Oswald Nielsen
STANFORD UNIVERSITY (EMERITUS)
IN ALL MY YEARS
Our present economic system displays a vital interest in the financial structure of business firms and the causes of changes occurring over time. Significant contributions toward analysis of such developments, stem from both the academic and practicing sectors of the accounting profession. Certain conspicuous aspects of these transitions will be reviewed here, more in terms of the broad facets without strict recognition of the overlaps in their chronology.
The “Where-Got-Where-Gone” Statement With respect to analyzing financial changes, the earliest landmark coming to mind is the one described by Cole in his discussion of the “where-got—where-gone” statement.1 His portrayal was phrased to include the changes in all balance sheet items, although his illustrations dealt primarily with working capital. He said, “Sometimes the conversion of one type of asset or liability into another is of great importance, for it may affect general solvency.”
Furthermore, he cautions, It must be remembered that such a study of the balance sheet gives no indication of the amount of earnings, for earnings which have been distributed as dividends cannot possibly affect a balance sheet; they appear on the income sheet only. The only indication that the balance sheet can give is of the earnings undistributed, as shown in the Profit and Loss or some similar account.
He indicates that “one or more railroads” began making the re-ports he described around 1903 and designated them under a title similar to “Summary of Financial Transactions for the Year.”
Anton comments appropriately on the lack of refinement of the statement that Cole described relative to those developed later. 5 Still, Cole’s statement was comprehensive in that it was not limited to changes in working capital, as has been the main thrust of such reporting for many years.
Sources and Uses of Working Capital
Moving on from Cole was the stage of preparation of reports on financial changes in what came to be called fund statements. The more specific designation of them as reports on working capital changes came about primarily since World War II, although they have appeared in accounting texts and handbooks since the 1920’s.6 Increased demands for strict working capital management which emerged to meet the needs of reconversion to post war production, stimulated efforts for greater clarity in the presentation of this statement. Notable among the improvements was the expression of operations as a source of working capital, which essentially was a conversion of the net income computation by adjusting it for those charges not involving working capital changes during the period under review, the most notable of which was for depreciation of long lived assets.
Cash Flow Analysis
During World War II business firms engaged in production of military supplies were permitted for income tax purposes to desig-nate elements of plant and equipment acquired solely for wartime purposes as emergency facilities. Despite longer life expectancies, they could write them off in five years.
As often is the case with tax concessions, there was a tenacity to this acceleration of depreciation charges. Fast write offs continued with formal recognition under a series of internal revenue codes, and came to be thought of under the term, “tax shelters.” Other facets of tax legislation permitted more write offs, with resultant effects of reducing reported income in the earlier years of assets lives below what otherwise would be the case. This was especially true where newly acquired long-lived assets consisted of one-time relatively large proportions of total business assets, such as would be the case for a company holding a large office building.
The adverse effect upon the reliability of annual net income computation due to successive periodic under- and over-statements was well reviewed by Cannon in 1952. 7 Consequently, in order to arrive at how business operations per se affect the well being of the business firm interest in cash flow analysis accelerated.8 As Mason said, for those analyzing published statements cash flow came to be “merely a short-cut technique for arriving at the amount of funds derived from operations.”
Mason also emphatically recognized the elusive nature of cash flow information when he said, “it is neither cash nor flow.”10 This lack of refinement in what is reported as cash flow is one reason for much disenchantment with that concept. Another, which relates to the working capital statement as well, is the resulting limitation in disclosure of financial changes. Other financial changes may be equally, and sometimes more, significant.
All Financial Changes
In efforts toward attaining more pertinent disclosure the Accounting Principles Board addressed itself to the whole matter of reporting changes in financial position and issued its Opinion No. 19 in March, 1971. Here the APB recognized the usefulness of both cash flow and working capital analyses. At the same time it recognized the significance of that series of other financial changes that do not directly impinge on either cash or working capital. In Opinion No. 19,
The Board also concludes that the statement summarizing changes in financial position and that the title of the state-ment should reflect this broad concept.11
In perspective, we now have come full circle back qualitatively to the comprehensive statement of analysis of financial changes which Cole advocated in 1908.
However, under Opinion No. 19, we are likely to furnish more dis-closure than was contemplated in 1903.
FOOTNOTES
1 William Morse Cole, Accounts, Their Construction and lnterpretation, Boston: Houghton Mifflin Company, 1908, pp. 97-120. 2Cole, ibid., p. 101.
3 Cole, ibid., pp. 101-102.
4 Cole, ibid., p. 102. Years later Henry Rand Hatfield comments as follows that Cole’s terminology did not come into general use:
“Professor Cole in his first edition of his Accounts uses the title ‘Where-Got-Gone statement, but this has apparently been abandoned even by its author. It is a source of regret that a colorful term introduced into the drab literature of accounting should have fallen into disuse. But it hardly seems the function of this treatise to serve as an asylum for a foundling abandoned by its progenitor.”
5 Hector R. Anton, Accounting for the Flow of Funds, Boston: Houghton Mifflin Company, 1962, p. 46.
6 An abbreviated list of texts including such references include: Roy B. Kester, Principles of Accounting, 4th edition, New York: The Ronald Press Company, 1939, pp. 589-591;
Robert L. Dixon, Samuel R. Hepworth and William A. Paton, Jr., Essentials of Accounting, New York: The Macmillan Company, 1966, Chapter XXXIII;
Maurice Moonitz And Louis H. Jordan, Accounting, Revised Edition, New York: Holt, Rinehart and Winston, lnc., 1963, pp. 536-541, 549. (This treatment also covers cash flow statements);
Perry Mason, Sidney Davidson, and James S. Shindler, Fundamentals of Account-ing, 4th edition, New York: Henry Holt and Company, 1959, Chapter 28; W. A. Paton, Editor, Accountants’ Handbook, Third Edition, New York: The Ronald Press Company, 1943, pp. 98-104;
Rufus Wixon and Walter G. Kell, editors, Accountants’ Handbook, 4th edition, New York: The Ronald Press Company, 1956, Section 3, pp. 25-32.
7 Arthur M. Cannon, “Tax Pressures on Accounting Principles and Accountants’ Independence,” The Accounting Review, Vol. XXVII, No. 4, October, 1952, pp. 419-
426. Also reprinted in Stephen A. Zeff and Thomas F. Keller, editors, Financial Accounting Theory I, second edition, New York: McGraw-Hill Book Company, 1973,
pp. 131-140.
8 As observed by the APB cash flow analysis actually is “an old concept with a new name.” APB Opinion No. 3, New York: AICPA, 1963, Paragraph 6.
9 Perry Mason, Cash Flow Analysis and the Funds Statement, Accounting Research Study No. 2, New York: American Institute of certified Public Accountants,
1961, p. 4.
10 lbid., p.5. ” APB Opinion No. 19, New York: AICPA, 1971, paragraph 8.
(Vol. 2, No. 4, p. 4, 1975)
