Abstract Reviews the book "Examples of the Use of FASB Statement No. 33, Financial Reporting and Changing Prices."

Abstract The article states that the economic theory is not a monolithic structure. A liberal use of assumptions has provided the base upon which the traditional theory of the static, profit maximizing firm has been constructed. Since the rent, taxes, and insurance associated with productive facilities are obviously independent of volume, the author suggests to single out depreciation of plant and equipment for further investigation. The cost of depreciable plant and equipment usually expires over a period of several years, because of wear and tear, obsolescence, and general deterioration. This time period is normally referred to as the useful life of the facilities. Now it may be true that some assets have the inherent capability of being used in the manufacture of a known stated number of units of production. According to the author a widely accepted way of allocating the cost of the mentioned factors over their useful lives is through the use of straight line depreciation, where the charge against income each time period is simply equal to the cost of the lumpy factor divided by the number of time periods in its useful life.

Abstract Reviews the book "Replacement Costing: Complying With Disclosure Requirements," by Melvin C. O'Connor, Rita C. Grant and Harold M. Sollenberger.

Abstract For years the SEC had required companies that experienced increases in their equity in subsidiaries due to a subsidiary stock issuance to enter that increase (or ‘gain’) in Paid-in Capital. In 1983, the SEC changed its views on this issue in Staff Accounting Bulletin No. 51 [SEC, 1983]. Following the conclusions of an AICPA Issues Paper on the subject, the Commission decided to offer companies the option of reporting such gains from subsidiary stock issuances either in capital or in income in consolidated financial statements. This treatment was later extended to stock issuances of nonconsolidated equity investees, and companies began reporting these gains in income. This paper critically examines the view taken in the Issues Paper and reflected in SAB 51, that gains on subsidiary stock issuances are similar in substance to gains realized when the parent sells part of its investment in the subsidiary It also reports on the treatment of these transactions in practice—and the window—dressing potential-by companies reporting them. We conclude that while a subsidiary stock issuance is similar in many respects to a parent's sale of its subsidiary's stock, there are important differences. Moreover, the proper accounting may depend on the theory of consolidation adopted. Public reporting of these transactions is often inadequate, particularly with respect to tax effects (an unsettled area in which standard-setting may be needed) and footnote disclosure.

Abstract Reviews the books "Foreign Exchange Risk Management under Statement 52, A Research Report," and "Determining the Functional Currency under Statement 52, A Research Report," by Thomas G. Evans and Timothy S. Doupnik.

Abstract ABSTRACT: Although many firms now prepare a cash-based statement of changes in financial position, reported "funds from operations" is typically a measurement of working capital. The statement reader wishing to determine cash flow from operations must use a series of indirect adjustments to do so. Our purpose in this paper is to identify the inherent difficulties the reader encounters when using this indirect method to convert reported funds from operations to a cash flow amount. We demonstrate how the indirect method will in fact not equal actual cash flow from operations because of numerous conceptual and practical problems encountered when applying the necessary adjustments. We develop illustrations of these problems, and we show how cash flow from operations calculated by the indirect method is, at best, an estimate of actual cash provided by operations.

Abstract ABSTRACT: In a provocative but rarely cited article, Anderson [1977] examined the potential implications of efficient capital markets research for auditors' legal liability under the common law. He concludes that if common law courts understand and apply the findings of efficient markets research in their deliberations, the class of potential plaintiffs may be enlarged, but auditors' overall economic liability for damages may be reduced. The present article criticizes certain of Anderson's conclusions in the common law context and questions the relevance of his analysis because (1) investors' suits against auditors of publicly-held companies generally are brought under federal statutory law--the Securities Act of 1933 and the Securities Exchange Act of 1934--and (2) the class of publicly-held securities investigated by efficient markets research is generally also subject to the 1934 Act. Some federal courts applying the 1934 Act have already implicitly acknowledged market efficiency by allowing plaintiffs to show indirect "market reliance" rather than prove direct reliance on a specific representation made by the auditor. Thus we find that introducing knowledge of market efficiency into the legal system will probably not have the far-reaching effects contemplated by Anderson.