Knowledge that Transforms

Breakeven analysis, Cost of capital

Inventory calculation procedures may be viewed as a set of linear transformations or functions which map the appropriate price and quantity vectors into a corresponding set of valuation scalars. This paper examines some of these calculations in terms of elementary matrix operations. The matrix can be readily adapted to the computer, and standard programs now exist for performing matrix algebra operations. These can be used for the required accounting calculations discussed herein. First, we consider purchase transactions; each such transaction may be described by a pair of points representing quantity and unit price, respectively. The purchase quantities, by years, may be represented by a diagonal matrix having, as the elements of its main diagonal, the quantities purchased during each accounting period. Such a matrix, Q, with typical element qji, for n accounting periods would appear as follows:

Financial reporting, Financial reporting users, Controller, Stakeholders of Accounting

James O. Horrigan, The Determination of Long-Term Credit Standing with Financial Ratios, Journal of Accounting Research, Vol. 4, Empirical Research in Accounting: Selected Studies 1966 (1966), pp. 44-62

The earliest known commercial use of the English term was in 15711 although the idea which it conveys is probably much older. Yet when Francis More read a paper2 on goodwill3 to the Chartered Accountants' Students' Society of Edinburgh in 1891, he felt the need to preface his remarks on valuation with an apology. He regretted his inability to quote any authorities on the subject; he was unaware of any previous writings on goodwill valuation. The earlier writings on goodwill had concentrated on legal aspects, particularly the protection of attendant property rights. If anyone had considered the effect of different factors on price and how goodwill might be valued in the absence of the direct evidence of a market transaction, his opinion seems to have remained unpublished. Twenty-three years after the appearance of More's paper, P. D. Leake first published his views on the valuation of goodwill in a paper4 read to the Leicester Chartered Accountants' Students' Society. In the intervening period, however, the subject seems to have aroused considerable interest, and several writings included a discussion of it. Many factors contributed to this surge of interest. An increasing number of accountants were joining professional societies, many of which had been founded in the decade or so before 1891. There followed more organised oppor-

level, the generalizations which emerge will have correspondingly great power as principles, predictors, or guides. The task is by no means simple, and Mattessich properly disclaims belief in the perfection of the result (p. 32). First of all, some comments on generality. Although he seeks to formulate the assumptions in the most general terms, all the illustrative and explanatory comment on the assumptions, with one or two minor exceptions, has reference to business entities. It would have been of interest to have some illustration of the counterparts of the examples given, or specific examples of the interpretation to be given to the assumptions and their component terms, in the case of service organizations and economies as wholes. One may well suspect that the absence of illustration is evidence that, after all, private accounting and national accounting may not be considered as of the same class. The generality of the statements of the assumptions is indicated in each case by the formula exists.. . or some equivalent indicative. Thus, the assumption of monetary values reads: There exists a set of additive values, expressed in a monetary unit; this set is isomorphic to the system of (positive and negative) integers plus the number zero (p. 32). And to take an example of the class of assumptions which are described as place-holders: There exists a set of hypotheses determining the value assigned to an accounting transaction (p. 42). A system built up on such pure postulates escapes many of the difficulties which arise if the postulates are to be tied to statements of function. A hypothesis is itself functional; we formulate hypotheses to serve our ends. It seems This content downloaded from 207.46.13.131 on Sun, 16 Oct 2016 05:11:45 UTC All use subject to http://about.jstor.org/terms

On the occasion of a corporate merger or combination, the most important issue which arises is the restatement of assets from historical costs to current values. Whether to make such an adjustment is the primary decision to be made before any other major question is considered.' Thus far, the usual approach to this problem has been to base the decision upon whether the combination qualifies as a or a of interests. The first expression refers to situations in which assets of certain parties to the transaction are deemed, in effect, to have been purchased by the surviving entity or interests, with the implied conclusion that they should be restated to current market figures. In the second case, assets are conceived as being merged, without any inference of a transfer or thereof. The implication in this latter case is, of course, that the merged assets should retain the bases of accountability previously adopted by the constituent firms, and this normally means unamortized historical costs. Thus, the attention of accountants has been given primarily to the development of rational criteria for distinguishing between the purchase and the pooling situation, as those two terms have been defined. The continuity of individual stock ownership, management, business objectives, and the business enterprise have all been postulated as appropriate guidelines, together with such other considerations as the relative sizes

Defense spending, Fixed price contracts, Overhead costs, Bloodhound

Financial ratios, Solvability, Predictability