return on investment will differ from the planned figures, thus they will indicate when there is a need for investigation.

As a whole, the new Model Income Statement represents a giant step forward in the direction of full disclosure. Although its basic structure is entirely different from that of the conventional American income statement, the information to be gained by it is equally informative. The disclosure of net sales, of the value of production, and of profit or loss from pooling agreements truly represents a climax in the history of German financial reporting. In conclusion it may be noted that the new Model Income Statement is mandatory only for stock corporations of which there are about 2,500 in Germany today. while about 25,000 "Gesellschaften mit beschrankter Haftung" (roughly: closely held corporations) are still free to use the form they see fit. Nevertheless, the new Model Income Statement is regarded as the codification of good accounting principles, and as was the case with the former income statement, it will certainly be adapted also by many of the other companies.

Notwithstanding the diversity of content and emphasis in the first-year course in accounting among different schools, it should be generally agreed that a major object of the introductory course is to enable the student to acquire significant skills in utilizing financial statements as analytical tools. The author in the article emphasize on one of the most significant inherent limitations of conventionally-prepared financial statements, the misstatement of historical cost as a consequence of creeping inflation, which should be forcefully demonstrated to all beginning accounting students. The magnitude of the entire price-level problem is too great to be ignored in the first-year course. It is important to anyone who expects to use financial statements-particularly in a day when published statements contain no hint that large profits and doubly large earning rates are creatures of a failure to make explicit correction for year-to-year changes in the potency of the monetary unit. Such financial statements can entrap the unwary, and it certainly should be an object of any introduction to financial accounting to warn the student of misleading accounting data. Most likely, at the present state of accounting development, the price-level issue should be scheduled as one of the last topics in the introductory-course discussion of financial accounting.

Reviews the book "Accounting Theory and Practice-Intermediate," by Robert L. Milroy and Robert E. Walden.