CONTRIBUTION OF F.W TAYLOR TO MANAGEMENT THOUGHT

F.W. Taylor

contributed a number of principles and features of management thought that adhered

to his new concept of approaching management thought scientifically. He was one of

the founders of management thought theory and is considered the father of scientific

management. His ideas were developed and used for decades after the concept was

created.

• Principles of scientific management. Taylor believed that scientific management

consists of a philosophy that results in a combination of four main principles. The first

principle suggests that management need to develop the best way to complete a job. It

is the task of finding the best method for achieving the objectives of a given job. The

second principle states that management must carry out a scientific selection of their

workers and develop them through proper management. Thirdly, management must

carry out a scientific approach. That is, a true science should be developed in all fields

of work activity. The fourth and final principle states that there should be an

elimination on conflicts between methods and men. Workers are likely to resist new

methods and this can be avoided by using it as an opportunity to offer more wages.

• Features of scientific management. Taylor put forward a huge number of features of

scientific management. One was the introduction of the standard task which every

worker is expected to complete within a day. This task should be calculated through

scientific investigation and work study is essential. Taylor also suggested that tasks

need to be planned. In order for workers to carry out this task every day, it will need

to be planned actively. A scientific selection and training of workers is another feature

of scientific management put forward by Taylor. This selection and training will

contribute towards the production activities.

Taylor is renowned for his research and work into management thought and scientific

management. His suggested principles and features have helped model the scientific

approach to management.

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His contribution to management theory is very significant for he says in his famous

book The Principles of Scientific Management that he was writing this paper for three

purposes;

First. To point out, through a series of simple illustrations, the great loss which the

whole country is suffering through inefficiency in almost all of our daily acts.

Second. To try to convince the reader that the remedy for this inefficiency lies in

systematic management, rather than in searching for some unusual extraordinary man.

Third. To prove that the best management is a true science resting upon clearly

defined laws, rules and principles, as a foundation. And further to show that the

fundamental principles of scientific management are applicable to all kinds of human

activities, from our simplest individual acts to the work of our great corporations

which calls for the most elaborate co-operation. And briefly through a series of

illustrations, to convince the reader that whenever these principles are correctly

applied, results must follow which are truly astounding.

He developed his theory emphasizing the new philosophy of management

responsibility for planning and supervision and formulating of rules, formula, etc. in

connection with labor and machine techniques, which would result in lower cost to

the employer and a higher return to labour. Taylor's chief contribution to the

development of management theory was an application of scientific method to

problems of management. His emphasis on the study of management from the point

of view of shop management led to the overlooking of "the more general aspects of

management, particularly in the United States and Great Britain."

Taylor has defined scientific management as follows:

"Scientific management is concerned with knowing exactly what you want men to

do and then see in that they do it in the best and cheapest way."

(F.W.Taylor, Scientific Management, New York: Harper Brothers, 1911)

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Elements of the Scientific Management

The main elements of the Scientific Management are:

1. Separation of planning from actual doing of work.

2. Functional foremanship, based on specialization of functions.

3. Job analysis to find out the best way of doing the things.

4. Standardization of things shall be fixed in advance on the basis of Job

analysis, etc.

5. Selection of workers on scientific basis and should be trained.

6. Financial incentives to workers to motivate them.

7. Apart from considering the Scientific and Technical aspects adequate

consideration should be given to economy and profits.

8. Suitable environment to create mutual co-operation between management and

workers.

Principles of Scientific Management

The principles of Scientific Management are:

1. Replacing rule of thumb with science.

2. Obtaining harmony in group action rather than discord.

3. Co-operation rather than chaotic individualism.

4. Increase in production and productivity instead of restricted production.

5. Development of workers by providing training.

While working in Midvale Company as a manager Taylor observed that employees

were not performing as per their capacity of productivity. And he considered that this

condition was occurring because of no care towards the waste. Taylor worked towards

the experiments at his work place to increase the worker’s efficiency so that

maximum output could be achieved by utilizing effort at maximum level.

1.   Scientific task setting:- Taylor observed that the management does not know

exactly the works – pieces of work- volume of works- which are to be performed by

the workers during a fixed period of time- which is called working day. In a working

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day how much work is to be dome by a worker but be fixed by a manager and the task

should be set everyday. The process of task setting requires scientific technique. To

make a worker do a quantity of work in a working day is called scientific task setting 

2.   Differential payment system:- under this system, a worker received the piece

rate benefit which will attract the workers to work more for more amount of wages

and more incentives would be created to raise the standardization of output to

promote the workers to produce more and perform more task than before and utilize

waste time to earn more wages.

 3.   Reorganization of supervision:- concepts of separation of planning and doing

and functional foremanship were developed. Taylor opines that the workers should

only emphasize in planning or in doing. There should be 8 foreman in which 4 are for

planning and 4for doing. For planning they were route clerk, instruction cord clerk,

time and cost clerk and disciplinarian. And for doing they were speed boss, gang boss,

repair boss and inspector.

4.   Scientific recruiting and training:-staffs and workers should be selected and

employed on scientific basis. Management should develop and train every workers by

providing proper knowledge and training to increase their skills and make them

effective

5.  Economy:- efficient cost accounting system should be followed to control cost

which can minimize the wastages and thoroughly reduced and thus eliminated.

6.     Mental revolution:- Taylor argued that both management and workers should

try to understand each other instead of quarreling for profits and benefits which would

increase production, profit and benefits.

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PRINCIPLES OF MBO

Definition

Management by Objectives (MBO) is a personnel management technique where

managers and employees work together to set, record and monitor goals for a specific

period of time. Organizational goals and planning flow top-down through the

organization and are translated into personal goals for organizational members. The

technique was first championed by management expert Peter Drucker and became

commonly used in the 1960s.

Key Concepts

The core concept of MBO is planning, which means that an organization and its

members are not merely reacting to events and problems but are instead being

proactive. MBO requires that employees set measurable personal goals based upon

the organizational goals. For example, a goal for a civil engineer may be to complete

the infrastructure of a housing division within the next twelve months. The personal

goal aligns with the organizational goal of completing the subdivision.

MBO is a supervised and managed activity so that all of the individual goals can be

coordinated to work towards the overall organizational goal. You can think of an

individual, personal goal as one piece of a puzzle that must fit together with all of the

other pieces to form the complete puzzle: the organizational goal. Goals are set down

in writing annually and are continually monitored by managers to check progress.

Rewards are based upon goal achievement.

Advantages

MBO has some distinct advantages. It provides a means to identify and plan for

achievement of goals. If you don't know what your goals are, you will not be able to

achieve them. Planning permits proactive behavior and a disciplined approach to goal

achievement. It also allows you to prepare for contingencies and roadblocks that may

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hinder the plan. Goals are measurable so that they can be assessed and adjusted easily.

Organizations can also gain more efficiency, save resources, and increase

organizational morale if goals are properly set, managed, and achieved.

Disadvantages

However, MBO is not without disadvantages. Application of MBO takes concerted

effort. You cannot rely upon a thoughtless, mechanical approach, and you should note

that some tasks are so simple that setting goals makes little sense and becomes more

of silly, annual ritual. For example, if your job is snapping two pieces of a product

together on an assembly line, setting individual goals for your work isn't really

necessary.

Rodney Brim, a CEO and critic of the MBO technique, has identified four other

weaknesses. There is often a focus on mere goal setting rather than developing a plan

that can be implemented. The organization often fails to take into account

environmental factors that hinder goal achievement, such as lack of resources or

management support. Organizations may also fail to monitor for changes, which may

require modification of goals or even make them irrelevant. Finally, there is the issue

of plain human neglect - failing to follow through on the goal.

Example

Let's say that you are a senior associate at a law firm who practices in the civil

litigation department. Your cases involve complex business litigation that usually take

years to prepare before trial (and the inevitable appeals, given the dollars at stake).

To study the M.B.O. process in detail, let us examine the principles involved in the

process: 1. Preliminary Objective Setting 2. Setting Subordinates Objectives 3.

Matching Goals and Resources 4. Recycling Objectives 5. Review and Appraisal of

Performance

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1. Preliminary Objective Setting:

The top management should be very clear in itself about the purpose the goals and

objectives which an enterprise has to achieve in a given period. The period can be

any, say a quarter year, a half year, a year or five years but in most cases it is made to

coincide with the annual budget or the completion of a major project.

There has to be a hierarchy of objectives in an organisation. The top management is

responsible for pointing out which objectives are primary and secondary and keeping

the people aware of changes which occur from time to time.

Certain goals should be scheduled for accomplishment in a shorter period and others

for a much longer period. As one goes down the line in an organisation, the length of

time set for accomplishing goals tends to get shorter.

The objectives set should be specific and realistic. These objectives are preliminary

and tentative subject to modifications as the entire chain of verifiable objectives is

worked out by the organisation.

In the setting of objectives, the managers also establish measures which will indicate

goal accomplishment. While operational objectives must be measurable, many of the

best strategic goals are not reduced to measurement, but to verbal statements of

conditions which would exist if the goals were attainable.

2. Setting Subordinates Objectives:

In any type of organisation, it is its human resource i.e. the individuals who are

responsible for achieving its objectives. Therefore, each individual must be clearly

told as to what the organisation expects from him.

In setting objectives for the subordinates in the light of preliminary objectives and

resources available, each subordinate is asked (a) what goals he can achieve (b) in

what time and (c) with what resources. The superior’s role at this point is very

important.

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Here, he can set his subordinates objectives by consultation and agreement. In fact, a

superior’s responsibility in setting objectives for his subordinates is to state objectives

in terms that invite confidence. Hence everybody gets involved in the process of goal

setting.

3. Matching Goals and Resources:

The objectives in themselves do not mean anything unless we have resources and

means to achieve these objectives. When the goals are carefully set in a net work of

verifiable measures, they also indicate the resource requirement.The resources are

needed at every level to attain goals. However, just like goal setting, the allocation of

resources should also be done in consultation with the subordinates.

4. Recycling Objectives:

Goals are neither set at the top nor brought to bottom, nor they are started at the

bottom and go up. In fact, there is a degree of recycling. Goal setting is not only a

joint process but also an interaction which requires recycling because in the goal

setting the contribution of subordinates comes into the picture.In recycling,

subordinates at every level are involved in goal setting and they influence it

considerably. Thus people set goals for themselves which create the feeling of

commitment which is necessary for attaining goals. Odiorne has indicated that “The

power of commitment is what makes M.B.O. work, and the absence of such

commitment can cause it to fail”.

5. Review and appraisal of performance:

This is the final step in the process of MBO. There should be periodic reviews of

progress between manager and the subordinates. These reviews would determine

whether the individual is making satisfactory progress.

It will also reveal if any unanticipated problem have developed. It also helps the

subordinate to understand the process of MBO better. It also improves the morale of

subordinates since the manager is showing active interest in the subordinate’s work

and progress.

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PRODUCT MARKETING VS SERVICE MARKETING

Products vs Services

A product is tangible – any item you can physically touch, has packaging and usually

a shelf life. But defining services is more difficult. They may not be the same for

every customer every time they are bought. Think about flights. Ticket prices

constantly change along with the level of service. The service on one flight could be

entirely different from another with the same airline. If you ask two people about

flying a particular airline you’ll hear a horror story  from one and great things from

the other.

There are 3 P’s in services that make it distinctly different from its product

counterpart – no, none of them are part of the marketing mix (Product, Price, Place,

Promotion), although still relevant. According to Marketing Teacher.com, Valarie

Zeithamal, “an internationally recognized pioneer of services marketing“, states the 3

P’s related to services marketing mix as physical evidence, people, and process.

Physical Evidence is “the   environment in which the service is delivered, where the

firm and customer interact, and any tangible components that facilitate performance

or communication of the service“. The second P is people. They play a large role in

customer experience and how service is delivered. Lastly, process is how a service is

carried out.

The Challenges of Marketing Products & Services

To be fair I would argue service industries face more challenges than its product

counterpart because of the “people factor”. When people are involved there is

room for error, especially with consistency. Once again think  flights. There are

factors that can’t be controlled like delays, frustrating enough, but add to that a rude

flight attendant and you now have an irritated customer who will think twice before

flying that airline again.

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There are however organizations who get it right. The Ritz-Carlton is known for its

superior service. Yes – their product is technically luxurious room and board but there

are plenty of other hotels offering the same thing. The Riz-Carlton competes on its

service. A guest feels that the staff genuinely cares about their experience and comfort

which makes a difference when compared to competitors. But service based

organizations can do exactly the same thing. With the right staff and training the

“people factor” can work in an organization’s favor.

Service as a Product?

You can really think of a service as a product. In the spirit of campaign season, let’s

look at politicians. They have something to sell you and it’s not themselves, but their

beliefs. A politicians’ plans for office and what they stand for are strategically

packaged for constitutes (customers). Product based organizations want customers

who believe what they believe – they want advocates, much like politicians want

dedicated volunteers who care about increasing votes (purchases).

If costumers are buying a service they still walk away with something, even if it’s not

tangible. For example, anyone who religiously gets their car cleaned probably

believes what their car wash believes. I’m talking about the people who go extra mile

to have people hand wash their car once a week. They both believe taking care of and

ridding in a clean car is important and part of maintaining an image. The customer

feels good about riding in a clean car and takes pride in it.

In its simplest terms a service is an intangible product that must offer superior

service in order to hold a competitive advantage. If a service is only an intangible

product then they are marketed similarly to products. A customer could take away

good feelings or an overall sense of well-being.

The Take-Away

Whether there’s a difference between product or service marketing depends on the

actual product or service. Products like luxury brands appeal to unique groups, posing

challenges, although they’re physical products. A service could appeal to a wide array

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of people making it relatively easy to market. Uber, for example, is a successful

service based company offering better customer experiences over traditional taxi

rides. There’s no haggling over money or phone calls. It’s all done through an app.

All Uber did was offer a better way to take a taxi through 21st century service.

There are basic marketing concepts at the core of both products and services. You

have what you’re selling, it could be tangible or intangible, its priced based on normal

criteria (what it takes to make a profit), there is a physical location for where products

and services are sold, and finally, those products and services must be promoted.

If a product or service offered can’t effectively convince people to purchase, then both

offerings stand an equal chance of failing. It doesn’t matter whether it’s a product or a

service. If you are able to effectively demonstrate why your offer is better than your

competitors, differentiate the offer, use the right medium for marketing, and

communicate the benefits of what you’re selling there is opportunity for success in

both product and service marketing.

The whole “product versus service marketing” topic is nothing new to marketers all

over the world.  Google the term and you will find more than enough material on

topics such as the tangibility versus intangibility and how product marketing is

relatively easier as compared to services marketing. I have collaborated with both

software services and software product marketing teams over the years and the

experience has been very different.

A key point that marketers have to remember is that the customer is the best

advertiser, be it a product or a service. It is basic human nature to go for the tried,

tested and validated products/services. This comes from our innate nature of not

wanting to take too many risks. The primary reason product and services marketing

differ based on this innate human nature.

Products are described as tangible, which can be touched, felt or experienced. A

software product can be downloaded and a trial version could be installed in your

system. Consider the average user of smart phones. It is highly likely that a majority

of these users has never read the user manual unless they encounter some serious

problems. Then, how is it that they are quite efficient at operating it? It is because

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they learn by experimentation. This experimentation is possible because the product is

tangible. Repeated experimentation is possible when it comes to products and it is

these experimentations that decide if the product sells itself or not. The risk level has

been lowered since the experience of the product is tested beforehand and the

customer is secure in the knowledge that the test product and final one delivered are

not radically different from one another.

Services on the other hand are a different game altogether. Consider a beauty salon

that offers haircuts and spa treatments. Each hairdresser and spa specialist differs

from the other. They have their own unique skills and levels of experience. A

hairdresser might have years of experience and very good skills but if at the end of it

all, the customer does not like the haircut they got, they are less likely to recommend

them to others. When it comes to service marketing, the experience of the customer is

what counts the most and it is also the hardest part to market. Even if the salon

decides to give free facials or haircuts as a part of brand promotion, repeated

experiences are rare and hence the user always has a sense of caution. This is because

a service rendered depends also on the moods of the customer at that particular time.

These factors make services marketing highly challenging. A major part of service

marketing depends on the relationship the marketer/ seller is able to establish with the

customer. Studies have proven that it is difficult for people to be highly negative

towards someone who is very positive in their behavior towards the said person. Their

trust level is also higher in people they are familiar with. Marketers have to remember

this and always create good relationships with their customers.When it comes to

marketing of services, do remember that it is all about customer relationships. An

example I can give is that of a Southwest Airlines case. A customer who was a

vegetarian was mistakenly given a non-vegetarian meal and he when complained, the

air hostess found out that a vegetarian meal was not available. She gave him some

fruits she had with her instead, profusely apologizing for the mistake. Once the

airplane landed, the captain personally escorted the passenger to the executive lounge

where a special meal was arranged. They then proceeded to give the passenger a

complimentary car ride from the airport to the hotel. The passenger was so highly

impressed with the staff that he decided that he would always travel with them

whenever he had to travel.

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STRATEGIES FOR THE NEW PRODUCT DEVELOPMENT

In business and engineering, new product development (NPD) is the complete

process of bringing a new product to market. New product development is described

in the literature as the transformation of a market opportunity into a product available

for sale[1] and it can be tangible (that is, something physical you can touch) or

intangible (like a service, experience, or belief). A good understanding of customer

needs and wants, the competitive environment and the nature of the market represent

the top required factors for the success of a new product.[2] Cost, time and quality are

the main variables that drive the customer needs. Aimed at these three variables,

companies develop continuous practices and strategies to better satisfy the customer

requirements and increase their market share by a regulate development of new

products. There are many uncertainties and challenges throughout the process which

companies must face. The use of best practices and the elimination of barriers to

communication are the main concerns for the management of NPD process.

The front-end marketing phases have been very well researched, with valuable models

proposed. Peter Koen et al. provides a five-step front-end activity called front-end

innovation: opportunity identification, opportunity analysis, idea genesis, idea

selection, and idea and technology development. He also includes an engine in the

middle of the five front-end stages and the possible outside barriers that can influence

the process outcome. The engine represents the management driving the activities

described. The front end of the innovation is the greatest area of weakness in the NPD

process. This is mainly because the FFE is often chaotic, unpredictable and

unstructured.[4] Engineering design is the process whereby a technical solution is

developed iteratively to solve a given problem[5][6][7] The design stage is very

important because at this stage most of the product life cycle costs are engaged.

Previous research shows that 70% - 80% of the final product quality and 70% of the

product entire life-cycle cost are determined in the product design phase, therefore the

design-manufacturing interface represent the greatest opportunity for cost reduction.[8]

Design projects last from a few weeks to three years with an average of one year. [9]

Design and Commercialization phases usually start a very early collaboration. When

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the concept design is finished it will be sent to manufacturing plant for prototyping,

developing a Concurrent Engineering approach by implementing practices such as

QFD, DFM/DFA and more. The output of the design (engineering) is a set of product

and process specifications – mostly in the form of drawings, and the output of

manufacturing is the product ready for sale.[10] Basically, the design team will develop

drawings with technical specifications representing the future product, and will send it

to the manufacturing plant to be executed. Solving product/process fit problems is of

high priority in information communication design because 90% of the development

effort must be scrapped if any changes are made after the release to manufacturing

With a well-considered new product development (NPD) strategy, you can avoid

wasting time, money and business resources. An NPD strategy will help you organise

your product planning and research, capture your customers' views and expectations,

and accurately plan and resource your NPD project. Your strategy will also help you

avoid:

overestimating and misreading your target market

launching a poorly designed product, or a product that doesn't meet the needs

of your target customers

incorrectly pricing products

spending resources you don't have on higher-than-anticipated development

costs

exposing your business to risks and threats from unexpected competition.

There are several important steps you will need to plan into your NPD strategy.

Define your product

An accurate description of the product you are planning will help keep you and your

team focused and avoid NPD pitfalls such as developing too many products at once,

or running out of resources to develop the product.

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Identify market needs

Successful NPD requires a thorough knowledge of your target market and its needs

and wants. A targeted, strategic and purposeful approach to NPD will ensure your

products fit your market. Ask yourself:

What is the target market for the product I am proposing?

What does that market need?

What is the benefit of my proposed new product?

What are the market's frustrations of existing products of its type?

How will the product fit into the current market?

What sets this product apart from its competition?

Draw on your existing market research. You may need to undertake additional

research to test your new product proposal with your customers. For example, you

could set up focus groups or a customer survey.

Establish time frames

You need to allow adequate time to develop and implement your new products. Your

objectives for developing new products will inform your time frames and your

deadlines for implementation. Be thoughtful and realistic. Some objectives might

overlap but others will be mutually exclusive.

Your objective to race against your competition will require efficiency from

your team.

Your aim to achieve a specific launch date will be influenced by demand for

seasonal products and calendar events.

Your aim to be responsive to your customers' needs and demands will require

time for research to ensure you develop the right products at the right time.

Your objective to stick to business as usual and maintain other schedules will

affect the resources you make available for NPD.

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Identify key issues and approaches

There are many tasks involved in developing a product that is appropriate for your

customers. The nature of your business and your idea will determine how many of

these steps you need to take. You may be able to skip or duplicate certain stages, or

start some of them simultaneously. Key tasks include:

generating and screening ideas

developing and screening concepts

testing concepts

analysing market and business strategy

developing and market testing products

implementing and commercialising products.

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LEGAL ISSUES IN SOCIAL MEDIA MARKETING

Key Point 1: Role in Society

a. Why is marketing communication a more socially responsible platform than

advertising?

b. Explain the two points of view represented in the shape or mirror debate.

c. Choose one of the concerns about MC that you either agree with or disagree

with, and research it. Write a two-page report on your findings.

d. Consider the advertiser censorship issue identified in the opening case. Is it

fair for advertisers to expect to receive favorable coverage in return for their

financial support of the media through advertising? Should editors consider

the possible negative response of advertisers or other influential people when

making a decision about whether to run a story?

Key Point 2: Ethical Issues

a. How would you define ethics?

b. What are sensitive areas in marketing communication? Do you think MC

shapes society or mirrors it? Explain your answer.

c. Find an example of a marketing message that offends you or someone you

know. Explain why the message seems offensive.

d. Find five examples of cigarette marketing communication, and list the

messages they appear to be sending and to whom. What ethical concerns do

they raise, if any?

e. Find an example of a social marketing campaign, and analyze how it relates to

various stakeholder groups.

Key Point 3: Legal Issues

a. What is the NAD?

b. How do puffery and fraud differ?

c. Find an example of a false or misleading piece of marketing communication,

and explain why you believe it has problems.

d. How and in what areas do competitors get involved in challenging a brand's

communication?

e. What is your position on commercial free speech? Visit the sites of the

International Advertising Association (www.iaaglobal.org) and its critics

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(www.corpwatch.org) and (www.ReclaimDemocracy.org). Then develop a

two-page position statement that outlines the arguments for and against

commercial free speech and concludes with your position.

Key Point 4: Regulation

a. What is the main federal agency overseeing advertising in the United States?

b. What is the difference between the FTC's and the FCC's oversight

responsibilities for marketing communication in the United States?

c. What is the role of your state's attorney general in overseeing marketing

communication?

d. You are planning to launch a new soft drink, first in the United States and then

in Europe. List as many regulatory agencies as you can that might factor into

the launch, and explain their involvement with this launch.

SUMMARY OF (UN)ETHICAL MARKETING

To sum this all up, in order to be ethical in marketing attempts, businesses should

make honest claims, and excel at satisfying the needs of their customers. This practice

over time builds trust and customer confidence in your brand’s integrity and therefore

leads to loyalty, customer and employee retention, greet public relations and increase

in business from customers spreading the word.

Unethical marketing behaviors will achieve the exact opposite and in time could even

lead companies into legal troubles and dissemination of a bad reputation and worse

customer experience. Below are practices of unethical marketing, which you should

avoid in order not to ruin your company.

Exploitation – avoid using scare tactics and hard sell and protect the

vulnerable consumer.

Spam – avoid flooding a customer’s voicemail, mailbox, email or any other

means of communication with unsolicited messages or aggressive advances.

Bad mouthing Competition – focus on the value and benefit of your product

and point out its unique selling point, the consumers are smart enough to

choose the better product.

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Misleading Advertisement and Information –any exaggerated claims or

dishonest promises will cause the customers to mistrust you and even

determine the failure of your brand.

Philanthropic gestures for public relations – giving to charities solely for a

tax write off will make the company appear callous and uncaring and people

tend to shy away from these types of companies and spend money where they

feel the leaders and marketers are especially humane and gracious.

DETERMINANTS OF WORKING CAPITAL

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Some of the most determinants of working capital are: 1. Nature of business 2. Length

of period of manufacture 3. Volume of business 4. The proportion of the cost of raw

materials to total cost 5. Use of Manual Labour or Mechanisation 6. Need to keep

large stocks of raw materials of finished goods 7. Turnover of working capital 8.

Terms of Credit 9. Seasonal Variations 10. Requirements of Cash and 11. Other

Factors.

The requirements of working capital are not uniform in all enterprises, and therefore,

factors responsible for a particular size of working capital in one company are

different than in other enterprise.Therefore, a set pattern of factors determining the

optimum size of working capital is difficult to suggest.

1. Nature of business:

It is an important factor for determining the amount of working capital needed by

various companies. The trading or manufacturing concerns will require more amount

of working capital along-with their fixed investment of stock, raw materials and

finished products.

Public utilities and railway companies with huge fixed investment usually have the

lowest needs for current assets, partly because of cash, nature of their business and

partly due to their selling a service instead of a commodity. Similarly, basic and key

industries or those engaged in the manufacture of producer’s goods usually have less

proportion of working capital to fixed capital than industries producing consumer

goods.

2. Length of period of manufacture:

The average length of the period of manufacture, i.e., the time which elapses between

the commencement and end of the manufacturing process is an important factor in

determining the amount of the working capital.

If it takes less time to make the finished product, the working capital required will be

less. To give an example, a baker requires one night time to bake his daily quota of

bread. His working capital is, therefore, much less than that of a shipbuilding concern

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which takes three to five years to build a ship. Between these two cases may fall other

business concerns with varying periods of manufacture requiring different amounts of

working capital.

3. Volume of business:

Generally, the size of the company has a direct relation with the working capital

needs. Big concerns have to keep higher working capital for investment in current

assets and for paying current liabilities.

4. The proportion of the cost of raw materials to total cost:

Where the cost of raw materials to be used in manufacturing of a product is very large

in proportion to the total cost and its final value, working capital required will also be

more.

That is why, in a cotton textile mill or in a sugar mill, huge funds are required for this

purpose. A building contractor also needs huge working capital for this reason. If the

importance of materials is less, as for example in an oxygen company, the needs of

working capital will be naturally not more.

5. Use of Manual Labour or Mechanisation:

In labour intensive industries, larger working capital will be required than in the

highly mechanized ones. The latter will have a large proportion of fixed capital. It

may be remembered, however, that to some extent the decision to use manual labour

or machinery lies with the management. Therefore, it is possible in most cases to

reduce the requirements of working capital and increase investments in fixed assets

and vice versa.

6. Need to keep large stocks of raw materials of finished goods:

The manufacturing concerns generally have to carry stocks of raw materials and other

stores and also finished goods. The larger the stocks (whether of raw materials or

finished goods) more will be the needs of working capital.

21

In certain lines of business, e.g., where the materials are bulky and have to be

purchased in large quantities, (as in cement manufacturing), stock piling of raw-

material is used.

Similarly, in public utilities, which must have adequate supplies of coal to assure

regular service, stock piling of coal is necessary. In seasonal industries finished goods

stocks have to be stored during off seasons. All these require large working capital.

7. Turnover of working capital:

Turnover means the speed with which the working capital is recovered by the sale of

goods. In certain businesses, sales are made quickly and the stocks are soon exhausted

and new purchases have to be made. In this manner, a small amount of money

invested in stocks will result in sales of much larger amount.

Considering the volume of sales, the amount of working capital requirements will be

rather small in such type of business. There are other businesses where sales are made

irregularly. For example, in case of jewellers, a costly jewellery may remain locked

up in the show-window for a long period before it catches the fancy of a rich lady.

In such cases, large sums of money have to be kept invested in stocks. But a baker or

a news-hawker may be able to dispose of his stocks quickly, and may, therefore, need

much smaller amounts by way of working capital.

8. Terms of Credit:

A company purchasing all raw-materials for cash and selling on credit will be

requiring more amount of working capital. Contrary to this, if the enterprise is in a

position to buy on credit and sell it for cash, it will need less amount of working

capital. The length of the period of credit has a direct bearing on working capital.

The essence of this is that the period which elapses between the purchase of materials

and sale of finished goods and receipts of sale proceeds, will determine the

requirements of working capital.

22

9. Seasonal Variations:

There are some industries which either produce goods or make sales only seasonally.

For example, the sugar industry produces practically all the sugar between December

and April and the woollen textile industry makes its sales generally during winter.

In both these cases the needs of working capital will be very large, during few months

{i.e., season). The working capital requirements will gradually decrease as and when

the sales are made.

10. Requirements of Cash:

The need to have cash in hand to meet various requirements e.g., payment of salaries,

rents, rates etc., has an effect on the working capital. The more the cash requirements

the higher will be working capital needs of the company and vice versa.

11. Other Factors:

In addition to the above mentioned considerations there are also a number of other

factors which affect the requirements of working capital. Some of them are given

below.

(i) Degree of co-ordination between production and distribution policies.

(ii) Specialisation in the field of distribution.

(iii) Developments of means of transportation and communications.

(iv) The hazards and contingencies inherent in the type of business.

ROLE OF IFCI IN INDUSTRIAL DEVELOPMENT

23

The Industrial Finance Corporation started with the authorized share capital of Rs. 10

crores divided into 20,000 share of Rs. 5,000 each. It can also issue bonds up to five

times of its paid up capital. The Corporation is authorized to borrow from the Reserve

Bank of India, the Central Government and the World Bank, in order to increase its

resources.

Functions

The Industrial Financial Corporation of India is authorized to grant loans to industrial

companies repayable with twenty five years grants, loans in foreign currency to

certain industries, under write bonds, shares and debentures etc. provided they are

disposed of by the I.F.C.I. within seven years, guarantee deferred payments by

importers of capital goods of foreign manufacturers, accept deposit from the local

institution, guarantee loans from any bank of a foreign country, subscribe shares of

industrial companies.

The corporation’s role now extends to the entire industrial spectrum in the country.

The facilities and services being provided by IFCI can be deemed to fall broadly

under (a) project finance, (b) financial services and (c) promotional services.

The Industrial Finance Corporation has played a vital role in our industrial economy.

Since its inception, the Corporation has provided financial assistance to the

underdeveloped industrial concerns. The Corporation has the power to examine the

financial aspects of the industrial companies and give valuable advice to the

management for improving their schemes.

I.F.C.I. has launched promotional schemes like

Subsidy in interest for women entrepreneurs

Schemes for modernization of small scale industrial units,

Consultancy fee subsidy for providing marketing assistance,

Pollution control schemes etc.

It is also diversifying its activities in the field of merchant banking to render other

financial services like project counselling, sanction of loans etc. I.F.C.I. is also

showing concern for the development of backward districts of the country.

24

Criticism

But the Industrial Finance Corporation is not free from criticisms.

1. The Corporation has mainly favored the big companies and has

neglected small and medium concerns.

2. The Industrial Finance Corporation is not authorized to sanction more

than two crores of rupees to many industrial concerns.

3. The Corporation may grant advances or loans only if the Central

Government is ready to repay the principal with interest.

4. The I.F.C.I. lack administrative efficiency. The members are not

properly trained and acquainted with the problems of industrial finance.

5. The Corporation has a bias toward the more developed industrial

companies.

6. It has been reported that the I.F.C.I. unusually delays in granting loans.

It is changed with nepotism and favouritism.

The functions of the IFCI base as follows:

(i) The corporation grants loans and advances to industrial concerns.

(ii) Granting of loans both in rupees and foreign currencies.

(iii) The corporation underwrites the issue of stocks, bonds, shares etc.

(iv) The corporation can grant loans only to public limited companies and co-

operatives but not to private limited companies or partnership firms.

Organisation and Management:

The Head Office of the IFCI is in New Delhi. It has also established its Regional

offices in Bombay, Chennai, Kolkata, Chandigarh, Hyderabad, Kanpur and Guwahati.

The branch office of IFCI is located in Bhopal, Pune, Jaipur, Cochin, Bhubaneswar,

Patna, Ahmedabad and Bangalore.

25

The IFCI is managed by a Board of Directors, headed by a Chairman, who is

appointed by the Government of India, in consultation with RBI. The chairman holds

his position for a period of 3 years, subject to extension.

Of the 12 directors, 4 are nominated by the IDBI, three of whom are experts in the

fields of industry, labour and economics and the fourth is the General Manager of the

IDBI. The remaining 8 directors are nominated.

Two directors are nominated for a term of 4 years by each of the following-scheduled

banks, co-operative banks, insurance companies and investment companies making

up eight directors.

Activities of the IFCI:

The promotional activities of IFCI are explained below:

1. Soft Loan Assistance:

This scheme provides soft loan assistance to existing industries in small and medium

sector for developing technology through in-house research and development.

2. Entrepreneur Development:

IFCI provides financial support to EDPs (Entrepreneur Development Programmes)

conducted by several agencies all-over India. In co-operation with Entrepreneurship

Development Institute of India.

3. Industrial Development in Backward Areas:

IFCI also take measures to promote industrial development in backward areas through

a scheme of concessional finance.

4. Subsidised Consultancy:

The IFCI gives subsidised consultancy for,

(i) Small Entrepreneurs for Meeting the Cost of Project.

(ii) Promoting Ancillary Industries

26

(iii) To do the Market Research.

(iv) Reviving Sick Units.

(v) Implementing Modernisation.

(vi) Controlling Pollution in Factories.

5. Management Development:

To improve the professional management the IFCI sponsored the Management

Development Institute in 1973. It established the Development Banking Centre to

develop managerial, manpower in industrial concern, commercial and development

banks.

Working of the IFCI:

The working of the IFCI came in for a large measure of criticism. In the first place,

the rate of interest which the corporation charged was extremely high. Secondly, there

was a great delay in sanctioning loans and in making the amount of the loans

available.Thirdly, the ‘corporation’s insistence on the personal guarantee of managing

directors in addition to the mortgage of property was considered wrong In the last two

decades the corporation had entered into new lines of activity, viz, underwriting

debentures and shares and guaranteeing of deferred payment in respect of imports

from abroad of plant an equipment by industrial concerns and subscribing to stocks

and shares of industrial concerns directly Besides, the performance of IFCI together

with the work of other public sector financial institutions has been extremely credit

worthy in the last two decades.

Conclusion

Thus it has been suggested that steps should be taken to improve the administrative

machinery of the Corporation and also to increase its financial resources. The

Industrial Finance Corporation has to see that all States in India receive financial aid

from it on a sound economic basis.

WEALTH MAXIMIZATION VS PROFIT MAXIMIZATION

27

The financial management has come a long way by shifting its focus from traditional

approach to modern approach. The modern approach focuses on wealth maximization

rather than profit maximization. This gives a longer term horizon for assessment,

making way for sustainable performance by businesses.

A myopic person or business is mostly concerned about short term benefits. A short

term horizon can fulfill objective of earning profit but may not help in creating

wealth. It is because wealth creation needs a longer term horizon Therefore, financial

management emphasizes on wealth maximization rather than profit maximization. For

a business, it is not necessary that profit should be the only objective; it may

concentrate on various other aspects like increasing sales, capturing more market

share etc, which will take care of profitability. So, we can say that profit

maximization is a subset of wealth and being a subset, it will facilitate wealth

creation.

Giving priority to value creation, managers have now shifted from traditional

approach to modern approach of financial management that focuses on wealth

maximization.

This leads to better and true evaluation of business. For e.g., under wealth

maximization, more importance is given to cash flows rather than profitability. As it

is said that profit is a relative term, it can be a figure in some currency, it can be in

percentage etc. For e.g. a profit of say $10,000 cannot be judged as good or bad for a

business, till it is compared with investment, sales etc. Similarly, duration of earning

the profit is also important i.e. whether it is earned in short term or long term.

In wealth maximization, major emphasizes is on cash flows rather than profit. So, to

evaluate various alternatives for decision making, cash flows are taken under

consideration. For e.g. to measure the worth of a project, criteria like: “present value

of its cash inflow – present value of cash outflows” (net present value) is taken. This

approach considers cash flows rather than profits into consideration and also use

discounting technique to find out worth of a project. Thus, maximization of wealth

approach believes that money has time value.

28

An obvious question that arises now is that how can we measure wealth. Well, a basic

principle is that ultimately wealth maximization should be discovered in increased net

worth or value of business. So, to measure the same, value of business is said to be a

function of two factors – earnings per share and capitalization rate. And it can be

measured by adopting following relation:

Value of business = EPS / Capitalization rate

At times, wealth maximization may create conflict, known as agency problem. This

describes conflict between the owners and managers of firm. As, managers are the

agents appointed by owners, a strategic investor or the owner of the firm would be

majorly concerned about the longer term performance of the business that can lead to

maximization of shareholder’s wealth. Whereas, a manager might focus on taking

such decisions that can bring quick result, so that he/she can get credit for good

performance. However, in course of fulfilling the same, a manager might opt for risky

decisions which can put the owner’s objectives on stake.

Hence, a manager should align his/her objective to broad objective of organization

and achieve a tradeoff between risk and return while making decision; keeping in

mind the ultimate goal of financial management i.e. to maximize the wealth of its

current shareholders.

We know that the goals of financial management are profit maximization and

wealth maximization. These are the important objectives of business firms.

Now the question arises of the choices,

i.e. which should be the goal of decision making be profit maximization or

which strengthen the case for wealth maximization as the goal of the business

enterprise.

 Argument and Counter Argument:

 Profits cannot be ascertained well in advance to express the profitability of

return as future is uncertain. It is not at possible to maximize what cannot be

known.

29

 The executive or the decision maker may not have enough confidence in the

estimates of future returns so that he does not attempt future to maximize. It is

argued that firm's goal cannot be maximize profits but attain a certain level of

profit holding certain shares of the market or certain level of sales.

 There must be a balance between the expected return and risk. The

possibility of higher expected yields are associated with greater risk to

recognize such

a balance and wealth maximization is brought in to the analysis. In such

cases, higher capitalization rate involves. Such combination of expected

returns with risk variations and related capitalization rate cannot be

considered in the concept of profit maximization.

 The goal of profit maximization is consider being a narrow outlook. Evidently

when profit maximization becomes the basis of financial decision of the

concern, it ignores the interest of the community on one hand and that of the

Govt., workers and other concerned persons in the enterprise on the other

hand.

 Keeping the above objection in view, most of the thinkers on the subject

have come to the conclusion that the aim of an enterprise should be wealth

maximization not the profit maximization.

 Prof. Solomon of Stanford University has handled the issue very logically. He

argues that it is useful to make a distinction between profit and profitability

maximization of profit with a view to maximizing the wealth of shares holders

is clearly an unreal motive. On the other hand, profitability maximization with a

view to using resources to yield economic value higher than the joint values of

inputs required is useful goal.

Thus the proper goal of financial management is wealth maximization.

30

OBJECTIVES OF FINANCIAL REPORTING

Financial statements are prepared according to agreed upon guidelines. In order to

understand these guidelines, it helps to understand the objectives of financial

reporting. The objectives of financial reporting, as discussed in the Financial

Accounting standards Board (FASB) Statement of Financial Accounting Concepts No.

1, are to provide information that:

1. Is useful to existing and potential investors and creditors and other users in making

rational investment, credit, and similar decisions;

2. Helps existing and potential investors and creditors and other usear to assess the

amounts, timing, and uncertainty of pro spective net cash inflows to the enterprise;

3. Identifies the economic resources of an enterprise, the claims to those resources,

and the effects that transactions, events, and circumstances have on those resources

All companies engage in financial reporting. Some companies create elaborate

financial presentations for the investors and lenders. Others produce basic financial

statements for the owner. Financial reporting allows the company to share its

activities during the period. Financial statement readers learn about the company's

profitability and how it balances its debt financing with equity financing. Financial

reporting meets several objectives.

Communication

One objective of financial reporting involves communication. Several individuals

hold a vested interest in how a company performs. These individuals learn about the

company’s performance by reviewing the financial statements. The income statement

communicates the company’s profitability. The balance sheet communicates the

company’s ability to obtain and invest its resources. The statement of cash flows

communicates the company’s ability to manage its cash. Companies communicate the

financial results by mailing financial statements and by publishing them on the

company website.

31

Solicit Investors

Another objective of financial reporting considers the company’s ability to attract new

investors. Investors try to predict which companies will provide the best return for

their money. Investors request copies of the company’s financial statements. They

review the numbers reported on each statement and compare those results with the

numbers on other companies’ financial statements. Companies issue financial reports

that share their past financial results and express their future plans. They present their

future plans as a way of communicating their ability to grow the company.

Demonstrate Creditworthiness

Financial reporting allows the company to demonstrate its creditworthiness to lenders

and creditors. Creditors sell products and services to the company and allow the

company to pay for them at a future date. Lenders give money to the company in

exchange for the promise to repay that money in the future. Lenders and creditors use

the company’s financial reports to evaluate whether the company can repay the

money borrowed.

Compliance

Compliance represents another objective of financial reporting. The Internal Revenue

Service requires corporations to report their financial results on their income tax

return. Sole proprietors report their financial results on their personal income tax

return. The Securities and Exchange Commission requires publicly traded

corporations to file their financial statements quarterly. These companies report their

financial results to remain compliant.

In specifying the overriding objectives of financial reporting, the board considered the

economic, legal, political, and social environment in the United States. The objectives

would be quite different in a socialist economy where the majority of productive

resources are government owned.

32

Implicit in the objectives is an overall societal goal of serving the public interest by

providing evenhanded financial and other information that, together with information

from other sources, facilitates efficient functioning of capital markets and otherwise

assists in promoting efficient capital allocation of scarce resources in the economy.27

The primary objective of financial reporting is to provide useful information for

decision making.

The importance to our economy of providing capital market participants with

information was discussed previously, as were the specific cash flow information needs

of investors and creditors. SFAC 1 articulates this importance and investor and creditor

needs through three basic financial reporting objectives listed in Graphic 1-6.

GRAPHIC 1-6

Financial Reporting Objectives

1. Financial reporting should provide information that is useful to present and

potential investors and creditors and other users in making rational investment,

credit, and similar decisions.

The information should be comprehensible to those who have a reasonable

understanding of business and economic activities and are willing to study the

information with reasonable diligence.

2. Financial reporting should provide information to help present and potential

investors and creditors and other users to assess the amounts, timing, and

uncertainty of prospective cash receipts.

Since investors’ and creditors’ cash flows are related to enterprise cash flows,

financial reporting should provide information to help assess the amounts,

timing, and uncertainty of prospective net cash inflows to the related enterprise.

3. Financial reporting should provide information about the economic resources of

an enterprise; the claims to those resources (obligations); and the effects of

transactions, events, and circumstances that cause changes in resources and

claims to those resources.

These are sources, direct or indirect, of future cash inflows and cash outflows.

SFAC 1 establishes the objectives of financial reporting.

33

The first objective specifies a focus on investors and creditors. In addition to the

importance of investors and creditors as key users, information to meet their needs is

likely to have general utility to other groups of external users who are interested in

essentially the same financial aspects of a business as are investors and creditors.

The second objective refers to the specific cash flow information needs of investors and

creditors. The third objective emphasizes the need for information about economic

resources and claims to those resources. This information would include not only the

amount of resources and claims at a particular point in time but also changes in

resources and claims that occur over periods of time. This information is key to

predicting future cash flows.

CURRENT PURCHASING POWER METHOD

Accounting-measurement showing the effect of inflation on the value of money. To

arrive at CPP, historical costs are converted into current prices by using an index such

as consumer price index (CPI).

34

Under current purchasing power ( CPP) method, financial statements prepared under

historical cost accounting are re-stated by using an approved price index. The

following steps should be followed to prepare financial statements under CPP method

of accounting for price level changes.

1. Calculation Of Conversion Factor

CPP method involves the re-statement of historical figures at current purchasing

power. For this purpose, historical figures must be multiplied by conversion factors.

The formula for the calculation of conversion factor is:

Conversion factor = Price Index at the date of Conversion/Price Index at the date of

item arose

Conversion factor at the beginning = Price Index at the end/Price Index at the

beginning

Conversion factor at an average = Price Index at the end/Average Price Index

Conversion factor at the end = Price Index at the end/Price Index at the end

Average Price Index= Price Index at beginning + Price Index at the end/2

CPP Value = Historical value X Conversion factor

Notes:

* For the items taken from the beginning period (e.g assets, liabilities, taken from the

operating balance sheet), beginning conversion factor is used.

* For the items which occur throughout the year like sales, purchases, operating

expenses etc., average conversion factor is used.

* For the items which occur at the end of the year like tax, dividend etc. ending

conversion is used.

2. Distinction Between Monetary And Non-monetary Accounts

CPP method classifies all assets and liabilities into two groups i.e. monetary items and

non-monetary items.

35

Monetary Items: Monetary items are assets and liabilities, the amounts of which are

receivable or payable only at current monetary value. Monetary assets include cash,

bank, bills receivables, debtors, prepaid expenses, account receivables, investment in

bond or debentures, accrued income etc. Monetary liabilities include creditors,

account payable, bills payable, outstanding expenses, notes payable, dividend

payable, tax payable, bonds or debentures, loan, advance income, preference share

capital etc.

Non-monetary Items: Those items which cannot be stated in ficed monetary value

are called non-monetary items. Such items denote assets and liabilities that do not

represent specific monetary claims. Non-monetary accounts include land, building,

machinery, vehicles, furniture, inventory, equity share capital, irredeemable

preference share capital, accumulated depreciation etc. Non-monetary items do not

carry a fixed value like monetary items. Therefore, under CPP method, all such items

are to be restated to represent current general purchasing power.

3. Gain Or Loss On Monetary items

Monetary items are receivable or payable in fixed amount irrespective of changes in

purchasing power of money. The change in purchasing power of money has an effect

on monetary assets and monetary liabilities, Therefore, the holding of such items

results gain or loss in terms of real purchasing power. Such gain or loss is termed as

general price level gain or loss. During the period of inflation, holding of monetary

assets results in loss and holding of monetary liabilities result in gain. Such gain or

loss must be taken into accounts when income statement is prepared under CPP

method to arrive at the overall profit or loss.

4. Valuation Of Cost Of Sales And Inventories

Cost of sales and inventory value vary according to cost flow assumptions i.e. first-in-

first-out (FIFO) or last-in-first-out (LIFO). Under FIFO, cost of sales comprises the

entire opening stock and current purchases less closing stock. And closing is entirely

from current purchase. Under LIFO method, cost of sales comprises current purchase

only. However, if the current purchase are less than cost of sales, a part of opening

inventory may also become a part of cost of sales. And closing stock comprises

purchases made in previous year.

36

5. Ascertainment Of Profit

Under current purchasing power method, profit can be determined in two ways. They

are:

i. Re-statement Of Income Method

Under this method, historical income statement is re-stated in CPP terms. Following

conversion factors are used to restate the figures of historical cost statement.

* Sales and operating expenses are converted at the average rate application for the

year.

* Cost of sales is converted as per cost flow assumption i.e. FIFO and LIFO.

* Depreciation is converted on the basis of indices prevailing on the dates when assets

were purchased.

* Taxes and dividend paid are converted on the indices that were prevalent on the

dates when they are paid.

* Gain or loss on monetary items should be shown as separate item to arrive at the

overall profit or loss.

ii. Net Change Method

This method is based on the normal accounting principle that profit is change in

equity during an accounting period. In order to determine profit, following steps are

taken.

* Opening balance sheet prepared on historical cost accounting method is converted

in CPP forms at the end of the year.Monetary and non-monetary items are re-stated by

using proper conversion factors. Equity share capital is also converted. The difference

in the balance sheet is taken as reserve. Alternatively, the equity share capital may not

be converted and the difference in balance sheet be taken as equity.

* Closing balance sheet prepared under historical costing is also converted. Only non-

monetary items are re-stated. The difference in balance sheet is taken as reserve after

converting equity capital. Alternatively, the equity capital may not be restated in CPP

terms and balance be taken as equity.

* Profit is equivalent to net change in reserve where equity capital has also been

converted or net change in equity where equity capital has not been re-stated.

6. Restated Balance Sheet

37

The historical balance sheet is prepared as per the historical income statement, so it

can not represent the revised or changed value of assets and liabilities. Under the price

level change, the historical balance sheet should be revised to reflect the true picture

of financial position of any organization. Inside the historical balance sheet, both

monetary and non-monetary items are listed. So, the monetary and non monetary

items should be separated first of all. It is not necessary to change the monetary item

into CPP value because such items are already utilized while calculating the holding

gain or loss. Only the non monetary items are to be adjusted to the CPP value by

multiplying appropriate conversion factors.

HISTORY OF ACCOUNTING THOUGHT

38

The original edition of A History of Accounting Thought was published in 1974.* A

Revised Edition has now been issued. Each of the twenty chapters has an extensive

bibliography, the updating and expansion of which represents the “revision.” Only

minor revisions have been made to the book’s contents. Chatfield’s work draws from

many important pieces in the literature and consequently is heavily footnoted,

although not to the point of distraction. The original edition was criticized for having

reprinting and typographical errors. A new publisher seems to have satisfactorily

corrected these.

Despite its title this book is a select exposition of the ideas, literature and events

which have been most important in the development of accountancy. It does not

merely present the views and thoughts of prominent individuals as the title might

suggest. From the chronology of events and tide of forces that constitute history the

author has discriminately chosen certain elements to write about which have been

most influential in bringing about the here and now in accounting. Furthermore, these

elements have been skillfully woven together so that the reader is offered more than a

descriptive account of the times. As various sections unfold they are forged into a link

work that joins the present with the past and produces a sense of understanding. The

book’s predominant purpose is to consider why we are in our present place and

condition; in so doing the relevance of history to contemporary accounting problems

becomes a matter of paramount importance. Because the author has been selective

and discriminating in this work it necessarily ought to be viewed as interpretive.

However, his interpretation of history is excellent and the outcome is not parochial.

The first seven chapters that make up Part 1 of the book are a history of bookkeeping

from the earliest times of man. Part 2 focuses upon the rationalization of accounting

that came about with the Industrial Revolution. In the eight chapters of this middle

section the development of budgeting, cost accounting, income taxes, and auditing are

related. The final section, Part 3, is a five-chapter

*See reviews in: The Accounting Historian, July 1974, p. 5, and The Accounting

Review, April, 1975, pp. 418-19.90 The Accounting Historians Journal, Fall, 1978

segment that examines the development of principles and formulation of accounting

theory such as it is. A history of accounting perforce ranges over a wide variety of

39

subjects. The author has written of them in a way that is scholarly in construction and

content, and with a style that is easy to read.

In the hardcover version the quality of paper, binding and printing is good. A

softcover version is also available. Chapter layout and length—each is quite short—

facilitate reading. This text could be employed to advantage in an accounting theory

class where an early portion of the semester is set aside for a review of accounting

history. Used as a text for a course in accounting history it would require a substantial

amount of supplementary material, much of which could be selected from Chatfield’s

bibliography. Any member of the world of accounting, be they academic or

practicing, should have this book in their library.

accounting, classification, analysis, and interpretation of the financial, or

bookkeeping, records of an enterprise. The professional who supplies such services is

known as an accountant. Auditing is an important branch of accounting.

The accountant evaluates records drawn up by the bookkeeper and shows the results

of this investigation as losses and gains, leakages, economies, or changes in value, so

as to reveal the progress or failures of the business and also its future limitations and

possibilities. Accountants must also be able to draw up a set of financial records and

prescribe the system of accounts that will most easily give the desired information;

they must be capable of arriving at a comprehensive view of the economic and the

legal aspects of a business, envisaging the effect of every sort of transaction on the

profit-and-loss statement; and they must recognize and classify all other factors that

enter into the determination of the true condition of the business (e.g., statistics or

memoranda relating to production; properties and financial records representing

investments, expenditures, receipts, fiscal changes, and present standing). Cost

accounting shows the actual cost, over a certain period of time, of particular services

rendered or of articles produced; by this system unprofitable ventures, services,

departments, and methods may be discovered.

Although there were stewards, auditors, and bookkeepers in ancient times, the

professional accountant is a 19th-century development. Unlike those precursors,

modern accountants usually do not service a single client or employer; instead they

40

offer their expertise, for a fee, to several individuals and businesses. The profession

was first recognized in Great Britain in 1854, when the Society of Accountants in

Edinburgh was given a royal charter. Similar societies were later established in

Glasgow, Aberdeen, and London. In the United States the first such professional

society was the American Association of Public Accountants, chartered by the state of

New York in 1887.

All the states and Puerto Rico and the District of Columbia now have laws under

which an accountant who fulfills certain educational and experience requirements and

passes an examination may be granted the title Certified Public Accountant (CPA).

CPAs have organized into state and national societies. The bodies representing the

accounting profession in the United States are the American Institute of Certified

Public Accountants, which is the contemporary successor organization of the

American Association of Public Accountants, and the American Accounting

Association, organized in 1916. In the United States, the Financial Accounting

Standards Board, an independent nongovernmental organizaiton sponsored by

financial-reporting industry groups, is the main institution responsible for establishing

accounting standards and rules. The International Accounting Standards Board

develops standards and rules that are accepted by many nations.

With the growth of corporate activity in the 20th cent., the field of accounting has

increased greatly in importance and has seen many improvements in theory and

techniques. The chief causes of changes in accounting methods have been more

complex tax laws and regulations and the need to keep uniform accounts for possible

governmental or public scrutiny. Contemporary accounting firms also have taken on

managerial functions and are no longer concerned simply with ascertaining and

reporting financial condition but also with advising a client how to act on this

information; they also consult on information-technology systems and other services.

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