general accounting (5)

7/27/2019 General Accounting (5)

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i c D o m a i n , G o o g l e - d i g i t i z e d

/ h t t p : / / w w w . h

a t h i t r u s t . o r g / a c c e s s_ u s e # p d - g o o g l e


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http://slidepdf.com/reader/full/general-accounting-5 3/419

.

NorthwesternUni-

theStudents'

ofAccountancy.

mann,Finney&

untants.Authorof

ntroductory;Prin-

mediate;andPrin-

anced.

P u b l i c D o m a i n , G o o g l e - d i g i t i z e d

/ h t t p : / / w w w . h




OFARTOFTHISBOOK

ANYFORM,BYMIMEO-

EANS,WITHOUTPERMIS-

EPUBLISHERS.

1

2

944

TATESOFAMERICA


/ h t t p : / / w w w . h




ageofcommerce—thelanguagein

businessisrecorded,itsoperationsare

conditionisstated,anditsbudgetfore-

ploysthefamiliarlanguageinwhich

pressed,itislikethelanguageof contract

egivenspecialsignificancetowordsand

whopreparesthereportsandthe

ddressedtoofrequentlyarein the

gepartnersofwhomonlyone fully

eoftheactivityinwhichtheyare engaged.

seful,mustbe understoodbyboth

er,bythe writerandthereader.Unfor-

the casewithaccounting.Business

nabletoreadtheir accountsandare

raspthe significanceofthereports

einmakingmanagerialdecisions;

tlyarehandicappedintheirserviceto

tywithaccounts;andmanyinvestors

zethereportsofcompaniesinwhich

dsorcontemplateplacingthem.

tateof affairsrestsnotwiththe

ntantsandeducators.Thisbookis

swho,althoughnotinterestedin

n,realizetheimportanceofageneral

t.

ncerethankstoProfessorRalph

ProfessorTheodoreLangofNewYork

.B.Gritzof AlabamaPolytechnic

nuscriptandwhosecommentsand

pful.

P u b l i c D o m a i n ,

G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h

a t h i t r u s t . o r g / a c c e s s

_ u s e # p d - g

o o g l e



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..........1

LUSSTATEMENTS.....15

25

NTS..........07

ERS.........._

STING......

TRY.

NTS............6g

OOKSOFORIGINAL ENTRY.79

M.............gg

............g-r

............J05

U3

NGTHEBOOKS......121

COUNTS.........12g

FACCOUNTS.......

............

RTH— CAPITALSTOCK....161

RTH— CAPITALSTOCKWITHOUT

3

RTH— TREASURYSTOCK......181

RTH— SURPLUS.......187

RTH— SURPLUSAVAILABLEFORDIVI-

03

BLE..........209

NCESRECEIVABLE..215


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SAGAINSTRECEIVABLES231

ETS255

ETS—DEPRECIATIONANDOTHER

5

SETS275

DASSETS285

CKS297

DS307

NGENTLIABILITIES325

ANDCREDITS;INSTALLMENTSALES.349

MPARATIVESTATEMENTS395

GCAPITAL405

OS419

LYSIS429

CATIONOFFUNDS439

ECTIVESTORY455

G469

NCESHEETS473

NCESHEETS491

TANDLossANDSURPLUSSTATE-

11

TORSHIPSANDPARTNERSHIPS.... 529


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http://slidepdf.com/reader/full/general-accounting-5 9/419 P u b l i c D o m a i n ,

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worth.

wned.Liabilitiesarecreditors'

businessistheexcessofthe valueof

s.

et.

nessis astatementoftheassets,

the businessonagivendate.It

rmillustratedbelow,whichisan expres-

s— Liabilities=NetWorth.

r31,1942

0.00

00

sofabusiness areequalledbythe

the equityoftheowners.Thisrela-

efollowingrestatementofthe foregoing

es+NetWorth.

thebasisofthe balancesheet

r31,1942

orth

0AccountsPayable$7,000

WORTH18,000


/ h t t p : / / w w w . h




ap.1

areintendedtoshowthe general

eetandthe natureofsomeofthemore

of.Abalancesheetispresentedafter

ssumedfact.(Theillustrationsare

oseof developinganunderstandingof

iderationsofnaturalcontinuityorcom-

ationshavebeensacrificedtothatpur-

dto compareeachbalancesheetwith

gone,andnotecarefullythechanges

on.

orporationisorganizedandissues

00parvalue.

941

ock$100,000

panyborrows$25,000.00froma

amount.Observehowthecaptions

h"areusedonthe rightsideofthe

oseofmoreclearlyseparatingthe claims

of theowners.

941

Worth

S:

ecompanybuysmerchandisefor

00.

941

orth

:

sPayable$25,000

nt.Thecompanybuysmerchandise

0,000.00.


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EET

941

Worth

:

sPayable$25,000

0$55,000

ate.The companypays$40,000.00

ost$5,000.00,andthebuildingcost

tcaptionsappearontheleftsideofthe

heassets;thesecaptionsare:

therassets whichnormallywill

he relativelynearfuturethrough

ebusiness."Relativelynear

asmeaningoneyear.

ypermanentpropertyusedin the

andnot intendedforsale.

941

Worth

TIES:

ble$25,000

,000AccountsPayable.30,000$55,000

TH:

k100,000

ote.Thecompanyborrows$15,-

notesecuredbyamortgageonits real

earontherightside ofthefollowing

heliabilitiesaccordingtothe immediacy

ptionsare:

eswhichmaturein therelatively

eanswithinoneyear.

eswhichmaturein therelatively


/ h t t p : / / w w w . h




0,000

941

0

0$55,000

000

andisewhichcost$5,000.00issold

eceivedtherefor.Thistransaction

.00anddecreasesthemerchandise

profitincreasesthenetworth.

balancesheetshowstwoelementsof

hichistheportionof networthcon-

rs;andsurplus,whichisthe increasein

ofitableoperations.

,500

941

0$55,000

000

rchandisewhichcost$30,000.00is

onaccountfor$45,000.00.

941

Worth

NTLIABILITIES:

ble...$25,000

00AccountsPayable.30,000$55,000

7,500FIXEDLIABILITIES:

eMortgage15,000

pitalStock$100,000


/ h t t p : / / w w w . h




EET

s.Variousexpensestotaling$5,000.00

reasingthecashandthenetworth.The

ectedby areductioninthesurplus.

941

Worth

NTLIABILITIES:

ble...$25,000


,500FIXEDLIABILITIES:

eMortgage15,000

pitalStock....$100,000

ompanypays$300.00foraone-year

0.00forcoal.

ancesheetpresentation,expense

edintotwoclasses:

viceswhichshouldimmediatelybe

eseshouldbedeductedfromSurplus,

xpensesalreadyincurred.

viceswhichwillbenefita future

anassetvalueto thebusiness;

he assetsideofthebalancesheet.

etshowstwosuchitemsofdeferred

surance,whichisthecostoffuture

thecostofthecoalto beusedin

941

orth

ENTLIABILITIES:

ble...$25,000


,800FIXEDLIABILITIES:

eMortgage15,000

pitalStock....$100,000

rplus12,500112,500

ocalleddeferredcharges.


/ h t t p : / / w w w . h




ap.1

xpensesmaybepaid inadvance,so

advance.Toill ustratetheeffectupon

ethatthecompanyleasesa portionofits

annualrentalof$1,000.00,whichis

ransactionresultsin a$1,000.00

therent incomewilleventually

plusshouldnot beimmediatelyincreased

ntwillnotbe fullyearneduntiltheendof

ethebalancesheetshouldshowa

eright side.

941

Worth

ENTLIABILITIES:

tesPayable...$25,000


0$142,800FIXEDLIABILITIES:

eMortgage......15,000

ERREDINCOME:

000RentCollectedinAdvance.. 1,000

ETWORTH:

tock----$100,000

..........12,500112,500

sheetisheaded"Liabilitiesand

ditis neitheraliabilitynora partof

ementsofboth.Itis notstrictlya

ayableincash;butits presenceina

etheexistenceof anobligation;the

ectedinAdvance representsanobliga-

occupytheleasedpremises.Ina sense,

sortofnet worthitem,becausethenet

thefuturewhentheservicehas been

asbeenearned.

acheraskedhowmanywantedto

ddidnot goup."No?"askedthe

nny.Hehadsomethings todoyet.

omeby and.by;buttheadditionto net

tilthe incomehasbeenearnedbythe

whichthecollectionhasbeenreceived

is oftenusedinsteadoftheDeferred

ntheforegoingbalancesheet.


/ h t t p : / / w w w . h




ngbalancesheet,whichshowsthe

ngfromnumeroustransactionsoccurring

ar,anewcaption,"OtherAssets,"

t isassumedthatthecompanypur-

cipationofapossibleadditionto its

edassetbecause,accordingtothedefini-

tsareusedinthe operationsofthebusi-

soused.Alsoit isassumedthatthe

permanentinvestmentsinstocksofother

r31,1941

00

0

0,000

00

69,000

000

e..1,000

alancesheetwaspreparedwithout

ertainaccruedassetsandaccruedliabili-

nconsiderationinmonth-endoryear-

$375.00hasaccruedonnotesreceiva-

cted;thisaccruedinterestisanasset;

ned,althoughithasnotbeencollected,

chisproperlyaddedto Surplus.Taking

esheetwill affecttheCurrentAssets

he mannershownbelow:

00

0

0,375


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s haveaccruedforthefollowing

450.00

axes3,375.00

thebalancesheet willinvolve

esand decreasesinsurplus,asindi-

00

075

et,afteradjustmentsforaccruals

below:

er31,1941

00

0

,375

00

000

..1,000

ems.Theitemof$300.00shownin

piredInsurancerepresentsthecost on

cy.Halfoftheyearhasexpired;there-

dbedeductedfromSurplusasan expense


/ h t t p : / / w w w . h




eriod;and$150.00shouldremainas a

tinganassetintheform ofanexpense

xmonths.

costof$400.00,approximatelyone

efore$100.00shouldbedeductedfrom

rred,andthe remaining$300.00should

arge.

expensesaffecttheDeferredCharges

he balancesheetasfollows:

0

ected$1,000.00asrentalfortwelve

has expired;therefore$500.00has

dedto Surplus,and$500.00remainsasa

eet,aftertheseadjustmentsofdeferred

itshavebeenmade,appearsasfollows:

r31,1941

00

0

0,375

0

000

e.500

0

eforegoingbalancesheetshows

estreceivabletotaling$60,375.00.The

wwhatportionofthis totalcanprobably

s,thebalancesheetshouldshowthe


/ h t t p : / / w w w . h




Chap.1

eivablesaftertheestimatedlosshas been

ofthereceivablestotheirestimatednet

correspondingreductioninthenetworth,

ngpartialbalancesheetin whicha

mthereceivablescausesacorresponding

ORTH:

k$100,000

50$115,250

0

9,375

mthereceivablesastheestimatedloss

."Thereadershould notallowhimself

oductionofaccountants'fancylan-

orBadDebts"meansnothingmore

tProbablyCannotBeCollected."The

orbaddebts isintendedtoreducethe

fthereceivablestotheamountwhich

matelycollected.

eetaftertheprovisionofa reservefor

ppositepage.

Thebuildingwasshowninallof the

atitscost,$35,000.00.Letusassume

stimatedWeof35yearsfromthe dateof

willhavenovalueatthe endofthat

esswillsufferatotal depreciation

00.00duringthe35-yearlife ofthe

eneralcustomtoignoredepreciation

he fixedasset,whentheentireamount

s.Itisnow recognizedthatdeprecia-

andcontinuouslythroughoutthelife

customarytodeductthelosslittle by

Forinstance,indealingwithdeprecia-

ost$35,000.00,theaccountant'sthink-

thebuildingcost$35,000.00andhas

arswithnoscrapvalue,theannualdepre-

raight-linebasis)is $1,000.00;the

xmonthsago;thereforethedepreciation

quisitionis $500.00.


/ h t t p : / / w w w . h




/ h t t p : / / w w w . h




ESHEET_ 13

nofthebuildingcouldbe shownin

s:

nValueResulting

........._ 500

.....................34,500

......$39,500

epreciationisusuallycalled a

Thereadershouldclearlyunderstand

tareservefordepreciationjs_not& fund

asidetoprovidemoneyfor theeventual

et.A reservefordepreciationismerely

shrinkageinthe valueofabuildingor

fromwearand tearandtheactionof the

geoftune.

Companyaftertheprovisionofa

thebuildingis shownonpage12.A

sheetwiththe oneonpage11shows

ciationhascaused a$500.00reduction

dingandinthesurplus. Noreserves

onofland,becauseland usedasabuild-

ydeclineinvalueas theresultofwear

theelements.


G o o g l e - d

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xpenseshownina company'soperat-

nthenatureof thecompany'soperations

saccountingsystem.Anumberof

s chapter.

ngcompany.

mpleillustration,thestatementofa

ealestateagencyandthatrecordsall

untandallofitsexpensesin oneaccount

CORPORATED

Expense

ber31,1941

$10,000.00•

0

panyearnscommissionsfromsales,

ment,insuranceagencycommissions,and

s;assume,also,thatitkeepsa separate

income,butthatit keepsonlyone

ementmayappearasfollows:

NCORPORATED

Expense

ber81,1941

,000.00

00

,800.00

0.00

00


/ h t t p : / / w w w . h




LUSSTATEMENTS[Chap.2

asfollows:

NCORPORATED

Expense

ber31,1041

,000.00

00

,800.00

0.00

.00

0.00

ense525.00

725.00

5.00

00

125.00

0

mpany.

handisingcompanyisthe excessof

oodssold.Thenetprofit istheremainder

ngexpensesfromthegrossprofit.

ber31,1941

615,460.00

680.00

0.00

urnmerchandisethatisunsatisfactory

ymayreceiveacreditallowancefor

ththeinvoice,asto quantityorquality.

andisingcompanythereforemayshow

owances,andnetsales,as follows:


/ h t t p : / / w w w . h




SURPLUSSTATEMENTS17

ber31,1941

dAllowances13,260.00

615,460.00

680.00

0.00

ecordofthecostof eacharticlesold.

nsivetomaintainandit isarather

tethecostofgoodssold byaprocedure

gh'smethodofweighingthesmokefrom

hedthetobaccothatwentinto the

oftheashesand dottleremainingin

mainderthe weightofthesmoke.

yaddtheinventoryatthe beginningand

eriod;fromthis totalhewilldeductthe

period;theremainderhewillcallthe

tis thecostofgoodssold,lost,

sedofduringthe period.

ssstatementis expandedbelow

onofthecost ofgoodssold.

ber31,1941

dAllowances13,260

:

1940$42,300

:

ances5,826

4,217623,870

ber31,194150,710

Sold 615,460

680

0


/ h t t p : / / w w w . h





veintheirtotalamountof $278,-

assifiedinthefollowingstatement.

ber31,1941

dAllowances13,260

:

1940$42,300

:

ances5,826

4,217623,870

ber31,194150,710

Sold 615,460

680

890

0

,050

8,250

30

:

600

4,680

0,710

04,720

es:

ble4,500

3,075

7,215

comeTaxes$87,505

xes12,065


/ h t t p : / / w w w . h




SURPLUSSTATEMENTS19

gschedules.

ndicatetheprocedureofshowing

sstatementanddetailsin supporting

Y

u

ber31,1941

dAllowances1,500.00

—Schedule170,675.00

825.00


25!00


930.00

dule43,385.00

e$4,315.00

Schedule41,125.00

YSchedule1

ber31,1941

1940$19,740.00

:

ances1,210.0073,915.00

ndPurchases$93,655.00

ber31,1941,22,980.00

5.00

YSchedule2

ber31,1941

000.00

0

ense4,000.00

uipment50.00

0

5,400.00


/ h t t p : / / w w w . h





YSchedule3

ber31,1941

00

dFixtures60.00

5.00

6,495.00

YSchedule4

xpenses

ber31,1941

225.00

5.00

00

115.00

25.00

otherearnings,such asinterestand

orcommissionsandotherformsof

s,arenotprofitsbutincome.Therefore

facompanyengagedinsellingpurchased

usuallycalledaprofit andlossstatement,

oss, whereastheoperatingstatementof

gsotherthanprofitsonsales ismore

ntofincomeandexpense.

presentingtheillustrationsinthis

ainuniformityofpatternso astoavoid

erstood,however,thatanyonewho

operatingstatementmayavailhimself

ffreedomto drawitupin anymanner

arestwayof presentingthefacts.

anyshowsthecompany'sfinancial

thereforetheheadingshould showthe

1941."Ontheotherhand,a profit

theresultsof operationsduringastated

ingofthestatementshouldshowthe


/ h t t p : / / w w w . h




SURPLUSSTATEMENTS21

Ended December31,1941."Donot

rtheYearEnded December31,1941";

businessdoesnot remainstaticduringa

andlossstatement:"December31,

n aday.Anddonothead it:"For

er31,1941";whatperiod?

agivenperiod shouldshowthesur-

eperiod,allincreasesanddecreasesdur-

anceattheendofthe period.Asimple

ementis shownbelow:

ber31,1941

40$132,610

r—PerProfitandLossStatement75,440

0

017,000

41$191,050

tshownintheprofit andlossstate-

otanexpense;theyarea distributionof

e surplusstatementbecausetheir

aseinsurplus.

llybelievedthattheprofitandloss

expensestatement)shouldshowonly

operationsofthebusinessduringa stated

mentistoshowonly theresultsof

notincludeextraneousprofitsand

orlossesresultfromtransactionsor

normalelementofregularoperations.

hatownedallofthe stockofasubsidiary

partof acompany'splantproperty

esultedin aloss.Extraneousprofitsand

mittedfromtheprofit andlossstatement

tatementwillnotgeta confusedideaof

eratingresults.Sincetheyareomitted

atement,theymustbeincludedinthe


/ h t t p : / / w w w . h





mentistoshowthe resultsofopera-

,it shouldnotincludeanyprofitsor

period.If,forexample,anerrorin the

rofitswasdiscoveredin 1941,thecorrec-

esurplusstatementfor1941.Toinclude

ementfor1941 wouldcauseamisstate-

tsof thatyearalso.

sstatementmaybe summarizedas

fthe period.

ularoperationsoftheperiod,as

s statement.

s.

sesof priorperiods.

period.•

ontainingtheseelementsisshown

Y

ber31,1941

40$22,650.00

ndedDecember31,19413,190.00

oryonDecember31,19401,000.00

_ 750.00

Taxes$320.00

.045.00

41$19,545.00

ts.

entscustomarilypreparedatregular

s.

entsshowtherelationshipsexisting


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DSURPLUSSTATEMENTS23

r31,1941

orth

NTLIABILITIES:

yable...$2,500

00$15,000NotesPayable1,500$4,000

TH:

tock$10,000

urplus—ExhibitB.4,50014,500

ber31,1941

40$3,850.00

r—ExhibitC1,800.00

940$150.00

,150.00

41$4,500.00

Expense

ber31,1941

00

0

ntsaregivenidentifyingexhibitletters

of cross-reference.

hesurplusat theendoftheyear and

urtherdetails regardingthesurplusare

wsthechangesinsurplus duringthe

ninthis statementcarriesareferenceto

ncomeandexpensearefound.


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procedures.

chaptersare intendedtopresentonly

neproceduresofbookkeeping—enoughto

tounderstandthenature ofdebitand

edgerand ofvariousbooksoforiginal

frecordingtransactions,posting,taking

tatements,andclosingthebooks.

ustratedanddiscussed;thereader

herrecordsmaybeused forthesame

methodsincommonusearedescribed;

berthatvariationsofthesemethodsmay

sameobject.Furthermore,thereader

ccountingrecordsserveonlyonepurpose:

chsomeoneisentitledtohave.Hence

esareapplicableto everybusiness;the

houldbethosebest adaptedtoservethe

.

tsofthesechapterswillbe sufficient

obtaininformationfromaccounting

romonewhorecordstheinformation)

withthebasicprinciplesandprocedures

mtounderstandsuchrecordsas hemay

.

onofthestatementsillustratedin

sdesirableto keeprecordsshowingthe

es,andnetworthresulting fromthe

ss.Thechangesinassets,liabilities,

din accounts,whichmayberuledin

followingpage.


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NTDATEEXPLANATIONAMOUNT

witheachasset,eachliability,and

Eachaccounthas twosides,as

creasescanbe recordedononesideand

changesinassets,liabilities, andnet

emainderof thischapter,inwhich

onthe operationsofBentonRealty

mmissionsforsellingrealestate.

orded initsaccountas follows:

heleft side.

theright side.

dby thefollowingcashaccount,

ed ontheleftsideand disbursementsare

5.00;thedisbursementstotal$1,-

balance,is$9,550.00.

ntriesinasset accountsisalsoillus-

ountwhichcontainsa recordofthe

ent:

ntainentriesonthe leftsidecharging

orrealestatesold forthem;theentries


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treductionsintheaccountreceivable

ctionsfromtheclients.

Mar.15|Cash collection||150|00

5|00|Mar.|27JCashcoUection|175)00

deoftheseaccountsshowthe amounts

btors.

ecordedinitsaccountas follows:

heright side.

theleft side.

din thefollowingaccountwiththe

mpanypurchasedtheofficeequipment:

deoftheaccountshowsthe amount

ly.

ceduresareappliedinasset andlia-

dbythe followinggraphicexpression

ncreasesanddecreasestherein:

ifferenceinprocedure,thebalances

heleftsidewhereasthebalancesin lia-

rightside.


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_ u s e # p d - g

o o g l e



untshavethis featureincommon:

rinterestsin theassetsofthebusiness.

interestsof creditors;networth

tsofthe proprietors.

tatesthatnetworthaccountsshould

ts,as follows:

heright side.

theleft side.

ptwithvariousincreasesand

lustratedbelow:

edtothetwosides ofanaccountas

reafterweshallrefertothem asthe

sewordsare derivedfromtheLatin:

editmeans"hetrusts."Theywerefirst

tskeptwereaccounts withdebtorsand

bit,sideofthe followingaccount

he owedthecompany$250.00on


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_ u s e # p d - g

o o g l e



00.

nnetworth).

sset).

eequipmentatacostof $1,200.00,fromWhite&

creaseinasset).

ncreaseinliability).

00asacommissionforsellinga parcelofrealestate.

et).

e(increaseinnetworth).

mithacommissionof$250.00,butmadeno collec-

n accountreceivableasset).



G o o g l e - d

i g i t i z e d

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_ u s e # p d - g

o o g l e



mpany$500.00onaccount.

ecreaseinliability).

sset).

0.00fromJohnSmithonaccount.

h asset).

einaccount receivableasset).

Brownacommissionof$375.00,butcollectednothing

einaccount receivableasset).



/ h t t p : / / w w w . h




5.00fromFredBrowntoapplyonaccount.

shasset).

seinaccountreceivableasset).

375.00.

nnetworth).

sset).

ostockholders,$200.00.

easeinnetworth).

sset).


/ h t t p : / / w w w . h




ntriesforeachtransactionareequal;

ngerrorsaremade,thetotaldebit

eequaltothetotal creditentries.The

he creditsintheledgerof BentonRealty

bylistingthe totaldebitsandcredits

00

0

0

1,200.00

5.00

theequalityof thedebitsandcredits

cesin theaccounts,asillustratedbelow:

NY

941

0

0

5.00

mtrialbalance.

ischapteritwas statedthataccount-

eparationof thestatementsillustrated

heforegoingtrialbalance,showing

edgeraccounts,providestheinformation

tatements.

NYExhibitC

Expense

41

25.00


G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



Y

1941

Y

41

550.00

Q,35Q


/ h t t p : / / w w w . h




/ h t t p : / / w w w . h




S

profits.

sstatementofa merchandising

page17.

ber31,1941

dAllowances13,260

:

1940$42,300

:

ances5,826

4,217623,870

ber31.194150,710615,460

680

0

sandaccounts.

presentedcertaintypicalmerchan-

herwiththeaccountsinwhichtheyare

dgerprovidesinformationrequiredfor

llustrated above.Theaccountsare

ondensedform.

acompanyinvested$9,000.00cashandmerchan-

xchangeforcapitalstockofapar value

d).

ory(assetacquired).

nalnetworth).


/ h t t p : / / w w w . h




TS

F.Baileytoapply onaccount.

h asset).

ein accountreceivableasset).

ling$450.00.

nnetworth).

sset).

00.00tothestockholders.

easeinnet worth).

sset).


/ h t t p : / / w w w . h




UNTS[Chap.4

ancesprovideallofthe information

tatements,withoneexception:thevalue

dofAugustmustbe determinedby

erwisemeasuringthemerchandise,and

s,bytakingaphysicalinventory.Let

ventorydisclosesavaluationof$900.00

formationavailable,thefollowing

ed:

ExhibitC

941

dAllowances25

$1,000

:

esandAllowances...100

_ 502,650

31,19419002,750

5

ExhibitB

941

00

0.00

125.00

ExhibitA

1,1941

rth

ENTLIABILITIES:

able$600

NETWORTH:

alStock$10,000

ExhibitB.125 10,125


/ h t t p : / / w w w . h




S

ordedin oneaccount,whichmayshow

turity,thus:

enameof themakerofthenoteand

Creditentriesare identifiedbyname

noteisreceivedareindicatedbelow:

mJohnMakerfora cashloan

creaseinnotereceivableasset).

ashasset).

mJohnMakertoapply on

edbyhim:

creaseinnotereceivableasset).

seinaccountreceivableasset).

noteiscollectedareindicatedbelow:

arinterest:

shasset).

decreaseinnoteasset).

includesthefaceof thenote

ollected(increaseincashasset).

orthefaceofthenote (decreaseinnote

reaseinnetworth).

ordedinoneaccount.Eachcredit

e payeetowhomthenoteis givenand

edebitsrecordingpaymentsareidenti-

namesofthepayees,thus:


/ h t t p : / / w w w . h




MATTERS45

noteisgivenareindicatedbelow:

esPayeefor acashloan:

shasset).

easeinliability).

esPayeeto applyonanaccount

aseinaccountpayableliability).

easeinnotepayableliability).

notepayableispaidareindicated

arinterest:

easeinnoteliability).

ashasset).

udesthefaceofthenoteand

efaceof thenote(decreaseinliability).

creaseinnetworth).

ashasset).

dabriefdiscussionol thereservefor

t,in thebalancesheet,thereserveis

ceivablestoreflecttheestimatedrealiz-

es.

stimateismadeof probablelosses

creditentries aremade:

expenseaccountandthe debitrecordsa

bts—thiscreditrepresentsadeductionfrom

he receivables.

bleisdeterminedtobeuncollectible,

ade:

ts.

ablethatisuncollectible.

l,assumethat abusinessbegan

dthat,atthe endofthatyear,the

ed$50,000.00andthemanagementesti-

osseswouldtotal$1,000.00.Thefollow-

wouldbemade:


/ h t t p : / / w w w . h




ERS[Chap.5

00(thisdebitrecordsanestimateddecrease

ybad debtlosses;itshouldbe shown

ntheprofit andlossstatement).

bts—$1,000.00(thiscreditrecordsanesti-

ountsreceivableasset).

deductionontheassetsideof the

000.00

s1,000.00$49,000.00

uncollectible,itshouldbe"written

fa $200.00accountreceivableare:

ts—$200.00.

able—$200.00.

accountis indicatedbelow.Assume

heaccountiswrittenoff,thetotal

hereserveforbaddebtsareshownin the

000.00

ebts1,000.00$24,000.00

tiswrittenoff,theaccountsandthe

lancesheetas follows:

800.00

ebts800.00$24,000.00

writingoffan uncollectibleaccount

eivablesandthereservefor estimated

vingunchangedthenetamountesti-

ainedabrief discussionofdeprecia-

esaresetupin theaccountsatannual

ollowingdebitandcreditentries:

sanexpenseaccount;thedebitrecordsa

shouldbe shownamongtheexpensesinthe

ation—thiscreditrepresentsadeduction

e assetaccount.

umethata deliverytruckispur-

00andthat itisexpectedtohavea life


G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



ERS[Chap.5

pensesandaccruedincome.Because

transactionsbutmerelyadjustthe

moretrulyreflecttheconditionat the

calledadjustingentries.

ustmentforaccruedexpense,assume

ndaryearare$700.00andthatit is

entsonJune30. Thetaxesarenotpay-

heyear,butthe profitandlossstate-

eyearshouldshowa $350.00taxexpense,

heetshouldshowanaccruedliability

adjustingentryshouldbemade:

expensetobeshowninthe profitandloss

50.00(aliabilitytobeshownin thebalance

ustmentforaccruedincome,assume

6%bondsof $100,000.00parvalueon

fDecember,onemonth'sinterest,or

.Theadjustmentforthisaccrued

eivable—$500.00(anassettobeshownin

500.00(anearningtobeshownin theprofit

its.

ntsatthecloseof anyperiod,con-

vento theproprietyofmakingadjust-

sanddeferredcredits.

ustmentforadeferredexpense(or

that,atthebeginningofa year,acom-

earinsurancepolicyata costof$900.00,

nexpiredInsuranceaccount,as follows:

thepolicy,theentire costwas

set—insuranceprotectionforthree

,onethird ofthecostmustbe regarded

;thisportionofthecost shouldtherefore

seaccountby thefollowingadjustment:


/ h t t p : / / w w w . h




S

—$300.00(anexpensedecreasingnetworth).

e—$300.00(decreasaintheasset).

earas follows:

inthe UnexpiredInsuranceaccount

eferredChargescaptiononthe asset

inthe InsuranceExpenseaccount

expensesintheprofit andlossstatement.

rredincomeadjustment,assumethat,

mpanycollected$1,000.00asrentin

aportionofits building,andthata

wascreditedasfollows:

efourthofthe renthasbeenearned

romthedeferredincome toanearned

owingadjustment:

ance—$250.00.

0.00.

earas follows:

einthe RentCollectedinAdvance

ndertheDeferredCredits captionon

cesheet.

einthe RentIncomeaccountshould

ssstatement.


/ h t t p : / / w w w . h




/ h t t p : / / w w w . h




NG

ayhaveledthereaderto assumethat

bymakingdebitandcreditentries

unts.This,however,isnotthe custom-

scustomaryfirstto recordthetrans-

alentry.

theonlybookoforiginalentry;

lowingfactswithrespectto each

stobe debitedandcredited.

ebit andcreditentries.

outthetransaction.

ownin thefollowingillustration:

andiseforstockof$20,-

.

onduein20 days,with

eofyesterday.

becreditedare indentedslightlyto

ountstobedebited.


/ h t t p : / / w w w . h




NG

cordingin theledgeraccountsthe

dbythejournal entries.Followingare

cedbypostingtheentriesfor thefirst

entryshowsthedateof thetransac-

ejournalpagefromwhichtheentrywas

unt.

deachjournalcreditis posted,the

eredin thejournal,asillustratedbelow:


n theledgerandtheledgerpage in

ss-referencebetweenthetwobooks.

n tracingledgerentriesbacktothe

er.

estorecordall transactionsintheir

dgerclassifiesalltheseentriesaccording

transactionsoccurredonagiven

rnal;ifhewishes toknowthetotal

ncashduringaperiod,he willlookinthe

dvantageofprovidingspacewhere

tionofeachtransactioncanbewritten.


/ h t t p : / / w w w . h




NG

rnal.

rerecordedinthe followingjournal.

entrybecarefullyreadtoascertainwhat

elpfulifeachentryis interpretedon

ebitsandcreditsstated inthepreceding

thefirstentry:

e acquisitionofthecashasset;

ordthe acquisitionofthemer-

recordtheinitial networth.


.

onduein20 days,with

eofyesterday.

.

ysat 6%forinvoiceof


/ h t t p : / / w w w . h




OSTING[Chap.6

duein 20dayswith6%

eivedJune4.

.

oiceJune2.

ances

1.


/ h t t p : / / w w w . h




NDPOSTING55

.

ances

o2.

oiceJune14.


/ h t t p : / / w w w . h




OSTING[Chap.6

GreenonJune5,with


/ h t t p : / / w w w . h




OSTING[Chap.6


/ h t t p : / / w w w . h




NG

albalance.

edrawnfrom theforegoingledger:

41

0

0

nces90.00

lowances300.00


G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



RY

heonlybookoforiginalentry,but

g specialbooksdesignedforrecording

ns.Ifatransactionis recordedinone

nalentry, itisnotalso recordedinthe

fspecialbookscanbeillustratedby

recordedinajournal inChapter6.

e onaccountconsistsofadebitto

tandacredittoSalesaccount.Ifthese

inabookwhichcontainsnothingbut

esofthecustomersto bedebitedshould

ow;thecreditto Salesisimplied,because

lesbook.


G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



RY

in twoways:(1)thecreditto Salesis

reditto Salesispostedonlyonce.

ncesbook.

koforiginalentrycontainsarecord

ditmemorandums.

ancesBook

ances— debit

dited,andthecreditswerepostedto

Thetotalwaspostedtothedebit of

ances.

gbookareequivalenttoseven

rchasesaccountandcreditingtheparties

isewaspurchased.


G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



RY

AllowancesBook

Al

ccountswerepostedindividually;

ecreditofReturnedPurchasesand

ementsbooks.

cashreceiptsbookshowsthe name

edebittoCash isimplied.


G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



RY

nethenatureofthe transaction

okentry.Threetransactionsmay

tthebank.

bookcreditsNotesPay-

nthedisbursements

se$25.00;theentries

netdebitof$4,-

tcollected.

kentriescreditNotes

dInterestIncome$4.00,

tpaid.

ntriesarerequired.

ainsarecordofthe transactions

edinthe specialbooksoforiginalentry.

ormerchandise.

%,forinvoiceofJune 1.

%,forinvoiceofJune 3.

%,forpurchasereceived

n30 days,forinvoice

adertracethepostingsfromthe fore-

ryto thefollowingledgeraccounts.

oseinChapter6, except:


G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



Y

columnsindicatethebooksfromwhich

g.,CR1meanscash receiptsbook

columntotals,fewerentriesappear

Sales,ReturnedSalesandAllow-

edPurchasesandAllowances,and


/ h t t p : / / w w w . h




NTRY[Chap.7


/ h t t p : / / w w w . h




Y


/ h t t p : / / w w w . h




/ h t t p : / / w w w . h




kkeeperstopost atthesametime,

dedinto thethreefollowingsections:

er—containingaccountswithcus-

—containingaccountswithtrade

ngallotheraccounts.

subsidiaryledgers.

nto thesethreesections,thegeneral

etwofollowingaccounts,whichare

alsof certaincolumnsofthebooksof

edebitbalanceofthisaccountis

lancesintheaccountsreceivable

editbalanceofthisaccountis equal

sintheaccountspayableledger.

lledcontrollingaccounts;thetwo

detailedaccountswithdebtorsand

aryledgers.

ts.

pterisbasedonthesametransac-

Chapter7.Thegeneralledgerillus-

esameasthatin Chapter7,exceptthat

andcreditors'accountshavebeen


/ h t t p : / / w w w . h




gers;but,sincetheyhavebeenreplaced

ts,itwillbepossibleto takeatrial

gerindependentlyoftheother ledgers.

inalentryarethe sameasthosein

cialcolumnshavebeenaddedwhere

stingofcolumntotalsto thecontrolling

is followedbyanexplanationofthe

gerand tothesubsidiaryledgers.The

l ofthepostingsfromthevarious

e ledgers,whichappearonpages74

alesandallowancesbook.

salesbook.


/ h t t p : / / w w w . h




alesandallowancesbook.

ancesBook

edtopage32—ReturnedSalesandAllow-

edtopage2—AccountsReceivablecon-

s:

dtoanaccountintheaccountsreceivable

edpurchasesandallowancesbook.

book.


/ h t t p : / / w w w . h




urchasesandallowancesbook.

AllowancesBook(Page1)

edtopage10—AccountsPayablecontrolling

edtopage42—ReturnedPurchasesand

s:

toanaccountintheaccountspayablesub-

viouslyillustratedhadonlyone

ingbookhasthree.AnAccounts

isprovidedsothatthecolumntotalcan

gaccount.Thisnecessitateshaving

hichtoenterthe amountstobeposted

neralledger,and theGeneralLedger

orthatpurpose.The Cashdebitcol-

sarytopermitthepostingofa column


/ h t t p : / / w w w . h




edtopage1—Cashaccount.

ntheGeneralLedgercolumnpostedtothe

t,onthepages asnumberedintheL.F.

e2—AccountsReceivablecontrolling

s:

AccountsReceivablecolumnpostedtoan

ceivableledger.

.

nprovidedinthefollowingcashdis-

onssimilartothoseexplainedin thepre-

ashreceiptsbook.

k(Page1)


/ h t t p : / / w w w . h




S


/ h t t p : / / w w w . h




COUNTS75

e2)


/ h t t p : / / w w w . h




NTS[Chap.8

Allowances(Page42)

w:


/ h t t p : / / w w w . h




S

eof thegeneralledger:

ce

trol)1,930.00

0

)$4,650.00

nces90.00 P u b l i c D o m a i n ,

G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



NTS[Chap.8

able

ocedurecanbeappliedwheneverit

ilsfrom thegeneralledger.For

arriedinanumberof banks,thegeneral

rollingaccountcalledCashinBanks,

theachbankmaybekept inasubsidiary

ofreal estateareowned,thegeneral

rollingaccountwithRealEstate,sup-

ershowingthe costofeachparcelof

an Expensecontrollingaccountmay

ger,withdetailedexpenseaccountsina

oreherethanto indicatethatthe

durehasmanyapplications.Ifyouever

edger toobtaindesiredinformation,

eaccountsmaybecontrollingaccounts,

dinformationcanbeobtainedfromthe

ords.


/ h t t p : / / w w w . h




KSOF

ns.

enhavemanycolumns,andatfirst

everycomplex.Usually,however,it

dtheir natureifitis rememberedthat

originalentryareintendedto indicate

adeinledgeraccounts,andthatspecial

rthepurposeoffacilitatingtheaccom-

oksoforiginalentry areintendedto

ollowingpurposes:

ntotalsto controllingaccounts.

ntotalsto accountsfrequently

nofdata.

hanonelineto recordonetrans-

hanonebooktorecordone trans-

counts.

ountcolumnsinbooksoforiginal

ustratedinthe precedingchapter.

uentlydebitedorcredited.

accountappearin thecashreceipts

nbereducedbyprovidinga special

ount.Entriescanbemadein thespe-

e GeneralLedgercolumn,andthetotal

bepostedat theendofthemonth.The

ashreceiptsbookon page80isan illus-

ountsfrequentlycredited.


/ h t t p : / / w w w . h




/ h t t p : / / w w w . h




SINBOOKSOF ORIGINALENTRY85

00fromC. J.Barnesinsettlementofan invoice

scountof 2%.

ecialcolumn) $20.00

0

rton,termsf.o.b.destination;thecustomerwas

tand deducttheamountthereofwhenpaying

s$700.00andthe freightwas$25.00;thenet

5.00.

olumn)$ 25.00

ceivedfrom JohnHolmes;whenitwasdeposited,

hange.

nge(specialcolumn)$.25

0

nvolvingtheuse ofthreeofthespe-

edabove:

tton$1,000.00

0.00

nddeductedby him15.00_ 35.00

on$965.00

k.50

64.50

20.00

nge.50

.00

page 84containsspecialdebit

cordingof thesetransactions.

kwitha specialcreditcolumnfor

so illustrated.

stofthe specialcolumnsillustrated

ngother thanthesavingofposting;

gfeatureisalwaysanincidentalbenefit

s severalentries,becausecolumntotals

by theledgerpagenumbersentered

he cashreceiptsandcashdisburse-

hichcontainall oftheillustrative

er.


/ h t t p : / / w w w . h




G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



NSINBOOKSOFORIGINALENTRY87

toodthatthespecialcolumnsillus-

thischapterarenotthe onlyonesthat

he illustrationshasbeenmerelyto

sesofsuchcolumns.Thoseincludedin

houlddependupon thenatureofthe

ansactionstoberecorded.

thatspecialcolumnsmaybeprovided

her thancashbooksiftheywill facili-

ransactionsorwill reducethelaborof


/ h t t p : / / w w w . h




G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



ountingmechanismforrecording

olveanimmediateorprospectivedis-

sentialelementsofthesystemare

ter,andacheckregister.

dicatestheessentialfeaturesofa

aybeaddedasdesired.

Y

ue

anynllpJuly13


G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



&Companypur-

mTheOsborneCompany;

edwasitemizedonthe

397,datedJuly3,1941.

ivedtheywerechecked

hat thegoodscharged

oiceandthepurchase

steachothertoseethat

ndtheinvoicewas

nsions,andfootings.

werefound tobe

mpanypreparedthe

easeparatevoucher

fromthesamesup-

navoucherjacket,and

cher.

hevoucher,thus

tionproceduresmen-

ompleted.

gned thevoucher

ment,becauseacheck

ssued;theperiodduring

ntis availabledoesnot

ysafterthedateof

nthevoucher

tobe paidimmediately

cherregisterserves

forpurchasesand

,asthischapterwill

eof theaccountspay-

tratedat theleft,

e,Payee,Explanation,

efortherecordingof

naboutthevoucher;the

bercolumnswillbe

aid;the moneycolumns

bitandcreditentries.


G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



eris enteredintheVouchersPayable

bitcolumn.(TheVouchersPayable

he AccountsPayablecontrolling

areprovidedforall accountsfre-

ustrationcontainsmanymoredebit

ntsforwhichspecial columnsarenot

ntriesin theSundryAccountsdebit

egister,wherespaceis providedfor

ount aswellasthe amount.

egisteronpage90debitsPurchases

sVouchersPayable.

aid immediately,itisfiledina

tilthe dateonwhichit shouldbepaid.

oucher,it ispresentedtotheperson

orizedisbursements;hesignsthevoucher

yment,"and

deaninternalcheckoverdisburse-

beapprovedandthe checkdrawnby

ster,showinganentry forthecheck

ecorded intheregisteronpage 90.

voucherisrecordedbya creditto

mentofeachvoucherisrecordedby a

theoffsettingcreditis toCash.(Dis-

creditedifadiscountis taken.)

dinthecheckregister,notationsare

dCheckNumbercolumnsofthevoucher

w:


G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



ckregisterandthenotationsinthe

oucherregisteraremade,thevoucheris

(usuallyinnumericalorder)whereit

eorotherdocumentsareavailableas

oftheentries andthedisbursement.

ssoonas drawn,theproceduredis-

xceptthatthereisno occasiontofilethe

tthe paymentdate.Paymentismade

y.

erandthevoucherregisteronpage

widefacingpages,containtherecordof

ssuggestedthat thereaderobserve

ction,notingtheaccountsdebitedand


/ h t t p : / / w w w . h




/ h t t p : / / w w w . h




M[Chap.10

ckregisters.

orofficesuppliesandstationery.

ckregisters.

e andinterest.

ckregisters.

cher1.

sefromL.N.Whitely.

month.

ckregisters.

sefromF.R.Mason& Co.

cher7.

rAugustrent.

ckregisters.

sefromGeorgeMartin.

voucher9.

tamps.

ckregisters.

sefromDalton&Doane.

onth.

ckregisters.

ndcheckregisters.

enteredbelowthecolumntotalsin

isters,andinthe L.F.columnofthe

sectionofthevoucherregister,indicate

completed.

:

Payablecolumn.

aldebitcolumnsanditemsin theSundry

Payablecolumn.

ntonPurchasesandCashcolumns.


/ h t t p : / / w w w . h




SYSTEM95

yableledger.

he vouchersystemistheelimination

payableledger;theindividualliabilities

minedbymerelynotingthe"open"items

atis,the itemswithoutnotationsin

umbercolumns.

the totalsoftheVouchersPayable

dcheck registersontheprecedingpages

ntrollingaccountwithVouchersPayable:

Aug.3l|VRlIl3,638|oO

balanceof$3,625.00.Theopen

re shownbythevoucherregistertobe:

n$1,750.00

ne1,875.00

cherregisterservesbothasa bookof

bsidiaryrecordsupportingthecontrolling

ble.


/ h t t p : / / w w w . h




G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



changesinsurplus.

our townlikedtoknowhowmuch

o hesetoutbarrels atthecornersof

pouts,andaftereach rainhemeasured

demptiedthebarrelsintothe cistern.

theamountsoftheir incomeand

arrels calledaccounts.Afterpreparing

eendofa yearorotherperiod,they

tthey canbeusedto measuretheresults

xtperiod.The processofemptying

ingthebooksorclosingthe ledger.

Chapter3isrepeatedbelow.The

ebeenpostedfrom pages1and2 ofa

gagedinselling realestateonacom-


G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



hap.11

loseonly theaccountswithbalances

plusduring theperiod.

Cash,JohnSmith,FredBrown,and

sshowtheamountsofassetsat theend

seaccountsare nottobeclosed.

accountwithWhite&Company


/ h t t p : / / w w w . h




incomeandexpenseaccountsare

rnalentryisfollowedbythe accounts

t.

comeaccountand

o thecreditofProfit

5

ccountisnowclosed;thatis, ithas

tbalance of$1,125.00hasbeen

e oftheProfitandLoss account.

nt.


/ h t t p : / / w w w . h




and theDividendsPaidaccounts.

asincreasedbythe netincome

alanceofthe ProfitandLossaccount)

dividendspaid(shownby thedebitin

t);thebalancesinthesetwoaccounts

bythe twojournalentriesshownbelow.

journalentriesis shownbytheledger

account.

accountandtransfer

ntingthenetincome

account.


/ h t t p : / / w w w . h




theSurplusaccount.

ount.

ffectedbytheclosinger


/ h t t p : / / w w w . h




OOKS103

the endofAprilis shownbythe

941

ng

35.00

0

0.00

001,200.00

00$900.00

0.00

0,000.00

0.00—

12,160.00$12,160.00

emonth.You oweme$100.00.

closemybooks."


/ h t t p : / / w w w . h




/ h t t p : / / w w w . h




tinued

serveasthe basisofanillustration

thebooksofamerchandisecompany.


/ h t t p : / / w w w . h




[Chap.12

Septembercost$1,150.00.

werepreparedfromtheforegoing

ss

er,1941

:

94111,000.00

mber30,19411,150.00

Sold 2,550.00

0.00

600.00

er,1941

600.00

0.00

941$350.00

Worth

sPayable$700.00

00NetWorth:

alStock..$5,000.00

chandisingcompanyaccomplishes

erminingthe netincomeforthe

ounts(suchasDividendsPaid)

sduringtheperiod,are closed.


/ h t t p : / / w w w . h




ndoftheperiodis enteredinthe

theforegoingledgerappear

sfollowedbythe ledgeraccounts

unt.Thefirstentrycloses theInven-

gitsbalance (representingthe

ry)to thedebitofProfitand

000.00

withtheinventory

riod.

...2]1,000|00|

ount.Thesecondentryclosesthe

sferringitsbalanceto thedebitof

ount.


G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



Thethird entryplacestheSeptem-

ooksasanasset,withan offsetting

ecredit toProfitandLoss

mtheopeninginventoryandpur-

ebitedtothataccount.

0

0inventoryonthe

creditProfitand

eof.

ventoryaccountshowsthevaluationof the

ofSeptember.

0.00intheProfit andLossaccountisthecostof

ber.


G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



t nowhasacreditbalanceof $600.00,thenet

account.

0.00

oSurplus.


/ h t t p : / / w w w . h




ngentries.


/ h t t p : / / w w w . h




OOKS111

ooksofamerchandisecompanyis

lbalances.

er30,1941

g

00~

.00

00.00

000.00

050.00$6.050.00


/ h t t p : / / w w w . h




/ h t t p : / / w w w . h




tinued

indicatestheaccountswhichwill

ustrationshowingasomewhatmorecom-

ON

31,1941

00.00

00

194025,000.00

0.00

.00

4027,361.00

ances1,500.00

Allowances1,000.00

0.00

0

0

0.00

0

onofthestatementsattheend ofthe

nalentries,accountantssometimesmake

milar tothefollowingillustration.


/ h t t p : / / w w w . h




ial balanceareclassifiedaccording

theywill beused.

theyeardoesnotappearin thetrial

elowthe trialbalancefigures,inthe

oss statementandthebalancesheet,

th ofthesestatements.

r isshownasthebalancingfigurein

s,andis extendedtothecreditSurplus

heyearisshown asthebalancing

ns,andis extendedtothecreditBalance

ON

ber31,1941

.

es.

.


/ h t t p : / / w w w . h




OOKS115

ONExhibitC

ss

ber31,1941

dAllowances1,500

:

1940$25,000

ndAllowances1,000

ndPurchases$91,000

ber31,194126,00065,000

000

0

000

00

:

025

8,975

0

dOtherIncome$11,099

0

ONExhibitB

ber31,1941

40$27,361

itC10,089

00

41$32,450


/ h t t p : / / w w w . h




[Chap.13

ONExhibitA

r31,1941

Worth

:

00AccountsPayable$7.375

otesPayable4,000$11.375

RTH:

0CapitalStock$35,000

5067.450

ntriestoclose thebooksattheend

iththe inventoryatthe

edaccounts.

Allowances1,000.00

hasesandAllowances

ted,theProfit andLossaccounthas

.00,representingthecostofgoodsavail-

ar.

941,inventoryonthe

e ProfitandLossaccounthasa

00,representingthecostofgoodssold

0

.

ances1,500.00

count.


0.00,representingthegrossprofiton

t andlossstatementonpage115.


G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



OOKS117

0.00

eaccounts.

0

seaccounts.

0

0.00

accounts.

sexpenseaccounts.


9.00,representingthenetincomeforthe

to Surplus.

ount.

toreducethenumberofclosingjour-

elateditems.Theextentto whichsuch

matterof personalpreference.An

dureis givenbelow:

1941)26,000.00

Allowances1,000.00

1940)23,000.00

ances1,500.00

theendofthe yearand

allaccountswithbal-

ationofgross profiton


G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



0.00

0

unts.

00

0.00

sincomeaccounts.

to Surplus.

ount.

accounts.

plus accountsappearbelow.


/ h t t p : / / w w w . h




OOKS119

accountsafterthebooksare closed

atedbelow.

erenotaffected:

00.00

00

0.00

.00

ereclosed:

ances

Allowances

ngaccountswerechangedbythe

kswereclosed,the

alanceof$25,000.00,

yattheendof 1940;

esentingtheinventory

mountof26,000.00

swereclosed,theSurplus

27,361.00,representing

940.Itnow hasabal-

plusattheend of1941,

0


G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



GTHEBOOKS

indicatestheaccountswhichwill

ustrationinthischapter.

ANY

31,1941

00.00

0.00

00

194035,000.00

—StoreBuilding8,000.00

—StoreFixtures1,200.00

0.00

—DeliveryEquipment.900.00

00

—OfficeEquipment...400.00

00

.00

5,000.00

ce600.00

4026,250.00

ances500.00

Allowances1,200.00

0.00

0

ense800.00

0

0

0

1941,$46,500.00


G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



OSINGTHEBOOKS_ [Chap.14

d,adjustingentriesmustbe made

ems,andfor baddebtanddepreciation

describedinChapter5.

...........375

......................375

ncepremiumstoanexpense

ance........................400

00

n incomeaccount.

able.........................150

.150

est onthenotesreceivable.

........300

.......................300

est onthemortgage.

00

.....................700

eserveto$1,500.00.

uilding........................2.000

— Store Building..........2.000

5%of$40,000.00.

ixtures........................300

— StoreFixtures..........300

7H%of$4,000.00.

ryEquipment...................600

— DeliveryEquipment.... 600

20%of$3,000.00.

quipment......................150

— OfficeEquipment.......150

7H%of$2,000.00.

ments.

etshowingthetrial balancebefore

onoftheadjustingentries,thetrial bal-

ndthedistributionofthe adjustedbal-

eofthe statementsinwhichthebalances

ngpapersarefrequentlypreparedby

hepreparationofstatementsandclosing

ppearonpages124and125.


G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



SINGTHEBOOKS[Chap.14

ANYExhibitC

ss

ber31,1941

dAllowances600

:

1940$35,000

esandAllowances1,200

ndPurchases$203,800

ber31,194146,500157,300

200

00

ense800

850

50

:

pment150

175

5,175

dOtherIncome$15,725

250

ANYExhibitB

ber31,1941

40$26,250.00

C12,476.00

00.00

41$29,725.00


G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



DCLOSINGTHEBOOKS125

ANYExhibitA

r31,1041

000

ebts1,50023,500

ble150

450

ciation10,000

0

ciation1,500

00

ciation1,500

ciation550

eciatedValue45,450

0.00

300.00

6,300.00

.00

ce200.00

.00

0

ntriestoclose thebooks.

nventoryatthe


G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



SINGTHEBOOKS[Chap.14

0

Allowances1,200.00

edaccountsandcharge

ases.

nassettheinventory

ances500.00

0

edaccountsandcredit

•

0.00

0

ding2,000.00

ures300.00

uipment600.00

ense800.00

eaccounts.

0

pment150.00

seaccounts.

sincomeaccounts.

0

0

sexpenseaccounts.

to Surplus.

ount.

.

of theledgeraftertheadjustingand

posted.Observethattheonlyaccounts


G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



DCLOSINGTHEBOOKS127

beenclosedare thosewithbalances

esheet.

ANY

—December31,1941

00.00

500.00

00

ble150.00

194146,500.00

—StoreBuilding10,000.00

—StoreFixtures1,500.00

0.00

—DeliveryEquipment1,500.00

00

—OfficeEquipment550.00

00

.00

300.00

.00

ce200.00

0


G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



NTS

buysitsgoodsreadyforresale,and

sesaccountwhichshowsthecostof

Amanufacturingconcernbuysraw

ofmanufacturealsoinvolvesexpendi-

eatvarietyofmanufacturingexpenses;

ontainaccountsinwhichallof these

berecorded.

ementsofmanufacturingcost:

dmanufacturingexpense.

eddirectmaterials)includeonly

toandbecomepart ofthefinishedprod-

erationof thefactorydonotbecome

t;thereforetheyare classifiedasindirect

edasa manufacturingexpense.

anbest beshownbycontrastwith

whoworkontheproductwithtools,

ntheprocessof production,aredirect

entsandforemenwhosupervisethework

ersandjanitorswhoseservicesareinci-

duction,areindirectlaborers.

ormanufacturingoverhead,includes

onwhichcannotbeclassedas material

ringexpenseincludes,amongother

preciationofthefactorybuildingand

supplies;taxesandinsuranceonthe

e;andrepairsandupkeepof thefactory.

ecostoffinishedgoodsmanufactured

ever,bymerelyaddingthe expendi-

materials,directlabor,andmanufactur-

eunfinishedgoods,calledgoodsin


G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



COUNTS[Chap.15

d oftheperiod,andonemust deductthe

odstodeterminethe costofthegoods

mayhavebeengoodsinprocessat

,and thesemustalsobetakeninto

howstheelementsincludedinthe

goodsmanufactured:

itD

sManufactured

1941

1940$12,000

andAllowances1,500

ases$105,300

r31,19419,000

alsUsed$ 96,300

00

epairs300

t6,000

pense2,500

nses30,775

dManufacturingExpenses$207,825

ntory,December31,194015,000

ventory,December31,194111,000

ed$211,825

statements.

entandthe surplusstatementofa

onotnecessarilydifferfromthose ofa

noneparticular:theprofitandloss

ringcompanyshowsthecostofgoods

inedbythestatementofcostofgoods

profitandlossstatementofatrading

fgoodspurchased.


/ h t t p : / / w w w . h




GACCOUNTS131

itC

ss

ber31,1941

lowances2,000

December31,1940$20,000

ed,perExhibitD211,825

tory,December31,1941.17,000

Sold 214,825

175

60

ense8,000

ense2,50039,860

15

0

andFixtures750

pense70023,990

9,325

e:

es1,2001,300

itB

ber31,1941

40$71,450.00

er ExhibitC18,025.00

41$83,475.00

nufacturingcompanyusuallydiffers

mpanyinthattheformerincludesfixed

acturingoperations,andinventoriesof

s,andfinishedgoodsinsteadofa single


/ h t t p : / / w w w . h




/ h t t p : / / w w w . h




GACCOUNTS133

albalanceandend-of-yearinven-

oingstatementswereprepared.The

erthepostingof adjustingentriesfor

msandforbaddebt anddepreciation

esakeofclarity,theaccountbalances

rdingtothestatementsinwhichthey

ngedinthe sequenceinwhichthey

s.

the booksofthismanufacturing

ediatelyafterthetrialbalance.

ATEMENTOPCOSTOF

12/31/40$12,000.00

4,000.00

Allowances$1,500.00

00.00

epairs300.00

3,500.00

yandEquipment...6,000.00

0

pense2,500.00

y—12/31/4015,000.00

ATEMENTOFPROFITAND

ances2,000.00

—12/31/4020,000.00

60.00

ense8,000.00

ense2,500.00

00

0.00

andFixtures750.00

pense700.00

0

00.00

00$302,700.00


/ h t t p : / / w w w . h




COUNTS[Chap.15

21,675.00$302,700.00

ATEMENTOFSURPLUS:

0.00

ALANCESHEET:

00.00

00.00

00

—F.B15,500.00

t60,000.00

—M.&E21,000.00

00.00

—F.&F2,250.00

00

.00

es1,275.00

0

,1941:

00

00

ries.

mentsofmanufacturingcostare

accountinsteadoftoProfitand Loss.

uceabalanceinthe Manufacturing

costofgoodsmanufactured.

eginningoftheyear:

000.00

y15,000.00

accountwiththecostof

eginningoftheyear.

ear:

2,000.00

,000.00

accountwiththecostof

e beginningoftheyear.

800.00

4,000.00

dFreightaccounts.

Allowances1,500.00

00.00

hasesandAllowances


/ h t t p : / / w w w . h




owEces

ec.31"1941

"Dec.31"1941.. .

ofitEdL"ss.. ..

O»O

O

OC OC O


/ h t t p : / / w w w . h




COUNTS[Chap.15

000.00

000.00

rawmaterialsattheend

750.00

accountwiththecost

775.00

00.00

epairs300.00

0

pense2,500.00

3,500.00

yandEquipment..6,000.00

gexpenseaccounts.

fperiod:

y11,000.00

000.00

cessinventoryatthe

cturingaccountrepresentsthecost

ringtheyear;theaccountisclosedby

wingpage,transferringits balanceto

entries.

similarto thosewithwhichthe

closingthe booksofatradingcompany.

Loss withnetsales:

0

.

ances2,000.00

sandAllowances


/ h t t p : / / w w w . h




CCOUNTS137

Losswiththecostofgoods sold:

20,00000

iththe inventoryof

ningof theyear.

0

1,825.00

gaccount,andto

thecost ofgoods

year.

17,000.00

finishedgoodsatthe

60.00

ense8,000.00

ense2,500.00

eaccounts.

s:

00

0.00

pense700.00

andFixtures750.00

seaccounts.

eandexpense:

00.00

00

0

to Surplus.

dendspaidduring


/ h t t p : / / w w w . h




COUNTS

oundledgers.Mostledgersare

eafbinders;eachaccountisgivena

heetsare keptinnumericalorder.Itis

relationshipsofgroupsofaccountsbya

tothat illustratedbelow.Numbering

owingchartofaccountsillustratesthe

ERVES—1to99.'

e.

bts.

eivable.

s.

s.

ation—Buildings.

ment.

ation—MachineryandEquipment.

ation—Tools.


/ h t t p : / / w w w . h




OFACCOUNTS[Chap.16

ation—DeliveryEquipment.

s.

ation—FurnitureandFixtures.

xpiration.

89:

.

DCREDITACCOUNTS—100to199:

139:

NotesPayable.

nterest.

—Common.

—Preferred.

79:

99:

Advance.

200to299:

mmon.

erred.

NTS—-300to499:

9:

aterials.

sandAllowances.

—400to499:

dings.

inery,Equipment,andTools.

xpense.

wer.

.


/ h t t p : / / w w w . h




ARTOFACCOUNTS141

yandEquipment.

oryExpense.

599:

Allowances.

o699:

s.

ngExpense.

veryEquipment.

Sales.

ngExpenses.

to799:

nitureandFixtures.

ng.

ange.

eralExpense.

49:

ses.

899:

0to999:

ount.

steadofnames.

rsinsteadofaccountnamessaves

al entry,andsavestimeandeffortin

untNumber(insteadofname)col-

nalentryisindicatedbelow.Thecheck

atedhadonlythreemoneycolumns,as

hefollowingpage.


/ h t t p : / / w w w . h




COUNTS

,whenpayingvouchers,todebit or

thosefor whichcolumnswereprovided

ster.Thereforeit isdesirabletopro-

bit columnandaSundryAccounts

kregister.(Similarcolumnsarealso

oksoforiginal entry.)

disbursementsbookonpage143

maybeused.The factsrecordedare:

aid$400.00

kforabank drafttobesentto thecreditor.20

he bankinpaymentofthedraft$392.20

ursementsbookcontainsthefollow-

accountnumbersarethoseshownby

unts.

400.00

ange.20

es$8.00

Accounts,"itwasstated thatcon-

ucedintothe accountingsystemwhen

ythatit mustbedivided.

econtrollingaccountproceduremay

.Forinstance,controllingaccounts

ensecanbe keptinthegeneralledger,

ptinsubsidiaryrecords.

chartofaccounts,the generalledger

gcontrollingaccounts:

ense.


/ h t t p : / / w w w . h




/ h t t p : / / w w w . h




COUNTS

wninthechartcouldbe keptina

dgersmaybekeptin theusual

arexpenserecordmaybekeptin the

ecord


/ h t t p : / / w w w . h




ARTOFACCOUNTS145

the statementsweredeterminedby

s(Inv.),orthattheywerebroughtover

nt(ExhibitB,C,orD).

bitA

Y28

25,000.00

Debts1.000.00

00.00

vable..50.00

000.00

00.00

.00

50.00

eciation10,000.00

00.00

ent$35,000.00

eciation15,000.00

0000

000.00

eciation500.00

0.00

3,050.00

eciation300.00

0.00

0.00

300.00

25.00


G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



OFACCOUNTS[Chap.16

ontinued

thT7ARY31RUARY28

0,000.00

.00

00

ble60.00

0

0,585.00

5,000.00

0

dvance$15.00

ctedinAdvance100.00

5.00

0.00

00

bitB

941

TC.

fPeriod$23,985.00

0

6,425.00

bitC

oss—1941

TC.

sandAllowances1,500.00

:

ry,Beginning$19,000.00

factured71,675.00

odsInventory,Endof

75.00

ard)$ 52,825.00


G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



ARTOFACCOUNTS147

oss—1941—Continued

ghtforward)$ 52,825.00

15,000.00

0.00

Expense4,000.00

eryEquipment50.00

50.00

,400.00

25.00

:

0.00

00.00

ureandFixtures50.00

0

g125.00

alExpense1.635.00

6,495.00

930.00

s3,225.00

00

e$4,315.00

.00

0.00

25.00

bitD

dsManufactured—1941

TC.

7,000.00

chases$800.00

iod5,000.00

0

0

00

Labor(Forward)...$58,400.00


G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



OFACCOUNTS[Ch«p.16

dsManufactured—1941—Continued

Labor$58,400.00

00

00.00

ngs200.00

nery,Equipment,and

00

r2,000.00

yExpense1,350.00

nses$12,975.00

eginning3,800.00

cess,EndofPeriod3,500.00

ed$71,675.00


G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



profits.

entis intendedtoshowtheoperating

eriodoftime.The profitandlossstate-

atementofabsolutefact;usuallyitis

pinionof oneormorepersons,because,in

ement,itis necessarytomakemany

pervaluationofthe inventoryandthe

ad debts,depreciation,andotherlosses.

argelymattersofopinion,andsince

er,conditionsoftenariseinwhich

tsofprofitsmaybedefendedbydifferent

cesofdoubtit isconservativetomake

rronthe sideofunderstatingtheprofits

em.Iftheestimatesare laterfoundto

swillbepleasantlysurprisedratherthan

ditorswillhavenoreasonto claimthat

onservatismunderstatesthebook

dtheearningsofthecompany;such

pressthevalueofthecompany'ssecurities

iceupontheir holders.

ountantisobligedtosaila careful

ofinflatedprofitsandthe Charybdisof

manypoints inthecoursehemuststeer

sopinions,however,shouldbedeter-

edruleswhichareknownasaccounting

reamongthemostimportantofthese

peratingandextraneousprofits.

pensein theproperperiod.

ofitsandsavings.


/ h t t p : / / w w w . h




[Ch«p.17

pitalandrevenueexpenditures.

rectlyaspossible.

providefor alllosses.

nservatism.

eperiods,aconsistencyinthebases

atingandextraneousprofits.

ebysalesof thecommodityinwhich

eousprofitsaremadebysales ofassets

ebusiness.Profitsonsalesof mer-

ofits;profitsonsalesof buildings,equip-

xtraneousprofitsunlessthebusinessdeals

dities.

andthe statementsareprepared

peratingprofitsandlossesshouldbe

extraneousprofitsandlosses.Operat-

to theProfitandLossaccountandshown

ment;extraneousitemsshouldbeclosed

wnhi thesurplusstatement.Thisdis-

nedinorderthat theProfitandLoss

llshowtheresultsofregular operations,

dextraordinarytransactionsextraneous

mayperhapsmakethereasonfor

erstood:

rations$ 40,000.00$50,000.00

00.000.00

00.00

atit madeaprofitof$140,000.00

astyear,the statementwouldbetruebut

estanexpansionofbusinesswhollyat

ecompany'sprofitandlossstate-

of $40,000.00thisyearandaprofitof

resultingfromregularoperations.And

dshowthatthis yearitalsomadean

000.00fromthesaleoffixedassets.

th respecttoextraneouslosses;

e surplusstatementratherthaninthe

Butthisvery properruleissubjectto

toshowagood operatingincomemay


/ h t t p : / / w w w . h




OFITS151

ensesfromitsprofit andlossstatement,

rplus,andinsistthat theyareextraneous

der-linesituations.Forinstance,

twasclosedduringtheyear,and that

edinthedispositionof itsinventories.

partment'soperationswereapartofthe

astrequire thelossfromliquidationof

gedtoProfit andLoss?Ordothe

becomeextraneouswhenthedecisionto

esequestionsarenotansweredhere;

erelycalledto thefactthat,becausesuch

dvantageofinanattemptto makea

ngincome,nooneshouldrelyon the

onein determiningthetotalprofitor

statedperiod;thesurplusstatement

derstandthisdistinctionbetween

s,showninthe profitandlossstatement,

dlosses,showninthe surplusstatement,

publicmaynotbe familiarwiththedis-

ttheprofit andlossstatementtellsthe

eralsotothesurplus statement.For

tlybeensometendencyto combinethe

owextraneousprofitsandlosses,aswell

nts,belowthenetoperatingincome,in

lowingillustration.

ssandSurplus

ber31,1941

70,000.00

000.00

00

donedPlant15,000.00

ncomeTax—1939...$1,500.00

00

eDividends$19,500.00

00.00

0.00

4025,000.00

41$39,500.00


/ h t t p : / / w w w . h




[Chap.17

nseintheproper period.

tatementpurportstoshowthenet

uringastatedperiodoftime, itshould:

cabletothe period;therefore:

madetotakeup income

ot beenenteredinthe

otbeencollected.

dbutnotdelivered,thesale

eprofittaken,provided

epurchaser.Thegoods

session,buttheyare held

plicabletothe period;therefore:

madetotakeup expenses

enotbeenenteredin the

dexpensesincurredpriorto the

e included,eventhough

ceiveduntilsometime

od.

abletoafutureor priorperiod.

vanceisapplicabletoafuture

redby settingupa

prior periodbutwhichwas

tandlossstatementfor

shouldnotbe includedin

ntfor thecurrentperiod

ecurrentperiodwould

dbe creditedtoSur-

profitsofthepriorperiod.

icabletoanotherperiod.

ldbedeferredtoa future

npreparingtheprofitandl oss

should bechargedto

the profitandloss

eriod.

napplicabletotheperiodis omitted

or lossesaretherebyignored,itis evident


/ h t t p : / / w w w . h




OFITS153

illbe incorrectlystated—soevident,in

arcelybeworthmentioning.But

attentionshouldbe calledtothisfact.

pointis oftenoverlooked.Expenses

oksbecausetheyhavenotbeenpaid;

auseithas notbeencollected;purchases

timeisrequiredto passtheinvoices

andtheydonot comethroughfor

ngofthenext period.

medoubt oftentimesexistsconcerning

sactionproperlybelongs.

tsandsavings.

resultsfrommanufacturingathing

whichit couldbepurchased.Com-

ucttheirownfixedassets,andwhenthis

nthepriceat whichtheycouldbepur-

clinationto valuethefixedassetsata

eandtotakeupa so-calledprofit.There

rnessin suchaprocedure;whyshould

facturingfacilitiestomakefixedassets

regotheopportunityofmanufacturing

esoldata profit?Theansweristhat,

fixedassetscurtailedthe manufacture

hichisunlikely),theprofitandloss

treallyhappenedinsteadofwhatmight

ufactureofthefixedassetsmayincrease

hedepreciationcharges,butapresent

creasedfutureprofitsmust notbe

dprofit.

alandrevenueexpenditures.

ment,orthe assumptionofanobliga-

ment,forabenefitreceived.Thereare

es,knownascapitalexpendituresand

pitalexpendituresresultinbenefitsofa

sland,buildings,andmachinery;such

pitalizedbychargestoassetaccounts.

einthenatureofexpenses,andshouldbe

unts.

saretofurnishan accuraterecordof

ties,andcapital,it isessentialthata


/ h t t p : / / w w w . h




[Oup.17

ebetweenthesetwoclassesofexpendi-

hased,acapitalexpenditureismade;

anexpenseaccount,ortheassetswill be

tsunderstated.Ontheotherhand,if

evenueexpenditureismade;the

apitalizedbybeingchargedto anasset

beovervaluedandthe profitsoverstated.

tinguishbetweencapitalandrevenue

yprinciplesareinvolvedthatacomplete

neduntillaterchapters.Justnow the

edistinctionmustbemadein accordance

counting,ortheprofitswill beincor-

yaspossible.

olvedinthe correctvaluationof

rsaredevotedtothis subject.Atthis

ostatethefollowinggeneralprinciples:

atereservesshouldbeprovidedfor

theinventoriesshouldbevaluedat the

ylossestakenon currentassetsin

uirementsofgoodaccountingshouldbe

perations.

ryinvestmentsinstocksandbonds

werofcostormarket,andanylosses

hargedagainstcurrentoperations.

arketvalueofpermanentinvestments

ealizationatcurrentvaluesisnot con-

ecreasesinmarketvaluesofpermanent

videdforbytheestablishmentofa

becreatedbya chargetoSurplusrather

distinguishsuchlossesfromthose

rations.

nsshouldbechargedwithdepre-

ortizationapplicabletofixedassets;

uationsinthemarketvalueoffixed

ovideforall losses.

nservatismshouldgovernthe

ertainingtothedeterminationofprofits.


/ h t t p : / / w w w . h




FITS155

tsshallnotbe anticipatedmaybe

ditoperationswithanyunrealizedprofits..

sor exchangesinwhichthevalue

ecost(or bookvalue)ofthethingparted

attheprofitberealizedin cash;

izedif cashorpropertyisreceivedinthe

ctioncreatesavalidclaimagainst a

incomemaybeanticipatedinmany

entionedbelow:

xcessofcost.

signments,onshipmentsto

fmerchandisefromonedepart-

r investmentswithoffsettingcredits

ollectedinadvance.

eforalllosses"is tosomeextenta

ndneedssomeclarification.Itisnot

losses.Fori nstance,thereisno

easeinthe marketvalueoffixedassets.

edforsale; theyareintendedforuse,

uepresumablydonotaffecttheir use-

companyisa defendantinalawsuit;

ersedecisionmaybetooremoteto justify

nyloss.

redthatsomelosses shouldbe

againstcurrent operations;these

dhavebeenchargedtooperationsina

ooked,andextraneous(i.e.,non-operat-

sesmay,therefore,bemodifiedas

dbeprovidedforby chargestoopera-

beprovidedfor bychargestoSurplus;

becauseoftheremoteprobabilityof

d.

rvatism.

notjustifyan understatementof

vasionof incometaxes.Moreover,the

emaybeprejudicialtotheinterestsof

ersofother securitieswho,believing


/ h t t p : / / w w w . h




[Ch.p.17

osperousthan itreallyis,maysell their

are reallyworth.

cessecretreserves.Toillustrate,

pany'sinventoryisworth$100,000.00,

y$75,000.00.Theprofitsfortheyear

00,andtheassetsandnetworthare

ebalancesheet.Thisunderstatement

directorsorofficialswhoauthorizedthe

swouldbea fairestimateofthelife

A2J %depreciationratewould,there-

ompanyprovidesdepreciationat5%

understatedeachyear,andthe assets

derstated.Asecretreserveisthus

that thedepreciationreserveisshown

actthat thereserveisexcessivemaybe

matecontrolof thebusiness.

esare asourceofstrengthtoa com-

ntofunusualor excessivelosses,thesur-

tisto say,afterthelosshas been

emaderestoringan understatedasset

settingcredittoSurplus.Butit isa

hetherdirectorshaveanyrighttocreate

nderstatementofthecompany'sprofits

ninformedstockholderstodisposeof

erthan theywouldacceptiftheprofits

tlystated.

eprocedurestowhichaccounting

ssentiallyequal,sanction.

so-called"cash"and"accrual"

erthecashbasisallconsiderationof

enseandincomemaybeignored;under

entsaremadeforall suchmatters.

eptable,achangefromonebasisto

fectthestatementofoperationsofthe

eis made.

ationregardedasmost conservative

verislower."Butvaluationatcost

zedasacceptable.Iftheinventoryat

savalueof $100,000.00atcostand


/ h t t p : / / w w w . h




OFITS157

viousthat achangefromthecostor

sis ofinventoryvaluationforprofitand

willcauseanadditionof$10,000.00tothe

edbasistoanotheracceptedbasis

elyforthe purposeofaffectingtheprofit

eforsomelegitimatereason,the

dbedetermined,ifpossible,and stated

nthe profitandlossstatement.

madefromanacceptabletoanunac-

ebasis(orviceversa)for nootherreason

sethestatedprofits. Forinstance,

ratelyundervaluedorovervalued,

nandbaddebtsmaybeincreasedor

uresforadvertisingmaybeunjustifiably

dcharges.

nthe precedingparagraphs,itis

ecustomforaccountantstoincludeinthe

rauditreportswordssimilarto the

withacceptedprinciplesofaccount-

edduringthecurrentandtheprior

ywill.

tis, oneshouldnotbesurprisedto

mentofteninjectsanartificialcontrol

hownin theincomestatement.

isedwiththedeliberatepurposeof

hestatedprofit.Inventoryvaluations

ed netincomefigureinmind—not

nofquantitiesortheuseof obviously

viceswhichcanbemorereadilycon-

setheyaremattersofopinion,suchas the

tobeused,orthemarketprices toapply

ble,orquotationsapplicabletothe

notbeavailable),ortheamountof the

emadeforobsoletemerchandise.Or

perationsandcreditedtoreservesfor

s,andforotherlossesand contingencies

thaneyesingle tothereserverequire-

oughtto theeffectofthechargeson

tandlossstatement.Orthere maybe


/ h t t p : / / w w w . h




[Chap.17

cescarriedforwardasdeferredcharges

eremaybeitems ofincomeand

enoughto theborderlinebetweenoperat-

ionstoprovideanarguablechoiceof

operlychargeableagainstincomemay

providedfor suchlosses,ortoreserves

xercisedwithabelief inthedesira-

rtedperiodicalearningsand leveling,

e peaksandvalleysincidenttobusiness

sinesshasbeen low,reducethe

ddefendtheprocedureontheground

ativelyinactiveand,therefore,that

nhasbeensuffered.Oradoptastandard

dssoldandthe inventoryatthestandard

adeferredchargeanyexcessof actual

fthe capitalstockiscloselyheld,

stockholdingofficers;thedifferencecan

dividends.

frequentlyapplied,notwiththe

nginganunsatisfactoryshowing,but

ch proceduresareproperandincon-

tingprinciples.Forinstance,businesses

y,andotherinsurablehazards.If

emiumsareproperoperatingexpense

ssesbelievethat,becauseofgeographi-

sons,thelosses willbelessthan the

hereforeadoptaso-calledself-insurance

servesagainstwhichlossescanbe

ccur.Itcertainlycannotbe saidthat

ina companyassumingitsownrisks;

surance"norinsuranceofanykind;it

butexperiencehasconvincedmanycom-

ein then1favor.Thequestionofimpro-

periodicalchargeto operationsandthe

ossto thereserve.Theseproducea

chiscontrarytothefacts.Theperiodi-

ortheamountscreditedto thereserve)

hat therewouldbeasimilar chargeif

d,andthatthecompany's.accountsshould

withother companiesthatdocarry

mstobethat,sincethere isadifference


/ h t t p : / / w w w . h




OFITS159

eaccountsshouldbekeptinsuch away

einsteadofconcealingit,and thatno

justifiedunlessanduntila lossis

caloperatingchargeforatheoretical

rginganincurredloss toareserve,pro-

nceatvariancewiththefacts;some

entherearenolosses,and otherperiods

ossesthat dooccur.

profitandloss statement.

esheetwasregardedas thestate-

forpurposesofinvestigationofa com-

tand lossstatementwasgivenless

anceoftheprofitandlossstatement

ognized.Thisincreasingemphasison

ntimposeson accountantsafurther

properaccountingprinciplesandpro-

othetreatmentof somedebatable

ylittleeffectonthebalancesheetbut a

tontheprofitandloss statement.

balancesheetshowsaworkingcapital

hof$150,000.00,anddeferredchargesof

ofitandloss statementshowsanetprofit

of$5,000.00tothedeferredcharges

eworkingcapitaland wouldcauseonly

atementofnetworth,buttheincreasein

00.00to$9,000.00wouldbea major

creditanalysts,investors,andothers

atementincreasestheaccountant's

respecttomatterswhichcanbe

misrepresentationsbutalsowithrespect

oreor lessplausiblydefendedasques-

hrespectto stabilizingprocedureswhich

ctuationsinoperations.

lrulesforthe guidanceofaccountants

andlossstatements(andincidentallyof

s),perhapsoneruleshouldbe giventothe

Takethemwitha grainofsalt.


/ h t t p : / / w w w . h




[Gup.17

trememberthattheyare,toa

mattersofopinionbasedonestimates.

andbaddebtreserveprovisions,andthe

enseandincomeitems,areoftenmatters

mination.Twoequallyableandequally

differwidelywithrespecttothemand

s.


/ h t t p : / / w w w . h




CAPITAL

ation,asshownbyitsbalance

ollowingelements:

ofits.

nsidersomemattersrelativetothe

theproper methodsofaccountingforit.

stockofa corporationareevidenced

kstockcertificatesareboundinbooks

ks.Thestockcertificateshownonpage

to itsstub,hasbeenfilled outfor

asevidenceofhis investmentof$800.00

n.

gnedbythesecretaryand thepresi-

dis readytobedetached,stampedwith

giventoTuttle.The stub,whichwill

ook,showstheessentialfactsaboutthe

nbythecertificateandthestub are:

wnbyStub

.00

res50

0

orgeTuttle

MarquisCorporation

ateJuly1,1941 July1,1941


/ h t t p : / / w w w . h




/ h t t p : / / w w w . h




163

notalwayscontainthereceiptform

stubintheillustration.

esunderthewordsTransferredfrom

xtsection.

hecorporateformof businessorgani-

lderhasa righttotransferall orapor-

apitalstock.Suppose,forinstance,

wosharesofhisstockto HenryReid.

mentformwhichisprintedontheback

s:

ryReid

tionedandherebyauthorize

nsferonthebooksof

lthis 3rdday

ckofCertificate

eispresentedtothecorporationfor

ertificateiscanceledandattachedtothe

nallytaken.The openstubs(stubs

nceledcertificatesareattached)indicate

nding.


/ h t t p : / / w w w . h




msofTuttle'sendorsement,two

d:onecertificatetoHenryReidforthe two

him,and anothercertificatetoTuttle

retained.Thefollowingisthestubof

toReid;thestub ofthecertificateforsix

ldbe similarlyfilledin.

nsdiscussedhereafter,theowner-

nfersthefollowingrightsuponits owner:

toadditionalsharesofthesame

emanagementbyvotingat the

eprofits.


/ h t t p : / / w w w . h




K165

edistributionof theassetsofthe

ts dissolutionandliquidation.

e classofstock,thefourabove-

yedproportionately,shareandshare

However,thepre-emptiverightto

resmayberestrictedor entirelyelimi-

specttonon-votingstock.Different

dbydifferencesinthe rightstovote,to

hareinthe assetsinliquidation.

stodividendsgives itsholderscer-

pectto profits—usuallytherightto

ainrate(or ofastipulatedamount,in

eforeanydividendsare paidonthecom-

endsshouldnotbeunderstoodtobe

wever,becausethepaymentofdividends

s oncommonstockdepends,first,on

second,onthe declarationofdividends

rsofstockwhichis preferredasto

dividendsbecausethecorporationhasno

ctorshavewithheldthedividendson

areneededinthebusiness.

httoreceiveadividendbeforeone is

holdersmaybenon-cumulativeorcumu-

paiddividendsfor anyperiodbecome

surplus infutureperiods,andall pre-

mustbe paidbeforeanydividendscan

tock.

stoassets entitlesitsholderstopay-

anypaymentsaremadeto thecommon

enceextendsonlytotheparofthe

quidationvalueisspecified.Dividends

payableatliquidationunlessthestock

sexists sufficienttocoverthedividends

rs'righttovotehasfrequentlybeen

somestatesit cannotlegallybewithheld.

specialpreferencewithrespectto

htsdoesnot inferentiallygiveitany

otheotherfundamentalrights.Thus,


/ h t t p : / / w w w . h




RTH[Chap.18

todividendsis notalsopreferredasto

beenspecificallyconferreduponit.

hasbeen givenaspecialrightcon-

sicrightsunlesssomerightis removed.

ferenceofopinionasto whetherstock

videndswithoutbeingspecificallystated

nsthe righttoparticipatewiththe

sabovethepreferencerate.

conclusionthatpreferredstockis

nrights.Itmaybecommonstockplus

hers.It isnecessarytoreadthecharter

certificate,anditmay benecessaryto

examiningthecharterprovisionsto

stock,one shouldstartwiththeassump-

he holdertothefourbasic rightsmen-

sumptionbyaddingthespecialrights

ndbyeliminatingthosebasicrightswhich

n.

indicatedtobe6%cumulative

analysisofitsrightswill beasfollows:

ewstock:

anagement:

ofits:

cumulativedividendsbefore

he common.

ebasicrightto sharepropor-

dation:

ce,thecommonandpreferred

y.

s.

hanoneclassofstockfrequentlyuse

iousclasses—asClassA,ClassB, and

eclassesmustnecessarilybecommon

mespecialprivilege,oraresubjectto

specttooneormoreof thebasicrights:

ent,intheprofits,inadditionalstock

on ofassetsinliquidation.

gnificancewhatever.Thedesigna-


/ h t t p : / / w w w . h




K167

tternecessitatesthedeterminationof

hestockby referencetothestockcer-

arter.

esheet.

ndicatetheparvalueof thestock

parvalue)and shouldpresentinforma-

mountsofstockauthorized,unissued

Someillustrationsofadequatebalance

enbelow:

arvalue;Authorizedandout-

00,000.00

enotbeenissued,theconditionmay

arvalue:

$100,000.00

OOP.00

$75,000.00

nmethodofpresentingthesamefacts

arvalue;Authorized,1,000shares;

standing,750shares$75,000.00

assofstock,completedatashould

achclass.

arvalue:

,participating;authorized,1,000

hares$50,000

00shares;outstanding,1,250shares125,000

s.

gfactswithrespectto acorpora-

00.

ionshavebeenfullycollected,600-

s,$25,00pershareon 400shares.


/ h t t p : / / w w w . h




RTH[Chap.18

00 shareshavebeenissued,although

fthemhavenot beenfullypaidforby

cesheetmaybedrawnupas follows:

000

arvalue:

s.

00

0,000$100,000

ubscriptionsasanassetispermissible

aretobe collected.(Ofcoursethey

yfromordinaryaccountsreceivable.)

tobeno intentiontorequirethestock-

nceoftheirsubscriptions,theuncollected

tedontherightside ofthebalancesheet,

worth,thus:

arvalue:

s.

00

$40,000

ptions10,00030,000$90,000

unt.

ckofacompany,ofaparvalue of

0.Thefactscouldbe showninthe

H:

ar

ethatstockof aparvalueof

scountof $5,000.00.Onesometimes

chthe stockdiscountappearsonthe


/ h t t p : / / w w w . h




K169

onofDeferredCharges,as inthefollow-

ORTH:

k—$100.00par

d,500shares$50,000

ce;thestockdiscountshouldbe

fromthestockin determiningthenet

eetshouldappearasfollows:

arvalue:

0shares$50,000

0

alaterchapteraboutincludingstock

eductingstockdiscountfromSurplus.

iredtopointoutthat astockpremium

orth,thata stockdiscountisadeduction,

eatedassuchinthe balancesheet.

ion,suchasincorporationfeesand

p inanOrganizationExpenseaccount.

ninthe balancesheetasadeferred

theNetWorthsection.Itshould be

ossiblebychargestoSurplus.Not

esarechargedtoaGoodwillaccount,

nentlycapitalized;thisisimproper.

opertyother thancash,thequestion

yisreallyworth theparvalueofthe

rththeparof thestock,aDiscount

ppearonthebooks.Suchanaccount

wever,becausedirectorsaredisposedto

ar ofthestock.Andinso doingthey

rights, forthelawallowsdirectors


/ h t t p : / / w w w . h




RTH[Chap.18

dwhenthecompany'sassetsare

henetassetsare, inreality,notworthas

inthe NetWorthsectionofthebalance

eductions,suchasStockDiscount,that

t sideofthebalancesheet.Wateris

sissued inexcessofthevalueof the

seassetsareoverstatedin theaccounts.

ccountsmaybegrosslyoverstatedor

totheaccountsata figurethatisnot

Waterisalso injectedintothestock

dastockdividendis declaredagainst

edbya scalingdownoftheoutstand-

dbyreductionofeitherthe numberof

eachshare.Ifeachstockholdersuffers

oportionateinterestinthe corporationis

ybedonatedandresold,thusincreasing

ngthestockoutstanding;thecreditfor

sedto theovervaluedassetaccountsand

maybewrittendownbychargestosur-

esmaybechargedoffas expenses.The

ble,however,asit correctsoneerrorby

ely,themisstatementofoperatingprofits.

signored.

s,particularlyinsmallcompanies,

anythingswhichcanbedonein apart-

oneina corporation,andthatmany

orationswhicharenot requiredof

iallytruewhenabusiness thathas

ershipischangedtoa corporation.

cesofthepartnersmustin many

byformaldirectors'meetings,andminutes

kept.Profitscan nolongerbedistrib-

butmustbedividedin accordancewith

ver,theycanbedistributedonlyafter

dends,andnotin thefreeandeasy

butionsofdividendsmustnotimpair

cersmustbeauthorizedby theboard

ockmustnotbe increasedordecreased


/ h t t p : / / w w w . h




Continued

PARVALUE

mittingtheissuanceofstockwithout

912in NewYork,uponrecommendation

ation,whichbelievedthattheissuance

wouldeliminatesomeofthe evils

ceofparvaluestock.

dtheexampleofNewYork;unfor-

riousstates differinmanyparticulars.

mmonstockwithoutparvalue,and

nceofpreferredstockwithoutpar value.

ementastoa minimumissuingprice;

mprice.Someprovidethatthe issuing

e directorsintotwoelements:stated

allyafixedminimumamountper share)

apitalStock,andthe remainder,which

.

wshavecreatedsomeconfusion

tingproceduresapplicabletono-par

sionhasbeenconsiderablyaugmented

wsapplicabletothepaymentofdivi-

k.

ctionstopar valuestockandtheo-

arstockarementionedbelow:

onashareof stockisnotatrue indi-

ni fthesharesareissued for

ediatelyhaveamarketvalue


G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



RTH[Chap.19

oftheprospectsof largeprofits.

ckdependsuponthevalueof

tsandtheamountof itsearn-

printedonthe certificate.

acertificatehasnotinfrequently

or promoterstoextractmoney

heunsuspecting.Thereisan

tahundred-dollarshareof

rswhichmanypeoplefind

heearlyadvocatesofno-par

that,ifa stockcertificate

showedonlythe totalnumber

enumberof sharesrepre-

purchaserwouldbemore

o thematterswhichaffect

ely,thenet assetsandthe

n.Experiencedoesnotseem

necessarilytrue.

krelievesthestockholdersof

Theliabilityfordiscount

ofstockat lessthanpar.If

ofcoursebeno discount.

kreducestheincentivefortheover-

to balancethebooksatthe

ertiescanbeputon thebooks

stockcanbecreditedatthe

parstockpermitsthe issuance

hises,goodwill,andother

einsteadof atanarbitrary

osslyexcessive.Assumethat

oninwhichAistoi nvest

$100,000.00incash.Itis

eequali nterestsinthecapital

alue stocksystem,Amight

eof $100,000.00toequalthe

cash.Thiswouldencumber

excessiveproportionof

oselargepatentamortization

Undertheno-parvaluesystem,

edto Bforhiscashand

0,000.00,whileanother1,000


/ h t t p : / / w w w . h




KWITHOUTPARVALUE175

Aforhispatentsand recorded

00.00.

lysuitedfor useinreorganizations

aretobecombinedandstock

.Ifparvaluestockis issued

donthefutureearnings,

eexcessearnings,tobe set

veryconsiderableamount

atetotheotherassets.If

anydesirednumberof shares

odwillmaystill beplacedon

gure.

dvantageswhennewcapitalis

nciallyembarrassedcompany

orthe sakeofillustration,

sufferedlossesuntilits stock

obtainadditionalcapitalby

ow.Parvaluestockprobably

causethepurchaserswould

ithno-parstock,sales

e whichwouldbeequitable

posingonthepurchasersthe

tock.

nfees,stocktaxes,feesforthe

eignstates,andother taxesmaybe

every muchinexcessofthefan* value

ovidethatno-parsharesshallbe

$100.00fortaxpurposes,whichwould

eexpenseiftheshares weresoldat,say,

hatthetotalamountreceivedby a

eofitsno-parstockshould becreditedto

reamountshouldberegardedas

atnoportionofit shouldbecreditedto

ablefordividends.Unfortunately,the

makeanysuchrequirement,andthe

hereforehaveassumedthattheywere


/ h t t p : / / w w w . h




RTH[Chap.19

ingprice intotwoportionsforpurposes

onbeingcreditedtoCapitalStockand

ditedto Surplus.

ypermitthedirectorstodivide the

ockandsurplus elements.Otherstate

stated valuebutprescribeaminimum

elowwhichstockof no-parvaluemay

rationssubjecttothis requirementhave

herequiredminimumpershareand have

theissuingpriceas Surplus;others

suingpriceto CapitalStock.

lawsandthe diversityofpractice,

ncesheetas thevalueassignedtono-par

ing.Itmayrepresentthe entireamount

ayrepresenta statedvaluepermitted

mumrequiredbythelaw;or itmay

untarbitrarilyarrivedatbythe directors.

nnectionwithparvaluecapitalstock

ckandacredittoCapitalStockAuthor-

is impossibleinconnectionwith

eisno valuetoassigntoit. Thenumber

beindicatedbya memoranduminthe

follows:

yment,withoutthenecessityof

criptions,theentriesare:

hfullamountre-

000shares.

ceedsofthestockis toberegarded

ingentrymaybemodifiedas follows:

)25,000.00

,000shares,and the

naccordancewiththe


G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



KWITHOUTPARVALUE177

ycollectedwhenreceived,entries

ock100,000.00

100,000.00

1,000sharesofstock.

ock40,000.00

ofsubscriptionsto

40,000.00

ullypaid shares.

ock30,000.00

onremainingsub-

no-parbasis.

onsorganizedonapar basisto

arbasis.This maybedonewithoutin

ountspreviouslyshownascapitalstock

angingfromaparbasisto ano-par

eamostconvenientmethodofeliminating

etusassumethata company'sbalance

ngNetWorthsection:

$100.00pershare;authorizedand

s$100,000

endmentauthorizingachangefrom

uebasis,theold sharescanbecalled

par sharescanbeissuedintheir place,

hpicturecanbe presented:

ue;authorizedandoutstanding,

eof thenewno-parstockintotwo

ngnet worthpicturemaybepainted,

ue;authorizedandout-

0,000

)15,000$65,000


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alue.

uedwithoutparvalue,a fixedprice

e preferredstockmayberedeemedby

presentsitsliquidatingvaluein theevent

ompany.Thisredemptionorliquidation

differentfrom thepriceatwhichthe

amount,then,shouldsuchpreferred

ncesheet?

,000sharesofpreferredstockwere

and thatitsliquidatingorredemption

pershare. Atthesametime,1,000

ereissuedat$40.00pershare.

areshowninthebalancesheetat

Worth sectionwillappearasfollows:

ue:

doutstanding,1,000shares$40,000

outstanding,1,000shares40,000

entationdoesnotindicatetheliquidat-

tock.Butif thepreferredstockwere

ueof $50.00pershare,thestatedvalue

dhavetobecorrespondinglyreduced,

ue:

doutstanding,1,000sharesatliquidat-

re $50,000


tiondestroystherecordof the

classofstock.Itis desirabletoretain

ncesheet,andto showtheliquidating

s:

ue;Statedatissuingprice:

outstanding,1,000shares(Liquidat-

e)$40,000


mon.

fpreferredandcommonshares

n units,withnoseparationofthe price

orifpreferredand commonsharesare

onofa business.Insuchcasesthe

tdifficultyinshowingseparatevaluations

rredstockinthe balancesheetunlessa


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KWITHOUTPARVALUE179

savalueforeachof thetwoclassesof

,000sharesofpreferredstockand

tock,bothwithoutparvalue,areissued

.The charterprovidesaliquidating

or thepreferred.Thebusinessacquired

e directorsestablishastatedvalue

,anda statedvalueof$40.00forthe

anthenshowthe factsinthebalance

ue:

standing,1,000sharesatstatedand

0pershare$50,000

standing,1,000sharesatstatedvalue

0

edbythedirectors,themerefactthat

quidatingvalueof $50.00pershareis

accountantinpreparinga balancesheet

dividedbetweenthetwoclassesof

nabove.Theliquidatingvaluewill

ate asmaybedetermineduponfor

rredstockor theliquidationofthecom-

otnecessarilyrepresentapresent

anthastherightto insistuponshowing.

sentto someapportionment,the

dtoprepareabalancesheetin which

thefollowingmanner:

ue$90,000

resofpreferredstockwithaliquidating

and1,000 sharesofcommonstock.


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Continued

tion'sownstock,onceissuedand

ired.Itwill benotedthatthereare

nthisdefinition:

thecompany'sownstock;holdings

aniesshouldnot becalled

enissued;unissued stockshould

k.

thestockmusthave beenpaid

portantelementof the

ountcarrieswith itapersonal

corporatedebts;if such

orporationandreissued,

it,ifpurchasedwitha

ssuanceatadiscount.

ed,thestockwaspaid forin

s treasurystockandreissued

abilitybeing imposed

cquiredbydonation,bypurchase,

ount.Donationsmaybemadetoprovide

furnishworkingcapital,ortoeliminate

rto wipeoutadeficit,orto provide

asa bonustothepurchasersofa new


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RTH[Chap.20

forother reasons.Itmaybepur-

holder,ortocreateamarketdemand

ardadownwardtendencyinthemarket

cesheet.

set;the acquisitionoftreasurystock

ntofstockoutstanding.Therefore,

shouldbeshownin thebalancesheet

orth section.Twomethodsareillus-

ar-value:

000shares$100,000

ares5,000

arvalue;authorizedandissued,1,000

res;outstanding,950shares$95,000

set.

metimesrequestedtoshowtreasury

thebalancesheet.Althoughthestock

ability,thepurchaseoftreasurystock

uisitionofanassetbut causesareduction

rth.Itis truethatthetreasurystock

,butsomayunissuedstockbe sold;it

rystock,likeunissuedstock,isnotan

ceofpossibleadditionalcapital.

parvaluestock.

ertheheading"Treasurystockin

rvalueofthe treasurystockisdeducted

ssuedstocktoshowthepar valueofthe

itatesuchadeduction,treasury

he accountsatitsparvalue,regardless

sacquired.Thepremiumanddiscount

esandsalesshouldberecordedin some

ryStock.Accountantsholdvarious


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CK183

accounttouseforthatpurpose.It was

omtorecordsuchpremiumsanddis-

agrowingpreferencefortheuseof a

nsomestatesitis illegaltopay

ntreasurystockpurchasesuntilthe

bysubsequentresaleofthe stock;in

tousesomespecialaccountsuchas

onTreasuryStock.Tomakethepresent

kentriesassimpleas possible,discounts

rdedinCapitalSurplus. Entriesare

strativetransactions;thestockhasa

are.

purchasedat90:

edat 101:

dto thecompany:

92:

3:

none classofstock,thetreasury

catetheclasses,thus:TreasuryStock—

ck—Preferred.

no-parvaluestock.

riginallyissueditsno-parstockfor

afterthe passageofsometime,the

asfollows:


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OCK185

ownin thebalancesheetasfollows:

ue:Authorizedandissued,

100shares,atcost3,500

nds.

that thefirstcorporationinEngland

eeuponapplicationbyanumberof noble

metanddecidedhowmuchof their

ay.The righttoincorporateisno

rivilegeavailableonlyto theinfluential;

tyis nowopentoall.

wsindicatesthattherehas been

ockholderstheadvantageoflimited

mesafeguardingthecreditors.Corpo-

ttemptedtodoso byprovisionsintended

dividendsexceptoutof profits.Thus,

onhadcapitalstockof$100,000.00par

,000.00,dividendscouldbepaidtostock-

f the$25,000.00surplus.

dividendsdid notactasa restriction

urystock;consequently,ifthestock-

mentionedintheprecedingparagraph

0outofthecorporatetreasury,theycould

0.00dividendoutofsurplusandalso

urystockfor$25,000.00.Andthepoor

houghtthattheirdebtor'snet worth

w$100,000.00,wouldfindthatit had

00.

tlawsrestrictingdividendsare not

creditors.Recently,therefore,corpora-

avesetupaconceptoffixed orstated

thatthecombineddividendsand

shallnotimpairthisstatedcapital.In

theintentofsuchlegislation,however

mbineddividendsandcostoftreasury

ountofthesurplus.

o suchalaw,itmayhavea surplus

payadividendbecausethesurplus is


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RTH[Chap.80

easurystockpurchase.Sucha condi-

eflectedbythe balancesheet.Several

oindicatetherestriction.Aclear

$100.00:

000shares;intreasury,250shares;

75,000

videndstothe extentof$25,000.00

of treasurystock)40,000

isindicatedbydeductionofthe

rplus,thus:

$100.00:Authorizedand

,000

aresoftreasurystock...25,000

000

tionisindicatedmerelybydeduction

hetotal issuedstockandsurplus,

$100.00:Authorizedandissued,1,000

ock—250shares25,000

115,000

eemto beasufficientlyclearpre-

enoticeofthedividendrestrictionto a

twhois notthoroughlyfamiliarwith

ngfromthepurchaseof treasury


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-Continued

gfacts relativetothegrowthof

nyduringthefirstyearofits existence:

ofa parvalueof$1,000,000.00

premiumof25,000.00

ywaslocatedmadea dona-

theland wasworth20,000.00

surystockresultedin a

quipmentpurchasedby the

undnotto berequiredand

00.00

sedattheend oftheyearand

inexcessofcost;this

edto50,000.00

the yearwas_ 100,000.00

therrecently,thenetworthofthis

vebeenshowninitsbalance sheetas

ver,therehasbeenagrowingbelief

crementsinnetworthof sodiverse

inthestatedsurplusof $220,000.00

alancesheetinone amount.


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RTH[Ch.p.21

tsinnetworth.

rementsinnet worthbelongtoseveral

ennedbelow:

eproducedbythe

usiness,suchas

services.

seproducedbyunusual

nswhicharenota

suchasdisposals

treasurystock.

ethatentriesin

yin connection

majorportionsof

tsor lossesonnormal

edasoperating

s:

include,amongothers:

stock.

ntreceivedfor

eamount

ck

setsat dates

n,usually

plantsite to

einthedonor

:

edtransactionsin

sgreaterthan

ts disposedofwere

realizedprofits,

easesinthe value

eendisposedof.


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dprofit"isreally

nincreaseinthe

t becalleda

ized.

hmentionedinthe foregoing

veclassificationasfollows:

0,000.00

etsS20,000.00

tock5,000.0025,000.00

ock$25,000.00

00.0045,000.00

000.00

cesheet.

,thereisa growingbeliefamong

ousclassesofsurplusshouldbeseparated

unfortunatelyseemstobe nounanimity

houldbedone.Threevaryingopinions

edextraneousprofits,andcon-

eshownas Surplus.

praisalsshouldbeshownas

withoperatingprofitsonly.

reditedwithextraneousprofits,

zedprofitsfromappraisals.

eratingprofitsonly.

mpriserealizedextraneousprofits

rofitonAppraisalshouldshow

zedprofits.

cesinthebalancesheetswhichwould

tsholdingthethreeabove-described

sentedonthe followingpage.


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RTH[Chap.21

ndUnrealizedProfitReserves

nIII

ized

rplusSurplusSurplus Profit

~~$100,000~~ $100,000

,000$20,000

05,000

00

020,000

__ $50,000

100,000$120,000$100,000$70^000$50^000

rthmightbeshowninthe balance

ys,asfollows:

00

00

0

00

sal....50,000.00

opinionand treatmentillustrated

alanceina balancesheethasnouniver-

e.Untilaccountantsthemselvesagree

ecalledSurplus(sometimesreferredtoas

shouldbeclassified asCapitalSurplus,

eexpectedtohavea verydefiniteideaof

anygiven balancesheet.

et inwhichaCapitalSurplus

dthattheaccountantwhopreparedit is


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sa significantclassification.Beyond

ancesheetcanusuallyonlyguess.He

nationofthebalancesheetalone,

sincludespaid-insurplus,extraneous

romassetwrite-ups,oramiscellanyof

uldunanimouslyagreeuponrules

eratingprofits,extraneousprofits,and

rth,thelaymanshouldrememberthat

ymentofdividendsmayallowthe

yanyattemptbythe accountantto

ninthebalancesheet,thesourcesof the

paydividendsfrom extraneous

as wellasfromoperatingprofits,andin

bletopaydividendsfromunrealized

sals.Thereforesomemayfeelthatit is

ssifymeticulouslythevariousincre-

tingupSurplus,CapitalSurplus,and

fthedirectorscanorder thatdividends

eseamountsaccordingtotheir pleasure.

25,000.00ofoperatingprofitsandmakes

extraneoustransactionsuchasthe sale

ountantclassifiestheseearningsas

rivedifthe directorsauthorizethe

ividendagainstcapitalsurplus?The

lytheearnedsurplus of$25,000.00.

outaswellhavethrowntheoperating

profittogetherin thefirstplaceand

mthetotal.

vantageisobtainedfromasurplusand

on:thesurplusstatementforeachyear

rmillustratedbelow)will moreclearly

ntsofnetworthduringthe year,andwill

uswerechargedwithdividendsduring

accesstoacompany'sstatements

usbeable toobtainanideaof thesources

any date.


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nthe balancesheet.

ustomarilydividedin thebalance

dsurpluselements(witha possiblesub-

gthe linesalreadydiscussedinthis

ossibleto tellexactlywhatthestock

n.

eamountshownascapitalstock

ers'originalinvestmentinthecompany.

rong,forthefollowingreasons:

beensoldat apremium;theamount

tascapitalstockwill thenbeless

nt.

beenissuedat adiscount;thepar

esheetwill thenbemorethanthe

ue,aportionof theproceedsofits

edtoCapitalStockandthe

creditedtoSurplus.

ebeenissuedin thepastandrecorded

creditto CapitalStock;thusa

onvertedintocapitalstock.

curredadeficitandobtaineddona-

he deficit.Forinstance,assume

ows:

g$100,000.00

5,000.00

halfofthen-stockto thecompany,

ybechangedto thefollowing:

g$50,000.00

0.00

hatthe amountshownascapital

anentcapitalnotdistributabletothe

ontinuanceandliquidationofthecom-

case;thecompanymayhavetheright,

n,to retirepreferredstock.And,sub-

itations,itmayreduceits capitalby

stock.


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RTH[Chap.21

atthe amountshowninthebalance

saccumulatedearnings.Thisalsomay

outabove,partofthesurplus may

sonparvaluestock,or fromdonations,

ssets,orfromanarbitrary treatmentof

oftheissuanceofno-parstockassurplus.

assumedthattheamountshownas

ountavailablefordividends.Thisvery

Thelaws relativetodividends-areso

ccountantsshouldnotpresumetoindi-

elsewhere,theamountwhichthecom-

dends;andthe readerofabalancesheet

eamountshownas surplusrepresentsthe

tantbelievescanbesodistributed.

sionitshouldbeapparentthat the

ncesheetascapitalstockand surplus

ydefinitesignificance.Thecombined

tthenetworth,butthe meaningofthe

tbeknownunlessoneknowsthehistory

rplusaccountsfromthe beginning

,andagoodbitof corporationlaw.

showthe networth?

oknowwithcertaintywhatis

stockandsurpluselementsshownin

alsounwisetoassumeunquestioningly

he balancesheetasnetworthreally

Someofthe reasonsarestatedbelow.

misstatedbyadeliberateorignorant

nciples,theresultbeing

eamountsofassetsand

arriedon theassetsideofthe

dbetreatedasnet worth

are:

countonstockis

der theDeferred

edeductedfrom

terminethetrue


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ons.

stocapitalstockare

ssetsideof thebalance

e currentlycollected,

heetshould regard

nfromthe statednet

beclassifiedasan

as adeductionin

ortunately,when

amongtheassetsin

emergedwith stock

mountcannotbe

assetssuchasgoodwill.

ses,copyrights,and

sometimesextremely

areworthevenmore

theyappearin the

eyaresometimes

eralsuchintangibles

valueunlessthe com-

s.Therefore,if

lancesheet,the

derwhetherthey

hestatednet worth.

smayhavebeentransferredtoan

rve.(Suchreservesarefurther

ter.)Appropriatedsurplus

plus,butsurpluswhich

to beusedfordividends.

plusshouldbeincludedin

e balancesheet;however,

sasliabilitiesandsometimes

ption,eitherwiththe intent

hor fromafailuretounder-


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Continued

DIVIDENDS

s.

orporationstotheirstockholders

s:

s.

ypaidin cash;other

orscripor other

smaybegiventothe

.

gstockdividends,which

fthe networthfrom

tockdividenddoes

f theissuingcorpora-

portionof thenetworth

dequallyincreasesthe

entedbycapitalstock.

ividualstockholder's

tmerelyincreases

hichhis interestis

.Thesearealso calledliquidating

estockholdersallor apor-

.

ollows:

eturnthe capitaltothe

corporationisdis-

dividendsintendedto

pitaltothestockholders


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usinessis beingreduced

ongerrequired.

tingfromthe paymentof

ntendedtobedividends

surpluslegallyavailable

ealswiththesubjectofdividendsout

itiesapartfromtheirstockholders,

sare,generally,notliableforthe debts

utesplacelimitationsuponthepayment

helimitationsbeing topreserveacapital

editors.Ingeneralitmaybe saidthatthe

pairmentof capitalbythepayment

tyofa dividendpaymentdependsupon

surplus,andnotupon itscashbalance;

mextraneousaswell asfromoperating

fordividends.Asidefromthese,

bletothecountryasa whole,canbe

ofthe manyvariationsinthecorpora-

ates,the followingmattersmaybe

scan bepaidfrompaid-insurplus

onparvaluestock,orthe

ofno-parstockover the

otherstates,suchdividends

tate,dividendsfrompaid-in

ferredstockholdersbutnotto

smay bepaidfromprofitsbefore

ceofstockis writtenoff;

annotbepaid untilthecom-

ckdiscountand hasaccumu-

he capital,moststatesprohibit

untilthecapitalis restoredand

afewstatespermit thepay-

rrentprofitsregardlessofthe

teddeficit.


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LABLEFORDIVIDENDS199

epaymentof anydividendsfrom

fassets;otherspermitthe

ndsfromasurplusthus

atepermits thedistribution

endsfromsuch asource.

easurystockis purchasedatless

gardedas aprofitwhichis

dividends;inotherstates

ucesurplusavailablefor

hestockis resoldatpar.

rchaseoftreasurystocknever

blefordividends,regardless

makessurpluspreviously

availabletotheextentofthe

k.

videndsonpreferredstockcanbe

source,whiledividendson

dfromearnedsurplusonly.

tionofcapitalstockwillnotbe

plusavailablefordividends;

aybe paidfromsurplusthus

ne stateascalingdownofthe

easurplusavailablefordividend

dstock.

lusavailablefordividendsmaybe

ctionfordepletion;insome

scannotbepaidfromsurplus

ts ofcreditorsarejeopardized;

htsofpreferredstockholders

.

requirementthatdividendsshall

estatutesincludespecific

amountofliabilities.For

statesprovidethatno divi-

abilitiesexceedtheassets;

maybepaidifthe liabilities

ssets;andincertainstates no

esstheassets exceedthe

stock.

rdiversitiesinthe corporation

nnotbeexpectedtoassumetheresponsi-

mountofsurplus whichislegallyavail-


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uently,thereaderofabalancesheet

eamountshownthereinas surplusis

ouldbeavailablefordividends

orpermanentlynotsoavailable.Such

maybeimposedbylaw ormayresult

somestatesfromthepurchaseof

seandnatureofthis restrictionwere

ailablefordividendsmaybecome

ebyreasonofcontractswithcreditors.

scussedinChapter37 isanillustration

equiredbya contract.

onmayconsideritinexpedientto

mountoftheaccumulatedsurplus

byprofitshavebeen,orareto be,used

splantadditions;they maytherefore

sbalanceso astoindicatethatlarge

cted.Tothisendtheymaydirectthat

transferredtoareserve bydebiting

countwithsometitlesuch asReserve

rvedoes notreflectalegalrestriction

ends;itis merelyanaccountingdevice

thesurplus,althoughlegallyavailable

ed forthatpurposebecauseitwould

todoso.Thedirectorscanat any

alancebacktosurplus.Meanwhile

nelementofthenet worthandshould

sectionofthebalancesheet.

ty.

een declaredandnoticeofthe

ntothestockholders,theunpaiddividend

and shouldbeshownassuchin the

rationbecomesinsolventbeforethe

holderswillbe entitledtosharepro


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LABLEFORDIVIDENDS201

nthe paymentofdeclareddividends

hereare liabilitiesof$45,000.00,

0.00,andassetsof$40,000.00,distribu-

lows:

.00$36,000.00

0.004,000.00

,ifa corporationwhilesolventsets

entofthedividendandbecomesinsolvent

rthedesignatedpurpose,thefundwill

or thestockholders,andwillnotbe

ofcreditors.

the corporationwasinsolventwhen

,orifthe dividendwasillegal,orif

asnotgivento thestockholdersbefore

olvent.

ars.

ars,eventhoughcumulative,do

tilthey havebeendeclared.Thisis

ybesufficientsurplus toprovidefor

etshouldindicatetheamountofthe

dendsinarrearsbecausetheyconstitute

earningshavingprecedenceoverthe

ts.Thefactsare usuallystatedina

ordedsomewhatasfollows:"Dividends

n arrearssince... ,"or"Nodivi-

e preferredstocksince...," or

eamountof$ ...wereinarrearson


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er,checks,bankdrafts,money

sitsinbanks.Depositsin savings

ifiedinthebalancesheetascash,not-

tofthe banktodemandacertain

Demandcertificatesofdepositmay

mecertificatesshouldnot besoclassified.

ebillsin thecashinplaceofmoney

ouldbediscouraged;ifsuchduebills

shouldbeshowninthe balancesheet

mofficers,employees,andsoforth,and

carriedintheoffice,itis customary

endituresuntilthefundis nearly

ordallof theexpendituresatonetime.

repared,allof thedisbursementsshould

shwill notbeoverstatedinthebalance

nvestmentsshouldnotbeshownas

eventhoughtheymayhave been

nvestmentsofexcessfundsandmaybe

shwithoutloss.

dein thebalancesheetbetweencash

atingpurposesandcashtiedup inspecial-

tobeusedforthe paymentofacurrent

hmoneydepositedwithatrusteefor

nterestandtaxesonmortgagedproperty,

arateitem,undertheCurrentAssets

availableforcurrentneedsshouldbe

notherthancurrentassets.


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ank forcollectionshouldbeshown

h orasareceivabledependsonwhether

adepositormerelyfor collection.

positor'saccountwiththe paper,the

dedinthe cash;otherwisenot.

ernalchecktosafeguardthecash

hreceiptsand disbursements.The

ontrolvarygreatlyindifferentorganiza-

ribedbelowshouldbeunderstoodto be

beattained,rather thanaprocedure

ationofcashisreducedif collusion

ealanabstractionofcashreceipts;there-

etheworkofhandling cashreceipts

oserecordsmustagree,asindicated

etotalsofcashregisterreceipts

dby atrustedemployee;

themailreceiptsshouldbe

withtheamountofthe remit-

dturnedoverto thebook-

eturnedin tothecashier.

ngupthe deposit,shouldsubmit

ployeementionedin(1),who

ntofthedepositwiththe

sshownbyhis ownlist.All

epositeddaily.Whenthe

edattheendof themonth,

e cashier,andthedeposits

mparedbytheemployeemen-

listspreparedbyhim.

akesupthecashbookshould

shier.

nal check,fraudwithrespectto

annotbepracticedandconcealedeven

sionof threepersons.Thefirst

othebooksandcannotfalsifythe records

tion;hecannotexpecttowithhold

orswithoutdetection,becausethedebtors


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ettersfromthecredit departmentand

es.Ifthecashierwithholdsany cash,

greewiththefirstemployee'slist orwith

eiptsrecordmadefromtheremittance

finformation.Thebookkeeper,having

no opportunitytomisappropriateanyof

centivetofalsifyhisrecordsunlessheis

rtycollusion.

siteddailyin thebank,alldisburse-

eck.Thepersonauthorizedto sign

horitytomakeentriesin thecashbook;

mentbycheckcouldnotbeconcealed

opersons.Thecollusionofa third

ssary:

allchecksshallbesignedby one

byanother.

uchersystem,allowingthechecks

n,butonlyuponauthorization

gnedbysomeotherperson.

mbered.Allspoiled,mutilated,

epreserved.Somecompaniesevengo

chchecksberecordedintheir proper

rsementsrecord,withoutentryinthe

notationtothe effectthatthecheck

esafeguardedbya propersystemof

rmayeasilyconcealashortageby

rlytrueifthe functionsofbookkeeper

byoneperson.Lappingconsistsofa

fentriesdebitingCashandcrediting

meotheraccount.

$100.00incurrencyis received

shierpocketsthemoneyandmakes

oustoleaveA'saccountuncredited

e Amayreceiveastatementandmake

he factstolight.Therefore,within

0is collectedfromB,thecashierturns

its CashandcreditsAwith$100.00,

00.Thisprocessmaybecarriedon


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eingshortallthe time,butthecreditto

beingdelayedonlyafewdays.

mers.

ngashortageconsistsoftakingmoney

andpassinganon-cashcreditthrough

eitemsuchas returnsandallowances.

greceiptsalreadydiscussedwillmake

naddition,itis desirabletohave

rtedbyduplicatecreditmemorandums,

ysomeoneinauthorityother than

stemofinternalcheck,itwasstated

uldbemadeby check.Howisthis

ursementsoftriflingamounts,for

nstance,mustbemadeincash?While

maynotactuallybemadebycheck,

tedby checksifapetty,sometimes

soperated.

mountwhichwillprovideforpetty

nabletime,andcashed;thecashis held

fthe checkisrecordedbyadebitto

thegeneralCashaccount.Asdisburse-

ettycashfund, receiptsandother

asevidenceoftheirpropriety.When

ed,anothercheckiscashedfor the

es;thischeckisrecordedbya creditto

andadebitto variousexpense(orother)

receiptsandothermemoranda.

count.

bank'sstatementatthe endofthe

hebalanceshownbythe depositor's

hecksareoutstanding;depositsmailed

yoftheperiod maynothavebeen

hebank;andthe proceedsofnotesand

collectionmayhavebeencreditedby

onthedepositor'sbooks.•

sprepared,therefore,thebank

led.Ifthedifferencesconsistentirely


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booksbut notonthebank'sbooks,the

aredasfollows:

cember31,1941

nt$862.57

,notrecordedbybank untilJanuary216.31

g:

.04

ron thebankstatementwhichhave

company'sbooks,thetruebalanceis

nk statementorthebooks,andboth

edtothe correctbalance;forexample:

cember31,1941

nt$2,500.00

sbooks,butnotyettakenup bythe

mber311,000.00

g:

0

.85

ment,butnotyet recordedoncom-

ectedby bank:

500.00

ent300.00

85

0

sbeencompleted,entriesshouldbe

itemsshownbythebankstatement

ecompany,sothatthecash balancewill

ooksand inthebalancesheet.

n itsbalancesheet,acompanymay

oldingitscashbookopen"for afew

period.Thismeansthatremittances

rthecloseof theyeararerecordedas

ctionsfromaccounts receivableasof


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hishastheeffectof overstatingthe

andunderstatingthelesscurrentasset

oastep furtherbydrawingchecks

odforthepaymentofcurrentliabilities,

entsasofthelast dayoftheperiod.

misstatesthecurrentposition,let

ngtransactionsactuallyoccurredin

cordedashavingtakenplaceonDecem-

ntsreceivable$25,000.00

ntspayable20,000.00

onditiononDecember31,1941is

olumn;themisstatedconditionisshown

00

00.0025,000.00

000.00

00.00$65,000.00

.0030,000.00

0.00$35,000.00

ollarsofcurrentassets

es 1.702.17

ofcurrentliabilities....10.33

mpanyshowsaworkingcapital

f1.70to1, andconsiderablyoverstates

tio ofcashtocurrentliabilities.


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be keptonledgersheetsruledin

lustrations.Suchanaccountisshown

disadvantage:thereisnocolumnin

of theaccount.Suchacolumnis

ling:

heamountshownin theBalance

adebitbalance;if,forany reason,the

balance,thisfact maybeindicatedby

nkorbyfollowingthe balancewith

gers.

maybesomanycustomers'accounts

annotbe keptbyonebookkeeper.In

edgermaybe dividedintosections,as:

oH.

P.

oZ.


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ithAccountsReceivablemaycontrol

s,but itismuchbetterto haveaseparate

chledger,sothateachsubsidiarybook-

edindependently.Itthenbecomes

tecontrollingaccountcolumnforeach

iousbooksof originalentry,asillus-

sheetsor cardsusedforaccounts

videdwithspacesinwhichtoenter

onrelatingtothedebtorwhichmaybe

urposes.Thedatavariesindifferent

usuallyismadetoshow theinforma-

ingillustrationrepresentingthehead-

t.

sneededonactiveaccountsextend-

tin aloose-leafbinder;ifthecurrent

ownthatsixothersheets mustbefound,

orinthetransfer binder,toinclude

showthecreditratinggiven

encies,suchasDun& Bradstreet.

wsthemaximumfixedbythe

ybedesiredonthe accountsothat

whetherthesalesmanappearsto be

tunitywiththecustomer,andsothat

epartmentcanseewhichsalesmenare

thatbecomedelinquent.


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oneimpression.

keapracticeofsendingmonthly

mersusebookkeepingmachinestokeep

.Themachinestypetheentriesand

anceaftereachentry.Suchconcerns

lumnledgerrulingwithdebit,credit,

erightside.

onth,astatementformisinserted

stomer'sledgersheet,andacarbon

ccountandthestatementareduplicates.

estatementisremovedfromthebinder

r.

tries.

howshowentriesinaccountswith

checkedandletteredtoindicateoffsetting


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LE[Chap.24

ccountsreceivable.

esarenotlikelyto becollectedinthe

nthe regularorderofbusiness;such

showninthe balancesheetunderthe

omereceivablesofthisnaturearemen-

officers,directors,andstockholders

efromsaleswhicharecollectibleinaccord-

tterms)are notlikelytobecollected

shouldnotbeclassifiedas currentassets.

affiliatedcompanies,ifofamoreor

ouldnotbeincludedwithcustomers'

eet.However,ifacorporationsells

ompanyandreceivescollectionsas

romothercustomers,suchreceivables

manentadvances)mayproperlybe

untsreceivableundertheCurrentAssets

msof salerequirepaymentwithin

ore,thereaderofabalancesheethas the

ccountsreceivablearerelativelyquick

businesstheaccountsreceivableare

overalongperiodof time;theauthor

e installmentsextendoveraperiodas

udethe totalofsuchreceivablesunder

produceagrosslymisleadingratioof

abilities.In suchcasesthebalance

f thecurrentlycollectibleinstallments

aptionandthetotal ofthenon-current

rentcaption.Ortheissuemaybe

all sidecaptionsfromthebalancesheet;

tthereceivablesarecurrent,butthe

eetshouldbe onnoticethattheomission

ymeanthatthe receivablesarenotall

tibleoveralong periodoftune.

ers'accounts.

theaccountsreceivableledger

ces;someaccountsmayruninto

foverpayments,becauseofcreditsfor

tertheaccounthasbeencollectedinfull,


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CEIVABLE213

in thesubsidiaryledger,thebalance

willbeequal tothetotaldebitbalances

ncesinthe subsidiaryledger.For

ryledger$6,500.00

ryledger175.00

gaccount$6,325.00

ntrollingaccountshouldnot

eet;that wouldindicatethatthere

00.Actuallytherearereceivablesof

f$175.00.Thebalancesheetshouldshow

bitbalancesinthe subsidiaryledger,

creditbalances.

NTLIABILITIES:

00CreditBalancesinCustomers'

gned.

theircurrentoperationstosome

ngtheir accountsreceivabletodiscount

ntcompaniesadvancefundsunderso

ntractsthatitis impossibletodiscuss

e.Toillustrateoneformof contract,

ntsreceivabletotaling$10,000.00

ountcompanycashamountingto8,000.00

argesacommissionof500.00

quityintheassignedaccountsof$ 1,500.00

ntitledtothefirst $8,500.00col-

soldtheaccountsisentitledto the

sinterestcharges.

yalsohas$20,000.00ofaccounts

dthatitshowsits accountsreceivable

ows:

500.00

mentbecauseitdoesnotdisclosethe

0.00ofthe$21,500.00isanequity in

ctisshowninthe followingstatement:


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LE[Chap.24

000.00

ts1,500.00$21,500.00

onofthe factsisnotadequate,

ningitsaccountsreceivableisusually

,andthusassumesa contingentliability

countcompany.Thebalancesheet

gentliability,eitherbya footnotetothe

wascontingentlyliableonDecember

$8,500.00asguarantorofassigned

showingthe receivablesinthebalance

000.00

countsReceivable

e1,500.00$21,500.00


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S

uotedfromtheUniformNegotiable

otewithinthemeaningofthis actisanuncondi-

adeby onepersontoanother,signedbythe maker,

dorat afixedordeterminablefuturetimea sumcertain

er.

otearethemakerandthe payee.

ote byendorsement,hebecomesan

mthenote istransferredistheendorsee.

namedpayeeorordermustbe

.Paperwhichispayableto bearercan

eliverywithoutendorsement;however,

er istobetransferredmay require

ertomakethetransferorcontingently

edandillustratedbelow.F.K.

payeeofthe note.

ents(thetransferorassumesthefull

edbylawuponanendorser):

partytowhomthepaper is

oorder;thatis,Smith

otransferit.


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ANCESRECEIVABLE[Chap.25

wnameofpartytowhomthe

o bearerandcan

bsequentholderswith-

fiedlymaybeheldforthe pay-

esentedto themakerat

yhim,andif theendorseris

orin accordancewiththelegal

t(theendorserlimitshiscontingent

rdsWithoutRecourse):

trecoursemateriallylessenshis

ndorser.Hewarrantsthat

hehasa goodtitletoit,but

alobligationtopaymerely

otdoso.

ent(whichmustbeinfull):

sfers:

n agentforaspecialpurpose:

.

ortwopurposes:

nstruments.

ccommodationendorsements).


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CEPTANCESRECEIVABLE817

dorsementforthelatterpurpose,

shestoborrow$1,000.00fromthe

l notmaketheloanunlesssomeperson

willendorsethenote.Fred White

Browninthisway.Brownmakesanote

Whiteendorsesit, thusassumingacon-

noteifBrowndishonorsitat its

edinjournalform,recordcertain

st-bearingnotes:

00

kerforcashloan tohim.

00

mMakertoapplyonhis

00

aker.

ansactionsinvolvingnotesbearing

00

mMakertoapplyonhis

00

mJohnMaker,with6%

ebtortoapplyonaccountcannot

shouldbe chargedbacktotheaccount

rsothatthe debtor'saccountwillshow,

mation,thatthenote wasdishonored.

ednotesareillustratedonthefollowing


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ANCESRECEIVABLE[Ch«p.25

ectanon-interest-bearingnotefromthemaker

00

dnote.

ecta60-dayinterest-bearingnote.Themaker's

dwiththeinterestbecauseheowesthe interest

00

dnoteandaccrued

day,6%notefor $5,000.00,butgivesusanew

terest.

00

dnote.

00

ed.

-day,6%notefor$1,000.00,wecollecttheinterest

al,andreceivea newnoteforthebalance

akernote.

echargedtohim.

ble—Computingproceeds.

eyatthebank,wemayissueour own

ayendorseanddiscountatthebank any

swhichareacceptabletothe bank.

ednotesarecomputedasfollows:

ofthenote atmaturity(i.e.,

kwillbe entitledtocollectat


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EPTANCESRECEIVABLE819

otes,thisvalueistheface.

,thevalueatmaturityisthe face

eriodofthenote.

countperiod,ortimefromthedate

ntatthebank'srate,on thevalueat

period.

ntfromthevalueatmaturity.

ethe proceedsoftwonotes:

gust1

maturity60days60days

August11

romdateofdiscountto

e noteNone5)4%

bythebank6%6%

:

,000.00

ote tomaturity:

est-bearing.

5J %for60daysis..55.00

00$6,055.00

50 days:

0.0050.00

.0050.46

04.54

gofnotes.

olenotes tothebank,wemust

ringourselvescontingentlyliablefor

gentliabilityshouldbeshownin our

cordingthediscounttransaction,we

edNotesReceivableDiscounted,as

entries:

receivelessthantheface:

nted6,000.00

datbank.

eceivemorethantheface:

nted6•0®® •®®

edatbank.


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SRECEIVABLE

estExpenseinthe entryforthedis-

representstheexpenseincurredfor the

11to September30,orforfiftydays.

orthe booksareclosedattheend of

nterestchargeshouldbe regardedas

the$30.00expenseapplicabletoSep-

sa deferredcharge.

54credit toInterestIncomeinthe

fthe Colenoteistheamountearned

romAugust1 toAugust11,whilethe

4.54is thereforeanearningofthe

ortionthereofshouldbe deferredat

egoingentrieshavebeenposted,the

tandtheNotesReceivableDiscounted

:

nted

hefollowinginformationwithrespect

ollected,asindicatedbythe credit

count.•

eshave beendiscounted;thedebits

countareoffsetbythecreditsi n


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SRECEIVABLE

on.

ndicatethatourasset ofnotes

000.00,andthatwehaveacontingent

ediscountedintheamountof $12,-

waysofshowingthesefactson the

dmostinfavoramongpublicaccountants

,1941

00

ontingentlyliable,onAugust31,1941,onnotes

heamountof$12,000.00.

das follows:

lancesheetshowtheexcessofthe

Receivableaccountoverthecredit

vableDiscountedaccount;this

enotesreceivableonhand.(In

.00representstheDalenote,

eld.)

tyonnotesreceivablediscounted

ancesheettotals.

lepaidbymaker.

hisnote tothebankatmaturity;

tingentliabilityon hisnoteandcan

ngjournalentry:

nted6,000.00

00

makeratmaturity

asfollows:


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edbymaker.

dforthe paymentofadiscounted

presentedittothemakerat maturity,

edpayment,andgivenpropernoticeof

nsome cases,noticeofdishonorcan

orallyorin writing.Inothercases,

per(thatis, paperoriginatinginone

er),protestandformalnoticeof dis-

cemayinanycasebegiven inthis

epaperdesirestodo so.

ionin writingbyanotarypublicto

entedan instrumenttotheperson

ddemandedpayment,andthatthe

nored.Noticeofprotestissent bythe

andto alloftheendorsers.

ngagestheservicesofthenotary

chhe maychargebacktothe

bemadeinthe eventthatadis-

snotpaidbythe makeratmaturity,let

ourpreviousillustration)dishonored

at itwasprotestedbythe bank.We

owingpaymenttothe bank:

ys55.00

dingthepaymentof thenote,

heentiredisbursementis chargedto

titledtoreimbursementofthe whole

te,interest,andprotestfee.

ntingentliabilityonthisnote;it

ty,whichwaspaid.Thereforethe

obemade:

nted6,000.00

00

bilityonColenotedis-

maturity.Seecashdis-


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uotedfromtheUniformNegotiable

conditionalorderinwritingaddressedbyoneperson

ersongiving it,requiringthepersonto whomitis

ndorat afixedordeterminablefuturetimea sumcer-

earer.

hangeare:

gningtheorder.

owhomthebillis addressedand

payment.

whompaymentistobe made.

s.

ge;itisawritten orderinwhichthe

rsthebank(as drawee)topayacertain

dpersonortobearer.Abank draftisa

bankagainstitsdepositinsomeother

anorderdrawnby abankagainst

atusof cash,andconsequentlywill

hapter.

velopmentofbankfacilities,three-

quentlyused.IfA, livinginNewYork,

untreceivablefromBandanaccount

Francisco,hemighteffectasettlement

ga draftonBorderinghim topayC,

offundsfrom BinSanFranciscoto

oC. Withthebankfacilitieswhich

e,suchdraftsarerarelyused.In

eshallbeconcernedonlywithtwo-party

emanddraft,is illustratedonthe

Co.isbothdrawerandpayee.

eredtopay thedraftimmediately

he.isunderno obligationtodosounless

edraft.


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O.D.sale.

ndisewhichisto beshippedbyfreight

C.O.D.terms,heobtainsanorderbill

Whenan orderbillofladingis used,

inthemerchandisefromthecarrier

oflading.

of ladingtoasight draftpayable

ebill ofladingandthedraft, and

Thebanksends thedraft,withbillof

n thepurchaser'scity;thisbanknotifies

thesightdraftandthe billoflading.

bank,paysthe draft,andobtainsthe

urnstheproceedstotheshipper's

pper'saccount.Eitherorbothof the

tionfee.

emerchandise,thesellerwilldebit

les;whentheproceedsofthe draftare

h(andCollectionandExchangeifsuch

it thecustomer.

stratedbelow:

ly20,1Q41

o theorderofOURSELVES

--.--»r)niiarg

^fY-Co.

sentedtothedraweetoobtainhis

turity.Thisagreementiscalledaccept-

xpressedbythefollowingwordswritten

:


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_ u s e # p d - g

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nacceptedbythedrawee,itiscalled

word"acceptance"hastwomeanings:

naccepteddraft.

e:

e dateofthepaper,thus:

ytothe orderof(...)."

payablethirtydaysafterdate,

rdlessofthedate onwhichit

eofacceptancehasnobearing

ft,thedateofacceptanceneed

e dateoftheacceptance,thus:

ytothe orderof(...)," or

o theorderof( ...)."

payablethirtydaysaftersight,

willbe dueonJuly20.Since

suchadraft determinesthe

e ofacceptanceshouldbe

cceptances.

eapromissorynote,is adebtor's

acertainsumof moneyatafixedor

Therefore,mostaccountantsrecord

heNotes Receivableaccount,and

eNotesPayableaccount.

ollectionpurposes.

edraftsareused toreduceapast-

omiseto pay.Ifadebtorwill notpay

enttogivea promissorynoteoraccepta

stobe used,itwillbe drawnbythe

ebtorforacceptance.Ifthedrawee

wershouldrecordthefactby debiting

ditingthedrawee.Whenthedraftis

houldberecordedbyadebitto Cashand

e.


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EPTANCESRECEIVABLE287

ermsofsale.

erequirethe purchaserofmerchan-

fortheamountofthe invoice.Thisis

standpointfortwo reasons:first,the

cedtowritingand hasadefinitematu-

discounttheacceptance.

sheda creditstandingwiththe

shippedona straightbilloflading and

chaserforacceptance.Ifthepurchaser

tstanding,a draftwithanorderbill of

nttoa bankinthepurchaser'scity.

ptthedraftbeforethebankwill release

esale inthecustomarymannerby

ndacredittoSales.Whenthe draft

ed,heshoulddebitNotesReceivableand

ntheacceptanceiscollectedatmatu-

nd creditNotesReceivable.

acceptanceathisbank,hewillmake

iscountandatthe dateofmaturity

rinthis chapterinconnectionwithnotes

ftor abillof exchange,drawnbythe

oods sold,acceptedbysuchpurchaser,

evidencethatitarosefromasale of

ptancesareusedinconnectionwith

ustdescribed.

ELVES

ptorhereofarisr01

edrawer.


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SRECEIVABLE

geraccountfor thedescriptionof

sosmallthatit isadvisabletokeepa sup-

wallexplanatorydata.

creditsfornotetransactionsare

nt,whichmightappearasfollows:

rsonthe oppositepage.

eregisterrepresentnotesreceivable;

ceptance.Alloftheentriesin thenote

orywiththepossibleexceptionofthe

mnsheadedJ,F, M,andsoforth.These

erentmonthsoftheyear,andthe num-

he dayofthemonthon whichthepaper

ceivableinthebalancesheet.

notesandacceptancesreceivable

hecurrentasset captioninthebalance

omofficers,employees,subsidiaries,or

onscannotbeexpectedcurrently,may

ble,butnotunder thecurrentcaption.

ally,shouldnotbeshowninthebal-

sreceivable;apast-duenotehas lostone

sticsofanegotiablepromissorynote,

ata fixedordeterminablefuturedate.

ast-duenotesareincludedwithother

yare pastdueisdisclosedin thecom-

rt.

tsprovidesforlossesonnotesand

wellas forlossesonaccountsreceivable,

tedfromthetotal oftheaccounts,notes,

paratereservemaybeestablishedfor

s.

notesoracceptancesdiscounted

balancesheetin themannerindicated


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o o g l e



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_ u s e # p d - g

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AINST

ndthenotesreceivableshould

eetat thetotalthereof,lesscertain

debtsshouldalmost alwaysbepro-

reshouldalsobereservesfor returned

ght,andcashdiscountswhichwillbe

thecreationof areserveforbad

insttheperiodthatcausedtheloss

stomerswhoseaccountsproved

ealizablevalueof thecustomers'

owever,toaccomplishbothofthese

thefollowingdiscussionofthevarious

amountstobecreditedperiodicallyto

to thereserveisusuallydetermined

esandconsideringsupplementary

erveapercentageoftheaccounts

od.

ewitha percentageofthesalesfor


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o o g l e



AINSTRECEIVABLES[Ch.p.26

sreceivableledgerisdrawnoffon

mnsheadedtoindicatevariousages,such

days,61to90days,3 to6months,and

eofeachdebtor'saccountis analyzed

componentelements,andtheaging

ntriessuchasthefollowing(whichis

J.H. Boyceonpage211):

g,NovemberSO,1941

ccountonpage211,itwill beseenthat

dcheckingtheentriesin theaccounts

npreparingthe agingschedule.

temsintheaccount,andtheseare,

hichenterintothe balance:

eaccountconsistsofthe$250.00

between61and90 daysoldonNovember

bitsandoneNovembercreditin anet

isbetween1and30 daysoldonNovem-

vebeen aged,thecolumnsare

estimatedonthebasisofthe total

Supplementaryinformationmustalso

ountswhicharenotoldmaybeknown

maybe goodreasontobelievethat

becollected.

thereserveisrecordedbya journal

ndcreditingReserveforBadDebts,

eofthe receivablesisnotonlyhelp-

baddebt losses;itfurnishesagoodidea

vables,andthereforeis informativeto

nancialconditionofthebusiness.For

eis frequentlyincludedinanaudit

paniedbyinformationasto theterms


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SERVESAGAINSTRECEIVABLES833

ndits informativevalueisenhancedif

rativebasisshowingtheconditionontwo

ustratedbelow.

mber31,1640

fTotal

%$20,000.0041.67%

00.0024.7416,000.0033.33

00.0016.505,000.0010.42

00.0012.374,500.009.38

000.008.251,000.002.08

e 2,000.004.121,000.002.08

s1,500.003.09500.001.04

%$48,000.00100.00%

2,000.004.122,000.004.17

095.88%$46,000.0095.83%

mparisonofamountsandpercents)

velylesscurrenton December31,

e closeoftheprecedingyear;and

fact,thereserveforbaddebtsis a

totalaccounts.

tageofaccomplishingthesecond

bove,sinceit resultsinafairly accurate

onthebooks.However,itmayeasily

utelossestothe periodsduringwhich

rate,assumemonthlyclosings,with

tibles,andascertainedlossesasfollows:

prilMay

0,000$10,000$10^000

atendof

50

month075100130 170

monthby month,itisto beassumed

qual amountsbythesesales;hence,

andpoint,thechargeforbaddebtsshould

ly.Ifthe estimateof$150.00for

theendofMayiscorrect,theaverageloss

nFebruary$75.00

atendofMay150.00

5.00


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SAGAINSTRECEIVABLES[Chap.26

hbymonth,areasfollows:

o setupreserve$100.00

gedtoreserve75.00

February(beforeaddition)$25.00

eservetodesiredamount85.00

y$110.00

toreserve100.00

March(beforeaddition)$10.00


25.00

oreserve130.00

April(beforeaddition)$ 5.00*


0.00

uringmonth170.00

May(beforeaddition)$40.00*


0.00

eserveintoa debitbalance,theexcessoflossesover

d,andprobablywould,bechargeddirecttoBad

o ProfitandLossforthe monthwouldbethesame.)

produceanequitabledistribution

months,ifit canbeassumedthatthe

osales,whichisprobablya fairassump-

tthat aninequitabledistributionof

ymonthis shownbythefollowingcom-

nts.

iredbalanceofthereserveby multi-

eivablesopenattheendofthe periodby

ptionthatacertainpercentof thereceiv-

d.

asaccountsreceivableof$40,000.00

ultingfromformercredits)of $1,000.00.


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SERVESAGAINSTRECEIVABLES235

mpany'sexperienceshowsthatabout

sonthebooksatanytime willprove

allossmaybeestimatedat8 percent

00.Sincethereservealreadyhasacredit

y$2,200.00needbeaddedtothereserve;

ollowingjournalentry:

00.00

he totalestimatedloss.

ecommended,partlybecauseofthe

nconnectionwiththemethodofaging

ybecauseofthedifficultyofmakingan

mate.Ifthemethodisused,therate

vidingtheaveragelossesduring several

eamountofr eceivablescarriedduring

beendecidedupon,carefulconsidera-

matterofauniformpolicywith respect

etusassumethat therateinuse was

rienceofafive-yearperiodinwhichthe

epolicyofpromptlywritingoffaccounts

tremelydoubtfulofcollection.Assume

sestablished.Atthe endof1941,

ccountsonthebooks;ofthese,$10,000.00

collectibility,andtherepresumably

ning$190,000.00.Iftheextremely

writtenoffbeforetheadditionis madeto

llbe computedas5percentof$200,-

willbeshownin thebalancesheetas

,000.00

s10,000.00$190,000.00

ccountsarewrittenoffbeforethe

onditionwillbeshownin thebalance

,000.00

s...9,500.00$180,500.00

tthecompanymentionedabovehas

tsbaddebt lossesaverageabout1per


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SAGAINSTRECEIVABLES[Chap.86

sis,thereservewill becreditedeach

h1 percentofthesales fortheperiod.

andpoint,thismethodprobably

bledistributionofbaddebt lossesamong

servecreditismadeonly onceayear,

naccuratestatementoftheestimated

eivablesshowninbalancesheetsprepared

at theendof1941is inareasonable

nthe receivablesopenatthatdate,

orlossesonreceivablesopenatthe begin-

vablesarisingfromsalesin1942),without

serve,willso reducethereservethat,by

illnolonger containanadequatepro-

blesthenopen.Onthe otherhand,if

gof 1942waslargeenoughtoabsorb all

veanadequatereserveagainstreceiv-

of thatyear,itsurelywasexcessiveat

nd thebalancesheetthenprepared

evalueofthereceivables.

ovisionsbasedonsales shouldbe

regardedasuncollectible,itshould

similartothefollowing:

00

leaccount.

ntwasfinallycollected.Thecollec-

ollows:

reviouslyWrittenOff75.00

Lane'saccount.

erve,towriteofftheaccount,proved

ountantscreditthereservewiththe

00

Lane'saccount,previously


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ERVESAGAINSTRECEIVABLES837

whollysatisfactorybecausetheentry

account,writingoffthebalancetothe

badcredit recordinhisaccount.For

ableto reversethewrite-offentryand

nthedebtor'saccount,asfollows:

00

fLane'saccount.

lowances/cashdiscounts,andfreight.

panyhastotalaccountsreceivableof

31,1941,andhasprovidedareserveof

hisreservemaybean adequatepro-

but itdoesnotnecessarilyfollowthat

19,000.00fromtheaccounts.Cus-

tsforreturnedmerchandiseandallow-

manyofthedebtorswilltake thecash

eentitled;and,if thegoodsaresoldon

stomerstopaythe freightbutallow

entsinremittingfor themerchandise,

rsuchfreight.

prospectivedeductionsshouldbe

othatthe accountsreceivablewillbe

tat theestimatednetamountwhichwill

eductionshavebeenallowed.How-

ndallowances,cashdiscounts,and

.


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thatbuysits goodsincondition

erelythemerchandiseinventory;ina

ereareinventoriesof finishedgoods,

erials,andsupplies.Whethersupplies

alancesheetas acurrentassetora

ablequestion.

showtheinventoriesoffinishedgoods,

materialsin detail.Toillustratewhy

assumethatacompanyshowsmerely

ntoriesinitsbalancesheet,andthat the

esshowedthefollowing:

5,000.00

,000.00

edisclosed.Butsupposethat,upon

tsareshown:

mber31,1940

fTotal

013.33%$20,000.0028.57%

0040.0035,000.0050.00

46.6715.000.0021.43

%$70.000.00100.00%

terialshasgreatlyincreased,andthe

odshasmateriallydecreased.Sincethe

onvertedintocashuntiltheyhavebeen

requiretimeandtheincurringofmanu-


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27

torieswererelativelymuchlesscurrent

eywereatthe endof1940.

ermination.

finventoriesinvolvesquestionsof

hip,andpricing.Quantitiesmaybe

ount,measurement,orweighing;con-

necessitatetheentireeliminationora

bsoleteorshop-wornarticles;questions

mattersastheinclusionof allpurchases

ceived,whetherornotthegoodshavebeen

oodsoutonconsignment,andtheexclu-

signment;theproblemofpricingisoften

ortance,initsrelationtoassetvaluation

hatextensiveconsiderationisgiventoit

ngparagraphs.Althoughtheprinciples

pplicationofteninvolvespractical

valuationofinventoriesis"costor

er."Thecostormarketruleis incon-

countingprincipleofanticipatingno

losses.

urchasepriceattheend oftheperiod

merchandiseonhand.Sincepurchase

ngpriceswillpresumablydeclinewith

toryfromcosttothelowermarket

heperiodwhenthe pricedeclined;in

ule: provideforalllosses.

ehasincreased,sellingpricesmay

asedprofitmaybe realized.Butthis

zeduntil themerchandiseissoldatan

einventoryatavaluein excessofcost

odoso iscontrarytoconservative

uld beappliedtoeachitemin the

e

0$800.00

.00

0$1,300.00


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41

eon grossprofit.

ketruleis aconservativeone,andis

pplicationoftherulemisstatesthegross

themarketpurchasepricesdecline.

companybuysgoodsat acostof

alfofthem for$7,500.00.Thetrue

sfollows:

of$10,000.00)5,000.00

0.00

toryvaluationoftheremaininghalf

ketisonly$4,000.00.Theprofitand

llybepreparedthus:

riod4,000.006,000.00

0.00

ementoffactswouldbe:

000.005,000.00

0.00

1,000.00

yShrinkage$1,500.00

tin thelastformillustrated,it

uetheinventoryatboth thecost($5,-

ostor market($4,000.00)inordertodeter-

putingthevalueoftheinventoryon

omuchworkthatit isusuallyregarded

the TreasuryDepartmentfortax

erordinarycircumstances,'market'

eprevailingat thedateoftheinventory

diseinthevolumein whichordinarily

r."Therestrictionastoquantityis

d,whollyinapplicablemarketvalues


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27

kofthecostofgoods,but itisnot

thecost.Theproblemofascertaining

umberofdifficultpoints,amongwhich

purchasepricebut alsoallincidental

ht,drayage,andstorage,necessaryto

rket.Thetotaloftheseitemsis clearly

stofpurchases,butitis notasimple

ncidentalcostsamongindividualpur-

hatportionofthe incidentalcostsis

he inventory.

erchandiseofatrading company

manufacturingcompanycanbedeter-

hecostofa manufacturingcompany's

edgoods,includingmaterial,labor,and

nedonlyifadequatecostrecordsare

evaluationsdeterminedbycostsys-

mates,ofvaryingdegreesof accuracy.

vestmentbeincludedin manufactur-

his questionreceivedagooddealof

ts.Thosewhoadvocatedincluding

edthatthe costofthefixedassetsused

hecostofthearticlemanufactured;that,

narticlemanufacturedwiththeaid of

nexpensivebuildingcostsmorethanan

inexpensivefixedassets;and,therefore,

booksshouldincludeinterestonthe

.


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43

inginterestincostsadmittedthat

ectsthe costofthemanufacturedproduct,

heeffectofvaryingfixed assetcostsis

oncharges.Theyfurthermaintained

argedwithatheoreticalintereston

sets,theoffsettingcreditfor interest

hecostswill thusbeoverstated,bythe

ncometherein,andprofits willbeantici-

nufacturedgoodsaresold.

eretothetheory th'atintereston

eincludedinmanufacturingcost,but

ociationsofaccountantsregardthe

orrectintheoryand unpracticalin

pecttointerestasan elementofcost

nufacturerequiresagingorseasoningof

rcumstances,shouldinterestonthe

ngperiodbe addedtocost?

eritpermissibletomakesuchanaddi-

valuethusdetermineddoesnotexceed

oodscould bepurchased.Theapproval

wever,adeparturefromconservative

nizedthattheuse ofcapitalinthe

esnotresultinthe productionofincome

goodsaresold.Buttheadditionof

entoryrequiresan offsettingcreditto

kingupofprofitbeforethe saleofgoods.

ofwhichcosttouseif severalinvoices

eriodat differentprices,orifgoodsare

yearatvariouscosts.Fourmethodsare

chareconsideredcorrect;itis significant

pricesaredefinitelyknown,thereare

nventorypurposes.

vebeenmadeduringtheperiod,as

SI.00$100.00

1.10220.00

1.20300.00

1.25125.00

nventory.


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27

Thegoodsonhandareconsideredto

mostrecentpurchases;thereforethe

its@ SI.25$125.00

ts@ 1.2060.00

Thesalesareassumedtoconsistof

andtheinventoryat theendoftheperiod

anyopeninginventoryandtheearliest

nventoryiscomposedof:

0units@ $1.00$100.00

0units@ 1.1055.00

posedonlyrecently,andhasnot yet

Onecriticismraisedagainstitisthefact

onattheend ofaperiodmaydepend

ncyofpreviousinventory-takings.To

nventorywastakenafterthe second

tswerefoundto beonhand;theywere

0units@ $1.00$100.00

00unite@ 1.10110.00

5)$21000

terinventory,therecordswould

ts@ $1.05$210.00

1.20300.00

1.25125.00

nventorywouldberegardedas

ginventory,andwouldbevaluedat

insteadof at$155.00,whichwasthe

heassumptionthattherehadbeenno

methodpointoutthatit hasastabiliz-

odsofrisingorfalling prices,byapplying

ntsellingpricesandlettingthe inventory

tofthestabilizationofprofits. The

at,sinceartificialstabilizationof

e157), themethodisimproper.


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45

d.Thetotalcostoftheopeninginven-

edby thetotalunitsin theinventory

eightedaveragecostis thusdetermined:

0 =$1.14615

14615X150=•$171.92

Assumethatpurchasesandsaleshave

orderand amounts:

t$1.00

tsat$1.10

t$1.20

sat$1.25

$100.00$1.00each

220.00

300.00

25.00

86

ngaveragecostcomputationillus-

tionis peculiarlysuitedforthedeter-

toryvalueswhenunitcostsvarywidely

useofdifferencesinthequantityof

etusassumethata companymanu-

ellsheavilyinwarmmonthsand poorly

productionfluctuateswithsales.

nthlycostsofproductionduringtwo

xt page.


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47

ountsonmerchandisepurchases

einventoryvaluationandhenceuponthe

hequestionsinvolvedrequirecon-

iscountsand,incidentally,oftheir

ofitand lossstatement.And,sincea

uldbeaccordedtodiscountsonpurchases

epresentdiscussion,althoughconcerned

onpurchases,willnecessarilygivecon-

sales.

heldbyaccountantswithrespect

ounts,theirproperpresentationin

nt,andtheir relationtoinventory

temslikeinterest,and shouldbe

wingcondensedprofitandlossstate-

ON

ss

ber31,1941

dAllowances1,500

:

1940$25,000

esandAllowances.1,000

0

ndPurchases$91,000

ber31,194126,00065,000

000

lExpenses28,025

8,975

0

dOtherIncome$11,099

henatureofcash discounts,itmay

contingentuponpaymentwithina


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27

cialandtimeelementsgivethema

hisrelationis increasedbyreasonof

alesmay beofferedtoobtainfundsfor

rowing;andthat,ontheother hand,

ndinterestmaybepaid toprovidefunds

tsonpurchases.Ifdiscountsare

meandexpense,thegrossinvoiceprice

inventoryvaluationpurposes.

ductionfromthe price;therefore,

bedeductedfromsalesin theprofit

untsonpurchasesshouldbededucted

erchandisecostforinventorypurposes

grossinvoicepricelessdiscountstaken.

sstatementis basedonthispointof

ON

ss

ber31,1941

ances$1,500

75

:

1940$24,750

Allowances$1,000

01,900

0

ndPurchases$89,850

ber31,194125,65064,200

825

lExpenses28,025

8,800

dOtherIncome$10,024

5

iew,itmaybe saidthatcashdis-

dnotbetreatedas animmediateincome,

tbe takendirectlyorindirectlyona

realizationuntil thegoodsaresold.


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49

ceof$1,000.00ispurchasedsubjectto

countis merelyasavinginthecost;

ordedat$980.00,andthatvaluation

ycost;if the$20.00istakenasan

egoodsareincludedinthe inventory

edprofitistakenonthe purchase.

pationofprofitresultsfromnot treating

ductionfromthesellingprice,aconsistent

wed.

purchasediscountsasincomemay

profit, thiswillpresumablybethe

t theendoftheperiod isgreaterthan

alargerproportionof discountswas

eriodthanduring thepriorone.Busi-

fore,issometimesdisposedtofeelthat

reticalaccuracymaynotbesufficient

nvolvedindeterminingwhatportion

valuedat thenetprice(becausedis-

dwhatportionshouldbe valuedatthe

ountswerenottaken),and(b)to justify

tand lossstatementofsignificant

company'sdiscount-takingpolicy

mentofinconsistencyinthetheory

onpurchasesareadeductionfromthe

eitsometimessaythatitspropriety

rentiftradepracticeswerectfangedand

tthenetprice(say $980.00)andapenalty

difpaymentwaspostponedbeyond

00wouldthenobviouslybe thepurchase

bea sortofinterestcharge.Thisis

soseemsto indicatethatconsistency

on-from-priceadvocatestotreatall

ntsasadeductionfromtheprice(and

aken)andtoshow asanexpenseall

heoryis,in fact,advocatedbysome

,perhaps,forthepurposesofconsistency,

withinformationastothe amountsof

edprofitandlossstatementis presented

paredonthe assumptionthat$1,300.00

savailableduringtheyear,andthat only


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27

ON

ss

ber31,1941

ancea$1,500

75

:

1940$24,500

Allowances$1,000

able1,3002,300

0

ndPurchases$89,200

ber31,194125,48063,720

305

lExpenses28,025

9,280

dOtherIncome$10,504

00435

(formerlymorethanatpresent)

rmalrate shouldbetreatedasfinancial

tan abnormalrateshouldbetreated

ce.A2%rate hasbeenmentioned,

hestrate atwhichdiscountscanbe

s.

henawhole,acquiredata lump

which,becauseofdifferencesin nature

fferentprices.Todetermineacostfor

orthepartsremainingin theinventory,

apportionmentofthelump-sumprice.

andis purchased,developed,and

ots.Thetotalcost,assumedtobe

rtionedtoindividuallotsinthe ratioof

he followingpage.


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51

.

purchasedbeforetheend ofthe

nthe inventoryattheendof theperiod.

smaybe madebyafailureto includeall

entory.t-

hasemayberecorded,butthegoods

ventory.Thisomission,ofcourse,

entofthe profits.

rymay bemadeforthepurchase,

tedfrom theinventory.Thisomission

rstatementoftheprofits,sincethepur-

ndLoss)and theclosinginventory

)areequally understated.Theprac-

however,bothbecauseitresultsin an

hasesandinventoryintheprofitand loss

understatesthecurrentassetsandcur-

cesheet.Thus,afinancialcondition

anreallyexists,partlybecausethe

rstated,andpartlybecause,inmany

ayablewillhavetobepaidbeforethe

onvertedintocash.

mesincorrectlyrecordedassales.

onbetweenasaleandaconsignmentis

e goodspassesfromavendortoa

ignmenttheconsignorretainstitleto


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27

entisnotasale,no profitresultsfrom

shouldbetakenup untilthegoods

ignee.

preparesstatementsorcloseshis

onsignmentshouldbeincludedin

uchgoods,for inventorypur-

pensesincurredinplacingthe

rk.

ngbusinessitis alwaysconsidered

ofit onworkinprocess;noprofit should

dsarecompletedandsold.Aspecial

nthecontractingbusiness,ifthecom-

esa considerableperiodoftime,and

orethecontractiscompleted.

-plusbasis,thereisno objection

on theworkdone;butifthe contract

alwaysdangeroustotakeupprofit

causeofthepossibilitythatunforeseen

profiti ntoamuchsmallerprofitor into

ointofagoingconcern,itis always

akingofaprofit untilthecontractis

metimesarisewhenapartnerorastock-

hecompletionofacontractandis tosell

ngpartnersorstockholders.Insuch

omarytoestimatetheprofit tobeearned

eup suchaproportionofthe profit

neuptothedate ofretirementbearsto

contractis takenataflatprice

onetodatehascost $25,000.00,and

0.00willcompletethe work.The

he uncompletedcontractmaybe

0

e15,000.0040,000.00

000.00

earnedtodate:


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yvalue.

edetermined,withvaryingdegrees

ods:

sicalinventoryistakenbylistingthe

stsshownbyinvoices,orlowermarket

ccurateofallmethods.

petualinventoryisarecordshowing

dcost)ofitems goingintoandoutof

keptwitheachkind ofarticle.Aform

lyisillustratedbelow:

edeterminedbytheapplicationofcost

ntities shownintheBalancecolumn.

yitis possibletodeterminetheinventory

heinconvenienceoftakingaphysical

however,totakephysicalinventories

r portionsthereof)atintervals,asa

heperpetualinventoriesandtodeter-

ckismysteriouslydisappearing.

methodisoftenusedto estimatethe

chhasbeendestroyedbyfireor otherwise.

tionofauniformrateof grossprofit;

ynotbewarrantedbythe facts,the

entorymaybeinaccurate.

ssumethata companymade25%

ring1941;aninventorywastakenat

occurredonMay25,1942. The

entoryatthedate ofthefirecouldbe

hownonthenext page.


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87

1941(physicalinventory)$10,000

y25,194294,000

dssold,January1 toMay25:

t—25%of$124,000.00....31,000

stofgoodssold93,000

hand,May25, 1942$11,000

sed toestimatetheinventoryif

alancesheetasofa datewhennophysical

od,whichisfrequentlyusedby

ainstores,enablesthemanagementto

ostofthemerchandiseonhandat the

eraltheoryofthe methodisindicated

n.

wing:

dpurchasesatcostandalso at

ummariescanbebuiltup asfollows:

0.00$86,000.00

0.00

0.00

001,000.00

8.500.00$90,000.00

8,000.00

(or retail)price$82.OOP.00

evaluedonan estimatedcostbasis

ce,ofgoodsavailableforsale—$58,500.00-5-

theinventoryis 65%of$82,000.00,or$53,300.00.

ubsequentdatescanbedetermined

hegeneralprocedurefollowed,but

ftheprocedureisusuallymuchmore

mark-upsandmark-downsinselling

oredintheillustration.


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relativelypermanentnatureused

sinessandnotintendedforsale.

ryisafixedassetbecauseit complies

the definition:Itisrelativelypermanent

operationofthebusiness,andit isnot

sitefor afutureplantis nota

ntpropertyanditisnot intended

theoperationofthebusiness.There-

fiedundertheFixedAssetscaptionin

edforoperationsbutno longer

t.Itis relativelypermanentproperty;

le;but itisnot usedintheoperation

edassets.

avingbodilysubstance.Strictly

setisintangibleifits valueresides,not

fthe assetitself,butinthe rightswhich

nitsowner.Tangiblefixedassets

achinery,tools,patterns,delivery

ixtures,andothersimilarproperty

e.Intangibleassetsincludegoodwill,

emarks,franchises,andothersimilar

bstancebuthavingvaluebecause

wnershipconfers.

ndamortization.

rever;wearandtearandtheaction

nimpairmentoftheiroperatingeffective-


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ETS[Chap.28

replacementsnecessary.Forthis

assetisasort ofdeferredchargetobe

uringthelife oftheasset.Thisexpiration

epreciation.

nvalue ofnaturalresources,

ells,and mines,causedbytheirconver-

oninvalueof intangiblefixedassets,

ts,andleaseholds,resultingfromthe

ets.

fied,withrespecttotheir natureand

hichtheyare subject,asfollows:

tion.

.

hinery,toolsand

pment,

ecttodepletion.

mines,oilwells.

.

ights,franchises,

tion.

oodwill.

untingtoshowfixedassets inthe

properdeductionsfordepreciation,

on.

othedeterminationofthecost of

nthis chapterunderthefollowing

nditures.


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DASSETS857

on.

urities.

ed.

cludestheoriginalpurchaseprice

es.Forinstance,thecostofland

e,broker'scommission,feesforexamining

ccruedatthedateof purchase,taxes

duringthe periodofconstructionofthe

sforlocalimprovementssuchassewers

sed,itstotalcostincludesthe

ncurredinmakingrepairsnecessitated

rchase,andcostsofalterationsand

gisconstructed,thecostincludes

hitects'feesandsuperintendents'

kmen'sliabilityinsurance,andtaxes

onstructionperiod.

udesthepurchaseprice,freight,

itis necessarytooperatethemachin-

hile,inorderto breakitinor testit,

maybe capitalized—thatis,regarded

achineryratherthanas anexpense.

nditures.

heownershipoffixedassetsare of

chshouldberecordedbyanincrease

sets.Inmostcasesthis isdoneby

ts;insome casesitisdoneby

eserves.

hichshouldbechargedtoexpense

bemadebetweencapitalandrevenue

ccountingforfixedassetsandfor profits

pitalexpenditureischargedtoan

kvalueofthefixedassetswillbe under-

nd networthwillalsobe understated.


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enueexpenditureischargedtoan

oanexpenseaccount,thebookvalue

overstatedandthenetprofitsand net

ed.

meofthe morecommontypesof

below:

eesecond-handma-

ssetaccount

ddepreciationwhichtook

eputintouse,theywere

hiswasacapital

ure

erepurchasedforusewith

itureischargeableto

thofoperations,are-

sarevenueexpendi-

machineswereagain

atacostof$400.00.

turebecauseitmade

depreciation;itshould

getotheassetaccount

ontocost;itshouldbe

e depreciationreserve

ofaccrueddepreciation.

machineryinafactoryisaproper chargetotheasset

arrangedinthefactoryforthe purposeofimproving

ducingthetime andcostofproduction,thereinstalla-

erlybechargedtothepropertyaccount,becausethat

debitedwithoneinstallationcharge.Ontheother

enditureasan expenseoftheperiodwouldscarcelybe

eexpenditureislarge.Thebest procedure,therefore,

ardtheexpenseasadeferredchargetobe writtenoffover

ebenefitedbythe reinstallation.


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DASSETS259

on.

tutilitycompaniestoincludeinterest

onperiodinthe costoffixedassets.

omeis earnedduringconstructionto

perationsbegin,ratesandearningsare

tment;sincetheinterestcannotbe

onsbegin,theutilityispermittedto

havebegunbyincludingit inthe

willdeterminetherateforservice.

ationforallowingindustrialsto

heconstructionperiod.Butthesanction

beencarriedoverintothe fieldof

withoutconsiderationofthedifference

,eitherbya utilityorbyan

arycostofconstruction;itcouldbe

s obtainedthroughtheissuanceofstock.

blepracticeinutility accounting,

dtocapitalizeinterestduringconstruc-

wellestablishedthatitis nolonger

oubtfulwhetheritcanbe defended

urities.

edbyan issueof1,000sharesof stock

pershare,didthefixedassets cost$100,-

ntquestionfor tworeasons:(1)if

than $100,000.00,thestockwasreally

hestockholdersmaybeliabletocreditors

ount;(2)ifthe$100,000.00valuation

axpurposes,thecompanywillnotbe

o deductdepreciationonthatvaluation.

evaluationisby showingthatsimilar

ashatpar ataboutthesametime.

conclusiveevidence.Assume,for

haresof stockatparforcash,and1,000

g;the10-sharesalemaybe merelya

alue,andmaybe challengedassuch.

moreconclusiveevidence.

ventcompanyhavecomeintocourt

snotworththepar valueofthestock

kwas,therefore,issuedatadiscount,


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ETS[Chap.28

shouldbeheld forthepaymentofthe

ountequaltothe discount,courtshave

em,becausethe lawallowsthedirectors

blediscretionindeterminingthevalue

entforstock.

blymoreimportantfromthetax

onofthepropertymust beestablished

ketvalueof thepropertyitselforof

git; otherwise,thestatedcostmay

fordepreciation.Acompanyissued

nsharesfora patent,chargedthe

stbasedonthe parvalueofthestock

rn,deductedamortizationofthepatent

hortlyaftertheissuanceofthe common

mpanyissuedpreferredstockandgave

bonus.The patentvaluationwas

becausetheissuanceofthecommon

thatthe commonstockissuedforthe

ed.

manufacturedincludesmaterials,

ad;ifacompanyusesitsfactoryfor the

tsforitsownuse,should thecostofthe

threeelements?Thereisno question

orcosts;theyshould beincludedin

smanufactured.Thereislesscertainty

d.

seditsplantin 1940forthemanu-

ly,thatin1941it alsoconstructedsome

ollowingdataare determinable:

ssets

,000.00$50,000.00$25,000.00

000.0050,000.0025,000.00

0,000.0050,000.00??

000.00?

00,000.00

7

ntityoffinishedgoodswas manu-

0andsoldat thesameprice.Ifwe


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DASSETS261

overheadin1941 tofinishedgoodsand

eratioofthedirect labor,forinstance),

esults:

,000.00$25,000.00

000.0025,000.00

ionedonbasis

33,333.0016,667.00

333.00$66,667.00

ods200,000.00200,000.00"

66,667.00

showntobe $16,667.00morethan

ame quantityofmerchandisewas

eremadeatthesameprice.This

ofoverheadchargedtofixedassets.

headwasnotincreasedbecauseofthe

ts,andifwechargethe fixedassetswitha

evidentthatthechargetofixedassets

ditiontothenet profit,andthatthe

ga profitonworkdoneforitself

eisto chargethefixedassetswith

ryoverheadascanreasonablybe

ionoffixedassets.

onpurchasesof fixedassets,should

sa financialincomeorasareduction

?Thisisa questiononwhichsome

samongaccountants.

ussionofthenature ofcashdiscounts

es,anditistherepointedout thatto

urchasesasafinancialincomeimmedi-

he inventoryatthegrossinvoiceprice

ncome,becauseaprofit istakenon

sarerealizedonlyby sales.Itwas

tnoseriousdistortionofprofits results

hebeginningandtheendof theperiod

sis, andiftherehasbeen nomaterial

mountsorin theratiosofdiscountstaken


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hasesatthegross invoicepriceand

immediateearningalsoresultsinan

eover,theanticipationismoreserious.

nningandend oftheperiodexercise

nfluenceupontheanticipationofprofits

epurchases;anydiscountearningtaken

assetisoffsetonlygraduallyby the

nchargesoverthelifeofthe asset.

ttreatingdiscountsonfixedassets

ceis apossibleoneofconsistency.

sepurchasesaretreatedasa financial

tsoncapitalexpendituresaretreatedasa

consistencyisintroducedintothe

stencyresultsinadistortionofwhat is

me.However,ifdiscountsonmer-

eatedasdeductionsfromcost,itis not

larlyconservativeproceduretothe

eceivegiftsoffixedassets,eitherfrom

citieswhichmakeapolicyof attracting

mwithplantsor withplantsites.

ostwerestrictlyapplied,suchassets

onlyattheamountof anyincidental

ptanceofthegifts.Sincethis rulemight

usinessbyrequiringit topresenta

ssetsweregrossly undervalued,therule

placingofsuchgiftsonthe booksatafan-

fixedasset accountmaybeoffsetby

distinctionis tobemaintainedinthe

ingandextraneousprofits,thecredit

Surplus.

notbe carriedinasingleaccount

teaccountsshouldbeopenedforthe

auselanddoesnot depreciateandneed

ildingsdodepreciateandare insured.

oesnotdepreciateapplies,ofcourse,to

e.Landusedforfarmingand deposits

bjecttodepletion.


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DASSETS263

dwhichisnotusedin operations(for

ctory,propertyheldasaspeculation,

nsions),itshouldnot beincludedin

eFixedAssetscaption.Theamounts

shouldindicatetheinvestmentinfixed

essoperations.

aseparaterecordwitheachparcel

o that,ifoneis disposedof,thecost,

gprofitorlosscanbe ascertained.

owned,amachineryrecordshouldbe

oreachmachine,containingthefollowing

chine).

cost.

data:

ovision,andaccumulatedamountprovided

ryrepairs,withinformationastodate,cost,

loperatingconditions,suchasovertime

onandoperatinglife.

mationdesirableforinsurancepur-

helpfulinprovinga claimforloss.The

ableasaguideto futurepurchases,and

llife andactualresidualvaluerealized

ssetishelpfulinmakingfuture estimates

appliedto similarequipment.


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-Continued

ER

e.

angedtheattitudeof manybusiness-

ciation.Beforethepassageofthelaw,

y:"HowlittledepreciationcanItake

howingaspossible?"Sincethepassage

manycaseshasbecome:"Howmuch

educemytaxableincome?"

onfrontedwiththetaskofconvincing

ationwasanexpensewhichshouldbe

heprofits;theirclientspreferredto write

ninyearsofpoorprofitsor oflosses,

eprovisionsinyearsofgoodprofits.

resshometheargumentthatdepre-

ichmustbeprovidedforin badyears

metbyseveralarguments.Onewas

noffsetbyanincreasein themarket

at theassets,evenafteranumberof

smuchas theycost.Thiswasmerely

ratingexpenseagainstan unrealized

atdepreciationprovisionswere

airskepttheassetasgoodasnew.It is

swertothisargumentthanProfessor

ndnowalmostclassicsentence:"All

blemarchto thejunkheap,andits

elayed,cannotbepreventedby repairs."

w,andbusinessmenwillinglydeduct

ndwouldalsogladlymakeadeduction

olescenceiftheywerepermittedto

scenceintheir taxreturns.


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ETS[Chap.29

.

0andwill lastforfiveyears,the

eofthe five-yearperiod.Eachyear's

gedwithaportionof thecost,andthe

shavinga decreasedvalueattheend

atdepreciationshouldbedetermined

gthecost,theestimatedlife,andthe

pvaluetobe realizedwhentheasset

cticethescrapvalueisusuallyignored,

oniscomputedbymultiplyingthecost

ableforincometaxpurposes.

f theoreticalmethodsofcomputing

chinvolveactuarialcomputations.

edbelow:

od.Apercentagerateisdetermined

ife(forinstance,20%fora

arlife) andtheannual

bymultiplyingthecostbythe

thodisacceptablefortax

ordiminishing-chargemethod.The

dthefirst yeartocost,and

ncreasingreserve.The

decreaseseachyear;thisis

causerepairchargeswillpre-

ssetages.Decreasingthe

settheincreaseinrepair

eamore uniformannualtotal

generallyacceptedfortax

ichthechargeis madeproportionate

maybeused,thus making

anyyeardependentuponthe

ear;aratepermile maybe

mobileequipment,thusmaking

roportionatetothemileage.

yacceptablefortaxpurposes.


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ANDOTHERDECREASESINVALUE267

lycreatetheirdepreciationreserves

eoftheirgrossrevenue.At

ntirelyillogical,as itwould

epreciationdependsuponthe

ratherthanupontheamount

em.But,ontheother hand,

fluencedbythe extentto

egross-revenuebasisof

maybedefendedbythisreason-

e,themore use;themoreuse,

rtaxpurposes,however,

omputedonthebasisof the

ty.

mpaniesprovidedepreciationonthe

ethodhastwothingsto recommend

apply,andit isacceptablefortax

sthedesiredresultofspreadingthecost

atedlifebyperiodicalchargestoexpense,

alueof theassettozeroat theendof

his methodisnottheoretically

ntoftheprofitand lossstatement.

t bethesameeachyear,andit maybe

eto expenseshouldbemadeina year

roflittle use.Butitis notalwayscon-

differences,andtheequalannualcharge

hstandingthetheoreticalinaccuracy.

depreciatedbookvalueof afixed

00.00and isdepreciatedbythe

anestimatedlifeoffiveyears,the

willbe$100.00,$80.00,$60.00,$40.00,

neerwouldprobablysaythatthe

ylittlephysicaldeteriorationthefirst

ecesrapidlytowardtheendof itslife.

romtheequalannual depreciation

edbyan engineeronthebasisofactual

ghtthereforebesomewhatasfollows:

basis$100.00$80.00$60.00$40.00$20.00$0.00

ineer'sbasis100.0090.0080.0065.0040.000.00


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ETS[Chap.29

uesshownbythe booksrepresent

esoftheassets.It iswellknownthat,

xedassetssuffermostheavilyduring

useonlyalittleusemakesthemsecond-

theoreticaldepreciationbasis,the

asis,andthe valuesonasecond-hand

fore,besomewhatasfollows:

eaccount-

60.00$40.00$20.00$0.00

ineer'sbasis100.0090.0080.0065.0040.000.00

es100.0070.0065.0050.0035.000.00

iationprovisionsmaybesummarized

y residualvalue)ofadepreciating

enoffas anexpenseoverthe

deto bearaportionofthis total

gDepreciation(expense

eserveforDepreciation.

tofexpenseproperlychargeable

nitelydetermined,anarbi-

madeeachyear.

shownbythebooksmerelyrepre-

setnotyetwrittenoffto

respondwithavaluefixed

aphysicalconditionbasisora

ebasis.

erentriesto bemadewithrespectto

ullydepreciatedassets,salesandabandon-

eriodicallybyajournalentry

untandcreditingareserve.Forexample,

achinewhichcost$1,000.00andwhich

years,withnoresidualvalue,would

ngjournalentry:

100.00

—Machinery100.00


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eaccountwouldbeclosedtoProfit

daccumulate.

atethat thecreationofadepreciation

ta fundofassetsisbeing setasideto

he endofitsusefullife. Thecreation

meansonlythata bookentryhasbeen

nsedeductioninthe profitandloss

intheasset carryingvaluefromcostto

accountanditsrelateddepreciation

balances:

—Machinery$36,OCO.00

iationhasbeenprovidedattherate

t theaboveamountsrepresentthecost

nsapplicabletotwounitsofmachinery,

t$20,000.00hasbeenfullydepre-

preciationisallowableonthismachin-

edfromthe assetaccountbythe

—Machinery20,000.00

theaccountsthecostof,

reciationon,fullydepre-

othisprocedurebecausethebalance

actthat thecompanyownsmachinery

isnotcarriedat anyvalueinthe

treserveorundervaluationofnet assets

optionoftoohigh adepreciationrate.

orecontendthat,sincethedepreciation

eexcessiveinthepast,thereserve should

Surplus,andthatcreditstothe reserve

gtheremainingusefullife oftheasset.


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ETS[Chap.29

yadvocatetransfers,asindicatedby

es:

ted20,000.00

ountforthefullydepre-


—FullyDepreciated

rvefordepreciationof

ontainthefollowingbalances:

—Machinery$16,000

ted20,000

—FullyDepreciated

how,undertheFixedAssetscaption:

tion16,000$64,000

epreciatedmachinerystillinusecould

sheetfootnote.

assetisdisposedof, anentryshould

etaccountwiththecost oftheasset

ionreservewiththedepreciation

tedforthe amountreceived.

moreorlessthanthe bookvalue,

eintheSurplusaccountforthe difference

thedate ofdisposalandtheamount

nsaregiven:

e.Assumethat,at thedateof

e assetandthereserveaccountshad

$2,200.00

valueof$300.00andwasdisposed

ngdebitsandcreditshould bemade:

00.00

torelievethereserveofthe

200.00

heassetaccountofthe


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ue.Assumethat theaccountshad

$1,760.00

valueof$740.00andwasdisposedof

wasaloss of$340.00;thefollowingdebits

:

1,760.00

alue.Assumethatthe accountshad

$2,200.00

valueof$300.00andwasdisposed

ewasa profitof$200.00.Thefollowing

emade:

2,200.00

theabandonmentofafixedasset

e,assumethattheassetcost$2,500.00

depreciationreservewas$2,200.00.

mustbe chargedtoSurplus:

2,200.00

by exchange,twoquestionsarise:

setacquiredand(2)anygainor losson

et.Theanswerstothesequestions

einformation.

heold assetiscarriedata gross

depreciationreserveof$400.00.Anew

ngeoftheold assetplusacashpayment

wassethasanascertainablemarket

canbeput onthebooksatthat value,


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ETS[Chap.99

aloftheold assetcanbecomputedas

:

00

400.00

set:

1,100.00

n350.00

ordedasfollows:

—valuationofnewasset1,100.00

rovisiononoldasset400.00

250.00

—costofoldasset 1,000.00

nt750.00

hasno ascertainablemarketvalue,

hangecanbedetermined,andthenew

ebooksatthebookvalue oftheold

e cashpayment;theentriesare:

—tovaluethenewassetatthe$600.00

assetplusthe$750.00cash

00

—costofold asset1,000.00

n.

nbothrepresentreductionsinthe

eydiffer fromeachotherintwoimpor-

physicaldeterioration;depletion

quantity.Amachinedepre-

ncauseslittleifany reduction

hand,thecoalina mine,the

rin aforestaredepletedby

dassetsintomerchandise.

to dividends.

onanddepletionmustbeprovided

reknown,depletiononsuch

lwells,and timberlandsneed


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inetheamountof dividends

Thetheoryof thelawis

ditors,knowingthenatureof

ethatthe receiptsfromsales

rta returnofinvestment.

twerenotlegallydistributable

hecorporationwouldbeobliged

exhaustionoftheproperty.

he corporationexpectedto

ersimilarpieceofproperty,

,therefore,allowsthecorpora-

policybest suitedtoitsplans,

sarenotinjured, becauseof

ureofthe business.

reservein ordertocompute

onmaypaya dividendequal

etion.

utedbydividingthecostof the

atednumberoftons,barrels, thousand

sset,thusdeterminingaunitdepletion

nchargeforeachperiodis thencom-

nitchargeby thenumberofunitscon-

oma fixednatureintomerchandise.

$90,000.00ispaidfor aminewhich

0,000tonsof availabledeposit.The

$.30

agivenyear,thedepletioncharge

20,000,or$6,000.00.

ournal entrysimilartothefollowing:

00.00

astingasset.

rse,beprovidedonbuildingsand

astingasset.Ifthelife ofthewasting

ssthanthelife oftheplant,itis customary

astingassetasthelifeof theplantfor

isisdoneonthetheory thattheplant


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e whenitisno longerneededforopera-

n.Asthelifeofthe wastingassetis

ntofannualoperations,thedepreciation

utedonthesamebasisthatis usedfor

ar

ost-Scrap)XTotalEstimatedUnits "

hevalueoffixedassets.

noftangiblefixedassetsandamorti-

ssetsaredecreasesin valuewhichare

ccurred,althoughtheamountsthereof

Provisionforthesedecreasesin value

fthebalancesheetand operating

toacceptedaccountingprinciples.

ssibledecreasesinfixedasset values

tureandfor whichreservesarenot

eservesmaybeestablishedoutof

atism.Thesecontingentlossesinclude:

assetmaybecomeobsoletefromtwo

erfectedwhichoperatesso

eoustodiscardthe old

chobsolescenceis

bytheasset mayhaveasale

fador afashion,or

eother product.If

f producingonlytheone

demandforthat

dassetobsolete.

expansionmaymakeanasset,

eofcarryingitsold load,

ervicerequired.

e.Aslong asthefixedassetsare

ong asitis expectedthatthey

rpose,declinesinmarketvalue

y reserves.Iftheassetsare

marketdeclinesarenotprospec-


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TS

efixedassets.

reclassifiedinaprecedingchapter

,orthedecreasein valuecausedby

s:Patents,copyrights,

dleaseholdimprovements.

tion.Examples:Trademarksand

bjecttoAmortization

purchase,itscostisthe purchase

einventor,itscostis thetotalofthe

ostsofworkingmodels,andexpensesof

dingdrawings,attorney'sfees,and

provenworthuntilithas stoodthe

;thereforethe costofasuccessful

bookvalueofthepatent.

enteenyears;hencethecostofthe

rittenoffduring thatperiod.Ofcourse,

sometimeafteritwasgranted,the

eit offinlessthan seventeenyears.

sisthetheoreticalperiodforwriting

siderationsoftenmakeitdesirableto

anthattime.Whenthe patentcovers

ketableonlyduringthe durationofa

eoffthepatentduringthe probable


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dsthattheproductmanufactured

ndcannotbemarketedprofitably,

elesseventhoughits legallifehas

t shouldbewrittenoff.

enty-eightyearswitha possibility

ltwenty-eightyears.Publications

blemarketforsolonga period,anditis

bletowriteoffthecopyrightcostas a

efromthefirstedition.

earonthebooksunlessa payment,

smadein obtainingthem.Franchises

hcasethecostneed neverbewritten

ora definiteperiodoftune,inwhich

ttenoff overthatperiod.Theymay

ofthe cityorothergovernmental

inwhichcaseitis advisabletowrite

thereisa tendencytolookuponsuch

dtomakenoprovisionfor writingoff

years.Itshouldnotbe entered

nlessrentalshavebeenpaidin advance,

ntsmaybewrittenoffto expenseover

ossessionofalong-timeleaseto

dwhererentsarerapidly advancingmay

,butthat isnotsufficientjustification

ueon suchaleaseandincludingit as

eet.

ethatthelesseeshallpaythe costsof

mentsoftheleasedrealestate,such as

built-inshelving.Suchimprovements

rtyand reverttotheownerof thereal

he lease;butthelesseeobtainsthe right


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odwill.Toillustrate,letus assumethe

00.00$15,000.00

tsof$100,000.00.If10%be

hebasicreturn onthenetassets

0,000.0010,000.00

reS— $5,000.00

snogoodwill;CompanyB,with

tlyhasagoodwill.

heprice tobepaidfor thegoodwill,

by thepurchaserandtheseller.It

rived atwithoutformalcomputations,

arefullycomputedby:

e probablefutureprofits,and

veralmethodsof estimatinggood-

bablefutureprofits.

sinesspays apriceforgoodwill,he

ssprofitsofthepast,but fortheprobable

.Theaccomplishmentsofthepast,

evidenceoftheprobableaccomplish-

nceit iscustomarytoestimatethe

ofpastprofits.Inmakinga statement

beusedasthebasis forcomputingthe

ouldbegiventothefollowingpoints:

-operatingprofitsandlossesshould

usualinnatureand not

etheyshouldnot beincluded

beusedinestimatingfuture

toadifferencebetweenpastand

houldbegivenconsideration.

entsalarieshavenotbeen

rifthe salarieshavebeen

nsshouldbemadefortheman-

dby thepurchaser,provided

ble.


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EDASSETS279

essinthepasthas beenduelargely

essability oftheoldmanagement,and

efor thissuccessarenottogo withthe

gement,theprofitsandthe goodwill

rgelypersonal,andconsiderationshould

matingfutureprofits.

usinessaretobe transferredtothe

than thatatwhichtheyhavebeen

s,recognitionshouldbegiven tothefact

hargeswillberequiredin thefuture,

becorrespondinglydiminished.

odwillonthebasisofaveragepast

gthetrendofthoseprofits.To empha-

profitsisindicativeofprobablefuture

companieswhoseprofitshaveaveraged

0.00$30,000.00$10,000.00

025,000.0015,000.00

020,000.0020,000.00

15,000.0025,000.00

010,000.0030,000.00

000'00$100,000.00$100,000.00

0,000.00$207000.00$20,000".00

odwill,amountto$150,000.00in

ncernshasmadeanaverageannual

s evidentthatitwouldbe unwiseto

he goodwillofeachbusiness.

awidefluctuation,fromaprofitof

s of$2,000.00in1940.Suchahistory

nceofdependableprofitsinthe future.

eotherhand,arevery uniformyear

tendencytoincrease.

ll(assumingthat10%is afairbasic

ydeclining;the profitforthelast year

etassetsexclusiveofgoodwill;and,if

tsis projectedfortwomoreyears,the

ts.

ethemostgoodwillof all,forits

ing.Infact,justas itwouldbeunwise


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SSETS[Chap.30

nythingforgoodwill,becauseofits

would probablybeunfairtoDto base

profits.BecauseD'sprofits are

earslikelythatitsfuture profitswillbe

epastaverage.

goodwillareillustratedinthe follow-

strationsare basedonthefollowing

aserandsellerofa businesshaveagreed

an goodwill,shallbevaluedat$100,-

ve yearsnextprecedingthedateof

9,500.00,$19,000.00,$21,500.00,and

verageof$20,000.00.

annualprofits.Assumethat the

anamountequaltothe totalprofitsof

rs;thepaymentto bemadeforgoodwill

haseofpastprofits.Theamountis

gyear.$21,500.00

art "21,000.00

forthegoodwill$42,500.00

ofcomputinggoodwillbecauseit

hat thegoodwillisnotdependentupon

wlarge,but upontherelationofthe

ndthatno goodwillexistsunlessthe

ormalincomeonthenetassetsother than

agepastprofits.Thismethoddiffers

onlyone particular:averageprofitsare

dwillisto bevaluedattwoyears'

rofitsofthe pastfiveyears;thecomputa-

madeasfollows:

years(as statedabove)$20,000.00

sofpurchase2

s theprecedingonesinceitignores

pendentuponexcessprofits ratherthan


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SSETS[Chap.30

fthepurchaseprice,the pur-

%thereof$12,500.00

0.00ofthepurchaseprice,the

will60,000.00

%thereof7,500.00

ibleassetofgoodwillhasno value

ofprofits.Therefore,itmaybe more

hepurchaserreceivesnetassetsand

0.00,thepurchaserreceivesonly

12^%is afairratefor thecapitali-

0.00ofprofits(whichareaccompaniedby

dbe usedforthecapitalizationofthe

arenotaccompaniedbyassets.The

tedbythefollowingcomputationof

thatthepurchaserandseller have

rrateforthe capitalizationofprofits

ndthattheremainingprofitsshouldbe

eyears$20,000.00

sapplicabletonetassets acquired—

500.00

edasindicativeofgoodwill$7,500.00

5%$loToOOToO

emosttheoreticallycorrectofall.

eet.

hebalancesheetat notmorethan

orit inacquiringagoingbusiness.

alancesheetshouldrepresentthe

notitsvalue atthedateofthe balance

ased,thegoodwillhasincreased;but

alancesheetas goodwillshouldnotbe

ecreased,thereisnoobligationto

oodwill.


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EDASSETS283

balancesheet,thereasonablenessof

nbetestedbyoneof the"capitalization

scribedintheprecedingsections,prefer-

t assetsotherthangoodwill,as

et(inother words,thenetworth

tminusthe goodwillstatedtherein)

tetocovera returnoninvestment

btainedfromthenet incomeshown

ement;

arnings,asthusdetermined,by

hrate (20%,forinstance)to

capitalizedvalueoftheexcess

uationthusdeterminedwiththe

nthebalancesheet.

sheetcouldbesurethat theamount

representedtheamountactuallypaid

withtheacquisitionofa profitablegoing

otsufferfromits presentdisrepute.

ncesheetshaveshownasgoodwillthe

ororganizationexpenses(whichshould

surplus),oradvertisingexpenditures

eductedfromtheoperatingprofits),or

opmentperiod,orthe amountsofstock

valueoftheassetsreceived.


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ETS

orvariouspurposes,amongwhich

esfortax,sale,consolidation,and

eriodofrising costs,thedepreciated

oncostislikelyto exceedthedepre-

nalcost.Forinstance,anappraisal

thefollowingvaluesof machinery:

perappraisal....$140,000.00

100,000.00

stnewoverorigi-

rappraisal35,000.00

ks25,000.00

reproductioncost

nalcost10,000.00

al$105,000.00

0

appraisalover

0

titude.

ntstookthepositionthatfixedassets

ooksandshowninthebalancesheetat

ardlessofhigherappraisedvalues,

etsto appraisedvalueswouldinvolve

ouldbeunwarrantedbecausethe

dbeanunrealizedprofit.However,

situationsofthissort:

eciation—perbooks$75,000.00

ssdepreciation—perappraisal105,000.00

amortgageontheproperty60,000.00


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DASSETS[Chip.31

ponshowingthepropertyin the

ostlessdepreciation,heindicatedthata

securedbypropertyworthonly$75,-

sreliable,thebalancesheet wasobvi-

he accountantmightshowthefacts

r81,1941

ostNew,LessDepre-

heBlankAppraisal

r31,1941,$105,000.00):

25,000.00$75,000.00

0.00

hichtheappraisedvalueof thefixed

enthetically,isobviouslymuchless

pany'sstandpointthanoneinwhichthe

nthemoneycolumns,asfollows:

r31,1941

byTheBlankAppraisal

31,1941:

140,000

105,000

0

consideredtheirposition,and

heconclusionthatitis permissible

accountsifthewrite-upisnotcredited

tionsubsequenttotheappraisalis

tmethod.

llustration,theassetand deprecia-

oretheappraisalwasrecordedwere:

—Machinery$25,000.00

djustedtoagreewiththe appraisal

efollowingpage.


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FIXEDASSETSM7


rementperAppraisal..30,000.00

achineryistheexcessof thereplace-

ginalcost;the $10,000.00credittothe

depreciationperappraisaloverthe

ndthe$30,000.00credittotheReserve

sthenetincrease;creditingthis reserve

tant'sdesiretokeepthe unrealizedprofit

heaccountswouldbeshownin the

r31,1941

byTheBlank

December31,1941:

140,000

$105,000

rementperAppraisal....30,000

xxx

ondmethod.

ecordingappraisalsareusuallymade

bove;thismethod,however,issubjectto

amely,acleardistinctionbetweenactual

upsisnotmaintained.Tomaintain

sirableto:

rtyaccountwhichwillbecharged

ctioncostnewoveroriginal

ciationreservewhichwillbecredited

eciationonreproductioncost

riginalcost.

ournalentrytotake uptheappraisal

ease40,000.00

—Machinery—Ap-

0

rementperAppraisal.30,000.00


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DASSETS[Chap.31

nthus recorded,theaccountswill

nces:

$100,000.00

ease40,000.00

oncost)$25,000.00

—AppraisalIncrease...10,000.00


veacombinedbalanceof$140,-

depreciationreserveshaveacombined

dtheunrealizedprofitisset upina

ononcost.

precedingillustration,thebooks

ecteddepreciationequalto25%ofthe

$140,000.00

5,000.00

5,000.00

ciation25%25%

saldisclosedaper centofaccrued

mthatshownbythebooks;forexample:

$140,000.00

8,000.00

2,000.00

ciation25%20%

showsonly 20%accrueddeprecia-

atthe depreciationprovidedinthe

sbeen excessive,andthatthetotal

nly 20%of$100,000.00,or$20,000.00,

ttheaccountswithrespectto this

on.However,itshouldbeunderstood

rees ofdepreciationshownbythebooks

ot necessarily,orevenusually,indicate

rvebasedoncostshouldbe adjusted.

preciationarenotintendedto equal

eringorappraisalbasis;theyare intended

vestedcostoverthe lifeoftheassetby


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FFIXEDASSETS289

erations.Thedifferencebetweenthe

ertheappraisaland thepercentof

anaccountingbasismaybeignored

ppraisal,itispracticallycertainthatthe

of theasset,onwhichthebookdepreci-

or,and unlesstheconsequencesof

usmagnitudeastomakeadjustmentsto

of materialimportance.

,andassumingthatanadjustment

eentryis:


nreservefrom$25,000.00

0(20%ofcost)and

stment.

amountof theexcessdepreciation,

sionreducedtheprofitsofprioryears and

sbalance.

e accountswillhavebalances

wwiththoseshownbytheappraisal:

stnew$100,000.00$140,000.00

0.0028,000.00

112,000.00

djustedtoreflectthe appraisalby

ease40,000.00

—Machinery—Ap-

rementperAppraisal32,000.00

e accountswillcontainthefollow-

$100,000.00

ease40,000.00

adjustedto20%ofthe

00.00

—AppraisalIncrease

ncreaseingrossvalue).8,000.00


epreciationinprior


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DASSETS[Ch«p.31

ethatthe appraisaldisclosesa

herthanthatreflectedbythe books;for

tnew$100,000.00$140,000.00

2,000.00

,000.00

ciation25%30%

dinthepast isinadequatebecause

fe oftheasset,andif itisdesiredto

djustmentmaybemadebythe following


onreservefrom$25,000.00

0(30%ofcost—basis

chargeSurpluswith the

ofprioryears' deprecia-

adjustmenthasbeen posted)are

appraisalvalues:

tnew$100,000.00$140,000.00

0.0042,000.00

,000.00

djustedtoreflectthe appraisal

ease40,000.00

—Machinery—Ap-

0


e accountswillcontainbalances

$100,000.00

ease40,000.00

—Machinery(adjustedto30%of

$30,000.00

—Machinery—AppraisalIncrease

creaseingrossvalue)12,000.00


uatedepreciationinprior


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IXEDASSETS291

.

,afteranappraisalhasbeenrecorded,

nces:

$100,000.00

ease40,000.00

—Machinery(oncost)$25,000.00

—Machinery—AppraisalIncrease10,000.00


matedoriginallifeoftwentyyears;

susedprior totheappraisal;theannual

herefore$5,000.00;fiveyearsofthe

ndhencetheaccumulatedreserve

0;fifteenyearsofestimatedlife remain.

hargedduringeach ofthesefifteen

sedoncostorwith depreciationbased

Therehasbeena differenceofopinion

squestion.

countantshaveheldtheopinion

xedassetisasort ofdeferredchargetobe

onsduringthelife oftheasset,depreci-

raisalshouldbe based,asbefore,oncost,

helife oftheassetwillbe chargedwith

e,noless.Accordingtothisopinion,

tobeclosedtoProfit andLosswouldbe

ournalentry:

5,000.00

—Machinery(oncost)...5,000.00

5%oftheoriginal costof

75,000.00remainingunde-

of theappraisal).

al,thenetappraisalvaluewas

enetbookvaluebased oncost,andthis

realizedprofitreserve.Butfifteen

willpresumablyhavenovalue,andthe

havedisappeared.Forthisreason,

Incrementshoulddisappearalso.It

byfifteen annualentriesasfollows:


Machinery—Appraisal

on—'••]5of$30,000.


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DASSETS[Chap.31

stheaccountswillcontainthefollow-

$100,000.00

ease40,000.00

—Machinery(oncost)$100,000.00

—Machinery—AppraisalIncrease40,000.00

rementperAppraisal—

preciated,theaccountscanbeelimin-

bitingthetwodepreciationreservesand

ounts.

entvalue.

sedonreplacementvalueisofcourse

axcomputations,manyaccountants

iationforgeneralaccountingpurposes

ementvalue(ifit isinexcessofcost),on

tureroperatinglow-cost,long-ago

eshimselfultimatelyinabad position

oncost.Forthe timebeinghismanu-

erthanthoseof anothermanufacturer

eexpensivemachinery,andhemaybe

gpricescorrespondinglylow.This

antageinmeetingcompetition;but

facturerifhegainallthe .business,butat

e himtoreplacehisfixedassetsat the

voidsuch aneventualcalamity,it

epreciationshouldbebasedonthe costs

replacingthemachinery,sothatmanu-

omputedatahigherfigure,and selling

setata higherfigure,andthemanufac-

ainstoget enoughforhisproductsto

xed assets.

viewadvocatethatannualentries

annersimilar tothefollowing:

y(tobeclosedtoP.& L.)7,000

—Machinery(oncost)5,000

—Machinery—AppraisalIncrease2,000

depreciationonreplacementvalue.

rementperAppraisal2,000

onofappreciation.


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FFIXEDASSETS293

edfor tworeasons:(1)thedebitis

duallytheUnrealizedIncrementaccount

eunrealizedprofitwillhavedisappeared

asset;and(2)Surplusshouldbe

etthefactthatchargingoperationswith

steadof$5,000.00resultedinshowinga

oSurplus)whichwas$2,000.00lessthan

s,theaccountswouldcontainthe

owninthe precedingsectionillustrating

the samejournalentrycouldbemadeto

eciation-on-replacement-value,the

scouldreply:Agood businessmanknows

behighenoughtoenablehim tobuy

oldisworn out;hecanrememberthis

ntsinsuchamanneras todistorthis

hargesareintendedtospreadthecost

sset'slifeasan expense;thetotaldepreci-

reaterthanthecost;whilethe low-cost

eciationexpenseshouldbebasedon its

ahigher-costasset,thedepreciation

enewcost.

adeclearerby analogy.Amer-

.00and marksittosell for$1.50.

etpurchasepricegoesupfrom$1.00to

advanceshissellingpriceto$1.85 sothat

for$1.35 andstillhave$.50for operating

Buthedoesnotsay thatthefirstarticle

nsiderit necessarytomisstatethecost

lemerelytoassurehisability toreplace

ment.

thischapterindicatethegeneral

untantsrelativetoappraisalsandsubse-

rdateofApril1940,theCommittee

oftheAmericanInstituteofAccountants

gtwopronouncements:

dnormallybe carriedintheaccounts

basisofvaluationis"imprac-


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corporationshouldrecordthe

setsdisclosedbyan appraisal,

terbechargedwithdeprecia-

sof theappraisedvalue.

preciation,ifmadeinaccordance

ion,wouldpresumablytaketheform

section"Entriesbasedon replacement

mmittee'sreasonforthisopinion

entfromtheargumentsformerlypre-

ohaveadvocatedbasingdepreciationon

easonofferedbytheCommitteein

tosubsequentdepreciationcanbesum-

panymustbeconsistent;ifthe balance

ntvalueofthepropertyis $150,000.00,a

0.00shouldnotbeusedfor purposesof

onchargesshowninitsprofitandloss

ifonevaluationappearsin thebalance

ntwithitshouldappearin theincome

supportof thispointofview,and

trendsofmajor importanceinthe

ounting:atendencytogiveincreasing

mentofearnings,andanemphasisupon

ofconsistency,itcanbecontended

sthecostbasis ofaccountingforfixed

goodbalancesheetshowing,itshouldnot

econcomitantpenaltyintheformof addi-

esagainstearnings.Itmayalsobesaid

esdownitsfixedassets doesnothesitate

reciationchargesonthelower values;

uirethatanaccountantwhosanctionsthis

onacomparableprocedureiffixedassets

mpossibletoforecasttheextentto

onouncementwillaltercurrentpractice.

withnoauthoritytoimposei tsfindings

strely uponthen:generalacceptability.

tantsmaybeimpressedwiththesound-

sistency;itis alsopossiblethattheymay

opertoshowappraisedvaluesinthe


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FFIXEDASSETS295

heet,for reasonsthathaveseemed

mayfail toseeanyglaringinconsistency

nwhich,althoughthefixedassetsare

,thereisan unrealizedprofitreserve

appreciation,andanincomestatement

sedoncost.

f priceswasupward,andappraisals

sesinfixedassetvaluations;appraisals

eandrecordedtoestablishincreased

cidenttotheissuanceofsecurities.

chbeganin1929,the downward

developedanotherpointof view,andnot

epolicyofwritingdownfixedassets to

ces,nodoubt,thefixedassets were

oreconservativepictureofthefinancial

bythebalancesheet.In manyother

pearsthatthewrite-offtoSurpluswas

evingfuture operationsoflargedepreci-

tmorefavorableoperatingresultscould

tement.,

theproprietyofmakinga large

eeffectis torelievefutureperiodsofa

chargeswhichwouldotherwisebe

enses.Manyaccountants,however,

missibleif thewrite-downwasmadeby

notsanctioncreatingacapitalsur-

rsturnina partoftheirstock,orby

o-parstockbasis,orotherwise,andthen

esoffixedassetsbychargesagainstsuch

therwords,relievingfutureperiods

epreciationbywritingdownfixedassets

eductionin valueischargedagainsta

yoperatingprofitsofpriorperiods,but

hargeismadeto asurpluscreatedin


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ments.

tockinvestmentsbecarried?The

pendsuponwhetherthe stockisheldby:

or.

mpany.

icabletotheseclassesofownersare

rofthis chapter.

rs.

tocksownedaremerchandise;under

sarepermittedtovalue securitiesowned

,namely:atcost,atmarket,oratthe

ta consistentbasismustbefollowed

missiontochangethe basisisreceived

helowerofcostormarketis, ofcourse,

aluation,forthereasonsstatedin the

aluationofmerchandise.

tors.

purposesofcomputingincome

wnedatcost.Adecreasein market

asaloss untilthesecuritiesaresold,nor

rprofitrepresentedbyan increasein

bya sale.

etvalueis notadeductiblelossfor

ersomecircumstances,butnotalways,

eneralaccountingpurposes.Slight

alueofpermanentinvestmentscanusu-

tmayrecoverbeforethesecuritiesare


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CKS[Chap.32

nthe marketvalueoflong-term

enupinthe accountsaslosses.And

valueof temporaryinvestmentsshould

aslosses.

sultingfromadeclinein marketvalue

wayastopreservearecord ofthecost

curitiesaresoldata laterdate,itwillbe

tinorder tocomputethedifference

rice,whichisthe taxableprofitor

nyownssecuritieswhichcost$100,-

marketvalueofonly $90,000.00,the

oss invalueshouldbe:

10,000.00

tiestoMarket10,000.00

rketLoss onSecuritiesaccount

Loss(orpossiblySurplus)whenthe

etandrelatedreserveaccountswill

0,000.00

ritiestoMarket$10,000.00

ownontheasset sideofthebalance

Market10,000.00$90,000.00

tValue$90,000.00

ofstock.

or'sor speculator'staxableincome

lingsin stocksisthedifferencebetween

costof thestock.Ifstocksarebought

cash,thereisno questionastothecost

edifficultycomesindeterminingthe

xchangeforpropertyotherthancash,

stockpartedwithin exchangefor

forotherproperty,thepartiesto the

ueonthepropertyor onthestock.For

onthe propertyifthecontractstates


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NSTOCKS899

ealestatefor $20,000.00,payableinso

uchstock.Ora valueisplacedonthe

thatB agreestobuyA'sstockfor

withsuchand suchrealestate.

ertyautomaticallyplacesavalue

a.In eitheroftheabovecases:

lossasfollows:

000.00

r lossasfollows:

$20,000.00

newlyacquiredassetonhisbooksat a

orpurposesofcomputinganyprofitor

osal.

statedinthe contractistentative

eptedbytheBureauofInternalRevenue

enta fairmarketvalueforeitherthe

amarketvalueforeitherthe stockor

hedat,say,$25,000.00,A'sandB'staxes

hanged.It willthenbedesirablefor

bookvalueofhisnewlyacquiredasset

00.00,becausetaxesonanysubsequent

ecomputedonthebasisof acostof

deatastatedprice,as inthefore-

sactionshouldberecordedonthe basis

thestockorthefair marketvalueofthe

of theexchange.

shafairmarketvaluefor either

A andBmaybepermittedtor eportno

eloss;inthat case,Ashouldtakethe

t theamountwhichthestockhadcost

stockontohisbooksatthe price

realestate.

corporationforsharesofits stock,

hestockshouldplaceit onhisbooksat

thisisnot determinable,atthefair

tygivenforit. Ifneithervalueis

mentmaysetthevalueatthepar ofthe


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CKS[Chap.32

axpayertheburdenof proofthatparis

fstockat$50.00per shareandten

and latersellstensharesat $60.00per

t oraloss?For taxpurposes(andthe

eneralaccountingpurposesalso)the

etherthesharessoldcanbe identified;if

thefirstsharespurchasedwill beassumed

herefore,ifthetaxpayerdesiresto

ewill takecaretotransfertothe pur-

hesecondpurchase(whichcost$75.00

ossofthedifferencebetween$750.00

wopurchases,the20 shareshadbeen

tesothat thesharessoldcouldnotbe

ldwouldbe assumedtobethefirst ones

thusbeestablishedat$50.00per share,

sharewouldhavetobe reported.

nright isaprivilegeextendedbya

derstosubscribeforadditionalstock

ethestockrightattractive,thestated

belowthemarketprice.

grantingoftheright statesthedate

swillbe closedtodeterminethestock-

thewarrantswill beissued,andalsothe

onswillbepayable.Betweenthedate

thedateofthe issuingofthewarrants,

reinseparable,andthestockisdealtin

riodnospecialaccountingproblems

rightsarecarriedatthe costofthestock,

ghts-on,"theprofitonthesale ofthe

essoftheamountreceivedoverthecost

ed,thestockis dealtin"ex-rights";

oldseparately.Iftherights aresold,

arise:

son thesaleofthe rights?

y,shouldbe madeinthevaluation


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NSTOCKS301

ofitorloss onthesaleof arightby

ostofthestockbetweenthe stockand

emarketvalueof therightandthe mar-

ights"atthe timeoftheissuanceof

methata shareofstockcost$100.00;

heacquisitionofthis shareofstock,the

ubscribeto anadditionalshare.(The

terialtotheillustration.)At thetime

therighthada marketvalueof$30.00

adamarketvalueof $120.00.The

etvalueof$30.00.Whatwasthe profit?

tockbetweenstockandright:

0.0080%

020

00

boveapportionment:

ostofstock)20.00

00

ountshouldbeadjustedtoreduce

f stockfrom$100.00,theoriginalcost,

ionof thecostregarded,underthefore-

pplicabletothestock.

vedforthe rightmayberegardedas

his basis,noapportionmentofcost

eright)is necessary,andnoadjustment

stockisrequired.

s.

or acontrollingportion,ofthe

y,therelationofparentandsubsidiary

roblemsarisewithrespectto thevalua-

mpanyshouldcarrythe investmentin

epropertreatmentto beaccorded

ts shareoftheprofitsof thesubsidiary.

nsidertheseproblemsfromthe

ompany'sbooksandstatements;con-

er(in Chapters47to49)to theprepara-

mentsoftheparentcompanyandthe


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CKS[Chap.32

nyP(parentcompany)organized

ndacquireditsentireauthorizedstock

00.00.Itsbalancesheetimmediately

showamongtheassets:

sidiaryCompanyS—100%$100,000.00

anddividends.

deby theparentcompanywith

nddividendsofthe subsidiary?And

aswellas thestockinvestment,be

ompany'sstatements?

cedures,basedontwoverydifferent

lled,forpurposesofidentification:

t;and

onomicconcept.

the firstyearofits operation,the

$30,000.00,thusincreasingitsnet

00investedto$130,000.00.

t,if thesubsidiary'snetassets

,000.00to$130,000.00,thevalueof

estment,basedonunderlyingnetassets,

mount.Italsoseemsobviousthat,

edbythe parentcompany,thesub-

nductedforthebenefitofthe parent

0.00profitmadebythesubsidiaryis

ntcompany.Inotherwords,itappears

sjustifiedin makingthefollowingentry:

sidiaryCompanyS30,000.00

fSubsidiaryS30,000.00

bythe parentcompanyafterthis

entwillbe showninthebalancesheet

00,andthe$30,000.00willbe shownas

s statement.

,letusassumethat thesubsidiary

00.Sincetheparentcompanyhas

profitmadebythesubsidiary,it can-

he dividendreceivedfromthesubsidi-


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STOCKS303

shouldrecognizethatthereceiptofthe

apartofits subsidiaryinvestmentinto

sfactas follows:

sidiaryCompanyS.5,000.00

stration,letusassumethat,during

diarysuffersaloss of$15,000.00but

entcompanyadividendof$5,000.00

oryear.

owrecordthelossand theresulting

oftheinvestmentbythe followingentry:

bsidiaryS15,000.00


ptofthedividendasfollows:


zedasfollows:

000.00

00.00

ent$125,000.00

00

ent$105,000.00

year,theparentcompanywillhave

5,000.00andwillbecarryingthe invest-

chisequaltothe netassetsofthesub-

sted+$15,000.00profits-$10,000.00

galconcept.

pointaparent anditssubsidiary

tities,andtheprofitsearnedby thesub-

eparentcompanyuntiltheyarerealized

oughthereceiptofdividends.If this

eproperbasis forparentandsubsidiary

ntwillalwaysbecarriedatcostandthe


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CKS[Chap.32

upasincomeonlythe dividendsreceived.

illustration:

,theparentcompany'sprofitand

sincomethe$5,000.00dividend

0,000.00netprofitearnedbythe

esheetwillshowthe investment

0insteadofat$125,000.00,the

netassets.

ear,theparentcompany'sprofitand

e$5,000.00dividendreceivedas

sidiarylost$15,000.00;andits

wthe investmentatitscostof

onciled?

scussedappeartopresentan irrecon-

egalconsiderationsofseparatecor-

mitthatprofits earnedbyasubsidiary

ilableforthepaymentof dividendsby

heyhavebeenrealizedby theparent

eiptofdividendsfromthesubsidiary.

estheinvestmentatcost,and takes

gardlessofthe resultsofthesubsidiary's

mpany'sstatementsmayreflectallsorts

ossstatementa$5,000.00income

en thesubsidiarymade$30,-

nefitoftheparentcompany;

ossstatementa$5,000.00income

en thesubsidiarylost$15,000.00;

eetthecostof theinvestmentregard-

easesinunderlyingnet assetvalues.

thatthe twobasesofaccounting

ronereason,onecannotsafelyunder-

mentsofa parentcompanyunlesshe

untinghasbeenused.Andforanother

whereacompanyhasjumpedfromone

dingyears,inorder tomakethebest

ryearningsasparentcompanyincome


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NSTOCKS305

gsexceededthedividends,andshowing

ear whentheyexceededthesubsidiary's

sthatthemethodof accounting

abettername)wehavecalledthe

rulyreflectstheparentcompany'sincome

fits investments.Itsonlyfaultseems

pany'ssurplusiscreditedwithsubsidiary

otheparentcompanyin theformof

theparentcompany'ssurpluscontains

bleforthepaymentofparentcompany

nddesirablecompromisebetweenthe

ctedbyentriessimilarto thefollowing:

sidiaryCompanyS30,000

osedtoRestrictedSurplus)30,000

ubsidiary'sprofitsofthefirst

vestmentaccount,butbycredit

ounttoshowthat theseprofits

ymentof parentcompany

sidiaryCompanyS5,000

ectionofa dividend.)

estrictedsurplusto freesurplus

y'searningsnow realizedby

ghthecollectionofadividend,

leforthepaymentofdividends

n theparentcompany'sbalance

ustratedbelow.It isassumedthat

esurplusincludes$50,000.00realizedby

ningsnotreceivedindivi-

reseemstohavethefollowingmerits:

anytotakeup trueeconomicearnings

ustmentofthecarryingvalueofthe

tchangesintheunderlyingnetassets;

of thesurplusintotwoelements,it


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CKS[Chap.32

gallyavailableforparentcompany

pterare basedonconditionsof

ershipbytheparentcompany.Ifthe

%but stillsufficienttoeffectacontrol

eproceduresdiscussedinthischapter

edonlybythe factthattheamounts

asis ofthepercentageofparentcompany


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bonds,carryingsomanydifferent

eraldefinitioncanbestatedonlyin the

promisetopaytheprincipalofand

sfromanotein thatitis moreformal,

oratefinancing,notesareusuallygiven

ondsforlong-timeloans;this isamatter

necessarycharacteristicofanoteora

ompletelistofthe varioustypesof

tlineincludessomeofthe mostcommon

fobligor:

ergovernmentalsubdivisions.

nies,streetrailways,railroads,etc.

gandtradingconcerns.

hotels,officebuildings,etc.

pandmethodofcollectinginterest:


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DS[Ch«p.33

titletoproperty,usuallymadeby

ectto theconditionthat,upondue

tle tothepropertyisto revestinthe

rtgagewasconsideredasanactual

yanceoftitle;if thedebtwasnotpaid,

propertythenvestedinthemortgagee

rtgageis thatitis primarilyasecur-

ortgagedeeddoespurporttoconvey

hepledgedproperty,actuallyitserves

epropertytosecurepaymentofthe debt.

theithernotesor bonds.Ifthe

sonwhois willingtoloantheentire

ndmortgagemaybeused;the note

bligation,andthemortgageservesasthe

wthemoneyfromanumberofpersons,

rust deedareused.Thebondissue

tions,allof equalrankandallequally

However,sincethereareanumber

dersarenot knownwhenthebondissue

etheywill changewitheachtransfer

nnotnamethe lenderspersonallyas

gedproperty.Thereforeatrust deed,

ed,is used.Corporations,whenborrow-

dissues,generallyuse thetrustdeed.

rconveysthepropertyto athirdperson,

ompany,astrustee.Uponfinalpay-

tee executesanddeliversareleasedeed,

perty,createdby thetrustdeed,is

defaultinpaymentofthebonds,the

oreclosureproceedingsforthebenefitof

ssuanceofbondssecuredbya trust

urposes,amortgagetransactionandisso

irst,second,third,or evenmore

nsarenotmet andforeclosureensues,

ertymustgofirst tothesatisfactionofthe

rs,anyresiduetothesatisfactionofthe

lders,andsoon.Bondssecuredbyprior

bonds;theothersare calledjuniorbonds.


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NBONDS309

iscalledafirst mortgagebonddoes

thasa lienpriortoall others.To

eecompanies,A,B,andC,eachhave

operty.Aconsolidationiseffectedby

sarecombined,andanewissueof bonds

mortgageonall oftheproperty.This

ConsolidatedBonds,butit isreally

e.Onthe otherhand,assumethat

rtgagebondshavebeenissued,and that

eenpaid; thethirdmortgagebonds

hepledgedproperty.

milarto collateralnotesinthatthey

lateral.Toillustratetheuse ofthese

orationholdsstocksandbondsof several

propertyoftheholdingcompanyand

ortgagedtothe pointwherejuniorissues

eforetheholdingcompanyissuesitsown

ksandbondsof thesubsidiariesinthe

ateral.

anteetopaytheprincipalandinter-

oughitobligatesitselftodo so.If

st bemadebyathird party.Some-

uaranteestheprincipalandinter-

sidiaries,andsometimesacompany

thercompanyguaranteesthebondsof

nture,ismerelyan unsecuredbond.

dnote,inthat itrestsonthe general

agenerallienonall oftheunpledged

yormaynotbe asafeinvestment,

cialconditionoftheissuingcompany.

ncomebondis thatthepayment

onthe earningofincome.Ifthe


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DS[Chap.33

eisnotsufficienttopaytheinterest,there

erest.Thebondmaybecumulative

ulative,anyinterestnotpaidinone

stfutureprofits;if non-cumulative,any

ostforever.Theprincipalmayor may

edprofit-sharingbondsbecause,in

dera definiterateofincomeregardless

title himtoparticipatewiththestock-

holdersmayparticipateprorata,

happlyto participatingpreferredstock,

ipationmaybelimited.

sholderthe righttoexchangethe

ty,usuallycommonstock,oftheissuing

atesthetermsonwhichthetransfer

orpar;orpar forthebond,andbook

andaccruedinterestforthebond,and

sforthestock;or parforthebond,

estock,andinterestanddividends

erarrangement.Suchbondsgive

meanda securedprincipalduring

ftheissuingcompany,witharight to

eoperationsofthecompanyare

nds.

threegeneraltypes,on thebasis

and interest.

thebondisregisteredon the

anyorits fiscalagent,and

drawntotheorderofthe

hastheadvantageofsafe-

stlossor theft,becausea

be accomplishedonlyby

vantages,however:(1)a

adeonly byassignmentand


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NBONDS311

very;and(2) thecheck

sburdensome.

only.

stoprincipalonly,andcoupons

st,theowneris safeguarded

he debtorcompanyis

suing interestchecks.

eby delivery,andwithout

tcouponsareclippedand

posit orcollection.

cedingchapterwithrespectto

ebooksof investorsanddealers,

ofsecuritiesacquiredforproperty,the

iredforsecurities,profitsonsales,

itsonsaleswhenpurchasesweremadeat

veprovisionsfordecreasesinmarket

nvestmentsinbonds.

ofpremium.

ear6%bondfor$1,035.85,holdit

t par,mynetearningis:

$240.00

rity1,000.0035.85

mustreportas incomeeachyear

willreportthepremiumlost asadeduc-

bondmatures.Althoughthisisthe

asthebestaccountingprocedure.If

remium,itsvaluetendsto decreaseto

ches;therefore,forbalancesheetpur-

amortize(write off)thepremiumover

usgraduallytoreducethe carrying

m theincomestatementstandpoint,

thepremiumlossoverthelife ofthebond

erest income,insteadoftakingthe

henthebondmatures.


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DS[Chap.33

rtizedinequalperiodical amounts;

eforegoingillustrationandassuming

semiannualcoupons,thesemiannual

uldbe$35.85-f-8,or $4.48(actually

$4.49)andtheentryateach semiannual

miumamortized)4.48

riesisposted,thebond accountwill

ne|30([Amortization|j4J48

d,thebalanceinthebond investment

ucedto par.

nvestment,andthe periodical

hebond,areshownbelowonthe tax

tionbasisofaccounting:

sis

come

5

37$25.52

925.52

125.52

325.52

525.52

725.52

925.52

25.51

4.15

hthperiodistheamountof thepremiumminusthe

ofdiscount.

year,6%bondfor$965.63,holdit

atpar,mytotalearningis:

$240.00

ity$1,000.00


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r thefirstthreeyearsI willreport

estcollected;in myreturnforthefourth

etheinterestplus thediscountrealized.

theinvestmentandtheincome

tionofthe factthatabondpurchased

easeinvalueasits maturityapproaches.

s,therefore,itappearsproperto amortize

ofthebond,thusgraduallyincreasing

bond.Andfromtheincomestatement

rtoregarda portionofthediscount

dinequalsemiannualinstallmentsof

allyseveninstallmentsof$4.30andone

collectionoftheinterestand the

ntateachsemiannualinterestdate

tamortized)4.30

miannualentriesisposted,thebond

ws:

d,thebalanceintheinvestment

easedtopar.

nvestment,andthe periodical

hebond,areshownbelowonthe tax

tionbasisofaccounting:


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DS[Chap.33

—effectiveratemethod.

sthat statedbythebond;the

yearnedon theinvestment.

apremium,theeffectiverateis less

woreasons:(1) theinvestmentismore

meisthecouponminusa portionofthe

foregoingillustrationofa$1,000.00,

asedataprice of$1,035.85,thenominal

verateisonly5%—or2J %each

installmentmethodofamortizing

ts,asdescribedon theprecedingpages,

mostpurposes.However,thetheo-

mputingtheamortizationrequiresthe

trate.The semiannualinterestand

ondboughtat apremiumareas

tofthe coupon.

hanamountcomputedbymultiplyingthe

tmentatthe beginningoftheinterest

miannualinterestrate.

ththe remainderofthecoupon.

dtothebondpurchasedfor $1,035.85,

firstsix monthsis:

fsemiannualcoupon$30.00

}^%of$1,035.8525.90

count—premiumamortized$4.10

hebondinvestmentaccountwill

75,asindicatedbelow:

une|30jAmortization|| 4J10

secondsixmonthsi s:

}£%ofnewbalanceof$1,031.7525.79

count—premiumamortized$4.21

mortizationisregardedastheo-

amountcreditedto incomedecreases

natelywiththedecreasein thecarrying


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NBONDS315

ionentries,andthereducingbook

uringthefour-yearlifeof thebond,

—effectiveratemethod.

adiscount,theeffectiverateis

ate,fortwo reasons:(1)theinvestment

eincomeis thecouponplusaportion

0.00four-year6%bondboughtat

asboughton a7%basis—thatis,toyield

ndamortizationentriesonthe

ndbought atadiscount,are:

hanamountcomputedbymultiplyingthe

tmentatthebeginningof eachsemiannual


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DS[Chap.33

ionentries,andtheincreasingbook

ringthefour-yearlifeof thebond,are

Balance

9.43

00

ondto netastatedratedepends

weenthenominalrateand theeffective

bond.Thus:

yieldmorethanthe nominalrate:

of theeffectiverateover

erthe discountfor

d,

ebond,themoreinterest

ythemoreaggregate

yieldlessthanthe nominalrate:

of thenominaloverthe

thepremiumforeach

ebond,themoreinterest

ythemoreaggregate

ondto yieldastatedrateis shown

otal premiumordiscountdependsupon

ablesusuallycontainapageshowing

nsix months,apageforbondsmaturing

smaturingina yearandhalf,andsoon.

ependsuponthe differencebetween

rates,thebondtablescontaincolumns

eachcolumncontainingvaluesatdiffer-


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nthefirst column.Thefollowingis

sucha bondtable.

ually


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uished.

esarewhollydifferentinnature,

nationtoconfusethem.

etasidefor particularpurposesand

shandsecuritiesheldbythe company

ounts,therefore,always* havedebit

ntassets,andalwaysappearontheasset

d,alwayshavecreditbalances,and

assets.Justwhattheydorepresent

r37. Atpresentitis desiredmerely

mely,fundaccountsalwaysrepresent

rdo.

no well-definedmeaning,anditsuse

ometimesappliedto afundand

ndforthis reasonitsuseis likelytobe

gchapterswithrespecttothevalua-

ld asgeneralinvestmentsapplies

specialfunds.All suchsecurities

xceptthat(1) decreasesinmarket

ationofreserves,and(2) premiums

pecialfunds maybeamortized.

ned,consistsofassetsset asideand

dinterestforthepaymentofaliability

eralindustrialaccountingisconcerned;terminologyis

nstitutionalaccounting.


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re,afuridcreatedfortheretirement

sinkingfund,becausepreferredstockis

ndfromwhichperiodicalexpendi-

rchaseandcancellationofbondsisnot

eliabilityis paidininstallmentsbefore

at maturity.Suchafundwouldmore

ptionfund.

stockretirementfund,abond

esinkingfundis interestingasamatter

y.However,usagemodifiesmeanings,

astsanctioningtheextensionoftheterm

ndsforthe retirementofstockand

tiesin installmentsbeforematurity.

s.

calcontributionstoasinking

nseveralbases,amongwhicharethe

tcomputedbydividingthetotal

erof yearsofthelifeof the

ndof $200,000.00istobe

nnualaddition tothefund

contributionsalonewill

entireindebtedness,interest

dassetscangointo thegeneral

tcomputedona compound-

e,contributionsof$15,900.92

ftenyearswillcreatea fund

of thetenthyearifcompound

earnedonallfundassets.

ntsperunit ofoutput.This

n thebondsaresecuredbya

tssuchasminesor timber

toincreasethefund asthe

shed.

fits.This methodhasbeenused

withso-calledpreferred-stock-

eingthatthe profitsareused

kinsteadof fordividendson


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seemstobeatendencyto

thepaymentofliabilities.

fundconsist ofcontributionsto

ecurities,thecollectionofincome,the

dtheeventualretirementofthebonded

forthesetransactionsareconsidered

.xx

ABBondsxx,xxx.xx

xx

hecostofthebonds

hethertheyarepur-

iumoradiscount.

maybeamortized

xx

spurchasedat par.)

sxx.xx

xx

spurchasedat adis-

sxx.xx

xx

spurchasedat apre-

.xx

from fundcash.)

.xx

from generalcash.)

aturity:

x.xx

ritiesxx.xx

x,xxx.xx

ataloss.)


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x.xx

x,xxx.xx

uritiesxx.xx

ataprofit.)

sufficienttopay

mentismadeinto

x.xx

onds.)

shremainsinthefund

eralcash.)

ndSinkingFundExpenseaccounts

dofeachperiodtoProfit andLoss.The

torlosson thefinalsaleofsinking

osedtoSurplus asanextraneous

sinkingfund.

ndtrusteeuses thecashdeposits

y bondsintendedtobepaidoff; what

ondsthusacquiredfromtimetotime?

tus assumethatacompanyborrows

rbondissue,agreeingtoestablisha

entof thebonds:

atedtopaythetrustee$20,000.00

ot dependentuponearning

fund assetstomakeupthe

hetrusteecanuseeachdeposit

.

niscomputedontheassumption

obe earnedonthesinking

eperiodicalcontributions

llproduceafundat the

icienttoretire itatthat date,

periodicalcontributionsin

es.

ownbonds,hemusttreatthemas

r companieswhichhemightbuyfor

"holdthemalive"in thefund.They


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nassetandasa liability;theywillbe

don theassetsideofthe balancesheet

iabilityontheothersideof thebalance

ontinuetopaytheintereston thebonds

the amountoftheinterestpayments

dedinthetotalbond interestshownas

ndlossstatement,andwillalsobe

dincomeshownin thatstatement.

paymentofdebt.

trusteeforthepaymentofdebt

h,doesnot constitutepaymentofthe

talfunds ondepositwiththetrustee

et sideofthebalancesheet,andthe

staswellas fortheprincipalshould

deofthebalancesheet.Theliability

nnotbeeliminatedfromthe balance

appliedthefundstothe paymentof

hodhaslongbeenusedfor theretire-

nts,andis becomingapopularmethod

Theprovisionsofthe stockissuemay

untof stockshallberetiredannually,

thisrequirementcouldbeenforced

rofitswereinadequateandcreditors'

orefrequentlytheamountofstock

adedependentupontheprofitsofthe

fixedpercentageoftheprofits,orit

ding scaleofrates.

ontingentliabilitiesareencountered

acontractortoguaranteetheper-

dancewithspecifications,andafund

eswhichmayresultfroman adverse

ntinfringementsuit,areillustrations

contingentliabilities.

liabilitieswhichdo notyetexist

consequenceoftheprovisionsofexisting

e,leasesfrequentlycontainclauses


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epositofcashtobe appliedinpayment

(oftenthelast)yearsofthe lease.Ceme-

nderan agreementthatacertain

hallbedepositedwithatrustee asafund

re.

facorporationadoptthepolicy

establishingafundfor theacquisition

und,machineryfund,or similar

pearanceontheasset sideofthebalance

.

yconsistofcashandreadilymarket-

yshouldnotappearin thebalancesheet

aption.Ordinarilytheyshouldappear

ptiondevotedtothemalone orunder

suchasOtherAssets.

eatedforuse forsomecurrentpurpose

ndinterest;such afundcanproperly

rentassetsin thebalancesheet.

rs.

ngparagraphs,somefundsare

onofthecorporatemanagement;others

ewiththetermsofmortgageindentures

respectto anobligatoryfundand

han itshouldbeto conformwiththe

tion,thisfactshouldbe disclosedbythe

sureismadeifa portionofthecash

orfund purposes,thus:

0

tioninarrears5,000.00

$20,000.00

ustee$13,000.00

mcurrentcash5,000.00

0.00

ndedto thebalancesheetstating

tthefollowingwords:"Asinkingfund

etrusteeincashprior toDecember31,

the balancesheet),hadnotbeenmadeat


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ENT

rliabilities.

ccountingforliabilitiesaremuch

ichconcernassets.Theproblem

ultinaccountingforassets,doesnot

es,exceptin casesofcontingentand

erminableamount.

obeconsideredin connectionwith

bilitiesinthe balancesheet.

ilitiesinthebalancesheet.

dasfollows:

s.

nion amongaccountantsastoa

rentiatingbetweencurrentandfixed

ntshaveheldthatonlyliabilities

ysfromthebalancesheetdateshould

wever,itgenerallyis heldthatayear

urrentperiod.

assifiedascurrentandnon-current

sheddividingline,becauseliabilities


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INGENTLIABILITIES[Chap.53

otheroperatingexpensesusuallyshould

ilities,andliabilities onbondsand

edistantfutureare fixedliabilities.

editarrangements,liabilitiesarising

edonothaveto bepaidwithinevena

etdate.It maynotbeproperto include

urrentLiabilitiescaption;to take

ions,acaption"DeferredLiabilities"

arely)appearsinthebalancesheet

xedliabilities.

esfromthebalancesheet.

soonafterthecloseofthe period

rrentliabilitiesexistingatthebalance

bilitiesfrequentlyomittedare:

oodspurchasedbeforethecloseofthe

missionmayresultfromtwo

chases.Inmostconcerns

orecordofthe liability

dsare received.But

n gettingtherecord

hasesofgoodsreceived

ingperiodmaynot

ningof thefollowing

yseriouserror ifthe

ventory,because

edontheassetside ofthe

eliabilityisnot included

lancesheet.Asa

misstated.Moreover,

thepurchasesresults

profits;and this

esultsinanoverstate-

te,assumethat

sehasbeenincludedin

recordhasbeenmade

bility.The profits

ed$10,000.00andthere


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CONTINGENTLIABILITIES387

heetasindicatedbelow:

plus

0$20,000.003Hto1$100,000.00

002Hto190,000.00

sare notincludedinthe

surplusand profits

ebalancesheetdoes

andiseowned,norall

hese omissionsmay

etweenthecurrent

lities.Toil lustrate,

ditions:

plus

00$20,000.003to 1190,000.00

002>$to190,000.00

ngmerchandisepurchases

d,insteadofr ecording

titletothe merchandise

soon astitletothe

aser;and,accordingto

sales,titlemaypassto

oodshavebeenshipped.

hat,ifthe booksare

heetto reflectall

asesshouldbemade

gtothelaw,whether

reshippedorwhen

sforservicesrenderedtothebusiness

ate butnotbilleduntil afterthat

robablysufficetoshowthe

enderedserviceduring

edinsomelegal difficulties;

tilMarch1941, andthe

dwhenthebalancesheet

1940.


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chexpensesaswages,interest,and

ookedbecausetheaccountant

ethasnothad sufficienttraining

nceoftakingupall such

edin merchandise,arisingfromthe

handisecouponbooks,trading

customtomakenoentry

evidencesofliabilitiesbecause

ey willeverbepresentedfor

ntingrequiresthatthe'liability

^!amountbaseduponthe

tothepercentageofsuch

edemption.

bilitiesinthebalancesheet.

tliabilitieswill bedetailedinthe

b-captionswhichwillbeusedfor classify-

tgroup,willdependsomewhatupon

alancesheetis tobeused.Thepresent

otherprospectivecreditorsareentitled

thanneedbegivengeneral publicity

eet.

ntpracticearesatisfiedifa balance

ainsthefollowingclassificationofcurrent

e,unlessotherwiseindicated,should

abletotradecreditorsformer-

purchased.)

reisnouniformityofpractice

whetherornotany ofthenotes

ers,stockholders,andemployees.

stockholders,andemployees.

amountspayabletotradecreditors

materialpurchasesbeshownseparately

nthe analysisofabalancesheet


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ONTINGENTLIABILITIES329

ment,itissignificanttonote theratio

rtheperiod(shownin theprofitandloss

ndaccountspayableliabilityforsuch

ndofthe period(shownbythebalance

meindicationasto whetherliabilities

dwithinthe creditperiodprevailing

companyispurchasingmerchandise

ymentwithinthirtydays.Itsprofit

alancesheetsshowthefollowingfacts:

edDecember31" '$100,000.00$100,000.00

payableatendofyear 10,000.0015,000.00

aidatend ofyear10%15%

ntheassumptionofuniformbusiness

dbe8}.^%ofthetotal purchasesfor

ssmayaccountforthefactthatmore

eyear'spurchaseswasunpaidat theend

ldthe ratiohaveincreasedfrom10%

mthepurchaseofmerchandise

nedinthe balancesheetwithmer-

owillindicatea moreunfavorable

s.

ndicatewhichcurrentliabilitiesare

ecured.Thisinformationmaybegiven

balancesheet,thus:

ypledgeofinventoriesvaluedat

givenon theassetside,thus:

espayableof

00,000.00

ringcurrently.

ficationariseswhenlong-time

aturityandareduewithin,say, ayear.

mongthecurrentliabilitiesin the

precedingbalancesheets,theywere

abilities?Theproximityofthe


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oledeterminingfactor.Ifbondsmatur-

e toberetiredwith theproceedsofa

ofthebondsamongthecurrentliabilities

ouldconveythe impressionthatthe

ofcurrentassets,andwouldso distort

nd currentliabilitiesastogive an

heconcern'sworkingcapital.It

factsareshownif thebondsareleft

witha statementastothematurity.

different,however,whenaninstall-

eisshortlyto becomedue.Thenatural

allmentwillbe. paidoutofworking

erto showtheconditionasfollows:

r31,1940

0.00

tallmentdueApril1,194110,000.00

—PayableinEqualAnnualInstall-

94290,000.00

methodisillustratedbelow:

usiveofCurrentInstallmentof

0.00

—MaturinginTenEqualAnnual

pril1,1941100,000.00

enestablishedforthepaymentof

allmentwillpresumablybepaid from

e currentassets;thereforethecurrent

ownamongthecurrentliabilities.

ssible debt.Itisimportantto

encontingentliabilitiesandcontingent

mayclarifythisdistinction:

mayrequirethe paymentof

gement;inthisinstancethere is

nda contingentloss.

cumulativepreferredstock;in

ntingentliability,butnocontingent


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CONTINGENTLIABILITIES331

accidentsmaydestroyproperty;

ontingentloss,butnocontingent

beshownbybalancesheetfootnotes,

alancesheetundera Contingent

htheamountsshown"short"—that

eycolumnsincludedin thebalance

encyseemslikelytobecomear eality,

formsofcontingentliabilitiesare:

properprocedureforrecording

eceivablewasdiscussedin

elihoodthatdiscounted

andthatcollectionscannot

ers,provisionforthel oss

serveforBadDebtsorin a

eprocedureforshowingassigned

discussedinChapter24.

dbemadein theReserve

r.Apersonmaybecomeanaccom-

ssorynoteeitheras amaker

tingentliabilitymaybe

ndedtothebalancesheet;

nshortasfollows:

yable$1,000.00

contingentliabilitybutdoes

ongtheliabilities.

oftensoldwithguaranteesregard-

e.Experiencewillshowthe

nggoodonsuchguarantees,

etupbya chargeagainst

pendingandifthereis aproba-

st,a reserveshouldbeset

cy.Ifit isnotdesiredto


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eofthe reserve,andthus

tthatthe management

e reservemaybecalleda

s.

es.Ifthereis apossibilitythat

heamountshownby thetax

, theadditionalcontingent

reserve.

narrears.Noentryshouldbe

ndsuntiltheyaredeclared.

earrearsof dividendsinthe

ssedinChapter22.

sofother companies.Onecompany

st,orboththe principaland

f anothercompany,whichmay

y.Ifthereisa probability

be madeundertheguarantee,

mpensationarisingoutofthe

ctibleinfull,a reservemaybe

oss.

ts.Ifgoodsareorderedforfuture

trepresentsacontingent

purchasepriceorforsuchan

theeventofcancellation.

ommitmentsmaybeignored,

ofloss,or,atmost,they

tnote.In afallingmarket,

odofa lossequaltothe

ommitmentpriceandthemarket

ry.Althoughthetotalprice

putonthe books,itwould

abletosetup areserveforany

llingmarketprices.


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tagesofbonds.

storaiseadditionalfunds,the

erthe fundsshouldbeobtainedbythe

es,bonds,orstock.Short-timepaper

sare requiredforcurrentoperations;

orother permanentinvestmentsshould

oflong-timesecurities.

ssueovera stockissueisthatthe

andthestockholdersthereforedonot

mentwiththem.Anotheradvantage

lybeobtainedata lowermoneycost.

thecontributorsofnew capitalwill

stockholdersinallearnings;if preferred

participating,inwhichcasethenewstock-

withtheold;orit maybenon-participat-

suallybe foundnecessarytogivethe

ratehigherthanthe rateatwhichbonds

bondsareasecuredliabilitywith a

ausethebondinterestispayableuncon-

eddividendsaredependentupon

dissueliein thefactthattheprincipal

dtheinterestis afixedcharge.If

nterestisnotpaid whendue,fore-

dthelosson liquidationmayleavea

ockholders.

t.

eflectallofthe importantfactswith

herfixedliabilities.Itis notsufficient

00


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ap.36

bondsshouldbe shown,andthe

shouldbe stated.Forinstance,thus:

e,SinkingFund,6%Bonds,Due

000.00

y,the balancesheetshouldcontaina

ementofthefactstoenablethereader

sexactly,thus:

e,SinkingFund,6%Bonds,

0.00Annually,fromDecember

e,andthe RemainderonDecem-

s.

mountofbondswill beauthorized

ately.Toillustrate,assumethat

rporationis ampleinvaluetosecure

first mortgagebonds.Only$300,000.00

but theremaybelaterrequirementsof

ueis madeforonly$300,000.00,a

ecuredonlybya secondmortgage,which

higherinterestrate,and willundoubtedly

difficulties.Byauthorizing$500,000.00

000.00,thecorporationputsitselfin a

aining$200,000.00atafuture date

vantagesincidenttoasecondmortgage

houldbe recordedasfollows:

00

0

he balancesheetshouldreflectthat

wayisillustratedbelow :

state,MortgageBondsPayable,

Authorized,$500,000.00;Issued.$300,000.00

.

par valueof$100,000.00,dueinfive

er annumpayablesemiannually,are

eentrytorecordthe issuanceis:

0


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ES335

earonthe balancesheetasadeferred

dditionalinterestcost,paidin advance,

dbysemiannualentriesinwhichthe

countisdebitedandtheBondDiscount

mmediately.

ngwhattheyseemtoregardasa

natethebonddiscountimmediately

writingit offagainstSurplus.

ativetothisextent:it getsthedeferred

et.Buttheoperationsoffuture periods

essityofabsorbingthediscountamortiza-

theinterest costswillbeunderstated

overstated.Mostaccountantsdonot

"cleanthebalancesheet"whentheresult

earningsof subsequentperiods.To

xpensewhichshouldbedeductedfrom

accounting.

ount.

investmentsinbonds,it was

onofdiscountorpremiumon bonds

ngbutwasnotrecognizedforincometax

onofdiscountorpremiumonbonds

purposes.

376.03iswrittenoffinten equal

uringthefive-yearlifeofthebonds,

ddiscountentrieswillbe:

ondinterest.

ofbonddiscount.

nterestexpenseaccountmaybe

ngentry:

0

nterestpaymentanddis-


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ap.36

tizedbythescientificeffective

ribedinChapter33.Thebonds men-

mplebeara'nominalrateof 4%;they

discountto placethemonaneffective

or2J %semiannually.Thefollowing

damortizationentrieson theeffective

putethesemiannualchargestoBond

column),theincreasingnetcarrying

bonds minusunamortizeddiscount,

mn)weremultipliedby2^%.

iscountAmortizationEntries

oldtoNet 6%

Minus

BondDiscountDiscount

90.6096,014.57

3696,414.93

3796,825.30

6397,245.93

1597,677.08

9398,119.01

9898,571.99

3099,036.29

9199,512.20

.80100,000.00

4,376.03

.

0parvalueofbondsduein fiveyears,

numpayablesemiannually,areissued

ytorecordtheissuanceis:

0

pearonthe balancesheetunderthe

Sincethepremiumreceivedatthetime

tinterestcost,the premiumshould

mis writtenoffintenequal semi-

ntrieswillbe:

ondinterest.

ofbondpremium.


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ES337

combined,asfollows:

na 5%effectiveinterestbasis.The

nterestandamortizationentriesonthe

s.ThesemiannualchargestoBond

s2H%of thedecreasingamountsshown

remiumAmortizationEntries

oldtoNet 6%

us

PremiumCashPremium

00.00103,985.43

00103,585.07

00103,174.70

00102,754.07

00102,322.92

00101,880.99

00101,428.01

00100,963.71

00100,487.80

.00100,000,00

0,000.00

ntificmethods.

mortizingbonddiscountandpremium

geconformingtotheeffectiverateat

ed.Forthis reasonitistheoretically

ntmethodisusuallyregarded,however,

elylittleeffort,resultswhicharesuffi-

cticalpurposes.

ordiscountonserialbonds.

0of6%bondsareissued,maturing

mentsbeginningatthe endofthesixth

$490,000.00.Whatamountofdis-

eachyear?

nterestpaidin advance;thecash

reaseafterthesixthyear;thediscount

similarly;boththecashinterestandthe

uldbeproportionatetothebonds

nbytheeffectiveinterestratemethod


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fficulttocomputeasto beimpracticable.

fthe"bondsoutstanding"methodof

uchcasesareusuallyhandled:


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eaccountantsmightsetupa reserve

nth ofthecostofthe improvements,

ferabletowrite downtheasset.

nsideredpropertosetupa reserve,

easset,eventhoughthe amountofthe

elyascertainable.Areserveforthe

ueofsecuritiesownedis agoodexample.

accountingandincometaxpurposes,

costofthesecurities;thisrecord

setaccountwerecreditedwithmarket

ales;to avoidthisconfusion,areserve

so justifiedinsuchasituationbecause,

easeatagivendateis determinable,the

ain)is notdeterminable.

avecreatedliabilitieswhicharecertain

mount.Liabilitiesbothcertain and

metimesshownasreserves,butit

eserveaccountsforonlythoseliabilities

rable,andtoset upaccruedliability

edefinitein amount.Thus,Accrued

esarebettertitlesthan Reservefor

ages,becausetheamountsofthese

elydeterminable.ButReservefor

eferabletoAccruedTaxes,iftheamount

ntcannotbecloselyestimated.

es.

dforcontingencieswhich,ifthey

ateliabilitiesorreducethevalueof

esfor contingentliabilities,assume

factorydoesnotcarry workmen's

sinceworkmenmaybeinjuredand

ybeincurredthereby,areservefor the

blished.Orassumethatacompany

inapatent infringementsuit;anadverse

abilityfordamages,andthecontingency

creationofareserve.

servesforlossesin assets,assume

tstangibleassetsaredistributedin

nalargenumberof locations,decides


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nce.Noinsuranceiscarried,but a

whichfirelossesmaybe chargedifand

serveprovidesfora contingency

reaseinassetvalues.Orassumethat,

yattheend oftheyearatthe lowerof

itappearsdesirabletomakea provision

tdeclinesduringtheensuingyear;

ngencymightbecreated.

tworth.

gardedasrepresentingapartof the

dasfollows:

us.

erve.

onofmanagement.

textension.

ealizedprofitonap-

gatoryappropriationsofsurplus.

edunderthetermsof acontractto

usunderthetitleof areserve.

hata companyborrows$100,000.00

uiredtomakecashdepositsof $10,-

sinkingfundforthepaymentofthe

ermittedto paydividendstothefull

dividendpaymentsplusthesinking

ecashto suchanextentastoimpair

akeitdifficultfor thecompanytoearn

ovideforthe sinkingfunddeposits.The

rovidethataportionof thesurplus

ividends,andthattheportionnotso

areserve.Sucha reserveiscreated

creditto SinkingFundReserve.

oodthatsuch areserveisstill apartof

dbeshownundertheNet Worth

et.

ntaryappropriationsofsurplus.

corporationmayhavethelegal

lto theentireaccumulatedsurplus,


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ciallyinexpedienttodoso.They may

stsof thecompanywillbeservedif

forotherpurposes;forexample,theymay

new plant,ortospendconsiderable

plowprofits backintothebusiness"

.Ofcourse,thedirectorscanlimit the

outdividingthesurplusintotwo parts

heymayfeel thatitis desirabletoreduce

usin thebalancesheet,andsetupsuch

Extension,ReserveforAdvertising,

nciesinordertoindicatea restriction

endsandthusavoid theclamorfor

erwisecomefromthestockholders.

efinitelyunderstoodtorepresent

underthe NetWorthcaptionofthe

s,apparentlywiththeintentionof

thenetworth,suchreservesareshown

a specialcaptionofReserves.

psuchsurplus reservesisthedifficulty

eserveforplant extensionisestab-

dwiththe costofanyadditionalplant

ustbechargedto theassetaccounts.

reatedasanappropriationofsurplus,

vertisingexpenditures;thesemust

accounts.Areserveforcontingencies

uchextraneouslossesas mightbedebited

opriatedsurplusreservestoreduce

mountwhichthe directorsfeelmay

,hasits disadvantages.Settingup

porizeswiththesituation,becausethere

gridofthe reservesexceptbyreturning

dividendis awayout;itgives the

withoutgivingthemthecurrentfunds

ndit disposes,onceandforall,ofthe

ncebymerelyconvertingitintoanother

alizedprofitsonappraisals.

dassetsin thebalancesheetatan

excessofcost lessdepreciation,the


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nsesorlossesshouldnotbecharged

outofSurplus.Thus,aReservefor

ppropriationofsurplusto showthat

tedforadefinite purpose.Advertising

e,shouldbechargedtooperations.Or

eenvaluedat thelowerofcostor

ovisionforpossiblesubsequentmarket

rplus,lossesincurredbecauseofsuch

absorbedinthe ProfitandLossaccount

estored toSurplus.Ifoperating

hargedagainstreservescreatedoutof

ationswouldbe incorrectlystatedin

t.

eet.

omanydifferentthings,theyshould

ebalancesheetto assistthereaderin

e.Thepropermarshallingofreserves

icatedbythefollowingclassification:

instassets.Reservesforbaddebts,

anddepletion,andothervalua-

ductedfromthegross valuesof

mes,inanattempttoimprove

ncesheet,suchreservesare

ghtside ofthebalancesheet

s,belowtheliabilities.

actualliabilities.Ifareserverepre-

distinguishedfroma con-

ossibleorcontingentliability,

aliabilitycaption.Assuch

tcurrentliabilities,theyshould

thecurrentliabilitycaption.

cies.Suchreservesareoftenvery

lancesheetbecausethe proper

onthedegreeofprobability

ingareality.Threedifferent

probabilitythatthe

arealityresultingina

ecreationofaliability,

ctedfromtheasset

lities.


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ossible one,butnotdefi-

eshouldappearon

cesheetundera

remoteastobedistinctly

onstitutesavoluntary

obeshownin the

networth:

us.Reservesrepresenting

whetherrequiredby

untarily,shouldbe

aption,thus:

50,000.00

n...75,000.00

s25,000.00

90,000.00

veforcontingencies

onthe assumptionthat

andthatthereserve

sbecauseoftheirinten-

dbecauseoftheir

olderstheimpression

blefordividendsthanis

deception,thedirec-

hereserveshownunder

closeto,the liabilities.

theSurpluscaption,

yobjecttosucha

theverypurposefor

ated.

ves.Someaccountants

nrealizedprofitsplaced

withan appraisal

eservecaption.How-

veactuallyincreasedin

atthe networthhas

herehasbeennoincrease

dends.If thenet

eseemstobeno good

ouldnotbe included


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on,providedit is

mrealizedsurplus.This

ollows:

$50,000

s25,000

00

of-

000

00

eneverthenetworthshownin the

ed.Itis,in asense,theexactopposite

cretreservemaybecreatedbyany

assetsoroverstatesliabilities.Capital

gedtorevenue,incomemaybecredited

etwhichproducedthe income,excessive

rovisionsmaybemade,liabilitiesmay

d,assetsmaybewrittenofftoSur-

erablevarietyofotherdevicesmaybe

rvesisnot socommonnowasitwas

deredinexpedientthemisstatementof

rporationsfrequentlywrotedown

eorythat itwasconservative,anddirec-

atedsecretreservesonthetheorythat

sibletoequalize profitsandthustomain-

tywhichwasadvantageoustothe

ofthesecretreserve wassomewhat

year,whenprofits wereabovenormal,

company'sprosperity,partlytoavoid

dpartlytoavoidcreatinginthestock-

tionofsimilarlyabnormalprofitsinthe

forewroteoffexcessivedepreciation

methodof overstatingtheexpenses.In

profitsweresubnormal,andwhenadis-

dverselyaffectthestandingand stabil-

ssetsformerlywrittendownwere


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lusorProfitandLosscredit,and an

wastherebymaintained.

enerallyrecognizedtobeimproper.

of thesubject,itmaybesaid thatany

ntheprofitandloss statementorinthe

scouraged.Stockholdershavearight

s,inorderthat theymayjudgeforthem-

etainingordisposingof theirinvest-

adeby stockholdersonthebasisof

sshownbythebalancesheetof acom-

cretreserves,stockholdersmaysuffer

othavesufferedifthey hadknownthe

liberateorunintentional.Provisions

n,baddebts,andotherexpensesmustbe

estimateis excessive,theexpensesare

networthareunderstated,anda secret

.Whenthereservesareestimatedin

ossible,thecreationofthe secretreserve

theoverprovisionisdiscovered,the

iminatedbyatransfer tosurplusof

epreciationorfor baddebtstocorrect


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CREDITS;

accounting.

etweenthecashbasisandtheaccrual

he factthat,ontheaccrualbasis,recog-

expensesandincomeandtodeferred

easonthecashbasissuchrecognitionis

fly,letus assumethefactsdiscussed

theendof1941,wageswereaccrued

hesewageswerepaid in1942.

ounting,the$500.00would

sof 1941,andaliabilityof

dinthebalancesheetat the

nting,noliabilitywould be

eetatthe endof1941,and

dedinthe expensesof1942,

id.

heendof1941,interestinthe

ruedonnotesreceivable;this

942.

75.00wouldbei ncludedin

i temwithsomenamesuch

esReceivablewouldappear

lancesheet.

rualwouldbe ignoredatthe

beincludedintheincome

itwascollected.

October1,1941,aone-yearinsurance

premiumcostof$1,200.00.


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SANDCREDITS[Chap.38

xpensesshowninthe 1941

ouldincludeonlythree

mber,andDecember)pro-

$300.00.Theremaining

nthebalancesheetat the

charge.

e $1,200.00wouldbeincluded

ctober1,1941,therewascollected

on aportionofthebuilding.

941profit andlossstatement

nlythreemonths'propor-

00.00;theremaining

ninthebalancesheetas a

e $2,400.00wouldbeincluded

useit wascollectedduring

ebasis?

accountingisacceptedbythe

eforpurposesofreportingincomefor

allyregardtheaccrualbasisasmore

heoreticalstandpoint.

oregoingillustrationsthat theyear

tedordisbursedmaynotbethe yearin

earnedorallof theexpenseisincurred.

usthatthe cashbasiscannotreflectthe

gagiven periodonthebasisof income

rredduringthatperiod.

shouldbeawarethattheaccrual

callymoreaccuratethanthecashbasis.

tatementpreparedonthe accrualbasis

ecttheresultsofoperations,becauseof

usestowhichitis subject.Whenever

atesnecessary,thedoorisopenedfor

deliberatemisrepresentationsdefended

donot openthisdooras frequently

dchargesandcredits.Thereforeno

begiventoaccrualsin thischapter,other

ualscanbe accuratelycomputed,others


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ARGESANDCREDITS351^

reforearesubjectto innocentmisstate-

ratelymisstatedor entirelyomitted.

onwillbegiventodeferredcharges

msappearingin abalancesheetshould

rutiny.

DeferredChargecaptioninthe

woclasses:

s.Forexample,discountonstock

s.Anyonefindingsuchitemsina

stifiedin immediatelydeducting

statedontheright sideofthe

djustthe networthtoacorrect

tions.Forexample,unexpiredinsur-

dsupplies.Thereaderofa balance

nlessheis wellinformedabout

uchitemsappearingin thestate-

hmakesitpropertodeferthem,

ountdeferredhas beencorrectly

maybe subjecttodefinitecomputa-

dtime;forexample,theportionofinsur-

d,ortheamountofinterestprepaidon a

bedeferredfor someotheritems,

maybe determinedwithvaryingdegrees

timatedinventories.

suchthat adeferringprogramis

rsinthe determinationofamountstobe

gnificant.Thereally seriousmis-

enthemanagementofabusinessdeliber-

theprofitandlossstatementto itsliking

rgepolicywhichwillshowa desired

pportedbyr easons,howeverspecious.

ughaperiodof businessexpansion

merousbranchofficesandtheexpendi-

ntsforradioandother advertising.The

suchthat eachnewbranchofficeusually

onsiderablepromotioncostsandoper-

sanofficewasestablishedona profitable


/ h t t p : / / w w w . h




SANDCREDITSIChap.38

ughnot intended)todisposeofit ata

aprofitorpaymentfor goodwill.

31st,thepresidentofthecompany

ectivesourcesofadditionalcapitalthat

ldbeatleastso manythousanddollars.

year,theauditorssubmittedaprofitand

wedearningssomewhatlessthanthe

esident.Aproposalwasimmediately

efer considerablechargesoftwoclasses:

allofficeswhichwerestill"inthe red";

anagementontheground thatthese

pmentperiod;and(2)portionsof the

thiswasdefendedonthegroundthat

rtisingcampaigniscumulativeandthat

eearlypartof suchacampaigndonot

yeffective.Thetotalof thesetwoclasses

geswassufficienttorestoretheearnings

esidenthad statedwouldbeearned.

eetcannotalwaysdetectsuch

therearecertainthingshecando.He

s,andraise inhisownmindthe question

asonableandpropertopostponecharging

s accesstooneormorepreviously

hecancomparethedeferredcharges

savailableandsee whetheraconsistent

enfollowed.Andhecanread theaudi-

commentsorqualificationshavebeen

edeferreditems.

epresentsanitemof grossincome

ProfitandLossina futureperiod.

othe factthatthecreditrepresentsa

ereaderofabalancesheetshouldunder-

rredcreditcanbe takenintoincome,

probablywillbeincurred.

ouldariseinthe mindofareaderof

cttoeachdeferredcreditincluded

rofitprobablybealargeor asmall

dcredit?


/ h t t p : / / w w w . h




ARGESANDCREDITS353

been setupbecausethereexistsan

orservicesto someother

pmerelyasa conservative

ditcanbe takenintoearnings,will

nsiderableexpendituresfrom

ords,shouldaconsiderable

ditbe regardedasasortof

erredcreditsuchthat thecompany

erciseachoiceasto thepro-

ome,andisitthusenabledto

trarilytheamountshownas

givenperiod?

cussedbelow:

ableprofitcontainedina deferred

timatedwithmuchaccuracybyaperson

withthebusiness,becausetheamounts

o beincurredcannotbeestimated.

been setupbecausethereexists

odsor servicestosomeotherparty,or

asaconservativebookkeepingdevice?

rentconditionsarepresentedbelow:

ortionof itsbuildingandhascollected

obligationtopermitthetenant

ectsayear'ssubscriptioninadvance;

endmagazinestothesubscriber

diseandmakescollectionsonthe

merchandisehasbeendelivered,

bligationtothepurchaser.Never-

grossprofitina deferredcredit

omegraduallyoverthe period

ofthereceivable,asa conservative

rtlytopostponethetakingof

elativelyheavyininstallmentsell-

ture periodswithaportionof

be requiredtostandaccounting,

yingchargesarisingfromthesale.


/ h t t p : / / w w w . h




SANDCREDITS[Chap.38

portionofthe deferredcreditbe

ntliability?Thenatureof thedeferred

ationoftheanswer.

ollectedinAdvancepresumably

rementforfutureexpenditures

eofthebuildingexpenses,such

ocurrentexpenditures;othersare

hichwouldbeincurredevenifa

otrented.

iptionsCollectedinAdvancepre-

roportionateelementofrequire-

urestoservicethesubscriptions.

edGrossProfiton InstallmentSales

keexpendituresforthebenefit of

egoodshavebeenmadeand

xpenditureswillariseoutofthe

eferredincometo earnedincome

themanagement,withplausiblesup-

ferredcredits,suchasrentand interest

uldusuallybetakenintoincomeona

riodsforwhichtheadvancecollections

arturefromthisprocedurenormally

fensible.Withrespecttosomeother

wocompanieswithsimilaroperations

edures.Forinstance,onecompany

atemortgagesata discounttakes25%

gsin theperiodwhenthepaperis

emaining75%ofthediscountinto

ringwhichthe paperiscarried;the

sdefendedonthe groundthatitis an

costs.Anothercompanyspreadsthe

ofthepaper.If thereisroomforreason-

astothe properbasisfortransferring

gs,thereaderofthe statementsshould

rningscan bearbitrarilyaffectedbythe

uldseektodeterminewhetherthemethod

leandproper;heshouldbesure thatthe

ainedonaconsistentbasisfromone

e methodhasbeenchanged,heshould

effectupon thestatedprofits.


/ h t t p : / / w w w . h




SALES355

stallmentsales involvesaccounting

somespecialconsideration.

sesincidenttoinstallmentsellingare

nperiods subsequenttotheperiodof

tyhasbeenencounteredintakingup

servativeway.Twomethodsmaybe

in theperiodofsale,andset up

ebts, collectionexpenses,and

possessedmerchandise.Such

orrect,butithas twopractical

culttoestimatethe amounts

nd(b) reservesforcollection

sesarenotdeductiblefor

ses.

stallmentsonabasis ofcashcollec-

spermittedfor taxpurposes:

dasincludingprofitand

eproportionthatthesetwo

thetotalselling price.Thus,

ncluded$100.00costofmer-

t,acollectionof$15.00would

$10.00return ofcostanda

theaccountingprocedureappliedin

sisoftheprofitelementincludedin each

hefollowingfacts:

ngprice,33Ji%

00

followingentry:

00


/ h t t p : / / w w w . h




ALES357

earas follows:

15,000.00

0,000.00

stallmentSales

0| Totalgrossprofit5,000.00

mentshavebeencollected,thebal-

Profitaccountmaybeclosedto Profit

les.

ntsalesaremade,itis impracticable

rate ofgrossprofitoneach saleandto

ss profittothecollectionsfrom each

ateofgross profitonallinstallment

pliedtothecollectionson receivables

hat year.Toillustrate,assumethe

1939:

00.00

00,000.00

ingprice33J %

05,000.00

%of$105,000.0035,000.00

thinstallmentreceivablesmaybe

ivable

ons105,000.00

fitaccount,after thebooksare

arinthe mannerpreviouslyexplained,

stallmentSales

00| Totalgrossprofit50,000.00

years.

stallmentsalesoperationsarecon-

ars,andthatthetransactionsduringthree

donthefollowingpage.


/ h t t p : / / w w w . h




[Chap.38

00$250,000

0120,000125,000

,000$125,000

40%50%

00$30,000$15,000

050,000

0

llections:

9 accounts$35,000$10,000$5,000

0 accounts50,00020,000

accounts87,500

ollectionsapplicabletodifferent

entgrossprofit rates,thecashreceipts

sheaded:

39

40

41

ccountsmaybekeptbyyears,and

untstoProfitandLossmaybe madeon

sshownbytheseveralaccountsreceivable

tsbook.Entriesfortaking upthe

ssprofit, computedonthebasisofcash

foregoingsummaryoffacts,wouldbe:

stallmentSales—193935,000

%ofcollections.



39accounts,and40%ofcollec-




39accounts,40%ofcollections

%ofcollectionson1941accounts.


/ h t t p : / / w w w . h




ALES359

ferredgrossprofitaccountswould

stallmentSales—1939

00

00

0

0


00

0

00


00|Totalgross profit125,000.00

andinstallmentsalesmaybeshown

mentinthemannerillustratedbelow,

showingthecomputationofthe gross

ntsales.

ber31,1941

mentSales$60,000.00

00.00

tallmentSales(Schedule1):

0

onInstallmentSales112,500.00

0.00

sProfit

ule1

ons


/ h t t p : / / w w w . h




e paymentofinstallmentsandifno

expected,bothhisaccountand.the

totheuncollectibleinstallmentsshould

let usassumethefollowingfacts:

00

ections,33>$%30.00

ountsindicatethatthe$60.00still due

es$20.00ofunrealizedprofitand$40.00

propertysoldcannotbe recoveredor

coveredcost,$40.00,isaloss.In sucha

defaultshouldbe:

stallmentSales20.00

sed,in whichentrieswillbemadeas

ble


/ h t t p : / / w w w . h




SALES361

nrecoveredcosts,tobe chargedto

s.

uallyresults inarepossessionofthe

andtheloss ontheuncollectibleaccount

thevalueoftheproperty.

tingforrepossessedmerchandiseare

ossessedmerchandiseasanassetat

;whenthemerchandiseisresold,

SalesofRepossessedProperty,

g priceasincome.

usedifthe repossessedproperty

lizablevaluecannotbedeter-

egreeofaccuracy.Butit

,ifthis methodisused,andif

alueisnottakeninto the

mentspreparedbeforethedis-

sstatethe profitsorlosseson

erstatethenetassets.

dmerchandiseatthe unrecovered

gainorlossis shownuntil

cation,sinceit placesawholly

ertyandfrequentlyresults

a loss.

dmerchandiseata depreciated

ttodetermine,butexperi-

nytoestablishrepossession

willallowafair profitonresale.

mmended,becauseitshould

orrectstatementofreposses-

lues,andofprofits onresales.

tionin thesectionon

attherepossessedproperty

35.00,the entryforthe

e35.00

stallmentSales20.00


/ h t t p : / / w w w . h




[Chap.38

yisgiven avalueof$75.00,the

e75.00

stallmentSales20.00

possessions,thedefaultregister

bemodifiedbytheinclusionof acol-

estimatedvalueofrepossessedmerchan-

mnshouldbepostedtothe debitofa

rinventory)accountandshouldbe

debit toDefaults.

ses.

especttoexpenses,namely:

deferredandtakenintoincomeon

ouldexpensesoftheperiod of

ndchargedto incomeonthe

procedurewouldbejustifiable,

ementofinconsistencyindefer-

andnotdeferringtheexpenses

es.Theinconsistencyis

setherealizationoftheprofits

ectionoftheaccounts,but

esnotexistwithrespecttothe

d.

edin periodssubsequenttothe

made.Forexample,collec-

redandsales commissionsmay

famountscollected.Should

chexpenses?

chargesagainsttheprofitsof

esweremadeappearsalittle

wouldmeanthatthesale period

eferredportionof thegross

ess,bechargedwithallpast

sconnectedwiththesale.For

cesanctionschargingthesale

ncurredinthat period,andsub-

xpensesincurredinsuchsub-


/ h t t p : / / w w w . h




SALES363

vesforbaddebtlosses and

eatedbychargesagainstthe

ctisdiscussedlater.

thebalancesheet.

eivableusuallyshouldbeshowninthe

maturity,andthe installmentsthat

omthebalancesheetdateshould be

tAssetssection.Oftenthisisimpracti-

businesscustomsanctionstheinclusion

receivablesunderthecurrentcaption.

estimatedfutureexpensesandfor

etupbychargesto ProfitandLoss,there

hemupbychargesagainsttheDeferred

t,suchaproceduremaybedesirable.

a clearerandmorecompletepictureis

sheet;and,sincethereservesare setup

ther thanbychargestoProfitand Loss,

gardedasrealizedduringthesale period

for subsequentexpenses.

houldbe sufficienttocoverbaddebt

sapplicabletopastsales,and stillleave

erefore,ifestimatescanbemade,the

dbedividedinto threeelementsfor

on.Forexample,assumethatadeferred

,000.00isestimatedtocontainthe follow-

0

letopastsales15,000.00

.00

eclassifiedinthe balancesheetas

,000.00

ccountsreceivable,toreducethe

edrealizablevalueofthe install-

lesExpenses15,000.00

s reserveshouldappearundera

dnotbeincludedamongthe

tiesforthe estimatedsubsequent

ncesheetdate.)

tallmentSales25,000.00

dgross profitshouldbeshownin

ecaptionofDeferredCredits.)


/ h t t p : / / w w w . h




[Chap.38

t,if thedeferredgrossprofitis thus

nmentismadeforbalancesheetpurposes

set upintheledger.The deferredgross

dtoincomewhenthe profitisrealized,

esshouldbe chargedtoincome.


/ h t t p : / / w w w . h




ebeendevotedtoa considerationof

erningcorrectstatementsofassets,

andnetworth.Thischaptercontains:

ythecompany'sbookkeeperatthe

atement,andprofitandloss state-

pany'sbookkeeper.

mberofviolationsofaccounting

ebeendisclosedbytheauditor.

theauditor(someof thesewouldbe

kingpapersandnot onthecom-

sstatement,andprofitandlossstate-

tor.

nis toreviewandtoemphasize

ountingprinciplesdiscussedinthepre-

hasisliesinthefactthat thecompany's

manyviolationsofaccountingprinciples,

ncialconditionandgoodoperating

or'sstatements,conformingwithgood

esentafarlessnatteringpicture.

ndstatements.

eand thussimplifytheillustration,

he trialbalancewastaken,thebooks

triesina CostofGoodsSoldaccount,

riesonDecember31,1939,purchases,

turingexpenseswereclosedto


/ h t t p : / / w w w . h




ber31,1940,wereplacedonthe

ntoriesaccountandcredittoCost

GoodsSoldaccountappearsbelow:

,1939$70,000

500

91,467

Allowances$8,500

,194085,000

667

31,1940

150

,194085,000

Bonds103,850

00

t40,000

00

ck7,500

0

ounts3,000

29,000

40,000

60,000

ances9,620

7

,200

7$1,189,687


/ h t t p : / / w w w . h




,125,837$1,189,687

410

310

00

900

bitA

r31,1940

150.00

0.00

Bonds103,850.00

650.00

000.00

t40,000.00

00.00

0.00

.00

ck7,500.00

,500.00

0.00

4,000.00

ounts$3,000.00

29,000.00

140,000.00

60,000.00

00


/ h t t p : / / w w w . h




anetworth of$369,510.00andlia-

0,or$2.40ofnet worthperdollaroflia-

ntassets of$306,650.00andcurrent

raworkingcapitalof$212,650.00,or

dollar ofcurrentliabilities.

bitB

ber31,1940

39$ 80,700.00

73,450.00

achinery2,000.00

CommonStock12,00000

40$169,150.00

bitC

ber31,1940

lowances9,620.00

524,667.00

700.00

00.00

0

400.00

00.00

:

0

00

410.00

6,810.00

80,490.00

enses:

600.00

900.00

0

310.005,110.007,040.00


/ h t t p : / / w w w . h




mattersdiscoveredbytheauditor

t.Eachadjustingjournalentryis

of cross-referencewiththeauditor's

pearonpages379to385.

practicewhenleavingnotesreceiv-

tiontomakeentriesimmediatelydebit-

esReceivable,asifthe noteshadbeen

ever,didnotgivethecompanycredit

tilitreceivedthe collection.Atthe

of$2,500.00leftwiththebank hadnot

ingadjustmentisrequiredtoreverse

panywithrespectto theseuncollected

00

requirementsoftheindenture,the

asinkingfundforthe paymentofthe

mber31,1940,thesinkingfundincluded

ountof$150.00.Thiscashis notavail-

andshouldbe shownaspartofthe sink-

ustmentisrequired:

open attheendof1940, and

ntheamountof$9,000.00,receiveddur-

ordedasofDecember31,1940.Thus

1,1940,was overstatedandtheaccounts

ted.Requiredcorrection:

0.00

stocreditors,totaling$8,000.00,

mber31,1940,bydebitsto AccountsPay-

equiredcorrection:

00

esheetincludesasaccountsreceiv-

nceoftheAccountsReceivablecontrol-


/ h t t p : / / w w w . h




udethefollowingdetailsshownby the

es)$105,150.00

s)2,000.00

ncreasesthereceivablesandsetsup

bility:

0.00

mers'Accounts2,000.00

sfinishedgoodsaredisposedofby

ent outonconsignment.Suchconsign-

dassales,thusincorrectlyreducingthe

ecostofgoodssold,overstatingthe

takingupaprofitbeforethegoodshave

1,1940,therewereunsoldgoodson

10,000.00,whichhadbeenconsignedat

0,andonwhichaprofit of$5,000.00

pated.Requiredcorrectingentries:

00.00

forconsignments.

0

00

f CostofSalesandadd

leincludeaccountswithofficers

Thisamountwasoutstandingthrough-

nd cannotberegardedasacurrent

t ofthecurrentaccountsreceivable

up asaseparateitem.Correction:

icers5,000.00

ent)5,000.00

e balancesheetasaccounts

ommonstocksubscriptionsamountingto

beeliminatedfromthecurrentreceiv-

mon20,000.00

00.00

countsreceivablealsoincludesan

gnedaccountstotaling$10,000.00.

nin thebalancesheetasaseparate


G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



ingadjustingjournalentryis required:

ned—Equity1,500.00

0.00

$8,500.00foradvancesreceivedon

ouldbementionedinabalance-sheet

countsreceivablealsoincludes

8,000.00toasubsidiary.Theseshould

gular receivablesfromtradedebtors.

000.00

0.00

ntingto$200.00,earnedonnotes

ed,wasignored.

ble200.00

inthecompany'sbalancesheetin

ouldbe detailedasindicatedinthe

0

0

eyear,thecompanypurchased

materialswhichwereintransiton Decem-

t (becausethegoodshadnotbeen

detorecordthe purchaseandthe

enoti ncludedintheinventory.The

affected,becausethe$10,000.00was

hasesduringtheyear andfromthe

year.Butthebalancesheetdoesnot

diseowned,norall oftheaccountspay-

.00

$4,000.00werereceivedbeforethe

ncludedintheinventory.Buttheentry

dtheliabilitywasnot made.There-

odssoldwasunderstatedbecausethe

inventorywithoutbeingincludedin


G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



(2)the liabilitiesattheend oftheyear

ction:

00

00

wmaterialson December31,1940,

reforethe rawmaterialinventory

asedtothemarketprice.Moreover,

and thefinishedgoodsincludematerials,

processand finishedgoodsshouldbe

e marketdeclineinthevalueofthe

f.Sincetheclosinginventorieswere

odssoldwasunderstated.Correction:

00

naso-calledmanufacturingprofit

s, thefinishedgoodsarevaluedabove

chthe companyconsidersthatitmakes

ofbuyingitsmerchandise.Thefinished

$8,000.00ofsuchunrealizedandantici-

f goodssoldisunderstatedbya like

00

ninthebalancesheetas Invest-

sshouldbe detailedasindicatedinthe

,850.00

sidiary(whollyowned).50,000.00

11,500.00

adilymarketable)10,000.00

readilymarketable)....8,500.00

Bonds103,850.00

andand Buildingsincludes:

10,000.00

0.00

ntofanaccount(being

de)10,000.00

buildingusedas asales


G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



dasshownbythefollowingentry:

0.00

00.00

s20,000.00

00.00

eserveforDepreciationshouldbe

29,000.00

ings15,000.00

hinery&Equipment8,000.00

eryEquipment4,000.00

—LeaseholdImprove-

eductedfromtherelatedassetbal-

wnonthe rightsideofthe balancesheet.

udedasamanufacturingexpensein

countconsistsofthefollowingdetails:

,500.00

yandEquipment3,750.00

uipment2,000.00

mprovements667.00

nsforbuildingsandformachinery

acturingexpensesandshouldremaina

old;thedepreciationofdeliveryequip-

ofleaseholdimprovementsshouldbe

enses.Correction:

uipment2,000.00

mprovements667.00

00

000.00sixyearsago.One yearago

tenupto $100,000.00bycreditingSur-

ationwassupportedbyanappraisalby

nditisallowedtoremain.But the

dfromSurplusto areserve.

ofitonAppraisal...25,000.00

stimatedlifeof30yearswhennew

yearsaftertheappraisal.Oneyear

aisal;therefore,Hsofthe unrealized


/ h t t p : / / w w w . h




ouldbe writtenoffbytransfertothe

Adjustment:

ofitonAppraisal1,000.00

—Buildings1,000.00

cturedsomeofitsownmachinery

$4,000.00,butputitintothe fixedasset

estimatedcostatwhichitcouldhave

00.00"manufacturingprofit"was

realizedprofitshouldbe eliminated

andthemachineryvaluationshouldbe

omplishedbythefollowingadjusting

t2,000.00

eofits machineryfor$2,000.00,and

bydebitingCashandcreditingthe

taccountforthatamount.Thecom-

:

000.00

dinthereserve1,000.00

hinerysold$4,000.00

parallelcolumns,theentrywhich

eentrywhichit shouldhavemade.

—M.&E1,000.00

t2,000.005,000.00

ncludesthedebitandcreditentries

debutwere not:

—M.&E1,000.00

t3,000.00

edsomemachineryfor$3,000.06,

stallments.UptoDecember31,1940,

0.IthasdebitedtheMachineryand

nlytheinstallmentspaid,andhasnot


/ h t t p : / / w w w . h




unpaidinstallments,allofwhichmature

t2,000.00

gation2,000.00

ccountwiththeremaining

hased,andtosetup the

llments.

ing$3,000.00,whichshouldhave

turingexpenses,havebeenchargedto

otherwords,revenueexpenditures

ecostofgoodssoldis understated

avenotbeenchargedtoit,and thefixed

ndinglyoverstated.

00

t3,000.00

xpenditurescapitalized.

avebeenmadereducingthebalance

pmentaccount,correspondingadjust-

relatedReserveforDepreciation.

sbeenprovided,becausetheassetvalue

edbelow:

value:

nufactureofmachinery..$2,000.00

machinerysold3,000.00

scapitalized3,000.00

value:

purchaseprice2,000.00

0.00

tsreducethebalanceintheMachinery

6,000.00.Weshallassumethatthe

chineryandequipment(providedonthe

nthe balanceintheassetaccount)is

isionoverstatedthereserveandover-

argedtoCostofGoodsSold.

—M.&E500.00

edepreciationprovision.

on thebooksthreeyearsagoby

sno authorityforthevaluation

mate.Whilethevaluationmaybe

easeholdmaybe shownasanasseton


/ h t t p : / / w w w . h




mshouldbe qualifiedtoshowthatitis

rs'estimate.Moreover-thecredit

surplusto areserve.

fitonLeasehold20,000.00

profitfromsurplus toa

00valuationwasplacedonthelease-

arstorun.Threeyearshaveexpired.

thevaluationshouldbewritten off.

fitonLeasehold6,000.00

valuation.

oldimprovementswasprovidedat

erate thatwasappliedtobuildings

uttheleasewasfor tenyears;there-

ementsshouldhavebeenwrittenoffover

shaveexpired;therefore,thecompany

eetenths,or 30%,ofthecostof the

haswrittenoff3>^%for3years,or

ditional20%shouldbeamortized;

amortizationis anadjustmentofprior

echarged toSurplus;theremaining

thecurrentyear'samortizationexpense.

mprovements1,333.00

—LeaseholdImprove-

0%amortizationonthe

oldimprovements.

enontothe booksbycreditto

noff bydebittoSurplus.

dthatthecompanyownsallofthe

ubsidiaryhas lost$10,000.00since

tock($1,000.00duringthe currentyear).

enup.

rations1,000.00

sidiary10,000.00


/ h t t p : / / w w w . h




edtreasurystock($11,500.00)

0.00.Thispremiumshouldbewritten

500.00

stments,"whichcost$10,000.00,

tvalueofonly$7,000.00.Areserve

creaseinvalue.

ned3,000.00

marketvalue.

60,000.00)wereissuedat90;the

ainsintheaccounts.Thebondswere

ftheirlife hasexpired.Therefore,half

ebeenamortized.Fourfifthsis appli-

ould bechargedtoSurplus,andonefifth

urrentBondI nterestExpenseaccount.

0.00

00

premiumsamountingto$1,200.00

costof goodssoldisoverstatedbythe

rancechargedasamanufacturing

0.00

00

umsasa deferredcharge

expenseshavebeenignored.

n'ssalaries)$1,800.00

Amanufacturingexpense)2,500.00

payable1,000.00

owingentry:

0.00

00

1,000.00

,500.00

Payable1,000.00


/ h t t p : / / w w w . h




miscellaneousexpensestotaling

dedbecausethebillshadnotbeen received

r.

,100.00

2,100.00

s.

shouldbeaddedto thereservefor

eanadequateprovisionforprobable

ounts1,000.00

00shouldbeprovidedfor freightto

eductedbythemin settlingtheir

educted1,500.00

quiresthe creationofasinkingfund

thebondissue.Anamountequal to

dissue($60,000.00)shouldhavebeen

othereserveannually.Fiveyearsof

expired,andnotransferhasbeen made

000.00

endsinaccordancewith

claredonthe preferredstockprior

yableafterthatdate.Noentry was

ycreatedbythedeclarationofthis

stockis$49,000.00($60,000.00total

tock),anda6%dividend,therefore,

ble2,940.00

kingpapers.

ersshowthebalancesappearingin

e,theadjustments(orpostingsofthe

mentionedontheprecedingpages,and


/ h t t p : / / w w w . h




/ h t t p : / / w w w . h




Tj

§

?oB™C"!


/ h t t p : / / w w w . h




3


/ h t t p : / / w w w . h




/ h t t p : / / w w w . h




j

f l?• M. f l io ]

C J" C J. »_ '?jrj

See

2a,j;cat;

»joB5'a(2

2Si-^a

d'"i3ow e'~T3o

«5°

g

"£S^o


/ h t t p : / / w w w . h




ment.

servesasthe basisoftheauditor's

ndbalancesheet.Toavoid further

workingpapers,thefollowingis

50

ned—Equity1,500

ounts$4,000

educted1,500

ble200

icers5,000

,850

0,000

000

10,000

ned3,000

00

00

0

—Buildings16,000

t34,000

—MachineryandEquipment....6,500

00

—DeliveryEquipment4,000

s20,000

—LeaseholdImprovements6,000

0

86.000

gation2,000

,500

Payable1,000

2,100

ers'Accounts2,000

ble2,940

60,000

11,000

40,000

ck7,500

mon20,000

$431.340


/ h t t p : / / w w w . h




608,550$431,340

ofitonLeasehold14,000

ofitonAppraisalofBuildings....24,000

000

ances9,620

0

00

uipment2,000

mprovements2,000

,510

00

1,900

erations1,000

310

tement.

aspreparedfrombalancesshownin

bitC

ber31,1940

lowances9,620

532,300

067

000

uipment2,000

mprovements2,000

700

67

:

510

9,910

orward)$47,457


/ h t t p : / / w w w . h




—Continued

roughtForward)$47,457

ense:

200

1,900

erations1,000

3105,3109,440

nt.

aspreparedfromdatashownbythe

ement,theSurplussectionoftheworking

teradjustments,andtheauditor's

bits

ber31,1040

39:

t$80,700

ferredtoReserves:

dImprovements—PriorYears2,667

ears9,000

ount—PriorYears2,400

Reserve—PriorYears24,00083,067

2,367

bitC)$38,017

$2,000

asuryStock500

einStocks3,000

eserve6,000

,000

ck2,94026,440

40$9,210

assificationofworkingpapers.

ersindicatethecaptionsunderwhich

heauditor'sbalancesheet.Comments

earonpage 391.


/ h t t p : / / w w w . h




8888888!


/ h t t p : / / w w w . h




«~ci"

8888


/ h t t p : / / w w w . h




upingorclassificationappearinthe

.Thecompanyincludedthesinkingfund

tock,thepreferredtreasurystock,and

ocksandbondsunder theCurrent

msarenotincludedundertheCurrent

or'sbalancesheet.Thepreferred

fromthecapitalstockinthe NetWorth

ksandbondsare shownunderanInvest-

aption.Themiscellaneousstock

hthavebeenleftin thecurrentasset

ficinformationthattheyhadno ready

sheet,thelandheldfor resalewas

the fixedassetgroup.Sincetheland

noperations,theauditor'sbalancesheet

entsandSundryAssets captionrather

sheetthediscountonstockwas

redcharges;intheauditor'sbalancesheet

pitalstocktoshowthepaid-incapital.

subscriptionsaredeductedintheNet

eingshownasan asset,becausethere

callforcollectionsfromthesubscribers.

sheetthevaluationreserves(for

preciation)areshownontheliability

cesheetthey aredeductedfromthe

ccountsreceivableassigned;the

$1,500.00in$10,000.00ofassigned

beenseparatedfromtheotheraccounts

alancesheet.Itis alsonecessaryto

bilityinafootnote.

ntingentlyliableintheamountof

'notesdiscounted.Thiscontingent

sheetfootnote.

ethesinkingfunddeposit of$6,-

ember31,1940.Thisfact ismentioned

edonpurchasecommitmentsamount-

materialswhichhada marketpurchase


/ h t t p : / / w w w . h




cember31,1940.Alsoonthat date

antinasuitchargingit withapatent

bitA

r31,1940

de(Including$1,500.00

ts)$66,150

ounts$4,000

educted... .1,5005,50060,650

.12,500

ble200

500

850

RYASSETS:

icers$5,000

gageBondsPayable:

estoWholly-ownedSub-

ustedtoAgreewithNet

00

—AtMarketValue7,000

Cost8,500

00

dryAssets102,500

onAppraisalby(nameof

ber31,1939$100,000

tion16,00084,000

t$34,000

tion6,50027,500

000

tion4,0006,000

s—LessAmortization14,000

ation—LessAmortization14,000

0

0

200


/ h t t p : / / w w w . h




r31,1940—Continued

RTH

$86,000

gation2,000

ers'Accounts2,000

ble2,940

,500

Payable1,000

2,100

30,340

gFundBondsPayable—

0,000

arvaluepershare:

00shares;un-

sury,110

hares$49,000

00shares;un-

andoutstand-

0

s$20,000

2,500

,000

dends9,21039,210

ofitonAppraisalofBuild-

ofitonDirectors'Valu-

238,710

gentlyliableonDecember31,1940,intheamountof

'notesdiscounted;intheamountof$8,500.00oncus-

d;andinanundeterminableamountonpending

tion.

untof$75000.00forpurchasesof rawmaterialshaving

.00onDecember31,1940,wereoutstandingatthat

nmadefor thedifferencebetweenthecommitment

eposit,requiredasofDecember31,1940,had notbeen

sandauditor'sbalancesheets.

lowingpageindicatethemajor

ompany'sbalancesheetandtheadjusted

ytheauditor.


/ h t t p : / / w w w . h




ets

o

SheetAuditor'sto

PerCentCompany's

5.24%$166,85038.89%J54

ssets— — 102,50023.89—

33155,50036.24.66

2.434,200.98.31

050100.00%

16.93%$130,34030.38%1.39

.8160,00013.981.00

05.76— — —

38,71055.64.65

050100.00%

00$166,850.00

00130,340.00

0.00836,510.00

61.28

Liabilities

0

t100,150.0060,650.00

rest10,000.0012,700.00

0.00

00130,340.00

ssetsOverCurrent

,990.00*

,000.00

,500.00

0

000.00

ofit:

8,710.00

340.00

00

340.00

401.25


/ h t t p : / / w w w . h




RATIVE

ercents.

lpercents"isintendedtodescribe

tofeachbalancesheetitemtothe total,

entitemto thenetsales,andeachele-

sttothetotal.Amountsandanalytical

lowingstatements.

2

0

~"

0.0031%

6

1940

5

%

ndanalyticalpercents.

vebalancesheetasoftwodatesand a

ofitandloss statementfortwoyears,

ntsandanalyticalpercents.


/ h t t p : / / w w w . h




/ h t t p : / / w w w . h




DCOMPARATIVESTATEMENTS399

decrease.

estatementswithpercentsofincrease

ets

940

crease*

s...


/ h t t p : / / w w w . h




MPARATIVESTATEMENTS[Chap.40

ProfitandLossStatements

mber31,1941and 1940

ncrease-Decrease*

nt

15,900.008253,240.0035.37%

5,460.00435,640.00179,820.0041.28

680.00$280,260.00$73,420.0026.20

.00162,440.0015,810.009.73

30.00$117,820.00$57,610.0048.90

ve

5.0017,495.0032.88

.$104,720.00$64,605.00$40,115.0062.09

215.0021,600.004,385.00* 20.30*

x$87,505.00$43,005.00$44,500.00103.48

5.005,700.006,365.00111.67

37,305.00$38,135.00102.22

decreases,andpercentsthereof.

arativestatementsandthedeter-

decreases,accountantsarefrequently

veand negativeamountsofarelated

nkbalancemayexistatonedate and

r;thebankbalancemaybe shownon

ncesheet,andtheoverdraftmaybeshown

other;or,theoverdraftmaybe shownon

rin blackinkwithanasterisk.

discountsmaybeshownnet'in a

statement;inonestatementthepurchase

esalesdiscountswhileinanotherstate-

xceedthepurchasediscounts.

gativeamountappearonthesame

edindeterminingwhetherthedifference

reaseorasadecrease.Sometypical

:

0.00*


/ h t t p : / / w w w . h




DCOMPARATIVESTATEMENTS_ 401

slyanincrease,andthe change

se.InC,thechangefrom anexpense

of$200.00is equivalenttoa$1,200.00

the changefromanincomeof$300.00

s equivalenttoa$500.00increasein

increasein incomeisequivalentto

ense.InF, the$300.00decreasein

$300.00increaseinexpense.

ofsomepeculiarproblemswhich

ofper centsofincreaseanddecrease:

se

t

:

0.00$1,000.00$500.0050%

01,000.0050000* 50*

00.001,000.00* 100*

0* 1,000.001,500.00* 150*

0.00— 1,500.00—

00* — 500.00* —

ar:

.00* 1,000.00* 500.00* —

01,000.00* 1,500.00—

.00* 1,000.00—

ercents inA,B,C,and Dareobvious.

utedinthesecondgroup;no baseexists,

howninthe LastYearcolumn.Inthe

reshownbecausetheLastYear amounts

Percentsmightbecomputedandposi-

rminedonan algebraicbasis,thus:

slywouldbemisleading,sincethe+50%

ecrease,andthe—150%andthe—100%

1,500.00and$1,000.00.Forthisreason

henthebaseisa negativequantity.

tto anotherinacomparativestate-

oscomputedby dividingtheamount


/ h t t p : / / w w w . h





dbytheamountforthe earlierdateor

tratedbelow:

.OO.67

1,000.001.09

onlyusedthanper centsofincrease.

ddecimallyhavecertainadvantages,as

efillustration:

ecrease* Ratio

nt1941to 1940

100*%0

1.50

* .50

001,40015.00

entofIncreaseandDecrease

red ink(orasterisks)andblackink,

requiresblackinkonly.

ofthe figuresinthePer Centof

umnshowincreasesandothersshow

ificanceoftheasteriskorthered ink

nized);thefiguresintheRatio column

s,expressingtheratiosofthe1941amounts

ultformanypersons tograsp

largepercents,suchas1,400%;it is

dthatoneitemis 15timesaslargeas the

shownthatpercentsofincrease

dif thebase(ortheamountfor the

waszeroor aminusquantity.The

ossstatementwithcomparisons

sonthe followingpage.

tsimilartothe following,inwhich

easeanddecreasearecomputedontwo


/ h t t p : / / w w w . h




NDCOMPARATIVESTATEMENTS403

ssStatements

mber31,1941,1940,and 1939

39Amount

$727,650.78$932,645

ances13,2601.1311,750.4128,600

715,900.79$904,045

01.41435.640.72608,710

6801.26$280,260.95$295,335

8901.38$36,210.74 $48,645

01.0419,615.7227,095

0,600.8834,780

3,050.8726,645.8232,610

424,8101.4517,065

,700.7520,810

,8601.078,285

8,2501.10$162,440.86$189,290

301.49$117,8201.11$106,045

veExpense:

1.25$20,0001.00$20,000

09,840.7712,810

5,000

6001.462,465.882,800

4,6801.612,9101.012,870

5.6113,650

se6,4101.923,330.913,650

2,375.484,900

trative

3,215.81 $65,680

04,7201.62$64,6051.60 $40,365

1.32$13,640.70$ 19,520

,200.8611,840

150.875,940

990.78$37,300

01.66$4,460.75$ 5,980

432,810.684,160

63120.091,340

90.64$11,480

7,215.80$21,600.84 $25,820

ncomeTax..$87,5052.03 $43,0052.96$14,545

52.125,7003.351,700

$ 37,3052.90$12,845


/ h t t p : / / w w w . h





becontinuallyonguardto avoidmis-

ce,theforegoingstatementshowsthat

ere.78ofthosefor 1939;inotherwords,

Thesalesfor1941 were1.35ofthose

increased35%.

35%increasebear tothe22%

omeconfusionaboutthismatter

ewascomputedonabaseof $727,650.00

ewascomputedona baseof$932,645.00.

usion,someanalystsadvocatecom-

ononebase—thefiguresforthe earliest

ureis illustratedbelow:

ssStatements

nd1939

39Amount

TT05$727,650.00^78"8932,645.00

ances...13,260.00.4611,750.00.4128,600.00

07$715,900.00.79$904,045.00


G o o g l e - d

i g i t i z e d

/ h t t p : / / w w w . h


_ u s e # p d - g

o o g l e



APITAL

sinessis theexcessofitscurrent

ities.Theworkingcapitalof The

onedinChapter40)atvariousdatesis

s


/ h t t p : / / w w w . h




NGCAPITAL[Chap.41

andtheinventorieshaveincreased

edecreased.

939

0

10,7402.081.96

195,015259,240.92.75

30037,1501.371.14

4,86017,6501.711.41

05025,2601.321.47

165$320,310$350,0401.07.92

000S 85,000.35.59

51,35064,2101.06.80

enses..25,43522,68020,4901.241.11

$123,650$124,030$169,700.73.73

$196,280$180,3401.391.09

9,140$715,900$904,0451.07.79

esirabletoshowthe changesinnet

ouldhaveabearing onthechangesin

liabilities.Forinstance,wefindthat

y.79ofthosefor1939; thereceivables

5ofthoseat theendof1939.These

ereceivableswereofapproximately

ates.Ontheotherhand,witha con-

ales,allof theinventorieshaveincreased.

41,we findthatthesaleswere slightly

asshownbythesalesratio of1.07;

s.92,there appearstohavebeenan

tionofthereceivables;however,the

odsandgoodsin processhaveincreased

shaveincreased,thussuggesting

tininventories.

o currentliabilitiesisregardedas

easureofcredit position.Theamount

ncerelativetothe sizeofaloanwhich

capitalratiois evidenceastothe

oan.


/ h t t p : / / w w w . h




WORKINGCAPITAL407

kingcapitalratio maybeshownby

ttwocompanieshavethefollowing

iabilities:

000.00$1,000.000.00

,000.00900,000.00

00.00$_JOO,000^00

ngcapitalof $100,000.00,but

talpositionisrelativelymorefavorable

ecauseCompanyAhas$2.00 ofcurrent

liabilitieswhereasCompanyBhasonly

dollarofcurrentliabilities.

ofTheOsborne Companyareshown

edbydividingthecurrentassetsby

165$320^310$350,040$370,100

,650124.030169,700186,310

$196,280$180,340$183,790

llarsof current

liabilities3.032.582.061.99

lratioofat least2to1 isconsidered

sfactorycurrentposition.

OsborneCompany,ortheratioof

kcurrentassets)to currentliabilities,

10,740$21,5OO

able—less

405195,015259,240227,860

$260,765$216,100$269,980$249,360

,650124,030169,700186,310

etsover current

70$100,280$63,050

uick current

liabilities....2.111.741.591.34

elymuchlesscurrentthan the

nventoriesmustbesold beforetheir


/ h t t p : / / w w w . h




NGCAPITAL[Chap.41

hepaymentof currentliabilities;this

toroftheabilityto selltheinventories,

merequiredforthedisposal offinished

ofrawmaterialsandgoodsin process

rthe saleofthefinishedproduct.

alystssupplementtheworking

edacidtest ratio.

st1to 1isusuallyregardedas

ets.

goingdiscussionoftheacidtestratio

a companyisnotentirelydependent

rentassetstototalcurrentliabilities,but

currentassetsowned.Thisfactmay

hefollowingcomparisonofacompany's

ates:

0.00

0,000.00

000.00

00.00$60,000.00

0030,000.00

00$30,000.00

eworkingcapitalratio(2to 1)

,itsworkingcapitalpositionat the

e.Fromone standpointitsposition

ndof 1941thanattheend of1940because

urrentassetofcashto themuchless

s.Ontheotherhand,the amount

omthe currentassetsmayhavebeen

relargerinventoriestobeconvertedat

inventoriescanbedisposedofat

realizablevaluesofthe currentassets

omparedasfollows:

0.00

0,000.00

ost36,000.0012,000.00

alue$66,000.00$62,000.00


/ h t t p : / / w w w . h




ORKINGCAPITAL409

hatthecurrentassetsatthe end

r ultimaterealizablevaluebecauseof

elargerinventories,ashiftfromthe more

receivablestothe lesscurrentassetof

rdedasundesirable.Todetermine

kingplace,a statementsimilartothe

d.Thepercentsarebased onthecur-

Company.

5.81%

e63.55%60.88%74.06%61.57%

3.21%10.61%13.34%

65.047.73

7.2211.55

32.54%22.87%32.62%

00%100.00%100.00%100.00%

pitalratio.

ftsfromtherelativelymorecurrent

current assets,orviceversa,will

ny'sabilitytopayitscurrentdebts

bletobreak downtheworkingcapital

showwhetherthecurrentliabilities

onhand,orwhethertheirpayment

andpartof theproceedsofthereceiva-

ceivablesandpartoftheproceedsof

on. Thefollowingratherextremecase

ustration:


/ h t t p : / / w w w . h




NGCAPITAL[Chap.41

etotal cashandreceivableswereequal

bilities; andsoon.

tionofWorkingCapitalRatio

75

5.750

8751.250

02.000

ingfacts:Atthe endof1939the

dgoods,andgoodsinprocesswererequired

ofthecurrentliabilities;at theendof

vables,andfinishedgoodswererequired;

ythecashand receivableswererequired.

abulationforTheOsborneCompany.

tionof

6

e

ngcapitalisalsodependentupon

hecurrentassetsareconverted.To

workingcapitalmoves,someanalysts

ngcapitalturnoverbydividingthesales

ageworkingcapitalusedduringthe

omputationsoftheworkingcapital

Company:

196,280.00$180,340.00

0.00180,340.00183,790.00

310.00182,065.00

,140.00715,900.00904,045.00

4.333.804.97

alturnover.

easeintheturnoverindicatesan

or'sopinion,however,changesinwork-


/ h t t p : / / w w w . h




ORKINGCAPITAL411

practicallynosignificance,sincethey

fferentcauses.

sfigureincludesaprofit;consequently

theamountof thesalesandby theprofit

methefollowingfacts:

000.00

s480,000.00380,000.00

000.00

.00SIOO.OOO.OO

(salesdividedby

verhasincreasedfrom4to 5,but

thisincreaseisanimprovement;the

tagreaterstrain wasputontheworking

ofit asbefore.Itwouldappeardesira-

ecomputationwhichwouldshowthe

andanothercomputationwhichwould

eturnover,thus:

pitalTurnover

s$480,000.00$380,000.00

00100,000.00

8

pitalTurnover

000.00

00100,000.00

apital20%20%

dividetherateof profitbythe

terminetherateof profitperturnover,

apital20%20%

8

4.17%5.26%

bjectiontotheworkingcapitalturn-

asalreadysuggested.Toillustratethe

esamesales,costof sales,expenses,and

eyears;thecompanyincreaseditscur-

thusreducingitsworkingcapitalbythe

arecomputedonthenextpage.

c e s s_ u s e # p d - g o o g l e

general accounting (5)

Documents