A Comparison of General Price Level and Historical Cost Financial Statements in the Prediction of Bankruptcy: A Comment.

Abstract The article presents comments of authors on a paper by C.L. Norton and R.E. Smith, titled "A Comparison of General Price Level and Historical Cost Financial Statements in the Prediction of Bankruptcy," published in the January 1979 issue of the journal "The Accounting Review." Authors of the article raised several issues concerning the paper by Norton and Smith. Authors argued in the first section that the paper's competing information system framework was inappropriate for assessing the usefulness of general price level (GPL) information. In the second section of the present article, they establish that the paper was biased against a finding of predictive value for GPL information since potentially important GPL information was excluded from GPL models and GPL information was required to meet an unnecessarily restrictive multiple dominance criterion. In the third section of the article, the time period, the single aspect of the study, which appears to "favor" GPL information, is shown to be less favorable than implied.