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.

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)

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 workers 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

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.

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

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

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 superiors role at this point is very
important.

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

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 youll hear a horror story from one and great things from
the other.
There are 3 Ps 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
Ps 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 cant 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.

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 organizations favor.

Service as a Product?
You can really think of a service as a product. In the spirit of campaign season, lets
look at politicians. They have something to sell you and its 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 its not
tangible. For example, anyone who religiously gets their car cleaned probably
believes what their car wash believes. Im 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 theres 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 theyre physical products. A service could appeal to a wide array

10

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. Theres no haggling over money or phone calls. Its 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 youre 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 cant effectively convince people to purchase, then both
offerings stand an equal chance of failing. It doesnt matter whether its 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 youre 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

11

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 designmanufacturing 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 the

13

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.

14

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.

15

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.

16

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

17

(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 brands 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 customers 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.

18

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

19

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 producers 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

20

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 rawmaterial 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 corporations 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.

24

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.
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 cooperatives 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.

25

The branch office of IFCI is located in Bhopal, Pune, Jaipur, Cochin, Bhubaneswar,
Patna, Ahmedabad and Bangalore.
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,
26

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

(ii) Promoting Ancillary Industries
(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 corporations 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.

27

WEALTH MAXIMIZATION VS PROFIT MAXIMIZATION

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 shareholders 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 owners 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
companys performance by reviewing the financial statements. The income statement
communicates the companys profitability. The balance sheet communicates the
companys ability to obtain and invest its resources. The statement of cash flows
communicates the companys 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 companys ability to attract new
investors. Investors try to predict which companies will provide the best return for
their money. Investors request copies of the companys 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 companys 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.

32

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.
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
33

to those resources.
These are sources, direct or indirect, of future cash inflows and cash outflows.
SFAC 1 establishes the objectives of financial reporting.
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

34

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).
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.

35

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.
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-infirst-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
36

inventory may also become a part of cost of sales. And closing stock comprises
purchases made in previous year.
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 nonmonetary 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.

37

* 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
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.

38

HISTORY OF ACCOUNTING THOUGHT

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 books contents. Chatfields 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
books 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

39

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
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 lengtheach 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 Chatfields
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.

40

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
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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