Showing papers in "Contemporary Accounting Research in 1984"

Pursuit of an ideal

Abstract: . My paper was prompted by deviations in the state of the art of accounting from ideals espoused by individual accountants and professional bodies. Professor Benston's defense or advocacy of traditional practice disregards those deviations. He disregards the facts that up-to-date prices alone provide serviceable data for the calculation of solvency, debt to equity and asset composition ratios and rates of return, and that only money equivalents or resale prices of assets at a given date can properly be added to derive the asset components of those ratios. Benston contends that traditional accounting may be upheld against exit price accounting on the grounds of its transactions basis, of its longevity, of its cost-benefit relationship, and of its free and willing acceptance by managers and other parties. There are serious defects in each of these lines of argument; and other critical observations on the use of selling price valuations will not withstand scrutiny. Only the acknowledgment of the flaws in present practice and the pursuit of ideals avowed by the profession will rid its practice of absurdities. Resume. Les deviations de la pratique comptable par rapport aux ideaux vises par des comptables individuels et par des organismes professionnels m'ont incite a ecrire mon article. La defense ou le plaidoyer du professeur Benston en faveur de la pratique traditionnelle ne tient pas compte de ces deviations. Il neglige le fait selon lequel seuls les prix actuels fournissent des donnees utiles pour calculer la solvabilite, les ratios d'endettement et de composition de l'actif et les taux de rendement; il ne tient pas compte non plus du fait qu'on peut additionner seulement les equivalents monetaires ou les prix de revente des actifs a une date precise pour obtenir les elements d'actifs de ces ratios. Benston pretend que la comptabilite traditionnelle peut se proteger contre la comptabilite des prix de sortie courants du fait qu'elle s'appuie sur des operations, du fait de sa longevite, de son rapport couts-avantages et de l'appui que lui accordent les gestionnaires et les autres parties. Chacun de ces raisonnements contient de serieuses lacunes; de plus, d'autres observations critiques sur l'utilisation des evaluations au prix de vente ne resisteront pas a un examen minutieux. La pratique comptable ne sera debarassee de ses absurdites que si on reconnait ses defauts actuels et que si on poursuit les ideaux que s'est fixee la profession.

Accounting ‐ “one of the finest inventions of the human spirit”*

Abstract: . To commerce and to finance there can be great service given by accountancy. Its power, though, will not be fully known while bits and pieces stand apart, alone. To teach, to practise, to research, invent, is how the time of many has been spent. But cost of time and effort has been vain; for doubt, dispute, confusion still remain. A better prospect far there is in reach. If those who practise and research and teach were disciplined in such a way that each acknowledged that a common course of thought relates, for all men, to things sold and bought - Accounting, then, might do the job it ought.

On the value and limitations of financial accounting

Abstract: . Accounting as a means to an end, rather than as an end in itself, is the basic concept on which this essay is based. The ends that accounting serves are control, information for decisions, and an overview, or conspectus, of the enterprise. For these purposes, traditional, transactions-based accounts are useful, because they yield trustworthy reports of resource flows into and out of an enterprise. Government intervention has emphasized and extended the inherent and cost-determined limitations of traditional accounting. Though such critics as Professor Chambers are upset at this situation, they have not shown how or which change would be beneficial, net of costs, to users. Exit values, in particular, are not the philosopher's stone that Professor Chambers seeks. As this essay shows, neither these nor other measures of economic values fulfill Professor Chambers' demands. Though traditional accounting has its limitations, they are debilitating only when one holds unrealistic expectations. While I doubt that the benefits from changes such as those suggested by Professor Chambers would exceed their costs, this is an empirical question on which research would be desirable. Resume. Cet essai se base sur le concept fondamental selon lequel la comptabilite constitue un moyen pour arriver a une fin, plutot qu'une fin en soi. Assurer le controle, fournir des informations pour la prise de decisions et donner un apercu general ou vue d'ensemble, de l'entreprise, telles sont les fins de la comptabilite. A ces fins, les comptes traditionnels bases sur les operations s'averent utiles parce qu'ils fournissent des rapports fideles des flux internes et externes des ressources d'une entreprise. L'intervention gouvernementale a souligne et accentue les lacunes reliees aux couts inherents a la comptabilite traditionnelle. Bien que des critiques telle celle du professeur Chambers s'offusquent de cette situation, elles n'ont pas encore demontre comment ou quel changement serait profitable, deduction faite des couts, aux usagers. Les valeurs de sortie, en particulier, ne representent pas la pierre philosophale que cherche le professeur Chambers. Comme le revele cet essai, aucune mesure des valeurs economiques ne satisfait les exigences du professeur Chambers. Quoique la comptabilite traditionnelle ait ses limites, elles ne s'averent embarassantes que lorsque notre attente est irrealiste. Meme si je doute que les avantages des changements suggeres par le professeur Chambers puissent depasser leurs couts, on souleve ici un probleme empirique pour lequel des recherches seraient souhaitables.

A Stochastic demand CVP model with return on investment criterion

Abstract: . The stochastic demand cost-volume-profit (CVP) model has recently received considerable attention. For this model, management must determine optimal production prior to knowing the actual demand, a stochastic variable with known distribution. Management must choose the production quantity to balance prospects for sales revenue against risks of losses from shortages and from unsold items. This paper develops an expected return on investment criterion model for determining the optimal production quantity. Formulas and solution methods applicable to general demand distributions are obtained. A special solution technique for normally distributed demand is presented. The resulting choice criterion offers the advantages inherent in return rate methods. In addition, compared to a profit maximization approach, the expected rate of return on investment criterion is more widely applicable. Resume. Le modele de demande stochastique cout-volume-profit (CVP), a recemment recu considerablement d'attention. Avec ce modele, la gestion doit determiner la production optimale avant de connaitre la demande actuelle, une variable stochastique ayant une distribution connue. La gestion doit choisir la quantite a produire afin d'equilibrer les perspectives de ventes et les risques de pertes resultant des penuries et des unites non vendues. Cet article developpe un modele base sur le rendement espere du capital investi pour determiner la quantite optimale a produire. On obtient des formules et des methodes pouvant s'appliquer a des distributions de demande generale. Une technique de solution particuliere pour une demande distribuee selon une loi normale est presentee. Ce modele offre les avantages inherents aux methodes du taux de rendement. De plus, comparativement a l'approche de la maximisation du profit, le critere du taux de rendement espere du capital investi, est applicable dans beaucoup plus de situations.

John E. Butterworth’s Pioneering Contributions to the Accounting and Information Economics Literature

Abstract: This paper reviews John Butterworth’s contributions to accounting and other disciplines. The general nature of his scientific work is discussed and comments on theoretical issues are provided. John’s path-breaking work in the application of information economics to the evaluation of accounting information systems is highlighted in the immediately following section and is followed by a review of his studies in the area of bounds on information value. Mathematical models in management accounting is the topic of the third part and John’s studies on multiperson models are analyzed in the fourth section. Material contributions to agency theory in the accounting setting are discussed in the fifth and sixth parts and are followed by comments on John’s research in the areas of oil and gas accounting, and accounting standards and regulations in Canada. Concluding remarks are offered in the last section of this paper.

Terborgh's asset replacement formula reconsidered

Abstract: . In 1949 Terborgh of the Machinery and Allied Products Institute (MAPI) developed an approximate decision rule for optimal replacement of assets that deteriorate, taking technological change into account explicitly. The simple rule is essentially equivalent to a full discounting analysis under the same assumptions. More than 30 years later it is still used by U.S. firms and, what is perhaps more important, it is still being taught to engineering students throughout North America. DCF analysis is now much more widely used by firms than the MAPI formula (though often only for major replacements) but, unlike the MAPI formula, often with a total lack of understanding of the nature of the replacement problem. This paper exmaines Terborgh's rule on its own terms (assumptions, approximations) and reveals errors in derivation of the rule, by Terborgh and later by Smith (1961). The original rule is tested against the revised form with these errors eliminated over a range of interest rates, technological and other changes, and is found to be remarkably robust. The topic should be of interest to students in managerial accounting who are concerned with repairs and replacement of capital goods. Resume. En 1949 Terborgh de Machinery and Allied Products Institute (MAPI) developpa une regle de decision approximative pour le remplacement optimal des actifs qui se deteriorent. Cette regle tient compte explicitement du changement technologique. La regle simple est essentiellement l'equivalent d'une analyse complete d'actualisation avec les memes hypotheses. Plus de 30 ans apres, cette regle est toujours utilisee par des entreprises aux Etats-Unis et, ce qui est encore plus important, elle est toujours enseignee aux etudiants en genie a travers l'Amerique du Nord. L'analyse des flux monetaires actualises est maintenant beaucoup plus utilisee par les entreprises que la formule MAPI (quoique souvent uniquement pour les remplacements importants) mais, contrairement a la formule MAPI, souvent avec un manque de comprehension total de la nature du probleme de remplacement. Cet article examine les fondements de la regle de Terborgh (hypotheses, approximations) et revele les erreurs de la derivation de la regle, par Terborgh et plus tard par Smith (1961). La regle originale est testee par rapport a la forme revisee en eliminant ces erreurs pour une fourchette de taux d'interet et pour des changements technologiques et autres. Il ressort que la regle originale est remarquablement ferme. Ce sujet devrait interesser les etudiants en comptabilite de gestion concernes par les reparations et le remplacement d'actifs.