Economics and Insurance: A Correction The Review of Economic Studies, Volume 5, Issue 2, February 1938, Page 157, https://doi.org/10.2307/2967531 Published: 01 February 1938

The following problems were presented by the Board of Examiners of the American Institute of Accountants as the second section of the examination in accounting theory and practice held in May, 1938. On January 3, 1936, the Eastern Manufacturing Corp. organized a subsidiary, the Eastern Sales Company of France, to operate at retail in Paris. Not having had any previous experience with foreign exchange, the treasurer of Eastern Manufacturing Corp. consults an account in February, 1937, concerning the valuation to be placed on the inventory of Eastern Sales Company of France at December 31, 1936, and the handling of intercompany transactions. The following data are furnished, sales of product by Eastern Manufacturing Corp. to Eastern Sales Company of France at $5 per unit, payable in dollars, February 15, 1936, 200,000 units, April 4, 1936, 10,000 units, July 20, 1936, 20,000 units and November 14, 1936, 50,000 units. The following information is requested, a statement showing transactions in the intercompany dollar account with Eastern Manufacturing Corp. as they should be recorded in the books of Eastern Sales Company of France.

Accountants, almost without exception, agree that goodwill should not be recognized in accounts until a bona fide purchase has been made. They are fully aware of the fact that goodwill created by a concern is just as valuable and in most instances, more valuable to that concern than to the firm which might make a specific purchase of that goodwill. Apparently there are a number of valid reasons which could be given in support of this position taken by accountants, other than the use of the term goodwill in connection with the watered stock frauds of the past. It is a generally accepted rule in accounting that it is the function of accounts to show the costs of assets, not the present value. This view may appear illogical at first sight. However, since an asset may have more than one value at a particular date, and since the actual cost of the asset to the organization is the only one which is capable of accurate determination, the latter, however, appears to provide a more realistic basis for the development of accounting principles, in spite of the fact that it encounters an obstacle in the situs of legal title.

Not much has been said about goodwill upon financial statements. Of three books on goodwill and its treatment in the accounts no mention was made of goodwill upon the balance sheet or profit-and-loss statement. A few writers have given their views as to its position in the balance sheet or have stated its proper position without giving reasons for their point of view. Again, but few writers have considered the question of whether amortized goodwill should be charged to current profit and loss or to surplus directly. In this paper, an attempt has been made to give a fairly complete discussion of these theoretical questions. In addition, the practical side of these questions is considered through the introduction and analysis of a number of recent financial statements of outstanding industrial concerns. The first question discussed in this article, and probably the most important, regards the placement of goodwill on the balance sheet. The Federal Reserve Board bulletin of 1917 recommended that the amount of goodwill be shown as a subtraction from the surplus and capital stock of the corporation.

The article focuses on professional examinations for students of accounting. Five problems have been presented from the Certified Public Accountants examination prepared by the Board of Examiners of the American Institute of Accountants. These problems constitute the second half of the examination in accounting theory and practice and were used by the examining boards in thirty-eight states and three territories on November 19, 1937. The candidate was required to solve problem 1, problem 2, problem 3 or 4, and problem 5. The weight given to the various problems has been given. In one question details of a hypothetical company, Miracle Chemical Company manufactures two products, Mirachem and Corim has been given. Both are made from the same raw materials in the same proportions. The plant of the company is divided into four departments. The expenses of the different departments have also been given. From the data given in the various problems the students are required to prepare a statement of profit and loss.

The article presents accounting problems which were prepared by the Board of Examiners of the American Institute of Accountants and used by the many cooperating States in the examinations held on May 12th and 13th, 2004. The examination in accounting theory and practice is divided into two parts and the first part of this examination is presented here. Acme Manufacturing Corp. uses a process-cost system; manufacturing costs, other than direct materials and direct labor, are applied to the product in an amount equal to 50% of the direct labor cost and, per contra, are credited to an account, "indirect costs absorbed." The books were closed as of December 31, 1937 when the inventory of goods in process in Process A consisted of 1,000 units of product. In January, 1938, 10,000 additional units of product were started; material requirements in full were issued at a cost of $31,000; direct labor amounted to $39,900; indirect cost was applied at 30 percent of the direct labor cost; 9,000 units were completed and transferred to the next process; 2,000 units remained in process on January 31st with material fully supplied and labor averaging 50 percent complete. The examinee is asked to set up a goods-in-process account for Process A showing total and unit material labor and indirect costs for units completed and for units in process at end.

Pricing of inventory is very often a part of the junior's work along with additions and extensions of inventory. He should obtain specific instructions as to the type of items to be taken off the inventory for the price test. After having set these items down, he should obtain the senior's approval on the extent of his test. The junior should be certain that he has seen all policies that have been charged either to the prepaid-insurance account or to the insurance-expense account. And he must be sure that all policies have actually been charged into one of these accounts. A junior accountant should recognize that his problems, responsibilities and training should make him the best possible type of accountant to serve his organization, clients and society. A sound education in accounting theory, auditing procedure, economics, principles of internal control, law, taxation, and other related subjects. Ability to express ideas and facts in clear, concise and understandable language. Studiousness and perseverance; a real desire to keep up with latest developments in accounting subjects and ever-changing tax laws, and an unwillingness to finish a job or draw a conclusion until he is sure he is right.

In a professional examination intended to determine fitness for professional recognition one would expect to find questions designed to disclose a candidate's grasp and perspective of the field of the profession. The value of a problem can be nullified quite as easily by giving too much information as it can by giving an insufficient amount. The accounts are to be kept on cash basis and immediately after the close of each calendar year an accounting is to be made of the preceding year's affairs on said cash basis; each partner is to receive in cash, to the extent available, his distributive share of the net income. Depreciation on furniture and fixtures is to be computed at the rate of 10% per annum; additions during the year on an average of six months. No interest on partners' balances or drawings is to be considered. Atlantic Seaboard Lumber Company began business on January 1, 1937, with a capital of $2,100,000 representing cash received for 12,000 preferred shares of $100 each and 180,000 common shares of $5 each.