T HE intent of this study is to ascertain that linear combination of financial characteristics which large industrial corporations with low ratios of earnings per share to common stock price from those with high ratios.' The linear transformation of several variables into a single variate (z) permits the categorization of firms on the basis of whether the z values are greater or less than a predetermined mean value. The proposition which underlies the division of firms into high and low ratio groups is that, if allowance is made for the historical nature of earnings and for market imperfections, the earnings-to-stock-price ratio reflects the composite market valuation of such factors as financial risk and dividend policy.2 With this in mind, it is interesting to inquire whether certain basic measures can be used to differentiate successfully between the two classes. Discriminating variables, that is, financial characteristics chosen to reflect individual elements of risk and other factors which affect e/p ratios, include the ratio of dividends to earnings, the ratio of current assets to current liabilities, the rate of return on additional investment, the relative change in sales, and the comparative stability of the common stock price. The construction of the problem is designed to parallel the thinking of investors and/or financial executives. Despite the apparent continuity of risk gradations, firms tend to be grouped on the basis of low, medium, and high risk; e/p ratios (or their reciprocals) are often used as the initial stratification variable; and attention is customarily directed to the extreme classes. The evaluation of common stock and other corporate securities tends in ddition -to be carried out in terms of certain conventional ratios. Discriminant analysis, as employed here, is not intended as a substitute for multiple regression analysis. Given little knowledge as to the appropriate form and complexity of the general regression function, this approach nonetheless serves as a useful device for observing directly those characteristics which distinguish lowand high-risk categories. The relevant information obtained is large relative to the sample size. The derived relationships may in turn facilitate the formulation of multiple regression functions. The potential utility of the analysis which follows is at least threefold. First, procedures for the selection of underand overvalued stocks may be improved by the introduction of discriminant analysis. If the discriminating index suggests that a firm clearly belongs to one group while its e/p ratio indicates otherwise, some reason exists for believing the company's stock to be underor overpriced. Second, partial conclusions may be drawn as to the influence of changing stock market levels upon the importance of different factors which condition e/p ratios. Distributions of e/p ratios, exhibited in Table i for samples of large industrial firms, reflect (for example) a greater central tendency for the I952-55 period than for I948-5I. If the discriminating function based upon the I952-55 data fails to predict well for the earlier period, there is some presumption that weights of the individual variables have shifted. The index characteristic of discriminant analysis affords certain advantages in this respect. The discriminant function is applicable whatever the level of stock prices, provided the * The helpful assistance of W. W. Cooper and Carl Hensley, Carnegie Institute of Technology, and Charles Christenson, Harvard University, is acknowledged. The computations were performed in the computer center at Carnegie Institute of Technology. I The method employed is described in G. Tintner, Econometrics (New York, 1952), 96-I02. See also M. G. Kendall, The Advanced Theory of Statistics (London, I946), Vol. ii, 34I-48. By best discriminates is meant that the chance of erroneous classification is approximately minimal. 2Earnings-to-stock-price ratios are hereafter referred to as e/p ratios.

This article informs that in financial reporting center primarily around failure to disclose the aggregate effects of both price-level changes and "footnote" liabilities. Accounting literature has treated problems arising from price-level changes extensively in recent years, but has neglected those arising from the incomplete recognition of liabilities. It is with the idea of redressing this disproportionate emphasis that the following comments pertaining to "footnote" liabilities are offered. In a sense, the full disclosure of liabilities is more definitely the accountant's responsibility than is the adjustment for price-level changes. It may be that price stabilization policies, clearly beyond the scope of accounting, are the only satisfactory solution to the problem of price-level changes. It may also be that some readers of financial statements prefer money, as opposed to deflated or real, values. For immaterial items, the consensus appears to be that application of the full disclosure and uniform treatment requirements is discretionary.

The article highlights that the tax notes were presumably purchased with the intent that they be used for the payment of federal income and excess profits taxes, it is also good accounting practice that they are shown as a deduction from the accrued liability for such taxes in the current liability section of the balance sheet. The purpose of this article is to investigate the current popularity of this alternative treatment of U.S. government securities in corporate balance sheets and to reexamine the argument for allowing Treasury Tax notes as deductions from accrued tax liabilities. The data required for this study are derived primarily from the 1950 balance sheets of 107 large non-financial corporations. From the information furnished by this sample, some idea can be obtained as to the extent to which government securities are employed as liability offsets and the effects this practice may have on financial ratios, particularly the current ratio. In the opinion of the writer, this way of handling tax notes runs counter to the much publicized accounting doctrines of full disclosure and consistency or comparability.

The article focuses on the determination of the most efficacious way of valuing assets on a consistent basis in accounting. A primary function of accounting is to provide entrepreneurs and other interested persons with useful data upon which to base their decisions. This objective can logically be attained best by valuing assets in real terms by adjusting their monetary expressions to changes in the general price level. The shift of emphasis from the balance sheet to the income statement during the preceding two decades has spotlighted the inherent fallaciousness of the doctrine of conservatism. The understatement of an asset in the balance sheet of one account big period means an overstatement of profit in another period when the asset is physically consumed in the process of production. One way of retaining conservatism in the balance sheet, and of avoiding the perils of profit overstatement, has been suggested by the proponents of the base-stock method and of Last-in, First-out method.