A Note on Profit Maximisation and its Implications Get access T. de Scitovszky T. de Scitovszky Stillwater, Oklahoma Search for other works by this author on: Oxford Academic Google Scholar The Review of Economic Studies, Volume 11, Issue 1, Winter 1943, Pages 57–60, https://doi.org/10.2307/2967520 Published: 01 December 1943
This article presents information on recent publications on cost accounting by the U.S. Government. Some of the books published are "Statistical Cost Functions of a Hosiery Mill," "The Relation of Cost to Output for a Leather Belt Shop," and "The Long-Run Behavior of Costs in a Chain of Shoe Stores." Between economic theory and business practice there is a deep and as yet un-bridged gull. The economist evolved a theory of how the rational businessman maximizes his profits, but this theory, however unassailable it may be logically, does not fit the facts of business practice very well. For this shortcoming economists used to lay the blame on the businessman, saying either that his behavior was not rational, or that he did not aim at maximizing profits. Only recently has it begun to be realized, since businessmen failed to reform themselves, that the economist may be the one to be blamed. He may have oversimplified his theory, and that he should learn something of the businessman's trade before theorizing about it.
This article presents questions on accountancy, which formed the part of the second half of the May 1943 certified public accountant examination in accounting practice, prepared by the Board of Examiners of the American Institute of Accountants. The candidate was allowed four and a half hours to solve all problems. Points allotted for each question are also given in the article. Question 1 carried 12 points, second question carried 22 points and third question carried 16 points. In the first question, from the given data the examinees had to prepare a summary of cigar-counter transactions, also showing amount of shortage, recommendations for maintaining adequate internal check and general-ledger accounting control. In the second question, from the given audited balance sheet, statement of profit and loss and summaries of ledger accounts of a company, the examinees were asked to prepare a statement of receipts and disbursements, condensed statement of application of funds, showing how the decrease in the net current and working assets came about, statement of profit and loss and statement of receipts and disbursements.
In 1917 and 1918, when the U.S. was participating in World War I, accountants were concerned primarily with the problems arising from the application of the income and excess profits taxes and the special war tax, all of which were practically new to American accountants. Aside from these tax laws, accountants did not seem to be concerned greatly from the professional point of view with war problems. In scanning the various monthly issues of the "Journal of Accountancy" through 1916, 1917 and 1918, one would hardly realize that the U.S. was at war except for a very few articles and editorials that appeared mostly in the latter part of 1918. Prior to October, 1918, there were articles on war contracts and cost accounting, cost-plus contracts, and overhead distribution on cost-plus contracts. The demand for accountants in war industries, governmental bureaus, and professional accounting firms has been so great that those who are frequently asked to assist in finding a supply of accountants have almost decided that the demand is unlimited and that there is no supply.
The problems asked in the first half of the May, 1943 C.P.A. examination in accounting practice prepared by the Board of Examiners of the American Institute of Accountants. The examinee was given four and one-hall hours to solve all problems. The problems were weighted as follows, problem 1, 10 points; problem 2, 20 points; and problem 3, 20 points. The solution to the problem 1 interprets, it is obvious that the reported earned surplus arose as a result of charging the opening inventory to cost of sales at the reduced price or by a write-up of the inventory to the contract price. While the original investment in inventory, 100,000.00 dollar, did represent the cost of those goods this special price was given because of other considerations, and good reporting would require disclosure of the special conditions surrounding this transaction. The solution of the problem 2 explains, the balance sheet should carry a footnote keyed to the capital surplus item reciting the fact that the company is contractually obligated to buy its raw material from one source at a fixed price and that the inventory must be maintained at an amount not less than 200,000.00 dollar. Further this note should explain that the capital surplus arose as a result of this contract by which the Black Corporation acquired its original inventory at a special price.
In author's opinion, land value as such is not a permanent and stable thing and, in the case of investment type properties, substantial losses are often the result of economic obsolescence in land. A reserve for normal depreciation on the improvements alone is not enough, there is need also for an adequate reserve from the earnings of the property during its estimated life of productivity to recapture not only the investment in improvements but also a part of the investment in land. Until some fifteen years ago, economic obsolescence of land was more or less an academic question. The centers of population were growing rapidly. Many people and hundreds of thousands of immigrants were taking their places on the farms. Large families were commonplace, Real estate seemed to increase in value regardless of its location. However in recent years the rate of population growth has been steadily declining. People have gradually become conscious of depreciating forces at work which were seriously affecting many of large urban centers. Not only have they experienced decentralization of population, but also a decentralization of business and industry. Technological changes-particularly, the automobile and other improved modes of transportation have brought about rapid shifts in population and, as a result, many neighborhood changes.
The following problems are the second half of the November, 1942, C.P.A. examination prepared by the Board of Examiners of the American Institute of Accountants. The examinee was given six hours to solve all problems. The problems were weighted as follows; problem 1, 14 points; problem 2, 16 points; problem 3, 20 points. Samuel Gifford died on July 18, 1941. The executor, having paid all debts, bequests and expenses and expecting no more transactions after June 30, 1942, desired to ask the court for his discharge and for an order to turn the remaining assets of the estate over to the trustee named in the will. On June 15, 1942, the executor sold one half of the AB Company preferred stock for $13,500 and the Parkhurst Transit Company common for $200. Other receipts during the executor's administration consisted of rents, $4,526; dividends, including those declared before the testator's death, $4,025; collection on deposit in closed bank, $465. All receipts were de posited by the executor in the First National Bank. Property taxes, accrued at date of death, were $1,575.20; and household debts on that date amounted to $2,111.00. The executor paid $20,000 bequests and $1,000 executor's fee as specified in the will; also $18,262.50 estate tax, $3,336.95 property taxes including those accrued at date of death, $750 funeral expenses, $88.50 court costs, as well as the household debts. The widow received allowances to the aggregate sum of $4,800 as directed by the court.
This article presents problems which were presented by the Board of Examiners of the American Institute of Certified Public Accountants as the first half of the November, 1942, certified public accountants' examination in accounting theory and practice.