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This article presents information on some empirical result related to tax allocation and depreciation methods. The evidence indicated that deferral earnings had the highest association with security price changes. This unexpected finding is consistent with two rather different interpretations, either the market is efficient and deferral earnings is more consistent with the underlying information set impounded in security prices, or the market is inefficient in the sense that security prices reflect only the very narrow set of reported earnings numbers. Being intolerant of ambiguity, we conducted a further analysis, which attempts to explain a result we felt to be anomalous. In fact, the ratio will be equal to the internal rate of return on the asset. The analysis reported here discards the currently prevailing views of deferred taxes as a deferred credit or deferred liability and treats tax allocation arising out of differing depreciation methods for tax and reporting purposes as a form of depreciation.

The article highlights the report of the Committee on Corporate Financial Reporting of the American Accounting Association. The charge of this committee is to identify, examine, and report contemporary problems in financial reporting; to recommend appropriate research projects as well as to critically evaluate both organized and individual proposals for research on financial reporting, and to issue broad position statements in specific areas when appropriate. In this approach, accounting data are used to attach subjective probabilities to previously developed quantitative estimates of relevant variables. For example, past turnover data, gross margin percentages, or rates of return on investment are calculated because they are thought to reflect managerial efficiency. Some take the position that changes in value of bonds held as long-term investments are irrelevant to the income of the holder of the bond if the changes are caused by changes in market interest rates. They point out that although the changes in interest rates affect the current market price of the bond, they do not affect the amounts or the timing of the future cash flows expected by the bond holder. Meaningfulness, like relevance, is difficult to define in specific terms for all readers of financial statements. Nevertheless, notes deserve careful screening by management to assure that they contain informative material.

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.

This article presents information on financial accounting. The net realizable value of an asset is defined as the maximum net amount, which can be realized from the disposal of that asset within a short period of time. Net amount is defined as the selling price less disposition costs including tax effects discounted to the point of measurement. Basically, the issue is whether or not society is better served by the valuation of assets for public reporting at the cash they command upon sale or at the cash required to have them available for use by the firm. It might appear that under pure and perfect competition, with equally well-informed actors, the gap between the net realizable value and the replacement cost would be minimal and could be ignored. This is not the case due to the existence of frictions in the market place, such as commissions, transportation costs and the like. A stronger argument favoring net realizable value is based upon the frequent reference by statement users to a rate of return computation. The measurement of assets influences both elements of this computation since this measurement affects the denominator directly and the numerator through the depreciation charge.

This article focuses on the effects of Accounting Principles Board Opinion (APB) No. 15 on earnings per share. To date the few research studies con ducted on the effects of APB No. 15 are entirely concerned with an analysis of the validity of the two-thirds rule, a cutoff point established by the Board to deter- mine the number of common stock equivalents of convertible debt which are to be used in the calculation of primary earnings per share. The Opinion concluded that a convertible security should be considered a common stock equivalent at the time of issuance if, based on market price, it has a cash yield of less than 664 percent of then current bank prime interest rate. The time issuance is then defined as the date when agreement as to terms has been reached and announced. In addition to the firm's capital structure, information about all possible relationships between the prime rate and the cash yields on the three types of bonds is input in matrix forth. For our purpose this matrix is predetermined by three rows corresponding to straight debt, convertible debt and debt with warrants and eight columns corresponding to eight possible economic conditions which are described later.

The article discusses some of the limitations of residual income in internal reporting and then describes interest-adjusted income, a modification of residual income, which mitigates some of these limitations. The residual income of a division is the net income of the division less the product of the capital of the division times a required rate of return. Despite its many advantages there are at some limitations of residual income. This can be that residual income is subject to all the imperfections of historical cost net asset valuation. There are some pitfalls in using residual income in conjunction with generally accepted accounting rules for performance evaluation. However, residual income can be used in conjunction with other accounting rules, eliminating some of the problems associated with it. Moreover, the allocation of imputed interest to accounting periods is arbitrary under residual income in that all imputed interest is expensed. But some imputed interest may have future service potential and therefore should be capitalized.

Accounting information influences many decisions, but little is known about the way in which this influence is exerted in particular classes of decisions. If the facilitation of decisions is taken as the purpose of accounting, then accounting measurement methods ought to be evaluated in terms of their influence on the decision-making process. The article looks at permitted rates of return for privately owned natural gas distribution utilities. It attempts to relate differences in these rates of return with differences in accounting methods used. It is observed that as compared to many other decisions, the regulatory decision is fairly well standardized. In addition, the output of the decision is a single unambiguous number. For these reasons the regulatory decision is studied with expectations of a greater probability of obtaining meaningful results than would be the case with well-structured decisions. Finally, whether decision-makers are influenced in their decisions because of fixation or because of their choice of a particular method of measuring an accounting variable, the fact that decisions may be influenced by the related accounting process points to a need for greater research efforts directed at finding objective criteria for selection among alternative accounting methods for particular purposes.

The article represents a study of one effect on issuers of financial statements in the airline industry which the use of alternative reporting practices has had. A discussion of the results of the study briefly considers the consequences of being able to observe this effect for organized public accounting practice and authority. Capitalists, in such economy in which both good and bad financial statements circulate, face investment decisions in which the results of selecting given alternatives are known with more or less certainty depending on whether the related financial statements are good or bad. The degree of uncertainty can be affected by the form and content management chooses for the financial statements. The author states that firms with bad financial statements would be penalized because capitalists would require a higher return from their equities than from the equities of firms with good financial statements. Financial statements are surely among the devices available for the firm to minimize its purchase of capitalist ignorance within the meaning of the profit-maximization constraint.

This article focuses on a study which examined the effects of alternative interperiod tax-allocation methods on regulatory rate-of-return decisions affecting the electric utility industry. It is intended to evaluate the extent to which different decisions are associated with alternative tax-allocation methods, and to find reasonable explanations for any such differences that are found. For many years accountants have tried to find criteria for selecting accounting methods that are best for particular decision-making purposes. The lack of knowledge about decision-making has been a major obstacle in determining which accounting methods are best for different purposes. Electric utility companies in most areas of the U.S. are under the jurisdiction of state regulatory agencies. Regulatory agencies prescribe the accounting methods to be used by the electric utility companies under their jurisdiction. The choice of accounting methods by regulatory agencies affects the amount of the net operating revenue and the rate base used for the rate-of-return computation.

The article examines various aspects of the concept of replacement value accounting. Replacement value theory is a particular measurement concept employed in ascertaining what constitutes that maintenance of a capital for the entire entity. Income is the residual that exists after capital is maintained in that sense dictated by this special measurement concept. In some cases it is possible that the capital to be maintained is measured in terms of current replacement costs. Historical cost accounting and the general or specific price level adjustments to it are restricted in the amount of their charges against revenue to the historical or price-level adjusted historical costs of those assets which the entity presently holds. In order to provide a detailed contrast with the price-level adjustments, it is necessary to leave the conceptual level of replacement-value accounting. However, whenever the individual-asset-and-liability-levels are selected for the purposes of brief comparisons, certain simplifying assumptions are required.

The article focuses on the establishment and use of investment loss reserves by long-term broadly diversified corporate bond investors. Long-term bond investment consists essentially of making long-term loans to various types of obligors giving due consideration to appraisal of degree of risk and timing of purchases. These loans may or may not be repaid in their entirety depending upon the fortunes of the particular obligors. It is necessary to develop a general measuring device by which to anticipate credit losses, which might be applied to corporate bonds acquired either through direct placement or through open market transactions. The criterion that would seem to best serve this purpose is the market rating. The market rating is the yield spread or risk premium defined as the difference between the promised yield of a given issue and the promised yield of outstanding issues of the highest-grade bonds that have the same term to maturity. The differences between the averages of promised yields and the modified averages of realized yields, or the modified average of loss rates, indicate roughly how much of the interest receipts would have had to be reserved in order to compensate for losses on the portion of the portfolio that defaulted and on the portion suffering from decline in market value at the end of the study because of credit deterioration.

The article focuses on the significant advances in accounting for income models, book yield and the rate of return of companies. The author considers the characteristics of the compound-interest investment model. He also explains the apparent differences between book yield and the project rate of return. The underlying difference is that the project rate and the book yield are calculated under two different sets of conditions, and with two purposes in mind. In addition, the author observes that many of the problems that arise in the use of book yields stem from the attempt to oversimplify the given situation.

History provides many instances of artists and thinkers in a variety of fields whose work has not been adequately appreciated at the time it was carried out. The instinctive opposition of people to radical change may be overwhelmed by a work of genius, but provides a stubborn barrier to the acceptance of the findings of the patient seeker after truth. No matter how logically sound the new ideas may be, there is almost certain to be opposition both to the ideas and to the changes in practice which would flow from them. The history of accounting research in the last five years provides further evidence of this. Accounting practice has followed the double entry system, and historical costs, for so long that it has worked its way into a rut. Now a rut is a comfortable thing so long as one stay in it. The accountant who is operating "comfortably" in the double entry and historical cost ruts does not think sufficiently about the adequacy of his objectives. Nor has he much time to think about basic objectives, for the pressures of the business world make heavy demands.

From an accounting viewpoint, business combinations are categorized into purchases or poolings. Many corporate executives, who have actually participated in business combinations, are still unaware of just what makes a pooling. A study of poolings indicates that the accounting profession itself has undergone an evolution in its concept of poolings that might have contributed to the state in business information. Accountants themselves are not certain of the criteria that distinguishes pooling from purchasing. The dividing line which distinguishes pooling from purchasing is narrow. In many instances, purchasings are made and recorded that have all the earmarks of poolings, and vice versa. This article examines the present-day pooling concept in the light of its development in the last decade. The significance of the concept is important because from it stems changes in reported earnings, changes in rates of return on investment, interpretation of financial reports by investors and other reactions.

The purpose of the paper is to draw attention to one of the sharpest expressions of the cleavage of attitudes between economists and businessmen, and to advance some tentative suggestions for improvements in both analysis and application. This relates to the use by business of a method of cost-volume-profit analysis, and of pricing and volume adjustments, which is referred to as break-even analysis and which, prima fade, ignores the economists' generalized theorems of cost and revenue behavior. The arguments which the paper has developed, however, set a program of research and development by the cost accountant, and suggest that economists now give their attention to examining the shape and stability of aggregate revenue and cost functions over time and over output ranges, applying their resources of statistical analysis to the reconstruction of empirical microfunctions and variables. For the financial manager in industry, the lesson of the analysis is that he cannot rely with the same degree of confidence on the more naive forms of his break-even charts.

The article focuses on the concept of profit planning. Business profits can ye planned with a reasonable degree of success. The objective of profit plan is to maximize the long run financial health of the enterprise. Profit planning implies the predetermination of objectives and the preparation of plans to meet those objectives. Budgeting often involves only a representation of what the results will be if present plans and policies are carried out in the forecasted economic climate. Profit planning, like budgeting, extends to all phases of producing, selling, and financing activity for the coming period and it anticipates needs beyond operations for the coming period through means of the capital expenditures plan. A very popular means for expressing the financial objectives of profit-seeking businesses is the return on investment. Profit planning involves setting long range corporate objective, and determining means of achieving them. A very popular means for expressing the financial objectives of profit-seeking businesses is the return on investment.

This article presents the price-level study of the American Accounting Association. The rate of return on the total investment is probably the most important single calculation which can be made from financial statements. The second set of percentages shows the rates of return for 1941, for 1951, and the average for the period 1941-1951. In general, the rate of return on the total investment on a constant-dollar basis was about half of the reported rate. One of the common complaints about income taxes is that they make no allowance for the changing value of the dollar. They tax reported income without taking into account that the amount needed to maintain capital in terms of its purchasing power has substantially increased. Also, firms having a relatively large investment in depreciable assets are discriminated against as compared with other industries whose costs are much dozer to current figures. It is important to note, however, that neither the company as a business entity nor the common stock interest was worse off than if the issuance of the preferred stock had been postponed until the very day on which the funds were needed.

It is the responsibility of management to know what is happening to the investment with which it is entrusted. What the real economic investment is, what real earnings on it are, and what real rate of return it is producing for stockholders are matters management should know. When prices are rising, accounting reports on these three matters are not likely to be correct. Conventional reports can be seriously in error and thus produce an illusion, an inflation puff, that can lead management astray. Measurement of a company's real economic earnings has great practical usefulness. And it can be done. It cannot be done simply, as in the case of personal income, by dividing one single index number into the reported accounting earnings, instead it must take the form of restating each asset or each group of assets in terms of dollars of constant purchasing power. This can be done with tolerable accuracy and applied with economic and statistical sophistication. [ABSTRACT FROM AUTHOR]

In the July 1952, issue of the "Accounting Review,"under the title "Some Notes on the Bond Yield Problem," the author discussed the application of a modified or improved Newton's correction formula to the problem of finding the accurate yield on a bond, the improved formula having been briefly set forth in an earlier paper by Hugh E. Stelson,' who had drawn it from one of the mathematical journals. This article includes the continuation of numbers of formulas and equations herein from where they stopped in the preceding article. With serial bonds, the problem of finding the initial approximation to the yield rate is more acute than it is with a single bond. This article also discusses the matter appearing in the thirteen pages of Mr. FitzGerald's article in the "Accounting Review," for January, 1953, on accounting for variations in gross profit.

The substantial fall in interest rates which began in the early 1930s resulted in a widespread exercise by corporations of the option to call bonds before maturity, where such provision had been incorporated in the bond terms. Even though a call premium had to be paid, the resulting saving in interest cost often was sufficient to make bond refunding appear mandatory. Other reasons which might have tipped the scales in situations where the interest saving may not have been significant, were the substantial saving in taxes based on income in a high tax year if a relatively large amount of unamortized bond discount and expense, applicable to the refunded bond, was present, and secondly, the opportunity to issue refunding bonds which omitted restrictive covenants found in the old bonds. The true nature of unamortized bond discount or bond premium and the correct presentation of the bond liability can be inferred from the ordinary compound interest computations used to arrive at the present worth of bonds.

The question whether premiums paid upon the redemption of an entire issue of preferred stock should be charged to earned surplus or capital surplus, has been the subject of difference of opinion among accountants for a long time. Even at present, many members of the accountancy profession seem to take opposite points of view in the matter. This study is based on the reasoning developed from the economic concept of profit and loss in business and from the single entry method of calculating profits. The conclusion, that the premium paid upon the redemption of an entire issue of preferred stock is properly chargeable to earned surplus to the extent that the total premium paid exceeds the amount of premium paid into the issuing corporation on the same issue of preferred stock at the time it was issued. The question under consideration does not deal with the treatment of discount on preferred stock when an entire issue is redeemed at a discount. Accordingly, no comment is made on that phase of the subject.

This article focuses on the relation between depreciation and rate base. Depreciation of capital assets and depreciation accounting in public utilities have long been the source of much controversy between the utilities and the state. The problem has been complicated by the unwillingness of some to recognize depreciation at all and by the insistence on the part of others that reproduction cost should be the fundamental element in the rate base determination, and in the decision made relative to the amount of the depreciation charge. It has been still further complicated by using one amount of depreciation for total charges to operating expenses and another, a smaller amount, or none at all, for deductions in calculating the rate base. A generalized statement of sound procedure has been hard to formulate, because the application to specific companies is so varied. One approach to the problem of understanding the relationship between depreciation and the rate base, consists of presenting thirteen examples which may be looked upon as thirteen cases handed down by a commission and which call for adjudication. Some of these examples represent undepreciated rate bases, some depreciated rate bases and some bases for which no names are given. Some follow the retirement method, some the depreciation method and some both the retirement and the depreciation methods. By no means are all of these examples equally satisfactory or typical. In fact some are quite the reverse.

Teachers of accounting, finance, or engineering economy may wish to devise problems that will lead their students to explore one of the pitfalls of internal rate of return or discounted cash flows. It is often suggested that alternative investment opportunities be listed in the descending order of their rates of return. This involves estimating the magnitudes and dates of expected cash receipts and disbursements, and calculating the compound discount rate which would make the net present worth of such future flows equal to the initial outlay. For example, the internal rate of return required to make this a break-even project is based on certain given details. These details include an initial cash outlay at T0 $100,000. It also includes a net cash receipts at the end of one year at T1 of $360,000. The method described in the article is applicable to whatever discount rates and however many discount rates, one may find interesting. It is expected that executives will use it to solve real capital investment problems. But it does represent a potential pitfall for some analytic approaches to real problems.

The purpose of external reporting is often assumed to be the aiding of stockholders in their resource allocation. William A. Peterson recommended that realized income be reported, so that it represents prospective net income plus or minus favorable or unfavorable deviations from expectations. In this way it can represent a meaningful index of the current performance of management in its endeavor to make a profit. The rational manager would make his investment decision on the basis of present value calculations. His aim would be to maximize the present value of expected income. For efficient allocation of resources, attention should be focused on assets and on the rate of return to the undepreciated resources employed. In order for the users of external reports to evaluate management performance, the prospective income computations must accurately reflect the decision model. The value of prospective income data remains in doubt. It cannot be an improvement unless it will discourage irrational decisions and reduce the manipulation of external reports.

This article focuses on how a constantly evolving procedure in the field of accounting is the presentation, calculation, and meaning of earnings per share (EPS). This evolution has caused most textbook material to become quickly dated and incomplete. The purpose of this article is to present a short example for classroom use that illustrates the current reporting requirements for the presentation of earnings per share data. The reporting of earnings per share on all outstanding shares of common stock has been a practice of many firms for many years. Traditionally, the EPS figure was included only as supplemental information in annual reports. However, this practice has undergone rapid evolution in recent years. In 1966, in its Opinion Number 9, the Accounting Principles Board (APB) strongly recommended that earnings per share data be presented on the face of the income statement. APB Opinion Number 15, issued in May 1969, changed this recommendation to a requirement, thus bringing EPS under the scope of the auditor's report.