Reviews the book "The Use of Computers in Accounting," by Robert B. Sweeney.

The purpose of this article is to re-emphasize the effectiveness of simple ranking techniques in the heuristic solution of capital budgeting problems. Certainly, the application of mathematical programming techniques to capital budgeting decisions provides a most challenging area for research. Such programming formulations have continued to increase their realism by accounting for capital constraints, institutional requirements, and the effect of uncertainty. To examine the relative efficiency of selecting capital projects by a ranking strategy, it was necessary to have several hypothetical capital budgeting problems. The efficiency of simple ranking techniques requires that projects have a reasonably proportionate utilization of resource constraints. However, even in the absence of this condition, it is possible to generate an "approximate" solution by extending the previous simple ranking techniques to a "multidimensional" ranking criterion. Basically, the multidimensional ranking algorithm is an extension of the simple ranking techniques, and this extension is required for capital budgeting problems with multiple resource constraints which have considerable variation in their utilization by the proposed investment projects.

This article presents information on the smoothing hypothesis in accounting. This hypothesis assumes that managers perceive their performance measure to be a decreasing function of earnings variability. Based upon this assumption, managers could be expected to make accounting policy decisions which tend to smooth reported earnings. The focus of this paper is on the differential impact of the cost versus the equity method of accounting for unconsolidated subsidiaries. Assuming that dividends typically fluctuate less than earnings, one might reason that the cost method would generally result in smoother reported earnings for the parent. However, closer examination shows that even if subsidiary dividends fluctuate less than subsidiary earnings, the equity basis can still result in smoother reported earnings. The least squares criterion was used to develop a linear relationship between earnings and time on each basis. The slope co-efficient of the line was used as an estimate of the rate of growth in before-tax earnings. Thus, each firm had a growth rate estimate for each valuation basis. The variability of earnings about the linear trend line described above provided the basis for a measurement of earnings variability. The actual measure of earnings variability used was the mean square error (MSE) of earnings about the linear trend line standardized by dividing by average earnings over the time period considered.

The article reports that in the October, 1971 issue of "The Accounting Review," professor Harold Bierman presented a discussion of a situation in which the application of general price-level adjustments to basic historical cost data results in an adjusted historical cost number which is significantly different from "value." "Value" for purposes of the Bierman discussion is estimated using discounted cash flow analysis. Bierman examined two cases. In the first case, the company incorrectly forecasts changes in the general price level and subsequently determines that increases in the general price level have occurred and are anticipated to occur in the future. In the second case, the company correctly anticipates movements in the general price level and adjusts its acceptable rate of return criterion accordingly. In both, Bierman assumes that cash flows from the project under analysis are "perfectly positively" correlated with movements in the general price level. Bierman's analysis uses discounted cash flow and annuity depreciation methods. He demonstrates that a difference exists in the net value of an asset when the investor ignores price-level change in the estimate of cash flows and the discount rate, and when he properly estimates the effect on both variables.

Reviews the book "Financial Accounting: The Main Ideas," by Arthur L. Thomas.

Introduction, 426. — I. The structure of the dual economy, 427. — II. Labor force growth and biased technological progress: comparative statics, 432. — III. Labor force growth and biased technological progress: dynamics, 435. — IV. A numerical experiment, 436. — V. Conclusion, 443. —Appendix A, 445. — Appendix B, 447.