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As a basis of comparison with the former year's results, the percentages of corporation B, in respect to their retail department and manufacturing department, may be accepted as applying to the whole of that year's results of the combined companies. These percentages were as follows:

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Gross profit ....

34.5% From the above information work out by percentages and show the causes affecting the reduction in profits from $30,000.00 to $14,000.00.

COMMENTS.

BY MR. JACOBSSON.

A great thinker has said that a man can accomplish almost anything to which he directs his attention, providing he is possessed of the dual qualification of faith and hard work.

The candidates who undertook to solve this unscientific problem needed an infinite quantity of faith and hard work.

Percentages as a basis of comparison ought to be calculated on a given base, but here they relate to a statement of experience which does not work out at all, hence the explanation of discrepancy.

It is a well known fact that the examiners, who are all practicing accountants, fall into the greatest temptation to draw upon their own professional experience for difficult problems.

Our problem under review will defy the best accountants in practice to work out within the time limit.

It is all very well to test the candidate's analytical ability, but the test must be scientific, fair, and square, and the examiners should not draw too freely on their professional experiences.

QUESTION 6 (New York).

The following trial balance is handed you, with the request that you prepare a revenue account and a balance-sheet:

A B's capitai

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If all the information required is not presented in this trial balance, supply what is wanting and submit the statements called for.

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SOLUTION.

Statement of Profits and Losses of the firm of A, B, as on.

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190

$15,000.00 8,600.00

$6,400.00

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Deduct debit balance of P. & L. Account.

Net profit for the period...

BALANCE SHEET OF THE FIRM OF A, B, AS ON..

.190.

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Any one familiar with C. P. A. examinations will agree with Mr. Jacobsson that examiners draw freely upon their experience for difficult problems, but there would be no great objection to the practice, provided they would present all the facts of the case, and provided, as stated in Mr. Jacobsson's comments, that these facts were scientific and fair. In most of such cases, however, this is not so.

The comparison of profits by means of percentages based upon selling prices is certainly unscientific. To quote Dawson on this subject:

"In taking the selling price as the base, the profit is necessarily included therein-thus the base will vary with the profits, although the underlying motive of comparison by means of percentages is to reduce results to a common base."

This variation is, moreover, uncontrolled by any principle, being, in the case of a large proportion of profits, entirely disproportionate to the variation caused by a smaller rate of profits. As an instance, 10 per cent. of profit computed upon the cost price is equal to 9 1/11 per cent. when the same result is taken upon the selling price, but if 50 per cent. of profits on cost prices be computed on selling prices it will only show 33 1/3 per cent. Furthermore, as the selling price is composed of the cost price and the profit, the latter cannot exceed the selling price, from which it follows that a profit based upon selling prices cannot equal or exceed 100 per cent.; if the goods have cost anything at all.

That this is also in accord with economic principles is shown by the following extract from John Stuart Mill's "Political Economy": "The capitalist, then, may be assumed to make all the advances and receive all the produce. His profit consists of the excess of the produce over the advances; his rate of profit is the rate which that excess bears to the amount advanced."

A State Board of Accountancy ought to present problems which should be scientific, and which could be solved according to rules, especially in a mathematical problem of this kind.

The solution of this problem is not clear either, especially so as Mr. Jacobsson in his comments simply refers to the make-up of the problem, or to the framers of it, but fails to enlighten us on some of the results shown in the solution. In many instances one has to hunt all over the problem to verify a result, and in some cases it is impossible to verify the final showing at all, which is due to the lack of sufficient explanations in the comments.

In the New York problem we are given a trial balance and asked to prepare a revenue account, etc. The nomenclature in this instance is not used well, as, according to Dicksee, a revenue account is prepared in nontrading concerns, while in trading concerns a profit and loss account takes the place of the revenue account. In this problem it is quite apparent that this is a pure and simple trading concern. Why then a revenue account?

Another undesirable expression we find in this trial balance is Merchandise Account. If there is anybody at all of the professional brethren who ought to emphasize the importance of keeping the merchandise account subdivided and not agglomerating purchases, sales, returns, etc., it ought to be members of the State Board. By arranging the problems in the shape this one is prepared, bookkeeping and not accounting methods are encouraged.

While this problem can be solved in different forms, the method used was adopted for the following reasons:

Due to the agglomeration of the purchases and sales, etc., into one account, a statement of profits and losses will give clearer results than a profit and loss account.

As the inventory is the chief item missing in the problem this was supplied, in order to complete the statement and make up the balancesheet. The inventory had to be taken at random, as no method could be applied to find out what was the amount of merchandise on hand, for the reason mentioned above.

The arrangement of the accounts in the balance-sheet follows the manner in which they would be realized and liquidated.

The Journal of Accountancy

Published Monthly under the auspices of the
American Association of Public Accountants

Vol. 5

DECEMBER, 1907

Professional Ethics.

No. 2

Discussion by John Alexander Cooper, C. P. A. (Illinois).

When the Committee on Arrangements for this Convention notified me that they expected me to open the discussion upon the topic so ably treated by our essayist, I confess to a feeling of diffidence, owing largely (as Mr. Sterrett very aptly puts it), to the fact that an accountant should-first of all-be the best judge of his own limitations.

Prior to my arrival in this city, this week, I was unaware of the line of treatment that the topic was to be given; so that fully appreciating its great importance, not only from a theoretical but from a practical standpoint, I took Time by the forelock and proceeded to study the subject for myself, hence the form of my remarks can hardly be styled a criticism or commentary upon the paper before us.

Mr. Sterrett, in the advance portion of his paper, makes a qualifying basis for the ethics, precepts, or rules, that we should be called upon to establish at this time. I must be allowed to differ with him there. We should establish rules which indicate the highest standard which we are able to attain now, or to which we can aspire under existing conditions.

He very truly says that we are debtors to the older professions and heirs to the accruing benefits therefrom. As will be

EDITORIAL NOTE.-The three following papers by Messrs. John A. Cooper, Franklin Allen and Robert H. Montgomery were delivered at the St. Paul Convention of the American Association of Public Accountants, October 16, 1907. They were called forth by Mr. J. E. Sterrett's article on PROFESSIONAL ETHICS, presented at the same con vention and printed in the October number of THE JOURNAL OF ACCOUNTANCY.

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