Inflation, Valuation, Accounting standards

Acquisitions by corporations of their own outstanding shares are one of those transactions which seem to be peculiarly subject to misunderstanding. From time to time efforts have been made to shed light on the nature of such transactions, but to date the gloom of confused thinking and questionable policy has not been fully dispelled in this special segment of corporate finance. About a half-century ago the author of this article published an article which he naively assumed would settle the basic issue, once and for all, and in other writings since this piece appeared he has tried his hand at the chore of promoting straight thinking on the subject of "treasury" shares. These comments represent a sort of postscript to the earlier attempts, and they are drafted with the thought that a continuing campaign is necessary to keep the leaven of logic alive wherever there is persistent susceptibility to error. The first step in grappling with the subject of "treasury" shares is to recognize that such shares have substantially the same status as stock that has never been issued. This essential point, unfortunately, has usually been overlooked in the textbooks and other writings on accounting and finance.

The article focuses on the controversy regarding the nature of education and the means by which a state of being educated is achieved. The education of the individual consists of the impact on his mind of the entire stream of phenomena encountered during his lifetime. Formal education is only one sector of the whole process, and presumably not the most important element in many cases. A school should be regarded as a specialized undertaking, not as the embodiment of all human experience and activity, in a miniature. A school should concentrate on the training and learning that can be accomplished more speedily and effectively in an institutional setting than through general day-by-day experience. Moreover, the school should not only restrict its efforts to fields which lend themselves to attack in classroom and laboratory but should give primary attention to subjects that are acknowledged to be especially significant and worthwhile. In making a start on the task of sets ting standards for selecting subjects to be taught it may be helpful to take note of some broad principles.

Reviews the book "Principles of Public Utility Rates," by James C. Bonbright.

Reviews the book "Accounting: Administrative/Financial," by George R. Husband.

It is generally agreed nowadays- among both teachers of accounting and professional accountants-that "accounting is based on cost." The significance of this proposition, however, has not been adequately clarified. It certainly does not mean that accounts and financial statements continuously show the total acquisition costs of the various factors listed in such statements; absorption of costs through depreciation, depletion and amortization is a major feature of the normal process of accounting. It does not mean that shrinkage in value of inventory items must be ignored; recognized inventory methods provide for appropriate write-down in the case of damaged or obsolete elements and for absorption of costs considered to be nonrecoverable and hence not assignable to future revenues-as a result of changes in prices. It does not preclude partial or complete write-off of assets such as investments when there is convincing evidence of permanent impairment, or total disappearance, of value (although not all accountants would take the position that partial write-off prior to disposition is required). It does not overlook the fact that conventional cost procedures result in cost compilations that are nothing better than reasonable estimates of allocated costs incurred to date, especially in the case of work in process and finished goods.

With the development of large-scale activity, elaborate technical processes, and the corporate form of organization the business enterprise has become in many cases a highly complex economic institution, and the valuation of the facilities and conditions of production in terms of the enterprise in its entirety is accordingly a bafflingly difficult problem, a problem which comprehends substantially all phases of accounting analysis and all types of value determinations. The business enterprise, it is scarcely going too far to say, is truly an organic entity, a something capable of being contemplated for its own sake and valued in its own right. The enterprise in other words, and as has often been pointed out in utility valuation cases, is an bite rated, functioning, continuing establishment, and not a mere bundle or aggregation of separate elements or parts. And the value of the enterprise, it follows, may be more or less than the sum of the values of the constituent factors, considered singly, in apparent violation of one of the more obvious mathematical axioms. Further, in view of the extent now-a-days to which both small and large blocks of securities evidencing enterprise ownership are transferred from one party to another, including the practices of acquiring whole businesses through merger and consolidation, to say nothing of the matter of proper periodic measurement in the interest of the various equities, it appears that there is some excuse for urging that more systematic and discriminating attention be given to the question of enterprise valuation as opposed to other forms of appraisals.

An extended period of reduced business activity, with its attendant financial difficulties naturally refocuses the attention of accountants on the underlying problems of valuation and income and surplus measurement. One of the questions receiving increased attention is the old problem of the distinction between operating costs and non-operating charges or losses. In times of depression such as the present, it is noticeable that many business managements, in their desperate anxiety to make a showing, are waking up to the fact that there is some basis for drawing a line between operating charges and non-operating losses. It is the business of the accountant to preserve every legitimate distinction, to bring out every angle of the situation that has a vital bearing from the point of view of any interest concerned, but it is also his business, as far as lieth in him, to see that no improper use be made of this approach to the treatment of business transactions and their results. Operating costs are charges which can be logically imputed to the regular activities of the enterprise during a particular period.

The article discusses economic theory in relation to accounting valuations. All items which are included under the term assets may be very roughly divided, for the purpose in hand, into two groups, more or less accurately designated as follows, repositories for funds and summations of costs. In the first may be placed cash in its various forms, account, notes, bonds and other claims for money and securities or rights readily realizable in money if not representing sums to be collected at specified times. In the second group are organization and development charges, land and wasting assets, structures and equipment of all types, long and short-term prepayments and various classes of inventories. As in most classifications there are many doubtful cases, one division shades into the other. Finished goods produced under contract, for example, are from the standpoint of both economic and legal character very closely allied to ordinary receivables. As a rule the valuation of items in the first group is a relatively simple matter, depending primarily upon legal conditions, simple arithmetical calculations and judgments as to good faith and responsibility of debtors. Further, in this group of cases there is ordinarily little to be gained by attempting to apply interpretations and reasoning of economics.

Reviews the book "Economic Rhythm: A Theory of Business Cycles," by Ernst Wagemann.