Reviewed by Dale Buckmaster University of Delaware
lt is tempting, but unfair, to start a review by describing this book as containing more than anyone would ever want to know about in-ventories. Professor Devine identifies his objective in writing the book as an “investigation into the effects of various inventory valu-ation methods on the reported income stream.” (p. iii) These “various inventory valuation methods” include Identified-Unit Cost, FIFO, Weighted Average, Moving Average, Standard Costs, Replacement Costs, Lower of Cost or Market, Normal Stock Methods (including LIFO), and Inventories at Selling Price.
Within the context of the literature of the period, Professor Devine does much more than examine the effect of these methods on income. The first chapter is an overview of accounting income theory and chapter two is a description of the nature of accounting inventory costing. In chapter three, Devine discusses balance sheet con-siderations of inventory valuation. Chapter four, “Costs and Their Determination,” contains, as a part of the discussion of cost deter-mination, a section on the appropriateness of capitalizing interest. I found this section to be a more objective evaluation of the controversy than is found in contemporary literature. The chapter on Replacement Costs is a summary of the various positions on re-placement cost accounting current at that time. Chapter eleven, “Inventories at Selling Prices,” is an interesting interpretation of revenue recognition. The highlight of chapter twelve, “Special Prob-lems in Inventory Valuation,” is a discussion of the economics of hedging and the accounting treatment of hedging contracts.
This book is not easy to read. By contemporary standards much of the analysis is trivial and one’s mind tends to wander. If, however, the book is put in its proper historical perspective, then the book must be viewed differently. The book reflects the change in emphasis from the balance sheet to the income statement that had started taking place a few years earlier and was common by the date of publication. This shift in emphasis combined with income tax laws surely was the reason that accountants developed several new cost flow assumptions for inventory cost determination (primarily base stock methods). The rationales supporting these methods were still very useful tools for the accountant when attempting to explain his position. Hence, Devine provides us with very detailed arguments that we never hear or see anymore for various cost flow assumptions.
The short, two-page preface is the most interesting section of the book for me. Here Devine reveals that he is wrestling with the problem of criteria for the evaluation of accounting policy. Another transition in accounting thought is reflected here. But rather than writing during the final stage of change as he was with the change of emphasis to the income statement, he is at some intermediate stage in the shift of thought. Specifically, Devine is writing during that rather long transition period when emphasis in the literature is shifting from practitioner and management use of statements to consideration of the perceived needs of external users. He states:
The method employed somewhat imperfectly throughout this work for testing the desirability of various proposals may be divided into three more or less independent phases. First, an attempt is made to determine the possible consequences of each course of action. This stage is given considerably more emphasis than either or both of the others. Second, an estimate of the probable reactions of those reading the accounting reports is made. These estimates admit a great deal of inexactness, because at various points the evidence is not sufficient to support clear-cut judgments. Third, the desirability of the probable reactions is tested by reference to certain broad social standards taken from the general fields of business administration, economics, sociology, and psychology. (p. iv)
I don’t think anybody would be surprised that Professor Devine was not able to apply these criteria with much success. The results of his efforts are intricate verbal descriptions of how the absolute income numbers and the income time series might be affected by the selection of each of the inventory methods and an empirical examination of how the various inventory methods affect the income of certain organizations. Professor Devine’s criteria are not operational and his empirical efforts are very primitive, yet this and other similar works of the next few years are the foundation upon which contemporary academic research is built.
Professor Devine’s concern for the development of criteria for the evaluation of accounting choice certainly did not end with the pub-lication of Inventory Valuation and Periodic Income. Some years later, he prepared the manuscript, “Research Methodology and Accounting Theory Formulation,” [1960] for The Accounting Review dealing with the same problem.
Earlier I indicated that the book is rather hard reading because it is concerned with the type of reasoning that is rarely used (successfully) in the literature today. One may properly infer, then, that the book is of little interest outside of the context of the development of accounting thought. Even then, if one is seeking a general knowledge of accounting thought in the second quarter of the twentieth century, the book should not be near the top of the reading list. Devine relied very heavily on Paton’s work and Gilman’s Accounting Concepts of Profit [1939]. Certainly, almost anything by Paton and Gilman’s work should have higher priority than Inventory Valuation and Periodic Income.
For certain types of work, the book is important. I would recommend it for someone concentrating on a chronological period as broad as from 1938 through 1950 or for someone working on the development of thought on any of the following: inventory accounting, early empiricism, criteria for accounting choice, or income smoothing. Devine anticipates Hepworth’s suggestion for smoothing [1953] by eleven years and Gordon’s formal statement of the hypothesis as a criterion [1964] by twenty-two years.
BIBLIOGRAPHY
Devine, Carl. “Research Methodology and Accounting Theory Formulation.” The Accounting Review (July 1960), pp. 387-389.
Gilman, Stephan. Accounting Concepts of Profit (New York: The Ronald Press Co., 1939).
Gordon, Myron J. “Postulates, Principles and Research in Accounting.” The Ac-counting Review (April 1964), pp. 251-263.
Hepworth, Samuel R. “Smoothing Periodic Income.” The Accounting Review (Jan-uary 1953), pp. 32-39.
