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schools are too theoretical, and the schools in turn are unfamiliar with the practical work of the accountants, with the result that lack of interest in each other's work is evident.

The last named advantage—the supply the examination would create of instructors in accounting-would be of great value. At present it is almost impossible to secure competent instructors in accounting and business management. Unless an instructor has the qualifications required of a junior accountant, he is of little value in the class room.

EXPENSES OF THE EXAMINATION

There should be no difficulty in meeting the expenses of the examinations. No reasonable objection could be raised against charging a fee of from five to ten dollars to defray the cost of preparing examinations, supervising them, grading the papers and furnishing the certificates. A fee of ten dollars would amply cover all such expenses and would leave a margin to defray expenses of investigation and promotion.

COMPARED WITH JUNIOR PHARMACY EXAMINATIONS The proposed examination for junior accountants would be similar to examinations which are given three times a year in Oregon to junior pharmacists. The board of pharmacy is charged with the duty of setting both a senior and a junior examination at such times and places as are convenient. The present regulations are that junior examinations may be taken either in Portland or at the Oregon agricultural college three times a year. The applicant must be eighteen years of age, have spent one year in a drug store and attended an approved school of pharmacy for at least twenty-four months. He is examined in five subjects and must not fall below sixty-five per cent in any one subject. A fee of ten dollars is charged for the expenses incident to conducting the examination. Two members of the board usually spend two days at the college, which makes it unnecessary for students to leave the college to take the examination in Portland. This is a considerable saving, as quite a number of students take the examination each year. During the last few years, not a single junior has failed to pass the examination. After an additional year's practice, the student is allowed to take the senior examination under the same regulations as those of the junior

examination; and upon passing this he is given a state certificate to practise pharmacy. It occurs to me that practically the same regulation in reference to the junior examination in accounting could be established.

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PROGRAMME MAY BE ADOPTED GRADUALLY I realize that the programme mapped out in the preceding suggestions is a large one and that its accomplishment would probably have to be brought about gradually. Indeed, perhaps the best solution would be to have the Association of University Instructors in Accounting assume the responsibility of encouraging such examinations for a year or two, with a view to determining exactly what should be recommended. Among other advantages, it would furnish an immediate field of useful activity for this association. The usual experience of an association like this is that unless it is stimulated by a definite programme of work, it is difficult to maintain enthusiastic interest.

RECOMMENDATIONS Finally, I venture to make the following definite recommendations for consideration at this meeting :

I. That this association recommend an amendment of the uniform examination law providing for junior examinations.

2. That a uniform course of study be recommended leading to the junior examinations.

3. That one year's practice in an accountant's office and the junior certificate be the standard requirements of eligibility to the state examinations.

4. That instructors in accounting bring this subject before accountants with a view to interesting them in accounting instruction and junior examinations.

5. That a committee of five be appointed to devise plans to carry out the above resolutions.

Treatment of Commitments of Purchasers, Etc.,

on Certified Balance-Sheets

BY HOMER N. SWEET

The impossible task has been assigned to me of presenting in twenty minutes a comprehensive exposition of a topic which contains the letters, “etc.” In the circumstances, I shall have to seek refuge behind a narrow definition of commitments, which will excuse me from speaking on contingent liabilities that arise from guaranties of quality of product, guaranties of dividend and interest obligations of allied companies, endorsements of notes and acceptances, provisions for cumulative dividends on preferred stocks and possible liability to additional assessments for federal taxes. I would restrict my discussion to commitments that involve more than ordinary risk of loss because of the possibility of an adverse movement of prices. Among commitments of this class are purchase contracts, sale contracts, agreements to protect the buyer against a decline in market price and various transactions that are hedged by futures or options. As my time is limited I shall confine myself principally to a consideration of purchase contracts.

Before proceeding, however, to analyze the relation of purchase contracts to the balance-sheet we may do well to ask ourselves two questions:

First: Why should commitments be expressed on the balancesheet? Perhaps we should not take too much for granted as to the answer which ought to be given to this question. The balancesheet, as a condensed exhibit of financial position, should set forth all relevant facts. On the other hand, it should not be encumbered with irrelevant data. What is relevant or irrelevant is, of course, a question of judgment. If it is probable that a given corporation will have to expend in the near future a larger sum of money for purchases of materials than the mater

An address delivered before the New England regional meeting of the American Institute of Accountants, Boston, Massachusetts, December 8, 1920.

ials will be worth in the market at the date of delivery, then there is a prospect of loss, and if the amount is considerable, the probability of loss is relevant to a thorough interpretation of financial position. It ought not to be omitted from the balancesheet.

The other question is: To what extent should an auditor be governed by transactions or developments occurring subsequent to the date of the balance-sheet and prior to the date of certification? In judging the financial position of a corporation as of a given date, should he look only upon the past and shut out entirely from view the prospects for the future? It is my opinion, as to a contingent liability, that if any development occurring after the date of the balance-sheet and prior to the date of certification materially modifies or possibly removes the contingency, that development ought to be considered in the preparation of the balance-sheet. On the other hand, if there should be an appreciable change in market prices subsequent to the date of the balance-sheet and prior to its preparation, it is in order for the auditor to take the most recent fluctuations into consideration in estimating any contingent loss. In brief, an audit should not be restricted altogether to transactions which have been concluded or have reached a precisely determinable status at the date of the balance-sheet.

A purchase contract in the ordinary sense does not become an actual liability until one of the parties to the contract makes a delivery of goods. For that reason it is not customary for accountants to include outstanding purchase contracts among the assets and liabilities on the balance-sheet. In year like 1920, however, when we have witnessed a marked decline in the prices of many commodities--wool, silk, cotton, leather and others—it is to be expected that many corporations will have, at the date of closing their books, outstanding purchase contracts that were entered into when prices were on a much higher level. Many of these purchase contracts are binding and, according to the present outlook, will oblige the purchasers to take title to goods that will have a market value substantially less than cost. While vendors may grant extensions of credit by allowing deferred payments or agreeing to accept notes, thus permitting the buyers to husband their cash resources for a time, the probability of contingent loss is none the less imminent.

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Purchase contracts give rise to three different classes of commitments, namely: (1) Commitments which are normal in amount and are for

materials that would have a market value, according to reasonable expectations, at least equal to cost on date

of delivery. (2) Commintments, abnormal in amount for the particular

concern, the liquidation of which would produce an un

precedented strain on the concern's resources. (3) Commitments, whether normal or abnormal in amount,

which are for materials that would have a market value, according to reasonable expectations, measurably less

than cost at date of delivery. Purchase commitments of the first class need not be discussed because they do not involve prospective, loss.

Let us illustrate the second class of purchase commitments by assuming that a corporation has entered into a contract for a large amount of material or for construction and that the contract is unfulfilled at the close of the fiscal year. If the corporation has not arranged for the financing of the exceptionally large expenditures and could not be relieved from abiding by the obligations of the contract, without serious consequences, there is a contingent demand upon working capital which should not be overlooked by the auditor. In any consideration of this sort the public accountant, of course, has to weigh carefully the interests of his clients. It is hazardous to generalize from the variety of cases met in actual practice, and, therefore, any general suggestion which might be made is subject to such qualifications as the special circumstances may demand. In an extreme case, the conclusion might be reached that a footnote ought to be appended to the balance-sheet, under the head of "commitments," reading somewhat as follows:

“The company's contracts for purchase of material and for construction outstanding on .(date of balance-sheet). aggregated $.........., payable during ..(period of time)."

While examples of the class of commitments just considered are not common, there will be numerous illustrations of the third class of purchase commitments on balance-sheets of corporations

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