MASTER NEGATIVE NO. 94-82260- 1 2 COPYRIGHT STATEMENT The copyright law of the United States (Title 17, United States Code) governs the making of photocopies or other reproductions of copyrighted materials including foreign works under certain conditions. In addition, the United States extends protection to foreign works by means of various international conventions, bilateral agreements, and proclamations. Under certain conditions specified in the law, libraries and archives are authorized to furnish a photocopy or other reproduction. One of these specified conditions is that the photocopy or reproduction is not to be "used for any purpose other than private study, scholarship, or research." If a user makes a request for, or later uses, a photocopy or reproduction for purposes in excess of "fair use," that user may be liable for copyright infringement. The Columbia University Libraries reserve the right to refuse to accept a copying order if. In its judgement, fulfillment of the order would involve violation of the copyright law. Author: Bell, William Hansell Title: Accountants' reports Place: New York Date: 1921 MASTER NEGATIVE * COLUMBIA UNIVERSITY LIBRARIES PRESERVATION DIVISION BIBLIOGRAPHIC MICROFORM TARGET ORIGINAL MATERIAL AS FILMED • EXISTING BIBLIOGRAPHIC RECORD IB wlKl&mtSr < \ « 4 Bell, William Hansell, 1883- Accountants' reports, by William H. Bell York, The Ronald press company, 1921. 247 numb. 1. incl. fold, forms. 28''"'. Autographed from type-written copy. - New 1. Accounting. i. Title. Library of Congress Copy 2. Copyright A 6227G& HF5681.R4B4 t3-3j 21-19655 RESTRICTIONS ON USE: TECHNICAL MICROFORM DATA FILM SIZE: .3^ r^^ REDUCTION RATIO: ) IX IMAGE PLACEMENT(JA) HA IB IIB DATE FILMED: JN^I-Q^i TRACKING # : MSs/ 0273^ INITIALS ■._M FILMED BY PRESERVATION RESOURCES, BETHLEHEM. PA. Ci> ^. > 00 o o o o tsi * 3 3 > 0,0 o m (D O >vi o o CO X N 1^. ^^ -3^. o; V' .'V^' ^■v^ ^X^^ ^^^7^ a? a '^: v^t*^ >^^ o 3 3 III o 3 3 ^. > ^^ 3 3 o tf o bo IS ro bo 1.0 mm 1.5 mm 2.0 mm ABCOEFGHIJKLMNOPQRSTUVWXYZ abcdefghi|klmnopqrstuvwxy;1234567890 ABCDEFGHUKLMNOPQRSTUVWXYZ abcclefghijklmnopqrstuvwxyzl234567890 ABCOEFGHIJKLMNOPQRSTUVWXYZ abcdefghijklmnopqrstuvwxyz 1234567890 2.5 mm ABCDEFGHIJKLMNOPQRSTUVWXYZ abcdefghijklmnopqrstuvwxyz 1234567890 ^ ^o i^ ^^ ./*. '^. •^A. c^ 4^ ■^^ fc> f^ ^ ■^ m o ■oED "o > C CO X TP ^ ;; Oo9 "CO 5 m 3D O m #•. ■ or if the amount of cash on hand is consider- able it may be shown separately, as "Cash on Deposit" and "Cash on Hand." In order to distinguish more clearly the general cash balance from deposits for special purposes, the former may 30 be designated as "Cash - Current Funds" or "Cash on Deposit - General Funds." A bank overdraft should be shown among the current liabilities. However^ if there should be an overdraft on one bank^ represented by outstanding oheoks> which is more than off- set by sji available balance in another bank^ there seems to be no object ion^ in a balance sheet of a going concern^ to showing the net balance as an. asset. If there is a net overdraft^ con- sisting of an overdraft on one bank and a debit balance of small- er amount in another^ the two items should be shown in the bal- ance sheet as a liability and an asset respectively. It -is some- times found that overdrafts shown on the books are caused by entering checks considerably in advance of their being sent out. If practicable^ the amounts of such checks in the office at the date of the balance sheet should be ascertained and the cash bal- ance and accoimts payable increased accordingly. The "Cash on Deposit for Payment of Interest, etc." would incliada deposits for payment of coupons, dividends, ma- tured funded debt, etc., the liabilities for which are included under current liabilities. Such deposits as for sinking funds, proceeds of sales of mortgaged property, gas and electric ser- vice, etc., shoxxld be shown separately, not under c\xrrent assets. Working Funds . By this term is meant cash funds in the hsjids of cashiers, salesman, or others, for payment of c\irrent ex- penses or for making purchases. Some accoimtants classify such funds as Deferred Charges, but as they are practically as c\irrent 31 as the general cash^ provided expenditures have been properly cleared^ there seems to be no good reason for excluding them from ctirrent assets; In fact there should be no objection to combining them with the general fxmds. In the Item "Cash." The various funds may be shown separately or In totals depending upon circumstances. Notes and Acceptances Receivable > It Is generally satisfactory to combine notes and trade acceptances receivable^ as there Is no essential difference between them. However^ If any considerable ainount of notes represents other than trade obligations such notes should be shown separately. In which case the Items would appear somewhat as follows: Notes and Acceptances Receivable - Trade Notes Receivable • Loans or they might be shown as three Items, thus: Trade Acceptances Receivable Trade Notes Receivable Other Notes Receivable The amount of contingent liabilities on account of endorsement of notes and acceptances may be disclosed iinder this heading by showing the total amount less the amount dls- co\inted, thus: Notes and Acceptances Receiv- able Less Discounted $100,000.00 75 > 000.00 $25,000.00 However, the usxial methods of showing such contingent liabili- ties are by means of footnotes or sepaxate Items on the balance sheet, as explained later. 32 Aooounts Receivable > In the balance sheet of a com- mercial business It Is usually desirable to show the trade ac- counts receivable separate from accoiints representing loans or advances to Individuals^ or other accounts which are presximably not as current as customers' accounts* If all the accounts re- ceivable are with cixstomers It Is wipll to designate the balance sheet Item accordingly, thus: "Accounts Receivable - Customers." It Is almost always desirable to anticipate the Inevitable in- quiry of a reader of the balance sheet as to the character of the accounts receivable by positive designation of the trade accounts. The extent to which the accounts other than with Customers are Itemized depends upon the sunounts thereof and other conditions. If the amounts of the accounts with officers and employees are considerable, they are usually shown separate- ly. Any comparatively large amount of claims against transpor- tation companies will also be shown as a separate Item. How- ever, If the total of the accoimts other than customers* ac- counts Is not large It may well be shown In one Item - "Others." The guiding principle should be to furnish an Interested person with s\xfflclent Information to enable him to form an opinion regarding the collectibility and liquidity of the accounts. Credit balances in customers' accounts, not offset by debit balances with the same customers, are usutally Included among the liabilities, either as a separate item or added to the accounts payable. Likewise, debit balances In creditors' 33 \( accounts, iinless they represent advance payments for merchandise or services, or are offset by credit balances with the same creditors, should be classified as accounts receivable, either being shovm as a separate item or included in "Others." If the debit balances in creditors' accounts actually represent advance payments (which should not be assumed) they should be shown \inder Current Assets, as "Advances on Materials Purchased," or under Deferred Charges with appropriate explanation. It is usually desirable to show separately accoimts with affiliated companies. If such accounts represent advances of a permanent character, they should be carried \mder the head of Investments. Many concerns assign their trade accounts receivable in consideration of advances made to them. For the better se- cxirity of the lender, these transactions usxaally take the legal form of actual sales of the accounts, with or without notifica- tion to the customers, but for practical purposes they are loans secured by the accounts and amounting to about eighty per cent of their value. Remittances by customers are usually made in the regular way and the entire amotints turned over to the lender. Accepting the theory that the accounts are pledged rather than sold, it seems logical to carry them as assets at their face value and the balance due the lender as a liability. This balance will consist of the original advances on unsettled accounts less the margin of, say, tv/enty per cent not yet re- funded by the lender on accoiints which have been settled. Under I 34 this treatment the oustomere' accounts will be shown on the bal- ance sheet as follows: Accounts Receivable - Customers: Pledged Unpledged The alternative procedure, which in the opinion of the author is illogical, is to shov/ as assets the equity in the assigned accounts and the refund due on settled accounts. How- ever, this method will be found useful in the preparation of cer- tain condensed financial statements in which it is desired to set forth the net assets of each class. Such statements will be discussed later. Practices differ with respect to the treatment in the balance sheet of reserves for doubtful accoxonts, discounts, etc. Some accountants deduct them from the assets, while others show them aunong the liabilities. In the opinion of the author, re- serves against specific accounts regarded as uncollectible or doubtful should always be deducted; but if all such accounts have been written off and. the reserve represents general pro- vision for such loss as may be sustained in the future, there seems to be no valid objection to carrying the accounts at their face value and showing the reserve among the liabilities, upon the theory that it is virtiaally a reserve for contingencies. That theory has actuated the Treasury Department to dlsallov/ deduction, as such, of auno\ints reserved for expected losses. If it is a settled policy to show reserves for uncollectible ac- counts among the liabilities, any considerable amount of doubt- 35 ful accounts covered by a reserve should be separated from the current accounts and included in the deferred charges. With re- gard to reserves for trade discounts, quantity discovmts, allow- ances, freight, etc., there seems to be little doubt that they « are properly deductible from the assets. The author does not advocate setting up a reserve for cash discounts to be allowed to customers on outstanding accotints, believing that such dis- counts become a charge when taken and not when the sales are made. The method of treating employees' subscriptions for government securities is not as live an issue as it has been, but undoubtedly some such balances will be carried for a con- siderable time, and it may therefore not be amiss to devote some attention to the subject. Generally speaking, employers who have purchased Liberty Loan bonds and Victory Loan notes for employees have also purchased some for their own account; and in perhaps most cases the employers do not insist upon the employees completing their payments if they desire to be released. In view of these conditions it has become quite a general practice to carry all these securities purchased in one account, that is, to treat them all as owned by the em- ployer; to credit receipts from employees to a liability ac- count; and when an employee completes payment to credit the former and charge the latter accoiint . In the opinion of the author it is preferable to carry separate accounts for the cost of the securities, charging the employees with the cost 36 of bonds subscribed for by them, upon the theory that the em- ployees actually own the bonds and the employer has merely aui- vanced the purchase price and is holding the bonds as security; the receipts from employees to be credited to their accounts and any necessary adjustments to be made later. The aggregate of the balances of these accounts would then be shown on the balance sheet as Due from Employees on Liberty Bond Subscrip- tions. In this connection consideration may be given to the treatment of obligations of the business arising from the ptir- chase of government bonds or notes. During the period of war financing there appeared to be some question as to whether the total amount of bonds subscribed for should be shown as an asset, the unpaid instalments or loans being shown as a liabili- ty, or merely the equity be shov/n as an asset, with or without details. Inasmuch as banks have always regarded the bonds as the property of the borrowers and not as sold on the instal- ment plan, it appears that both the asset and the liability should always have been shown, although the latter may have been differentiated from other notes payable. Moreover, any conditions prevailing during the war financing which may have seemed to warrant unusual treatment of notes payable secured by Liberty Loan bonds and notes, certainly do not prevail now. Temporary Investments . Whether or not securities may properly be classified as current assets depends primarily upon the purpose of holding them, and secondarily upon their 37 marketability. If the securities can be disposed of readily, and without changing the company's policy with respect to its investments or affecting its business relations, they may be considered current assets. If, on the other hand, they are re- garded as more or less permanent investments, or represent pro- prietary or controlling interests, they should be treated as permanent investments, even though marketable at will. The matxirity of the securities may not necessarily be a criterion; a company may invest some part of its permanent reserve funds in short-term notes on acco\int of their higher interest rate. The book value of securities carried as current assets should not be materially in excess of market value. If any of the securities are pledged that fact should be indicat- ed on the balance sheet . There will usually not be many items of temporary investments, and it is preferable, if practicable, to carry them in the balance sheet by name instead of as a group. Accrued Interest Receivable . This may be shown in one amo\int or itemized as, for example, on notes receivable and on bonds owned. Inventories . As much detail regarding inventories may be shown in the balance sheet as the circumstances seem to call for. It is usually desirable to classify the inven- tories of a manufacturing business in the general groups of finished goods, work in process, and materials and supplies. 38 Some accoxintants olassify supplies which are not ac- t\ially Ingredients of the product - fuel, repair parts, sta- tionery, etc., - as Deferred Charges, along with other prepaid expenses, but the atithor makes a distinction between physical or tangible Items and Intangible Items, Including the former In Inventories, under Current Assets* If any of the merchandise Is pledged, that fact should 'be Indicated on the balance sheet, either In the Item Itself or In a footnote. In an audit report It Is frequently desirable to quail- fy the balance sheet with respect to responsibility for physical Inventories as to qixantltles or prices, or both. This can be done effectually by stating the caption In one of these ways: Inventories as Taken by the Company Inventories as Taken and Valued by the Company Inventories (not verified) If physical inventories have not been taken and the book Inventories are not accepted without qualification, the item may be shown thus: Inventories - Book Value. Any reserve against decline in value of inventories or for Interdepartmental profit on goods on hand, should usual- ly be deducted from the amount of the inventory. The deduction of a reserve representing a conservative provision, not actually required, is usually shewn on the face of the balance sheet^^ In certain seasonal businesses, such as the dry goods business, it is quite customary, in closing the books at the end of a season, to exclude from the acco\ints p\ir chases and 39 / expenses for the next season's business • There are often large amoiints of goods on hand for the succeeding season which are not included in the inventory; and the Invoices therefor, which usually bear future dating, are not taken up as liabilities. As the practice is well established there seems to be no objection to the elimination of the contra asset and liability, provided settlement is not required for some time in the future and it is definitely determined that the merchajidise is on hand and is not included in the inventory. The writer has known of cases where part of the next season's goods have been sold without any charge 'having been made for the cost thereof. There should always be a footnote on the balance sheet to the effect that the asset and the liability have been excluded. Any considerable sjnount of merchandise out on consign- ment should be shown as a separate item. The same applies to samplers, if inventoried at all. Merchandise held on consign- ment, for account of others, should not be shown on the balance sheet, but any advances thereon should be carried as a separate item under Current Assets. Carrying charges on merchandise - storage, insurance, etc., - may properly be added to the cost of the merchandise unless the total exceeds its market value. For balance sheet purposes it is usually necessary to show only one amount as the value of such merchandise, but in certain cases it seems de- sirable to separate the carrying charges from the original cost. INVESTMENTS Under this head should be shown permanent or long-term 40 / investments^ such as: seciirities of^ and advances to^ subsidiary companies; securities representing investments of reserves; and real estate^ other than plants purchased for investment or ac- quired in settlement of a debt. If the items are too numerous to be shown separately on the balance sheet the details should be given in a schedule or in the comments. The essential points as to securities are: par value^ number of shares of stocky maturity and rate of in- terest of bonds^ book value^ and perhaps market value. It is not usually necessary that investment securities be carried at market^ or liquidating value^ but if there is a considerable difference between the book value and the actual investment value as determined from the most reliable available source, that fact should be brought out in some nanner. The treatment of investments in subsidiary companies in connection with con- solidated balance sheets is discussed in Chapter III. If any of the securitifes are pledged that fact should^ be indicated on the balance sheet. Investments in subsidiary companies may be exhibited somewhat as follows: Investments in Subsidiary Companies: A. 6. Company: Stock - 1,000 shares Advances Total C. D. Company: Stock - 100 shares Bonds Total Total Investments in Subsidiary Companies 41 ; SINKING FUND The composition of the sinking fund should be shovm on the balance sheet. It will be assumed to be: Cash Securities Accrued Interest The securities should be fully described. They may be outside securities or some of the bonds for which the sinking fund is created, which have been purchased out of the sinking f\ind instalments but are not canceled and continue to bear in- terest. Such bonds, if purchased at a discount or premium, should be written up or down to par value, and when brought to par they may properly be deducted on the face of the balance sheet from the bonds issued, whereupon the sinking fund assets may be shown thus: Sinking Fund - Cash and Accrued Interest (Bonds Deducted from Liabilities, per Contra). PROPERTY The physical property, i.e., the land, buildings, and equipment, with which a business operates, is grouped under various heads, the most common being Property, Plant Property, and Property and Plant. The author favors the first of these in most cases, as there is often property which is not aptly described as "plant,'* even though, in a broad sense, it is em- ployed in the business; and the word "property" seems to have acquired a technical significance so that it needs no modifier. However, where there are outside investments in real estate, carried separately, and the property pertaining to the business 42 Itself may be appropriately thus designated, it may be better to use the term Plant Property. If there is no real estate, it may be appropriate to use the caption "Equipment." The usual balance sheet classification of property for a manufacturing concern is somewhat as follows: Land Buildings Machinery and Factory Equipment Automobiles, Horses, and Wagons Office Fixrniture and Appliances In an audit report the principle of valuing the proper- ty should be made clear in the balance sheet, comments, or certi- ficate - whether the valuation is at cost, depreciated cost, ap- praised reproduction cost, or appraised sound value, i.e., depre- ciated reproduction cost (of course, the depreciation does not apply to land). While the accountant may not question the pro- priety of adjusting the book value of property to conform to values determined by competent appraisers, under recent condi- tions such an adjustment almost invariably constitutes apprecia- tion, if not inflation, and it is desirable to disclose in the balance sheet any considerable accretion to surplus from such a source, or at least to mention that the appraised value is used, 80 that any interested person is put on notice and may thereupon Inquire regarding the effect of the adjustment upon the surplus. Provision for depreciation is generally carried in reserve accounts, rather than credited to the property accounts. Such reserves may be deducted from the assets on the face of the balance sheet, in total or in detail, or be shown among the f 42 itself may be appropriately thus designated, it may be better to use the term Plant Property. If there is no real estate, it may be appropriate to use the caption "Equipment." The usioal balance sheet classification of property for a man\ifacturing concern is somewhat as follov/s: Land Buildings Machinery and Factory Equipment Automobiles, Horses, and v;agons Office F\irniture and Appliances In an audit report the principle of valuing the proper- ty should be made clear in the balance sheet, comments, or certi- ficate - whether the valuation is at cost, depreciated cost, ap- praised reproduction cost, or appraised sound value, i.e., depre- ciated reproduction cost (of course, the depreciation does not apply to land). While the accountant may not question the pro- priety of adjusting the book value of property to conform to values determined by competent appraisers, \inder recent condi- tions ouch an adjustment almost invariably constitutes apprecia- tion# if not inflation, and it is desirable to disclose in the balance sheet any considerable accretion to surplus from such a source, or at least to mention that the appraised value is used, 80 that any interested person is put on notice and may thereupon inquire regarding the effect of the adjustment upon the surplus. Provision for depreciation is generally carried in reserve accounts, rather than credited to the property accoxints. Such reserves may be deducted from the assets on the face of the balance sheet, in total or in detail, or be shown among the 43 liabilities. Ordinarily it probably makes very little differ- ence which of these methods is adopted, except for the sake of uniformity, especially if the amo\ints reserved have little or no direct relation to physical depreciation. However, as there are more cases in which it appears to be desirable for one reason or another to deduct the reserves from the assets than there are for showing them as liabilities, if an invariable rule is to be established it is probably better to deduct them from the assets. This appears to be logical, as depreciation reserves represent little, if anything, more than bookkeeping expedients, designed to show the total provision for depreciation at any time, and to permit of showing in the asset accounts the total cost of property, neither of which would be shown if the depreciation were credited to the asset accounts. It will be observed that the Federal Reserve Board in its standard form of balance sheet recommends the practice of deducting the reserves from the assets; in that form the assets are stated in more or less de- tail but the reserves are shown in total only. On the other hand, most of the commissions having jurisdiction over public utilities prescribe that the reserves shall be carried as liabilities. If no provision has been made for depreciation, or if the provision is obviously inadequate, it is usually neces- sary to call attention to the fact in a footnote. The foregoing remarks on depreciation apply equally to depletion of natural resources. 44 GOOD-WILL. PATEHTS. TRADE-MARKS. ETC , The only point to be considered regarding the stating of these intangible assets in the balance sheet is that they should be shovm separately, that is, not included with the tan- gible property items. In those cases where such separation is impracticable, the item should be described in such language as to indicate clearly that intangibles are included, DEFERRED CHARGES This classification is intended to cover various ex- penditures which are applicable to future operations, or which are held in suspense pending determination of their actual status. In many cases the group is also made to incliide work- ing f\mds, special deposits, advances for various purposes, and accounts receivable the collection of which is deferred. The titles used for this group of items are various, e.g.: Deferred Charges, Deferred Debit Items, Deferred Assets, and Prepaid Ex- penses. The latter two terms could not always be employed. \7hile the connection is rather remote, it is nevertheless in- teresting to observe that the Interstate Commerce Commission, in its standard form of balance sheet for steam roads (that for electric railways is virtxially the same) prescribes two groups. Deferred Assets and Unadjusted Debits, classified as follows: Deferred Assets: Working Fund Advances Insurance and Other Funds Other Deferred Assets (not further defined) 45 Unadjusted Debits: Rents and Insurance Premiums Paid in Advance Discount on Capital Stock Discount on Funded Debt Property Abandoned Chargeable to Operating Expenses Other Unadjusted Debits (defined as debit balances in suspense accoxints that cannot be entirely cleared and disposed of until additional information is received; items credited to operating revenues or operating expenses on an estimated basis; unextinguished dis- coxint on short-term notes; estimated accrued depre- ciation on equipment leased; and other similar items). The same commission, in its classification of ac- counts for carriers by water, inclucies virt\ially the same items as are contained in both the foregoing groups under the caption "Deferred Debit Items." It appears that the Federal Reserve Board intends that only "prepaid expenses, interest, insurance, taxes, etc.," shall be classified as Deferred Charges; and that any unusual items shall be carried Under the head of "Other Assets." For the purpose of exemplifying principles it will be assumed that the following items are included under the cap- tion "Deferred Charges": Unexpired Insurance Interest Paid in Advance Taxes Paid in Advance Unamortized Debt Discount and Expense Experimental Expenses Unamortized Improvements to Leased Property Unamortized Organization Expenses Deposits with Public Utility Companies, etc. The first three of these require no comment except to call attention to the impropriety of showing net debit balances if there are considerable accrued liabilities involved. For exaimple, the company may have one account for all insurance. 46 / and the debit balance may comprise the \inexplred proportion of premiiims on fire insurance less a large accnial on acooxmt of liability insurance premium, based upon the pay-roll. The same principle applies to interest and taxes. Unamortized Debt Discoxint and Expense. The name used for this item is the customary one for railroads and public utilities, in the accounts of which companies it most frequently appears. If appropriate, the item may be designated more simply as Unaunortized Discoxint on Bonds. This item frequently requires particular attention in the preparation of audit reports, as the amount is so often in- correct. The balance in the accoiint, or accounts, should un- questionably represent the proportion of discoiint and expense applicable to the principal of the bonds or notes outstanding at the date of the balance sheet, computed upon the basis of the term during which interest will be paid on the securities. Yet it is found that companies retire bonds in advance of ma- turity, through sinking funds or otherwise, crediting Profit and Loss with discoxmt on the piirchase and leaving the discount on the sale to be written off over the original term of the bonds. It is also occasionally found that a company has issued short-term notes ^ a discoxont and continues to carry the dis- count as an asset after maturity with the intention of amortiz- ing it over the term of a refianding issue - which is also sold at a discoiint. 47 If in making an audit it ia fo\md that through some such method the asset account is grossly overstated, and not corrected, the balance sheet in the auditor's report should so indicate, either in the item itself or in a footnote* If the amoiint of overstatement is nominal the matter may be covered in the comments of the report. Experimental Expense s > The sunount to be shown thus should be the cost to date of experimental work which has not yet reached the point where its value may be determined* It is ass\uned that if hopes are realized the cost will be capi- talized; otherwise it will be written off. Unamortized Improvements to Leased Property . This item should represent the remainder of the cost of alterations to, a:nd fixtures, etc., installed in, leased property, which cost is being amortized over the term of the lease. Buildings erected on leased land, and improvements to leased buildings, when the leases cover a lohg term, may properly be carried as Property, subject to depreciation, practically the same as property held in fee. Unamortized Organization Expenses. It is assiamed that in this case it is not the intention to capitalize the organization expenses, notwithstanding that amortization thereof will not be allowed as a deduction in the income tax returns. The word "unamortized" indicates that some part has been written off; otherwise there would seem to be no reason to use it . 48 In amortizing sucli accoxmts as this, the amortization is sometimes credited to a reserve, which is included among the liabilities. There is nothing to be gained in this procedure from the standpoint of the balance sheet. However, in this par- ticular case, it may possibly be that the amount charged to Profit and Loss would in that manner be advantageously kept in sight as a part of invested capital for the computation of the excess profits tax. CURRENT LIABILITIES The following classification v/ill be assumed: Notes Payable - Loans Trade Notes and Acceptances Payable Accounts Payable Dividends Payable Accrued Acco\ints: Wage's Taxes Interest Notes and Acceptances Payable. It is well to sh^w loans separate from trade liabilities, as above. Uhen the obli- « gat ions are secured it may be desirable to indicate the fact, although in most cases in which specific property is pledged, the statement to that effect in the description of the asset item is sufficient. In an audit report there is generally at least a siimmary of the obligations by .maturities, but such de- tails as are given are usually presented in a schedule or in the comments of the report. Consideration should be given to the practical value of details of such obligations, in view of the time that may have elapsed, before presenting them in the report . / 49 Aoooiints Payable, If desired, the accounts payable may be classified in groups somewhat as follows: Trade Credi- tors or Audited Vouchers, Advances or Loans, and Others (if any) • However, there is not the same necessity for differen- tiating between trade and other accounts as there is with ac- counts receivable, the only purpose being to show that some are not payable immediately. Credit balances in customers' ac- counts^ not offset by debit balances with the same customers, should be included in accounts payable; they may be so de- scribed if desired but it is not usually necessary. It is U8\aally desirable to show separately accounts with affiliated companies* In the opinion of the writer no deduction should be made from aooooints payable for cash discoxmts which may be taken in settlement of the accoxints, for the reason that the discount is earned when the account is paid and not when the purchase is made. If any accounts payable, together with the related assets, be omitted, as is frequently done in the case of pur- chases of goods for the succeeding season (see Inventories) the fact should be covered by a footnote. Dividends Payable. Dividends declared but not paid at the date of the balance sheet should be included in the current liabilities, as above. Many companies regard pre- ferred stock dividends as fixed charges and accrue them on the books. Such accruals, at any date other than immediately 50 preceding the date of payment, should be treated as reserves rather than current liabilities. Accrued Wages . This amo\mt should represent the ac- tual or estimated accrual of wages at the date of the balance sheet, payable in the subsequent period. 7/ages or salaries due, and unclaimed, or for any other reason unpaid, should be in- cluded under the head of Accounts Payable, Accounts and Wages Payable, or Unclaimed Wages. Accrued Taxes . This item is intended to represent taxes accrued but not due at the date of the balance sheet. Any that are due and unpaid should be shown separately, as Taxes Payable, or included in Accounts Payable. Many companies object, on account of the effect upon the comparison of current assets with current liabilities, to classifying as Accrued Taxes the provision for Federal income and excess profits taxes, part payment of which is considerably deferred; and it is difficult to controvert their contention when the business is continuing and prosperous. However, it is dangerous to follow this process of reasoning to its con- clusion and regard such taxes as payable out of the income of the period in which paid. If a client has not made provision for all accruals of taxes, the auditor should state the fact in a footnote on the balance sheet. If practicable, the amounts of such accru- als, especially of Federal taxes, should be given in the foot- note. 51 The asset of taxes paid in advance should not be de«- ducted from the liability for accrued taxes. Accrued Interest . This liability may be divided, if con- sidered desirable, into such items as Accrued Interest on Bonds and Accrued Interest on Notes Payable. Any interest matured and unpaid should be shovm as a separate item with an appropriate title. Interest paid in advance, that is, on notes discounted, should not be deducted from accrued interest payable. FUNDED DEBT The indebtedness shown under this caption is dis- tinguished from floating debt, shown \mder Current Liabilities, by its term rather than its seoxirity. Usiially bonds, notes, or mortgages matiiring in less than a year are treated as Current; as aj^e also any longer-term securities which have matured but are unpaid, or which will matxire the next day. The items should be fully described in the balance sheet, and if there be only one the caption may be omitted. The date, or year, of maturity is especially important. Securities held in the treasury and in sinking funds are usually deducted from the liabilities. If for any valid reason their book value is different from par value, it is, of course, impossible to deduct them and they should be carried as assets. If treasxiry sec\xrities have been purchased at a dis- count to be held only temporarily, nothing is gained by writing them up to par. 52 The following Illustrates several conditions under v/hich bonds may be issued and held: First Mortgage, Sinking Fund, 5^ Bonds, due 1925 (Authorized, $1,000,000.00): Issued $500,000,00 Less: Held to Redeem Outstanding Underlying Bonds $100,000.00 Held by Sinking Fixnd Trustee 100.000.00 200.000.00 Outstanding $300,000.00 Refunding Mortgage, 5fo Bonds, due 1950: Issued $200,000.00 Less Held in Treasury: Deposited with Blank Com- mission $ 50,000.00 Unpledged 50 . 000 . 00 100.000.00 Outstanding 100,000.00 General Mortgage, 6^ Bonds, due 1942: Issued. $100,000.00 Less in Treasury - Pledged to Secure Notes Payable 100.000.00 Outstanding nil Six per cent Debenture Notes, due serially, 1921-1925: Issued $100,000.00 Less Retired throxigh Sinking Fund. 50.000.00 Outstanding 50,000.00 DEFERRED CREDITS This group is just the opposite of Deferred Charges. It is intended to include all receipts on accoxint of income which is not yet earned, such as interest and rent collected in advance, and any receipts the disposition of which has not been determined. The term Deferred Credits is often made to cover advance collections on 53 sales, xanpresented coupons, etc., but when inventories are in- cluded in current assets such advance collections may well be properly classified as current liabilities, notwithstanding that a part of the amount collected may represent profit. RESERVES The items \mder this caption will be assumed to be as follows: Depreciation Doubtful Accounts Donated Treasury Stock Sinking Fund Contingencies Depreciation. As stated in the foregoing, under the head of Property, reserves for depreciation may be deducted from the corresponding property items, or be carried among the liabilities, although the former treatment is generally pre- ferred. On whichever side of the balance sheet they are car- ried, it is thovight to be usually desirable to show as much de- tail of the reserves as of the depreciable property. It is often appropriate to show the details in a schedule, or in the comments, in the case of an audit report. Doubtful Accounts . The reserves for doubtful, or uncollectible, accounts receivable, or "bad debts, " may also be deducted from the corresponding asset item or items, as previously stated, althoixgh there are cases when it appears that it may not be insisted upon. 54 Donated Treasury Stock. The subject of accounting for donations of capital stock is a large and much-debated one. It v/ill only be touched upon here. Some acco\antants assert that the proceeds from sales of stock issued for property (usually intangible) and donated back to the company to provide working capital, should be credit- ed to the property account affected. In the opinion of the author this is usually improper, unnecessary, and futile - im- proper because it overrides the action of the directors in valu- Ing the property; unnecessary because no one is likely to be misled regarding the actual value of the property in any event; and futile because the deduction of the proceeds from sales of the donated stock does not usually result in a much more accu- rate statement of actual values. If not deducted from the stated value of property, the proceeds from sales of donated stock become capital surplus. But before the stock is sold it is necessary to record it as in the treasury. Opinions differ as to the value to be placed upon such stock while held in the treasxiry. In the opinion of the author it makes little difference whether the stock is carried at par or at a nominal value, provided the offsetting credit is not carried to surplus. The preferred method is therefore as follows: Carry the treasury stock at par, deducting it from the amount issued; carry the offset in a Reserve for Donated Treasury Stock; as stock is sold credit the proceeds to a capi- tal surplus account, which may be entitled Donated Working 55 / / Capital or Siirplus Arising from Sales of Donated Capital Stock, and olaar the Treasxary Stook and Reserve for Donated Treasury Stock accounts. Sinking Fund . As sinking fxmd reserves are frequently enco\intered when a company has issued bonds with a sinking fund provision, the matter is dealt with under this head, althovigh the word "reserve, "^ as applied to provision for paying an obli- gation for which the company has received value, is a misnomer* Uany sinking fund clauses in mortgages stipulate, evidently for the better secxirity of the bondholders, that the sinking fund instalments must be paid "out of earnings"; and this is often construed as effecting a reduction of the earnings to which the stockholders are entitled. This interpretation is Illogical and should be overridden if practicable. Bonds are invariably issued to pay for permanent capital assets. It being assumed that due provision is made for depreciation or depletion of the property diiring the life of the bonds, there should not be a double charge against income to pay for the property, that is, to keep the capital intact. There should only be a segre- gation of assets s\ifficient to liquidate the obligation at matxority. If, notwithstanding the fallacy of so doing, amo\ints equivalent to the payments into the sinking fund are charged against current income, they should be credited to an Appro- priated Sxxrplus account, which should be shown on the balance sheet under the head of Surplus. Upon liquidation of the 58 bonds by means of the sinking fund assets there will be no fur- ther reason, or excuse, for keeping the reserve separate and it will become free surplus, available for dividends. Contingencies . The only point regarding this reserve that need be mentioned is that it should be, in fact, a reserve for contingencies; that is, it should not include provision for known charges even though their amo\ints may not be determined. If the reserve is of a general nature, including, for example, provision for depreciation, its designation should be such as to disclose that fact. CAPITAL STOCK If there is more than one class of capital stock it is generally desirable to show each as a main item of the bal- ance sheet, rather than to combine them as a group. The total of all classes usixally has no significance, and may indeed be misleading, as the shares of one class usioally differ from the shares of another class in respect of the proportion of sur- plus or deficit applicable thereto. The balance sheet should show, as to each class of capital stock, full information regarding the number of shares authorized, issued, and outstanding, and the par value per share, if any. In the case of preferred stock it is usually desirable to state whether it is c\imulative or non-c\imulative and the rate of dividend; also any other essential facts re- garding the relation of the preferred to the common. 57 There are two general methods of stating the authorized issue^ exemplified as follows: (1) Common Capital Stook - Shares $100.00 each: Authorized, 1,000 shares. $100,000.00 Less Unissued, 100 shares 10^000.00 Issued and Outstanding, 900 shares • $90, 000.00 (2) Common Capital Stock - Authorized, 1,000 shares of $100.00 each; Outstanding, 900 shares 90,000.00 It is believed that the latter method is preferable. The method of showing a lesser amount outstanding than issued is illustrated as follows: i Preferred Capital Stock - Cumulat ive : Authorized and Issued, 1,000 shares of $100.00 each Less in Treasxxry, 100 shares. $100,000.00 10.000.00 Outstanding, 900 shares $90,000.00 This treatment presupposes that the treasury stock is carried on the books at par value. If its cost to the company is less than par, auid it is likely to be disposed of for less, it is equally proper to carry it as an asset at cost or realiz- able value, or, if donated, at a nominal value. When capital stock is subscribed for but not issued, ' the subscriptions are us\aally included under the head of Capital Stock, somewhat as follows: 58 Class "A," Participating, 1% Cumu- lative, Preferred Capital Stock (Authorized, 1,000 shares of $100.00 each): Issued, 500 shares $50,000.00 -Subscriptions - SO^t Paid - 100 shares 10^000.00 Total $60,000.00 This treatment contemplates carrying the uncollected balance on the subscriptions as an asset. It is sometimes de- sirable to show as a liability only the aimoiints collected on subscriptions. When capital stock has no par value that fact should be indicated. The value at which it is carried should be the consideration received by the company for its issue. There is a growing practice of placing a value upon non-par- value stock of less than the consideration actually received, which has legal sanction in some States. In New York State the minimum value for which such stock may be issued is $5.00 a share, and the capital may not be reduced, by payment of dividends, below the value stated in the certificate of incorporation. Accord- ingly, advantage is being taken of the wording, if not the in- tent, of the law and a value of $5.00 put upon each share re- gardless of the consideration received, the obvious purpose be- ing to enable the corporation to pay dividends out of actual capital if desired. Any excess of capital paid in by stock- holders over an arbitrary value placed upon the stock should be shown as Capital Surplus, preferably under the head of Capital Stock, or, as it is sometimes called. Share Capital. 59 Assximing that there is no preferred stock, or if there is, that its share in the profits is limited to its stated divi- dend rate, and that the dividend thereon to date has been paid or reserved, the stock without par value may be stated as includ- ing the surplus, somewhat as follows: (1) Common Capital Stock - without par value: Stock Issued and Outstand- ing - 1,000 shares (Authorized, 2,000 shares) $53, 246 .27 Surplus 21>659>46 $74, 905 • 73 (2) Common Capital Stock: Stock Authorized and Out- standing - 1,000 shares of no par value, but of a declared value of $5.00 each $ 5,000.00 Capital Surplus 48,246.27 Profit and Loss Surplus 21^659.46 74,905.73 While some such combination as one of the foregoing is undoubtedly logical and in many cases desirable, the author does not recognize any inherent difference between stock with par value and stock without par value with respect to the relation of the stock to the surplus, and believes that in most cases such a direct combination as the above is not called for, preferring to state non-par-value stock at the value originally placed upon it, the same as par-value stock. It is always appropriate to group all classes of stock and surplus imder the head of "Capi- tal Stock and Surplus" or "Capital," or to bring out the dis- tinct ioisi between common stock and preferred stock which is 60 limited as to dividends, by allocation of the siirplus or deficit to the common stock, somewhat as follows: Preferred Capital Stock $100,000,00 Equity of Common Stockholders: Common Capital Stock $100,000,00 S\irplus 100,000,00 200,000,00 Such allocation of surplus might, if practicable, be extended to exhibit the values of participating preferred stocks, The principle applies whether or not the several classes of stock have a par value, SURPLUS While the word "surplus" literally denotes the excess of assets over liabilities and original capital, when employed without explanation of its composition it is usually intended to, and in fact should, mean earned surplus, as distinguished from capital, or special surplus. The latter, however specifi- cally described, should include paid-in capital in excess of the stated value of capital stock; donated capital; apprecia- tion of intangible values; and appreciation of property repre- senting unearned increment, which may with propriety be con- sidered for some purposes but may not constitute distributable profit. The term "surplus" may also be assumed to denote free sxirplus, i,e,, surplus regarded as available for distribution and not appropriated for some other purpose. Opinions of prominent accountants differ considerably with regard to the necessity for segregating as capital, or 61 / speolal 8\2rplu8^ some or all of the extraordinary credits cited above. It being argued by some that reasonable appreciation of property is in fact earned siirplus, and by others that the sur- plus is sinqply the balancing figure and that the word is not necessarily synonymous with Undivided Profits. In controversion of all such arguments, it is submitted that the word "surplus" is generally understood, not only by laymen but by most accoiint- ants, to denote free surplus from normal operations, and that the inclusion in a balance sheet item thus described of consider- able amoimts of such extraordinary credits as the above, without qualification, may put the accountant in the position of tacitly coxmtenancing, if not abetting, misinformation of readers of the report who are not cognizant of the conditions. In cases in- volving the valuation of assets, adequate q\aalification may be expressed in the description of the asset items of the balance sheet, by fully stating the basis of valuation, preferably showing the amount of appreciation. It is thought not to be sufficient to refer in the balance sheet item Surplus to the accompanying statement of income and profit and loss which shows the credits in question, as the balance sheet should generally speak for itself as to such important features, and, fvirthermore, in succeeding years the items will not be shown on the accompanying statement. A special surplus representing appreciation of proper- ty should be charged with the proper proportion of subsequent depreciation, depletion, or amortization of that property. This 62 may be done by crediting the property or reserve account direct- ly, or by crediting Profit and Loss as a partial offset to the depreciation, depletion, or amortization, based upon the appre- ciated value, previously charged to operations and credited to the property or reserve account. Under either method the pro- portion of depreciation, etc., applicable to the appreciation in value becomes "realized appreciation," and as such, is earned sxirplus. There is no objection to crediting to Surplus a pre- miiim on the sale of capital stock of a successfully established company In accounting parlance the word surplus, as applied to commercial companies, is an evolution from Profit and Loss Balance; therefore, the item is often described as Profit and Loss Surplus. There seems to be no present necessity for the prefix "Profit and Loss" tinless it is necessary to distinguish such surplus from Capital Surplus or some other special form of surplus. Representative accountants employ two general methods of exhibiting the surplus in a balance sheet. In one the bal- ance at that date only is shown, with a reference to the accom- panying Statement of Income and Profit and Loss - thus: Sixr- plus, per Exhibit "B, " $100,000.00 In the other, whether or not there is a Statement of Income and Profit and Loss, there is shown in the balance sheet the balance of surplus at the beginning of the fiscal period, a summary of the charges and 63 credits for the period, and the balance at the end, somewnat as follows: Surplus: Balance, January 1, 1919 $100,000.00 Surplus for the Year 50.000.00 Total $150,000.00 Less: Charges applicable to prior period (net) $10,000.00 Dividends 40.000.00 50.000.00 Balance, December 31, 1919 $100,000.00 If a Statement of Income and Profit and Loss is rendered, that statement may be referred to in the item ^'Surplus for the Year." The essential difference between the two methods exem- plified in the foregoing is that xinder the first method all profit and loss or surplus charges and credits are shown in the profit and loss statement rather than in the balance sheet. When the balance sheet only is rendered, it is generally desir- able to show a svimmary of the surplus in the balance sheet, as under the second method, unless there is objection to disclos- ing the results of operations or the dividends. As stated under the preceding caption, "Capital Stock," in some cases it seems desirable to combine the surplus with the capital stock. It is ordinarily considered proper to show a deficit on the asset side of the balance sheet, but if there is a capi- « 64 tal svirplus It seems desirable to deduct the operating deficit therefrom. In some special statements, it is deducted from the capital stock to show the actual net worth. CAPITAL (Sole Proprietorship or Partnership) In the balance sheet of a sole proprietorship or partnership there is U8\aally one item, viz., "Capital," which corresponds to the capital stock and siirplus of a corporation. However, the proprietor or partners may prefer to carry sepa- rately the original capital invested or such ajno\int (including subsequent investments of new capital or accretions from in- come) as is regarded as the fixed capital, the remainder being shown as Undivided Profits. If the Undivided Profits are kept separate it seems to be appropriate to show in the income statement the with- drawals during the period and the balances at the beginning and end of the period. The balance sheet items would then appear somewhat as follows: Capital: Investment $300, 000 .00 Undivided Profits, per Ex- hibit "B" 50.000.00 Total Capital $350,000.00 Where only one account is carried for capital, that fact is of itself no logical reason for treating withdrawals of income differently, but it may well be an indication that there is no intention or desire to differentiate between capital in- 65 vested and accretions through income, and possibly that it is not regarded as important whether or not the withdrawals exceed the income. In any event, the elements of capital other than undivided profits have no proper place in a statement of opera- tions. Therefore, if an invariable rule is to be established, it is better in such cases, in the opinion of the author, to carry the net credit to capital on account of operations from the income statement to a summary of the capital account for the year, which may be shown in the balance sheet, in the com- ments of an audit report, or as an addendum to the income state- ment - which in that case should be entitled "Statement of In- come and Capital Account." It seems appropriate generally to show the information in the balance sheet, somewhat as follov/s: Capital: Balance, January 1, 1919..., $325,000.00 Additional Investment during the Year 50, 000 . 00 Net Income for the Year, per Exhibit "B" 50^000.00 Total $425,000.00 Less Withdrawals 75,000.00 Balance, December 31, 1919 $350, 000,00 In a balance sheet of a partnership the balance of capital may be divided to show the respective interests of the partners. CONTINGENT ASSETS AND LIABILITIES Contingent liabilities fall into two classes - those which are, and those v/hich are not, offset by corresponding 66 contingent assets. Of the former class are liabilities on ac- count of notes and drafts discoiinted, accommodation endorsements and guaranties, and \inused letters of credit; of the latter class are continuing guaranties of product and legal or other claims for which there can be no recoupment* It is important that the balance sheet disclose any considerable amo\int of contingent liability. This is usually done by means of footnotes, but where there are offsetting con- tlngent assets the items are frequently shown on both sides and included in the totals. For example, the most common item, cus- tomers' notes and acceptances discounted, may be shown thus: Asset - Notes and Acceptances Receivable Discounted (see contra) $100,000.00 Liability - Discoxinted Notes and Accept- ances Receivable (see contra) 100,000.00 UNDECLARSD DIVIDENDS ON CUMULATIVE PREFERRED STOCK There is no legal justification for setting up a lia- bility for dividends until they are declared. Hov/ever, there is no objection to accruing a dividend on preferred stock when it is known that it will be paid. This is often done, especially in public utility corporations, and is frequently desirable in connection with determining the balance of surplus applicable to the common stock. As such accruals do not in fact consti- tute liabilities, they should be treated as reserves. I V/hen a corporation is in arrears in declaring divi- dends on cumulative preferred stock, it is well to state the \} 67 faot in a footnote to the balance sheet, as such arrearage has a decided bearing upon the value of both preferred and common stocks. 41 ♦ ♦ ♦ ♦ For most businesses it is desirable to present the bal- ance sheet in comparative form, unless it is knovm that it is not desired by the officials. This, of course, should be done in an audit report only if the accounts have been audited by the accoxxnt- ant for the preceding period, or as of the end of that period, unless the client desires to have comparisons shovm subject to qualification regarding the figures for the prior date. Very often the client would appreciate the comparisons even though the ac- countant might have to qualify the statement with regard to the figures for the prior date by reason of his not having audited the accounts at that time. A comparative balance sheet may show the figures for both dates and the comparisons, in which case it would be entitled, e.g., "Balance Sheet, December 31, 1919 and 1918, and Comparison;" or the figures for the prior date may be omitted, when it would be entitled, e.g., "Balance Sheet, December 31, 1919, and Comparison with December 31, 1918." Business men generally like to see the figures for both dates. The c\irrent date should be at the left. The comparison may be shown in two columns, increase and decrease, or in one column, increases in black and decreases in red. The latter method is generally preferred. In the rather rare cases where it is desired to show on one sheet the balance sheets for more than two dates no comparison is usually wanted. In such a case an appropriate heading is, e.g., K "Balance Sheet, December 31, 1919, 1918, and 1917." 68 In the proparation of comparative balance sheets it is often necessary to change the arrangement of items at the prior date in order to effect a true comparison with the current date. In some cases it is desirable for this purpose to shov/ items of the prior date in red. * ♦ 41 ♦ ♦ V.Tiile qualifications regarding balance sheet items in an audit report are usually expressed in the comments, they should be made on the face of the balance sheet, whether or not repeated in the comments, if they are so material as to have a decided bearing upon the financial condition. Judicious use should be made of schedules for the presentation of details which if shown in the balance sheet itself would make that exhibit cumbersome. As has been seen, it is also appropriate in many audit reports to utilize the com- ments for displaying details. 41 ♦ ♦ It « Following are specimen balance sheets and statements of financial condition of single concerns which are illustra- tive of the practice, under several varieties of conditions, of perhaps most prominent American accountants. It is not claimed that the whole field, or any considerable part of it, is covered, but it is thought that the solutions to most of the problems regarding form which are commonly encoxmterel in actiial practice are either exemplified or are suggested by analogy, excepting where the forms to be used are prescribed by some jurisdictive authority, such as a public commission. 69 Form 1 l8 a simple balance sheet of a corporation at a single date, vertical arrangement, presumed to be accompanied by a statement of Income and profit and loss, which Is referred to In the statement as Exhibit "B." Form 2 Is similar, and Illustrates the usiaal manner of exhibiting a deficit and one method of showing donated stock In the treasury and the credits resulting from sale and valuation of donated stock. Form 3 Is a still simpler balance sheet of a sole pro- prietor. In which no classification pf the Items Is made and the changes In capital during the year are shown. Form 4 Is a condensed balance sheet of a corporation, with some new features. Including a footnote. Form 5 Is a balance sheet of a branch, the balancing account of which Is with the main office. Form 6 Is a more elaborate balance sheet of a corpora- tion, lateral arrangement, exemplifying among other things, the use of schedules and the summarizing of changes In surplus dur- ing the year. Form 7 Is a condensed balance sheet of an association whose capital Is In the form of fimds, showing such funds and their investment. This statement is not literally a balance sheet, as certain liab-ilities are deducted from the assets to preserve the arrangement, but It appears that no harm can ensue from using the commonly accepted title. It is re^rded as proper to use the term "fund" to denote a liability of such an association or institution. 70 Form 8 is a balance sheet by departments, a brewing company having been selected as an illustration. This statement* exemplifies the col\amnar arrangement, where it is necessary to draw a line under each total or major item, except in the com- paratively rare case exhibited under Liabilities where there are no subordinate items below the total of current liabilities. Form 9 is a typical balance sheet of a stock broker- age firm. An additional interesting feature is the statement of the partners' capital accounts. Form 10 is a comparative balance sheet, vertical ar- rangement, in which the amounts for both dates are shovm. The amounts for December 31, 1919, are those shown in Form 1. Form 11 is a comparative balance sheet, lateral ar- rangement, in which the amounts for the prior date are not shown. The amounts for December 31, 1919, are those shavn in Form 6, but the footnote is different* Form 12 is a comparative balance sheet in which the amounts for both dates are shown in a six-column arrangement. This form is in use by many accountants, being preferred by them to the more compact form illustrated in Form 11, in which it is necessary to draw lines under the major items. While the extended form possesses the advantage of presenting an xininterrupted perpendicular view of the major items, the horizontal alignment of type intermittently spread over so much space, is not easily followed. In the opinion of the author, the compact form is generally more satisfactory. 71 Form 13 is a statement of financial condition, de- signed especially to fxirnish a banker with a statement of assets and liabilities in the form which it is thought will best suit his requirements and will, therefore, anticipate his computa- tions. When appearing in an audit report, such a statement usually has a certificate appended. It may also furnish in a footnote other information, such as the amount of sales for the period. Form 14 is the same as Form 13 with the addition of comparisons with a prior date, which are often appropriate as explaining relatively large items of merchandise, receivables, or current liabilities. Form 15 is submitted as a suggestion of what may be done to present a general view of the affairs of a company in receivership. 72 FORM 1 THE BLANK COMPANY BALANCE SHEETs DECEMBER 31. 1919 ASSETS CURRENT ASSETS: Cash, $ 2,316.25 Notes Receivable, 3,201.47 Accounts Receivable: Customers, $50, 254 . 79 Less Reserve for Losses, 1.116.04 Net, $49,138.75 Others, 2.316.14 51,454.89 United States Liberty Loan Bonds (Market Value), 4,438.62 Accrued Interest Receivable, 210.50 Merchandise Inventory (At Cost ) , 40.112.23 Total Current Assets, $101, 733.96 PROPERTY: Land, $10,000.00 Building, 15,417.95 Furniture and Fixtures, 2, 000 .00 Automobiles, Horses, and Wagons, ^ 3.250.45 Total, $30,668.40 Less Reserve for Depreciation, Net Property, . . ; ' 6 ,250.14 24,418.26 DEFERRED CHARGES: Unexpired Insurance, *. $ 234 . 79 Taxes Paid in Advance, 125.14 Total Deferred Charges, 359.93 TOTAL, $126,512.15 i LIABILITIES dURRENT LIABILITIES: 1 Notes Payable, * $15,000.00 / Accounts Payable, 25, 661.19 / Accrued Taxes, 1> 254.75 Total Current Liabilities, $41,915.94 RESERVE FOR CONTINGENCIES, 5,000.00 / CAPITAL STOCK - AUTHORIZED AND OUTSTANDING, 500 SHARES OF $100 .00 EACH, 50,000 .00 SURFLUS, PER EXHIBIT "B", 29,596.21 TOTAL, $126,512.15 EXHIBIT "A" 73 FORM 2 BLANK & COMPANY. IMC. BALANCE SHEET. DECEMBER 31» 1919 ASSETS CURRENT ASSETS: Cash, ....... $ 27,391.21 Accoiints Receivable: Customers, 143,880.29 orrlcers and Eniployees, 4 242 .00 Merchandise Inventory, * 890 '.en Total C\irrent Assets 4176 404 in ^°mJ J^CEIVABLE COVERING SUBSCRIPTIONS FOR CAPITAL STOCK*- »'»"'^--^" «.?EE ^^ °^^^ AFTER DECEMBER 31, 1920, 11 000 00 RIGHT TO RECEIVE 375 SHARES OF CAPITAL STOCK OF A. B. -^a."""-"" COMPANY, 37 g^o no ^^^!H?^ ^°°K - REMAINDER OF STOCK DONATED FOR SALe'to"* '^"-W" PROVIDE WORKING CAPITAL - 100 SHARES, AT ESTIMATED SALE VALUE! ^^ FURNITURE AND FIXTURES,* .*.*.*.'.*.*.*.*.'!.'!!! DEFICIT: Profit and Loss Deficit, per Exhibit "B",... $ 53,425.71 Less: 5,000.00 865.24 Proceeds of Sales of Donated „ Stock, $20,000.00 Valuation of Unsold Donated Stock, 5.000.00 Net Deficit, 25.000.00 28.425.71 TOTAL, $259.195.05 LI. ABILITIES CURRENT LIABILITIES: Trade Acceptance Payable, $ 2, 618 .88 Accounts Payable, 156 509.17 Accrued Wages, 67.00 Total Current Liabilities. $159 195 o5 CAPITAL STOCK - AUTHORIZED AND ISSUED, 1,000 SHARES OF , ^.vo $100.00 EACH 100.000.00 TOTAL, $259.195.05 EXHIBIT "A^ 74 FORM 3 JOHN doe; BALANCE SHEET. DECEMBER 31. 1919 ASSETS CASH, $ 2,316.05 ACCOUNTS RECEIVABLE - CUSTOMERS, 4,617.52 ADVANCES TO EMPLOYEES, 125.00 LIBERTY LOAN BONDS (Par Value) , 2,000.00 MERCHANDISE INVENTORY, 27,319.50 STORE SUPPLIES, 852.14 STORE AND OFFICE EQUIPMENT, 1, 525.00 DELIVERY EQUIPMENT, 2,097,53 UNEXPIRED INSURANCE, 212.05 TOTAL, $41,064.79 LIABILITIES NOTES PAYABLE, $ 5,000.00 ACCOUNTS PAYABLE, w 3.812.94 CAPITAL: Balance, January 1, 1919, $26, 247.11 Net Income for the year, per Exhibit "B", 13.619.96 Total, $39,867.07 Less Withdrawals (Including Salary), , 7,615.22 32,251.85 TOTAL, $41.064.79 EXHIBIT "A" 75 FORM 4 THE BLANK COMPANY CONDENSED BALANCE SHEET. DECEMBER 31. 1919 ASSETS CURRENT ASSETS: United States Treasury Certlfloates* of 'indebtedness!** * Ri?ff ^2? ^h ^^^^ ••• 100,000.00 Bills Receivable, 7-z q7>i cq Accounts Receivable: ^^,^74. 68 Foreign, $1,832,930.72 Domestic,.. 692.527.49 2,525,458.21 M^nSinH -^^^"°^^ " ^^^> ' 2 154 809.98 Merchandise, l!917!o07.82 Total Current Assets, $7,297,294.20 INVESTMENT SECURITIES, ^ 3^95 854 .84 EXPENDITURES APPLICABLE TO FUTURE OPERATIONS, 74 195 . 71 GOOD-WILL ... ^* __30a,000.00 TOTAL, $7,867,345.75 LIABILITIES CURRENT LIABILITIES: S^frPaya^r' ^ 530,537.08 L^^'unt^X'abi;;::;::::::^ i53o'§89-2f Dividends Payable, ;:.:;; '69 382 60 Reserve for Taxes (Company's Estimate), .'..'!.'!!! 650 ! OOP ! 00 Total Current Liabilities, $3,455,506.89 DEFERRED CREDITS, ♦ iAi> 1.-1-. on ' • 14d,317.81 RESERVE FOR CONTINGENCIES, CAPITAL STOCK: Preferred- Issued (15,000 Shares), $1,500,000.00 Less Held in Treasury, 32 500 00 Si 4.67 ^^n^ nn Coumon - Issued (15,000 Shares) ! $1,5Qq;qqq:5q ^^'^^^'^^^-OO j Less Held in Treasury, 174.10Q.qq 1.325. 900. QQ Total Capital Stock, 2,793,400.00 1,351.119.05 $7,867,Ji45.75 125,000.00 /SURPLUS, TOTAL, NOTE: Contingent liabilities on account of cirafts and bills negotiated under bankers • credits against shipments of merchandisi cunount to approximately $4,550,000.00. 76 FORM 5 THE BLARK TRADING COMPAHY CHICAGO BRANCH BALANCE SHEET, DECEMBER 31, 1919 ASSETS CURRENT ASSETS: Cash, $ 35,490.75 Notes Receivable, 16, 884 .51 Acco\ints Receivable: Customers, $246,293.72 Others, 1.388.38 247,682.10 Merchandise Inventory, as Taken and Valued by the Company, 384, 784 .30 Consigned Merchandise, at Sales Prices, 21, 782.80 Total Current Assets, $706^624.46 FURNITURE AND FIXTURES, 5, 748 .92 DEFERRED CHARGES: Advances for Traveling Expenses, $ Deposits on Account of Rent and Electric Current, Doubtful Accounts Receivable, Prepaid Insurance and Taxes, _ Total Deferred Charges, 5.285.49 450.00 1,497.23 2,607.27 73Q,99 TOTAL, $717,658.87 LIABILITIES CURRENT LIABILITIES: Customers ' Credit Balances, $ 2, 201.47 Sundry Aocoiints Payable, 3.561.71 Total Current Liabilities, $ 5,763.18 THE BLANK TRADING COMPANY, NEW YORK: I Investment Account, $574,922.04 / Current Account, 135.994.72 710,916 .76 / DEFERPJ:D credits, 978.93 TOTAL, $717,658.87 77 FORM 6 THE BLANK COMPANY BALANCE SHEET, DECEMBER 31, 1919 ASSETS PROPERTY, LESS DEPRECIATION - Schedule #1, $ G00D-V7ILL, PATENTS, AND TRADE-MARKS, Iir^ESTLIENT IN SUBSIDIARY COMPANY*: Capital Stock - 1,000 Shares of $100.00 each,.. $136,237.73 Advances, 50,000.00 Total Investment In Subsidiary Company,.. SINKING FUND FOR REDEMPTION OF BONDS - CASH AND ACCRUED IN- TEREST (Bonds Deducted from Liability, per Contra) , 462,834.47 250,000.00 186,237.73 4,962.94 CURRENT ASSETS: Cash - Current Funds , $ 97 , 526 . 06 Cash on Deposit to Pay Interest and Dividends,. 12,324.97 Salesmen's Working Funds, 3,422.95 Trade Notes and Acceptances Receivable, 143,212.57 Accounts Receivable: Trade Debtors, $261,404.06 Less Reserves: Discounts, $13,386.31 Doubtful Accounts,.. 10.326.42 23.712.73 237,691.33 Accounts Receivable - Officers and Employees, .. 34,778.67 Marketable Securities - Schedule #2, 556,183.00 Accrued Interest Receivable, 7,981.07 Inventories: Finished Goods, $205,042.36 Work in Process, 102,193.14 Materials and Supplies, 180,269.80 487,505.30 Advances on Materials Purchaised, 24,967.04 Total Current Assets, 1,605,592.96 DEFERRED CHARGES: Unamortized Discount on Bonds, $ 24,516.29 j Prepaid Insurance, Interest, and Taxes, 8,235.24 Experimental Expenses, 16,294.08 Total Deferred Charges, 49,045.61 TOTAL, $2,558,673.71 LIABILITIES PREFERRED CAPITAL STOCK, 8^, CUMULATIVE - AUTHORIZED, 3,000 SHARES OF $100.00 EACH; OUTSTANDING, 2,500 SHARES, $ 250,000.00 COMMON CAPITAL STOCK - AUTHORIZED AND OUTSTANDING, 10,000 SHARES OF $100.00 EACH, 1,000,000.00 FIRST MORTGAGE, 6fo BONDS, DUE 1934: Issued, $500,000.00 Less: In Sinking Fund, , $ 50,000.00 In Treasury - Pledged to Secure Notes Payable, 175.000.00 225.000.00 Outstanding, CURRENT LIABILITIES: Notes Payable - Loans, $100,000.00 Trade Acceptances Payable, 190,776.64 Accounts Payable, 248,729.57 Interest and Dividends Payable, 12,324.97 Accrued Accounts: Income and Excess Profits Tajces (Estimated),. 40,000.00 Wages, 13,069.17 • Interest, 3,762.43 Total Cvirrent Liabilities, DEFERRED CREDIT - FIRE INSURANCE SUSPENSE, RESERVES: Injuries and Damages, $ 8,250.27 Contingencies, 25^000.00 Total Reserves, SURPLUS FROM REVALUATION OF GOOD-WILL, PATENTS, AND TRADE- MARKS, PROFIT AND LOSS SURPLUS: Balance, January 1, 1919, $ 85,743.68 Surplus for the Year, 220.525.34 Total, $306,269.02 Less Dividends, 120,000.00 Balance, December 31, 1919, 275,000.00 608,662.78 5,491.64 33,250.27 200,000.00 186,269.02 TOTAL, $2,558,673.71 ♦^ Should be named. NOTE: The Company has contingent liabilities of $109,326.73 on account of notes and acceptances receivable dis- counted. FORM 7 THE BLANK CHARITY ASSOCIATION CONDENSED BALANCE SHEET. DECEMBER 31. 1919 INVESTMENT OF RESTRICTED CAPITAL FUNDS : Mortgaeds, $ 67,550.00 Bonds, 290,181,02 Stocks, 64,700.00 Property - Land, Buildings, and Equipment, 217,750.00 Cash, 12.610.92 Total Investxnen't of Raatrioted Capital Funds , $ INVESTMENT OF UNRESTRICTED CAPITAL FUNDS : Mortgages, $ 7,545.00 Bonds, 57,355.00 Due from Employees on Liberty Loan Bond Subscriptions, 3,477.11 Stocks, 54,019.12 Real Estate, 109,368.85 Cash, 24,622.03 Due froru Social Welfare Fund,.... 3.000.00 Total Investment of Unrestrloted Capital Funds, NET CURRENT ASSETS: Cash, $ 89,522.21 Bonds, 5,000.00 Accounts Receiviible, 39,407.74 Accrued Interest Receivable, 5,347.99 Supplies , 4,932 .30 Unexpired Insurance, 2^821.31 Total, $147,031.55 Less: Due to General Reserve Fund, $ 3,000.00 Accounts Payable,... 20,785.93 Accrued Interest Payable, 116.67 23.902.60 Total Net Current Assets, 652,791.94 259,387.11 123,128.95 LIABILITIES RESTRICTED CAPITAL FUNDS: General Work, $196,982.91 Fresh Air Work, 440,059.03 Blank Fund, 15.750.00 Total Rastrioted Capital Funds,. $ UNRESTRICTED CAPITAL FUNDS: General Reserve Fund, $195,518.25 Fresh Air Reserve Fund, 63.868.86 Total Unrestricted Capital Funds CURRENT FUNDS: General Fund, $ 46,616.59 Fresh Air Fund, 26,046.14 Seashore Fund, • 32,584.70 Social Welfare Fund, 17.881.52 Total Current Funds, 652,791.94 259,387.11 123,128.95 TOTAL, $1,035,308.00 TOTAL, $1.035.308.00 fPRM 8 THE BLANK BREWING COMPANY BALANCE SHEET. BY DEPARTMENTS, DECEMBER 31^ 1919 — ASSETS — TOTAL ELIMINATIONS BREWERY BOTTLING ICE PLANT DEPARTMENT CURRENT ASSETS: Cash^ Notes Reoeivable - Schedule #1, Aooounts Reoeivable: C\i8t(»ner84 • • Bottling Department - Beer Furnished^ .••... • Other, Inventories: Beer, Materials and Supplies , Aoorued Aooounts: Interest on Notes Reoeivable, Interest and Dividends on Securities Owned, • Rentals , Total Current Assets, IlfTESTMENTS: Real Estate and Improvements - Schedule #2, • • • Less Reserve for Depreciation, Net Book Value Securities - Schedule #3, * Net Investments , PROPERTY: Real Estate ajod Improvements, Machinery and Equipment , Horses, Wagons, and Harness - Inventory, Cooperage - Inventory, Boxes and Bottles - Inventory, Office Furniture and Fixtures, Total, Less Reserves for Depreciation: Real Estate and Improvements, Machinery and Equipment , Office Furniture and Fixtures, Total, Net Property, PREPAID INSURANCE AND LICEIISES, INYESTUENT IN ICE PLANT, INVESTMENT IN BOTTLING DEPARMENT, 95,765.27 82,814.74 168,218.18 $ 12,265.00 920.50 31,654.12 35,216.44 5,723.35 2,433.38 2.701.80 $ 425.447.78 $ 12.265.00 $ f I $ i $ I 31,189.44 82,814.74 161,752.83 12,265.00 920.50 31,439.02 30,416.05 5,723.35 2,433.38 2.701.80 361.656.11 $ 40,486.08 $24,089.75 5,694.50 770.85 215.10 3,701.38 1,099.01 i 45.861.66 $26.174.71 792,464.49 168.570.81 623,893.68 190.043.33 813^937.01 $ T 792,464.49 168.570.81 J 623,893.68 190.043.33 813,937.01" 328,316.44 286,387.90 11,783.00 12,519.23 10,458.98 1.834.69 $ 193,859.13 169,279.64 10,179.00 12,519.23 1.520.38 $ 97,527.75 108,570.49 651.300.24 $ 387.357.38 242.71 $206.340.9"5 $36,929.56 8,537.77 1,604.00 10,458.98 71.60 $57.601.91 127,832.35 157,513.34 747.18 98,518.93 116,008.01 747 tM $ 10,560.27 34,092.23 $18,753.15 7,413.10 286 . 092 . 87 365. 207. 3f $ 215.274.12 $ 44.652.50 $26.166725 1.328.75 $21l.l42.73~; 211.142.73 ]; 45.225.77 $ 45.225.77 172.083.26 1.312.65" $161:686.45 l;31.435.6B t 16.10 TOTAL, $1,605,920.91 $268.633.50 EXHIBIT "A^ $1.605.357.53 $211.570.41 $57.626.47 (Continued) - 1. FORM 8 "^^- ■■" --- THE BLANK BREWING COMPANY BALANCE SHE ET, ETC, « — -^ BOTTLING — LIABILITIES— TOTAL ELIMINATIONS BREWERY ICE PLANT DEPARTMENT CURRENT LIABILITIES: a * ^^e ao ^ t ttq 7a * ax aa t Rn ah Aooounts Payable, $ 3,475.98 . ,^ _^ ^ $ 3,379.74 $ 45.84 $ 50.40 Brewery • Beer FirnleHed, $ 12,265.00 12,265.00 Aoorued Aooounte: , . -o- -, Salaries and Wagee, i'^MS 9 f^l'lt Im^m T&xAfl . T 2,600.20 2,401.87 186. do «. ,a AuSwiAoM, :::::.:.::!!.... !..!.!.!!..! i; 773.66 1,688.26 85.30 Interest, . • — ;i-^;— •Llibilitiw; V.V.M I 9,243;i7 $ 12,265.00 $ 8,879:79 $ 427.68 $12,400.70 MORTGAGffiS ON REAL ESTATE - Schedule #4, 39 , 500 . 00 39 , 500 . 00 RENTALS RECEIVED IN ADVANCE, 343.77 343.77 BREWERY - INVESTMENT ACCOUNTS, .^. ^^^ ^^ 256,368.50 ^^^ ^^^ ^^ 211,142.73 «,ci«.rf CAPITAL STOCK - 5,000 SHARES OF $100.00 EACH,... 522*g22-g? , n22*2$S*2? SURPLUS, PER EXHIBIT "B", 1^056^833.97 1^056^853 .87 TOTAL, $1.605,920.91 $268,633.50 $1,605,357.53 $211,570.41 $57,626.47 NOTE: No proTision has been made for Federal Inoome and Excess Profits T€uces for the yeeir ended December 31, 1919. s EXHIBIT "A" (Cono laded) • 2. DAMAGED PAGE(S) 81 FORM 9 JOHN DOE & COMPANY BALANCE SHEET AT CLOSE OF BUSINE SS. DECEMBER 31, 1919 ASSETS !ASH ON DEPOSIT, $ 41.421.76 lASH ON HAND, 455.14 I'EDERAL AND STATE TAX STAMPS, 893 .14 "lECURITIES BORROWED, 180,400 .00 lECURITIES SOLD AND UNDELIVERED, 110, 535.90 lUSTOMERS • DEBIT BALANCES - SECURED, 2, 018, 245 .67 lUSTOMERS' DEBIT BALANCES - UNSECURED, 17. 857.51 5R0KERS* LONG ACCOUNTS, 674.962.24 !OMMISSIONS RECEIVABLE, 1,039 .75 lECURITIES OWNED, 120.456 .29 lYNDICATE PARTICIPATIONS, 84.327.12 :XCHANGE MEMBERSHIPS, 75!oOO.OO LNITURE AND FIXTURES, 1. 725.00 'ARTNERS' TRADING ACCOUNTS: John Doe, $23,385.21 Richard Roe, 34,540.13 57.925.34 TOTAL, $3.385.244.86 LIABILITIES LOANS PAYABLE, $2,300,000.00 f;SECURITIES LOANED, * 146 500 00 ISECURITIES BOUGHT AND NOT RECEIVED, 47*365*00 [securities SHORT, 11*337*50 lUSTOMERS' CREDIT BALANCES, ['/. 68*96365 [CUSTOMERS' SHORT BALANCES, 227*447*47 BROKERS' SHORT ACCOUNTS, 102*680 *00 ACCRUED INTEREST PAYABLE, 8* 816*36 DIVIDENDS PAYABLE - NET, 4*326*37 ICAPITAL: * It^vestraent Aocounts: ,John Doe, $300,000.00 iRiohard Roe, 100,000 .00 Undivided Profits, 72.916.57 / Total, $472,916.57 L>QB9 Personal Aooount, John Doe, 5.108.06 467.808.51 / TOTAL, $3,385.244.86 ( i 82 THE BLANK COMPANY BALANCE SHEET, DECEMBER 31, 1919 and 1918. AND COMPARISON . . .DECEI3ER 31, INCREASE 1919 1918 ♦DECREASE ASSETS CURRENT ASSETS: Cast, $ 2,316.25 $ 1,568.47 $ 747.78 Notes Receivable, 3,201.47 4., 013. 01 ♦ 811.54 Accounts Receivable: Customers^ Less Reserve for Losses (1919, $1,116.04; 1918, $500.00), 49,138.75 42,517.96 6,620.79 Others, 2,316.14 1,060.00 1,256.14 United States Liberty Loan Bonds (Market Value, 1919; Par Value, 1918), 4,438.62 2,000.00 2,438.62 Accrued Interest Receivable, 210.50 156.47 54.03 Merchandise Inventory (At Cost), 40.112.23 32.550.29 7.561.94 Total C\irrent Assets, $101,733.96 $ 83.866.20 $17,867.76 PROPERTY: ^ — * Land, $ 10,000.00 $ 10,000.00 Building, 15,417.95 15,016.49 $ 401.46 Furniture and Fixtures, 2,000.00 1,924.25 75.75 Automobiles, Horses, and Wagons, 3.250.45 2.116.92 1.133,53 Total, $ 30,668.40 $ 29,057.66 $ 1,610.74 Less Reserve for Depreciation, 6.250.14 4.219.27 2.030.87 DEFERRED CHARGES: '^•* ^^P"^*^' ^ .4;4X8..6 ^ 24;838.39 >| ^aoiia Unexpired Insurance, $ 234.79 $ 167.14 $ 67.65 Taxes Paid in Advance, 125.14 - 112.01 13.13 Interest Paid in Advance, 196.50 ♦ 1S6.5Q Total Deferred Charges, $ 359.93 $ 475.65 ♦^ 115.72 TOTAL, $126,512.15 $109,180.24 $17.331.91 j LIABILITIES CURRENT LIABILITIES: Notes Payable, $ 15,000.00 $ 20,000.00 ♦$ 5,000.00 Apcounts Payable, 25,661.19 23,516.29 2^144.90 AOcrued Taxes, 1.254.75 514.68 740. Q7 _ ' Total Current Liabilities,.. $ 41,915.94 $ 44,030.97 ♦$ 2,115!o3 RESERVE FOR CONTINGENCIES, 5,000.00 5 OOO 00 CAPITAL STOCK (Shares $100.00 Each), 50,000.00 45,000.00 5*000.'oO SURPLUS, PER EXHIBIT "B«, 29.596.21 2o!l49.27 9!446.94 / TOTAL, $126,512.15 $109.180.24 $17.331.91 ♦ Typed in Red. I EXHIBIT "A** 83 TOW 11 THE BLANK COMPANY BALANCE SHEET, DECEMBER 31^ 1919, AND COMPARISON WITH DECMBER 31^ 1918 — ASSETS — DECEMBER 31, 1919 INCREASE ♦DECREASE PROPERTY, LESS RESERVES FOR DEPRECIATION - Schedule #1, GOOD-WILL, PATENTS, AND TRADE-MARKS, INVESTMENT IN SUBSIDIARY COMPANY: ♦♦ Capital Stook - 1,000 Shares of $100.00 Eaoh, ••• Advances , , Total Investment in Subsidiary Com- pany, , • SINKING FUND CASH AND ACCRUED INTEREST, CURRENT ASSETS: Cash - Current Funds , Cash on Deposit to Pay Interest and Dividends, •• Salesmen's Working Funds, Notes and Acceptances Receivable, • Accounts Receivable - Trade Debtors (Less Re- serves for Discounts, $13,386 .nSI, and for Doubtful Accounts , $10,326 .42) , Accounts Receivable - Officers and Employees,... Marketable Securities - Schedule #2, Accrued Interest Receivable, Inventories: Finished Goods, Work in Process, Materials and Supplies , Advances on Materials Purchased, Total Current Assets , fEFERRED CHARGES: Unamortized Discount on Bonds, Prepaid Insurance, Interest, and Taxes, Experimental Expenses , Total Deferred Charges, I 462.834.47 $ 34.783.54 2So!oo6.0o 136,237.73 50.000.00 $ 10.000.00 186.237.73 $ 10.000.00 4.962.94 *$ 2.364T96 $ 97,526.06 12,324.97 3,422.95 143,212.57 $ 28,542.44 376.01 222.95 24,142,07 237,691.33 34,778.67 ♦ 556,183.00 7,981.07 205,042.36 102,193.14 180,269.80 24.967.04 19,122.47 5,620.34 10,500.00 1,054.23 67,505.22 20,114.95 45,327.56 24.967.04 $1,605,592.96 $236,254.60 24,516.29 8,235.24 16.294.08 49,045.61 $ 1,519.12 792,05 12.150.43 $ 14,461.60 TOTAL, $2.558.673.71 $293.134.78 — LIABILITIES — DECEMBER 31 1919 INCREASE ♦DECREASE PREFERRED CAPITAL STOCK - &fo, CUMULATIVE (Authorized, 3,000 Shares of $100,00 Each; Out- standing, 2,500 Shares) , COMMON CAPITAL STOCK (Authorized and Outstanding, 10,000 Shares of $100,00 Each) , FIRST MORTGAGE, 6fo BONDS, DUE 1934: Issued, Less: In Sinking Fund, In Treasury - Pledged to Secure ITotes Payable, Total, Outstanciing, CURRENT LIABILITIES: Notes Payable - Loans , Trade Acceptances Payable, Accounts Payable, Interest and Dividends Payable, Accrued Accounts: Income and Excess Profits Taxes (Estimated),.. Wages , , Interest , Total Current Liabilities, DEFERRED CREDIT - FIRE INSURAITCE SUSPENSE, RESERVES : Injuries and Damages, Contingencies, Total Reserves, SURPLUS FROM REVALUATION OF GOOD-WILL, PATENTS, AND TRADE-MARKS, PROFIT AND LOSS SURPLUS: Balance at Beginning of the Year, Surplus for the Year, Total, Less Dividends , Balance at End of the Year, $ 250,000,00 $1,000,000.00 1 $ 500,000.00 50,000,00 175.000.00 $ 7,000.00 f 225.000.00 $ 275,000.00 5 7.000.00 $ 7.000,00 $ 100,000,00 190,776,64 248,729,57 12,324,97 ♦$ 25,000.00 75,122.68 107,250,74 376.01 J w 40,000.00 13,069,17 3.762.43 ♦ 25,000.00 1,201,92 576 ,?2 608 , 662 . 78 $183 . 375713 5,491.64 $ 5.491.64 $ 8,250,27 25.000.00 $ 33,250":^ $ 742,67 10.000.00 $ 10.742.67 $ 200.000,00 $ 85,743.68 220.525.34 306 26d.02 $ 35,617,73 114.907.61 $150,525.34 120.000.00 50.000.QQ $ 186,269.02 $100.525.34 TOTAL, $2,558,673.71 $293.134.78 •« Typed in R^d, Should be Named. / NOTE: The Company has Undetermined Liabilities on Account of Unreported Drafts Drawn by its European Agent for Purchases of Merchandise Under Letters of Credit, the Untised Balances of Which Aggregate $100,000.00. 84 FORM 12 THE -BLANK POITER CQHPANY BALANCE SHEET ^ DECEMBER 31, 1919 AND 1918^ AND COMPARISON — ASSETS — DECEMBER 31 , 1919 DECEMBER 31, 1918 INCREASE OR ♦DECREASE ) 1 PROPERTY AND PLANT - Schedule #1, INVESTL!ENTS - A. & B. COMPAOT: Capital Stock, $ First Mortgage Bonds, _ Total Investments - A« & B. Company, WORKING ASSETS: Materials smd Supplies, $ Advances to Right-of-way Agents and Field Em- ployees, Prepaid Expenses: Insurance, ••••.. Interest, Taxes, __ Total T7orklng Assets, SPECIAL DEPOSITS WITH TRUSTEES: Guaranty Trust Company, New York: Sinking Fund Cash, $ Cetsh Available for Construction, Equitable Trust Compaiiy, New York - Trust Funds, _ Total Special Deposits with Trustees CURRENT ASSETS: Cash - General, $ Cash on Deposit for Payment of Matured Funded Debt amd Interest , Notes Receivable, Accounts Receivable - Consumers, Accounts Receivable - General, United States Liberty Loan Bonds, Less Collec- tions on Subscriptions by Employees, Accrued Interest on Sinking Fund Securities, ... • _ Total Current Assets, DEFERRED DEBIT ITEMS: Unamortized Debt Discount and Expense, $ Unamortized Depreciation of Power Plant, Miscellaneous, Total Deferred Debit Items, TOTAL, $16,789,779.12 $16,739,851.31 $ 49,927.81 60,000.00 20,000.00 187,142.13 6,395.57 8,387.41 14,521.53 12.223.92 382 .48 16,618.41 161,672.59 18,355.00 224,100.00 248,542.10 149,631.14 47,046.20 14,464.90 900,093.36 11,100.00 17.002.74 80,000.00 228,670.56 17,000.89 863,811.93 928,196.10 $18,907.458.60 $ 60,000.00 $ 292,527.97 5,851.86 8,138.51 7,460.10 12.584.50 $ 20.50 15,847.26 21.592.36 $ 30,373.03 29,820.00 800.00 312,127.85 115,076.68 52,696.37 11.018.05 $ 713,673.18 19,500.00 10.920.85 60,000.00 326,562.94 $ 20,000.00 ♦$ 105,385.84 543.71 248.90 7,061.43 ♦ 360.58 37,460.12 551,911.98 744,094.03 $18,459,880.38 $ 361.98 771.15 21.592.36 $ 131,299.56 11,465.00 223,300.00 63,585.75 34,554.46 5,650.17 3.446.85 $ 186,420.18 8,400.00 6.081.89 20,000.00 97,892.38 20,459.23 311,899.95 184,102.07 $447.578.22 ♦ Typed in red. (Continued) - 1, 85 FORLI 12 THE BLANK POWER COLIPANY BALANCE SHEET, ETC, —LIABILITIES-- DECEMBER 31, 1919 DECEMBER 31, 1918 CAPITAL STOCK: First Preferred, 6^^, Cumulative - 25,000 Shares Seo1nfp?ef«rtdf'6f/NoA:cumii;tiv;':'i6;666---- ^^'"^'^^'^ $2,500,000.00 Shares of $100.00 each, 2.000.000.00 2 ooo ooo on Con«.on - 12. 500 Shares of $100 00 each i:250:ogg:g? ftjgg^ggglgg FUNDED DEBT: ^ * ^ ^*°°^ ^ 5,750,000.00 $ 5.750,000.00 '"Lrss"S!^^sr&i„T^r:.°^!.t'!^:::::::: 1:;S:ggg:gg ^^'2SS'§Sg-§? -Unaerl.ir?JS^?«H«t-Mi;ig;^: -Sf/BoAds; -Bii ^^^^^MM EMI^^M Hefun.in^"Se^^f'gi- -sikkink'i^: -diid'ioA^. MZZIIMM E^dti Sl8^Sf!d'b;'T;u8t;;'to's;ou;;'fv;o:;;wr6iid' ^'°°°'0°o.oo $2,000,000.00 l^otee outstaniiiig;:::::::::::::::::::::::::::: ^^.bco.ooo.oo 2.000000,09 Two-year, 6f,, Convertible, Gold Notes, Due 1919, * ' — $1.600 666 (5 5 CONTRACT OF PURCHASE^-^STESTpLMT^cky^bii-it "th^ 10,660,000.00 ' '— 9.905.000.00 CU?Snt1i1b'!£???ES? ^« A^™> 144,075.00 159.075.00 Ko^Kj:^!;::::::::::::::::::::::::::: ^ Hf-fiJl? $ ii'.'ir.-^ Matured Two-year, 65S, Gold Notes, ....::..::;.::: 3000*00 481.372.84 Matured Interest on Funded Debt isS^^'nX «« « , Accrued Interest T........ . li?'!!^*?? 29,820.00 i Accrued Taxes,..'..::::::::::;::::::::::::::::;:; U'S^JI 171,736.64 Total Current Liabilities. :::: * ' — i xm akt ik 34,614.17 DEFERRED CREDIT ITEMS: u*»wixi»ABB, . . .. 1,302,653.35 1.453.423.21 Unearned Land Rentals. * 4. S54 31 * -,««««. Unexpended Portion of Insurance Received, 11300*04 * Ta'?f2*ff Total Deferred Credit items... ' is 429.49 3,929.49 UNADJUSTED DEBITS, 40,209 .03 EQUIPMENT SUBJECT TO SPECIFIC LIEITS, $ 159,010.00 Less Aoorued Depreciation, 52^076.55 106,933.45 ROAD AND EQUIPMENT SUBJECT TO UNDERLYING BONDS AND GSINERAL LIENS, $5,673,342.17 Less Accrued Depreciation, 112,936.60 5,560,405.57 LIABILITIES CURRENT LIABILITIES INCURRED BY THE RE- CEIVER: Loans and Bills Payable^ $ Traffic and Csor-Service Balances Pay- able, Sundry Creditors , «..,.. Matured Interest Unpaid, Accrued Interest , Accrued Taixes , 232,043.86 9,824.61 97,167.25 5,000.00 8,977.31 6.760.24 EQUIPMENT NOTES, UNDERLYING, SjJ, GOLD BONDS, GENERAL CREDITORS, PRIOR TO RECEIVERSHIP: Loans and Bills Payable, Interest, Sundry Creditors , > 438,245.80 112,235.24 31.901.04 FUNDED DEBT SUBORDINATED TO CLAILIS OF GENERAL CREDITORS, AND INTEREST THEREON: General Mortgage, 5^, Gold Bonds, $2,500,000.00 Matured Interest on General Mortgage Bonds, 452,550.00 Unmatured Interest Aoorued on General Mortgage Bonds, 12.916.68 UNADJUSTED CREDITS, RESIDUE OF THE ESTATE: Amount of Estate at Appointment of Receiver* Capital Stock, $3,000,000.00 Less Profit and Loss Deficit 706.132,52 Less: Deficit from Receiver's Operations (Subject to any amo\ints represent- ing losses or gains on the original estate which may be included) $ 89,118.12 Interest Accrued on General Mortgage Bonds during Receivership,.. 417.725.82 $2,293,867.48 506,843.94 $ 359,773.27 52,643.59 200,000.00 582,382.08 2,965,466.68 11,705.03 TOTAL, $5,958,994.19 TOTAL, 1,787,023.54 $5.958.994.19 89 CHAPTER III INCOME AND PROFIT AND LOSS STATEMENTS fi 'I f Statements of operations are designated by various titles, such as: Statement of Inoome and Profit and Loss; Siim- mary of Inoome and Profit and Loss; Statement of Income; State- ment of Profit and Loss; Inoome Aocoxmt; Profit and Loss Ac- ooxint; Statement of Income and Capital Account; Statement of Revenue and Expenses; Statement of Income and Expenses; State- ment of Earnings and Expenses; and Statement of Operations. Several of these, and perhaps others, are accepted as good usage by prominent accountants • The choice depends to some extent upon what the statement embraces* Statements of manu- facturing and trading businesses usually show all operations. Including changes in the surplus, and are perhaps generally entitled "Statement of Income and Profit and Loss." If a similar statement is somewhat condensed, that is, shows only the totals of some major groups, it may appropriately be termed "Stimmary (or Condensed Statement) of Income and Profit and Loss." If the statement ends at Net Income, it should be called a Statement of Income. It will usually be supplement- ed by a Statement of Profit and Loss. The title, "Statement of Income and Capital Accoxint, " is used when a statement of the Capital account is appended to a statement of Income of a sols proprietorship or partnership. Such terms as State- ment of Revenue and Expenses are applicable to other than commercial enterprises. 90 It is axiomatic that statements of income and profit and loss, however entitled, are for a period ^ and not at a date; yet many statements are seen headed somewhat as follows: "State- ment of Income and Profit and Loss, December 31, 191S" - instead of, "For the year ended December 31, 1919." Statements should be so designed as to be readily understood by the layman. The "running" form of statement is generally considered clearer to the majority of people than the "account" form. The former is simply a series of additions and deductions, beginning with the gross sales or earnings and end- ing with the final balance of profit and loss; the latter ex- hibits the several sections of the statement in the form of led- ger accounts, bringing down the respective balances in bookkeep- ing fashion. The "r\mning" form has been adopted by most of the prominent accoimtants, and is the only one treated in this work. In the practice of representative acco\intants with respect to the preparation of statements of income and profit and loss for a particular kind of business there is little variation in the general form but considerable variation in the detailed treatment of many items. For example, depreciation, rent, insurance, and property taxes are treated vauriously as cost, general expenses, and income charges; uncollectible ac- counts as general expenses, income charges, profit and loss charges, and deductions from sales; income taxes as general expenses, income charges, and profit and loss charges; cash dis- counts as income items and deductions from sales or purchases; 91 shlpping and delivery expenses as cost, selling expenses, and deductions from sales; and so on through the whole category. ^ These differences of treatment are largely questions / of acco\inting. theory, which are discussed in many good books and ^ articles on the subject. Many of them are really debatable, so that an accountant cannot with good grace take a decided stand one way or another. Further, it is very often necessary, for practical purposes, for a professional accountant to prepare his report in accordance with the accounting system or publish- ed statements of his client. Unless there is some important issue involved it is often unwise, for example, to change the classification of cost accounts, thereby necessitating an ad- justment of inventory values or destroying the co-ordination between the operating and balance sheet accounts. Also, it is often found that the accounts as kept do not fxornish siifficient « information for the preparation of theoretically correct state- ments, and it is impracticable to obtain the information by analysis. In short, it is very often necessary to sacrifice idealism to expediency. Following is a skeleton form of statement of income and profit and loss of a manufacturing or trading corporation: Gross Sales Deductions from Sales Net Sales Cost of Goods Sold Gross Profit Selling Expenses Selling Profit General Expenses Profit from Operations Other Income Credits Gross Income 92 ; Income Charges Net Income Surplus at beginning of the Period Other Profit and Loss Credits Gross Surplus Profit and Loss Charges Surplus at end of the Period The latter part of the foregoing is predicated upon the assiamption that this statement is intended to support one item in the balance sheet, viz., the siirplus at the end of the period - which, in the opinion of the author, is generally de- sirable. It will be noted that in the above arrangement the Profit and Loss Charges are applied to the accumulated Gross Siirplus. It is eqxaally proper in many cases, and preferable in some, to arrive at a s\irplus for the period, arranging the statement as follows: Net Income Other Profit and Loss Credits Gross Siirplus for the Period Profit and Loss Charges Surplus for the Period Surplus at beginning of the Period Surplus at end of the Period This may well be done unless it results in showing a deficit for the period, due to dividends exceeding net credits. Some companies are particular about declaring dividends only from the earnings of the period, and their views should, if known, be reflected in their statements. On the other hand, it seems logical in the majority of cases to apply most items of profit and loss credits and charges to accumulated siirplus. Further variations of the form of statement are shown later in this chapter. 93 As virtiaally all items entering into the Profit and Loss accoxint of most oommercial business concerns can be allo- cated to one of the general groups of charges or credits out- lined in the foregoing, we shall proceed to show what items usually embraced in each of these groups. GROSS SALES Under this head appears the gross business done - charges to customers or cash sales. Under conditions different from the ordinary manu- facturing and trading business, it is appropriate to use some term other than Gross Sales. For example, if, as a general practice, goods are shipped on approval, the gross charges to customers are better designated by some such term as "Ship- ments Billed"; if the billings represent completed contracts only, it is proper to use the term "Completed Contracts Billed," or if they represent the completed portion of con- tracts, it may be well to use the simple expression "Bills Rendered." Charges for services, as distinguished from com- modities, are usually designated as Gross Earnings or Revenue. If the business is departmentalized, and one depart- ment sells to another, in a statement relating to the business as a whole the interdepartmental charges and credits should be eliminated; if the statement is designed to show the opera- tions of each department, the credits should be designated as transfers, not sales. 94 The sales may be classified on the statement^ if de- sired^ in accordance with the requirements in each particular case - by classes of goods^ department Sj wholesale and retail^ etc. Some companies^ notably producers of cane sugar and cotton-seed oil^ regard production instead of sales as their revenue or gross earnings • The result is the same if the Inven- tories are properly valued^ but it appears to be more logical to treat sales as the source of profit Sj deducting the inven* tory at the end of the period from cost instead of adding it to sales. DEDUCTIONS FROM SALES Deductions from sales are usually: returns^ allow- ances^ trade discount s^ and freight and express outward. Uexe corrections of billings should not be incl\ided in this group^ but should be absorbed in Gross Sales. Trsule discoxints are intended to include qiaantity discount s^ i.e.^ discounts granted when a customer has pur- chased a certain quantity. In the opinion of the author^ cash discoxmts allowed to customers are not properly treated as de- ductions from sales^ but should be classified as Income Charges^ in the same general category as interest. There are some so-called cash discotints, however, which are practically trade discoijuits. If the granting of the discoimt is condi- tional entirely upon settlement within a certain comparatively short time it is a cash discoiint; if the terms are such that 95 If settlement is not made within the specified time the discount will be allowed but interest will be charged, the discoimt is a trade discount . It is argued by soms that the giving of cash discounts is such a general custom that its practical effect is to reduce the sales prices • The author has no objection to the applica- tion of this principle if it is followed to its logical conclu- sion, that is, if all discounts that might have been taken are deducted from sales, and if all discounts that have not been availed of by customers are credited to income. The same argu- ments may be urged against deducting cash discounts from pur- chases, with the additional objection that where a cost system, or perpetual inventory, is maintained, the reduction of invoice prices by the amo\mts of cash discounts results in awkward frac- tions in unit costs. The theory underlying the deduction of freight and express outward from sales is that when such charges are pre- paid or allowed to customers, they are usually added to the Invoice or included in the price, more or less specifically. There is usually such a wide variation in the freight rates as between the several points in the territory covered that it is impossible to fix a uniform selling price which will in- clude the cost of delivery to all points. In those compara- tively rare cases^where goods are sold delivered at a \iniform price, it is proper to treat delivery charges as cost of goods* sold. 96 In seme classes of business^ commissions paid are a direct deduction from sales, but in nearly all manufacturing and trading concerns it is better to treat them as selling expenses, deductible from gross profit. Excise or revenue taxes based upon sales are deductible directly from sales. NET SALES This item is simply the result of applying the Deduc- tions from Sales to Gross Sales. In many cases, where the de- ductions are inconsequential, the net sales may be the first item of the statement. In cases where it is desirable to use the term Shipments Billed, Instead of Gross Sales, that is, where the goods retiirned have not all been actually sold, it is appropriate to designate this item as Sales, instead of Net Sales. COST OF GOODS SOLD For a mercantile business the cost of goods sold, or, as it is often called, cost of sales, comprises the Inventory at the beginning, plus the purchases and freight thereon, less the inventory at the end. This may be shown in the statement in total only or in one of the following ways: (1) P\ir chases (including freight) Add decrease (or deduct in- crease) in Inventory 97 \ (2) Inventory, Piirchases Freight January 1, 1919 Total Less Inventory, December 31, 1919 The choice of method should be governed by the ex- pressed or implied wishes of the persons primarily interested as to the degree of detail to be presented in the report. It may also be desirable to classify the cost, as well as the sales, by departments, etc. As to a manufacturing business, what constitutes cost of goods sold occasions more controversy among accoxintants, and between accountants and business men, than any other one sub- ject. This is due largely to the fact that the cost of manufac- ture, which is the principal element, in most cases determines the valuation of the inventory. Most of these varying opinions are iindoubtedly cor- rect under certain conditions. Therefore, such of the author »8 views on disputed subjects as are here enunciated should not be construed as invariable in their application. The amount of detail of the cost of a manufacturing business that may be presented in a statement is limited only by the classification of accounts or by the analysis that may be made of them. Following is a fairly complete statement of the cost of manufactured goods sold: 98 COST OF MANUFACTURE : Materials Consumed Direct Labor Factory Expenses: Superintendent and Foremen Factory Office Salaries and Supplies Receiving Dei)artment Expenses Cartage Inward - Estimated Stores Department Expenses Stock Department Ejqpenses Janitors^ Watchmen^ and Elevatormen Power^ Heat> and Light: Fuel Wage s 011^ Waste^ etc. Current Purchased Repairs: Building Machinery and Equipment Depreciation: Building Machinery and Equipment Property Taxes Insurance - Flre^ Liability^ etc. Rent of Factory Building Unemployed Time Inspection Defective Goods Experimental Expenses Infirmary Miscellaneous Total Factory Expenses Total Materials^ Direct Labor^ and Factory Expenses Less: Sales of Scrap Increase in Inventory of Work In Process Total Total Cost of Manufacture ADD DECREASE IN INVENTORY OF FINISHED GOODS MANUFACTURING COST OF GOODS SOLD PACKING AND SHIPPING' EXPENSES: Salaries and Wages Materials Cartage Outward - Estimated Total COST OF GOODS SOLD 99 In the foregoing it Is assuuned that Inward freight^ duty, marine insurance, and other direct costs have been applied to the niaterial and supply accounts affected, but that the com- ; pany does its ovm carting and no distribution of the cost is made except a more or less arbitrary division between inward and / outward . The statement is also based upon the assumption that the finished goods are not packed until they are shipped. If, as often happens, the goods are carried in stock in the con- tainers in which they are shipped, or they are not carried in stock at all, but are shipped as soon as manufactured, the major part of packing and shipping expenses should be classified as Factory Expenses, and thus be reflected in the Cost of Iflanufao- ture, which should be the basis for validation of the inventory of finished goods. In such oases the remainder, representing shipping expenses, is relatively so inconsequential that it is treated in the same way. The cost of materials consumed may be shown in great- er detail if desired - as to kinds of material and as to pur- Chases (net) and Inventories at the beginning and end of the period. It is not considered necessary to show returned pur- chases as a separate item in any event. The differences in in- ventories of work in process and finished goods may also be de- tailed by showing in each case the inventories at the beginning and end. In the opinion of the author, most business men pre- fer the condensed form; if they want to know the amounts of the inventories they look at the balance sheet. 100 It Is ooxaparatlvely seldom that the degree of detail shown above would be given in a Statement of Income and Profit and Loss. For the presentation of such elaborate details^ whether of cost or expenses^ schedules are us\aally employed^ only the totals being shown in the exhibits. In some cases excise or revenue taxes are properly treated as cost of mantif actxxre • GROSS PROFIT In statements for manufacturing companies^ this item is sometimes called Uanufactxxring Profit. SELLING EXPENSES The items comprised in this group are usually some- what as follows: Salaries of Sales Manager and Clerks Salaries of Salesmen Commissions Traveling Advertising Catalogues^ etc. Rent of Sales Offices Postage, Stationery, etc. Telephone and Telegraph Sundry Sales Office Expenaea Miscellaneous GENERAL EXPENSES This group is often called Administrative and General Expenses. It is intended to include expenses which apply to the business as a whole, and not exclusively to any one of its major operations. These expenses are as follows: 101 Salaries of Officers Salaries of General Office Clerks Rent of General Office Postage, Stationery, and Printing Telephone and Telegraph Legal Professional Accounting Directors* Fees Traveling Corporation and Car)ital Stock Taxes Exchange (Domestic; and Collection Charges Dues and Subscriptions Contributions and Donations S\mdry Office Ejgpenses Miscellaneous The selling and general expenses are often combined under the head of Selling and General Expenses, Operating Ex- penses, or Expenses - with or without subsidiary captions - which eliminates the item •'Selling Profit," If . the classifica- tion of expenses as between the two groups is siifficiently accurate, it is usually desirable to show the two totals, whether or not an intermediate figure of profit is computed, as the totals may be valuable in their relation to sales and prime cost for statistical purposes. PROFIT FROM OPERATIONS This item is the profit from the regular operations of the business, before deducting the cost of procuring capi- tal with which to operate the business and any extraordinary losses or losses over which the management has had no control. There are many names for this profit, e.g.: Profit from Operations, Net Profit from Operations, Profit from Sales, Net Profit from Sales, Net Profit on Sales, Income from Opera- tions, and Operating Income. 102 OTHER INCOME CREDITS The items to be grouped under this caption should represent income from sources other than the regular operations of the business, including as such extraneous income that de- rived from financial operations and considered applicable to the current period. Such items, in Tihe case of a manufactur- ing or mercantile business, may be as follows: Cash Discounts on Purchases Interest on Bonds Owned Interest on Notes and Accounts Receivable Interest on Bank Balances Dividends on Stocks Owned Net Income from Real Estate Profit from Sale of Temporary Investments Profit from Foreign Exchange Royalties Received Commissions Received Profit from Sale of Materials, etc. Miscellaneous The net income from real estate is usually detailed to the extent of showing the total rentals and total operating expenses - including insurance, taxes, and depreciation. In this connection, a distinction should be made between real estate held for investment ( including any that may have been acquired in settlement of debts) and property which is essen- tial to the operation of the business although not part of the plant itself. In the latter class are the tenant houses of a mining or manufacturing company, which must be maintained to house employees. TThile there can be no objection to treating a net income from the rentals of such property as an Income Credit, it appears that any loss should be treated as an element of cost of production. 103 INCOME CHARGES Under this caption should be shown charges represent- ing the cost of prooiiring capital and losses deductible from the income of the current period, such as the following: Cash Disco\ints on Sales Interest on Bonds Interest on Notes and Accounts Payable Uncollectible Notes and Accounts Amortization of Bond Discount and Expense Loss from Sale of Temporary Investments Loss from Foreign Exchange - Net Loss from Real Estate Amortization of War Facilities (when it is impracticable to charge it to cost) Income and Excess Profits Taxes Miscellaneous Sometimes it is desirable to exclude from this group one or more items and show them as separate deductions, some- what as follows: Net Income before Charging Interest on Bonds and Income and Excess Profits Taxes Interest on Bonds Net Income before Charging Income and Excess Profits Taxes Income and Excess Profits Taxes Net Income PROFIT AND LOSS CREDITS AND CHARGES These groups are intended to provide for the follow- ing: extraordinary profits and losses from the sale or other disposal of capital assets, i«e., permanent investments; origi- nal capital in the form of good-will and organization expenses written off; premiums and disco\ints on the redemption of capi- tal stock; distribution of profits; and items applicable to the operations of prior periods. The latter class is often treated as Surplus Adjustments, being applied to the Surplus 104 at the beginning of the year or shown separately, but no advan- tage Is usTjally derived from such separation, as all the Profit and Loss items, with the exception of dividends, are, or should be, extraordinary* In the preparation of condensed statements, however, it is often convenient to show the surplus at the be- ginning of the period as adjusted. There is a prevailing tendency to include in the Profit and Loss section charges and credits as applicable to prior periods when they are merely "lap-overs," that is, items which are constantly recurring but are seldom applicable to the period dxuring which they are recorded. The effect is that these items are never comprehended in the income of any period. The most common instances are taxes, interest, uncollectible accoiints, commissions, rebates on sales and purchases, legal expenses, and sundry adjustments of accruals* In the opinion of the author, all such items should be absorbed in the current ac- coiints for the year if practicable* This can usually be done with propriety, except when the current year would be charged or credited with considerably more than a full year's propor- tion of such expenses or income. If taxes, for example, had not been accrued at the beginning of the year, but had at the end of the year, it would not be proper to charge both the payments and accrual as ex- pense applicable to that year. On the other hand, if accounts receivable are written off only when they are determined to be uncollectible, they should be charged against the income of the 105 period during which they were thus determined, regardless of the fact that they had originated in prior periods* Minor adjust- ments should not be shown in the Profit and Loss section unless, as a matter of expediency in the case of an audit report, it is done to conform to the client's statement. If income and excess profits taxes are not charged by means of accruals against the income to which they apply, they should be treated as a charge against the income of the period during which they are paid, as otherwise the net income is always overstated. There is no justification for the treatment of such taxes as distributions of income. As to items applicable to operating accounts of prior periods, if it is impracticable to include them in the same ac- counts for the current period, it is often well to show them as income charges or credits, so that in any event they will be comprehended in the net income. VARIATIONS IN FORM FOR SPECIAL PURPOSES It is sometimes desirable to vary the form of state- ments so as to show the siirplus for the year, or the accumulated surplus, available for dividends, deducting the sunount of the dividends as a separate item. The former arrangement is as fol- lows: Net Income Profit and Loss Credits Gross Surplus for the Period Profit and Loss Charges, exclusive of Dividends Surplus for the Period Available for Dividends Dividends 106 Siirplus for the Period Surplus at beginning of the Period Surplus at end of the Period It ocoasionally happens that a coameroial corporation sets aside a certain amount of profits as fixed surplus, desig- nating that amount as S\xrplus and the remainder as Undivided Profits. This is analogous to the paid-in surplus of a finan- cial institution, as distinguished from its undivided profits; and to the capital surplus of any corporation, arising from valuation of assets in excess of cost, as distinguished from its earned or profit and loss surplus. If a company makes a distinction between surplus and undivided profits, the state- ment of income and profit and loss should support the latter, and any appropriations of profits to increase the surplus should be shown as profit and loss charges. Then the latter part of the statement would appear somewhat as follows: Net Income Undivided Profits at beginning of the Period Other Profit and Loss Credits Total Profit and Loss Charges Undivided Profits at end of the Period Similarly, if there is a capital surplus, it is neces- sary to earmark the surplus from operations, which is generally done by using the term Profit and Loss Surplus in the balance sheet, and wherever necessary in the statement of income and profit and loss. If dividends, or any expenses or losses, are charged against a fixed surplus, or if reserves are used for any pur- pose except that for which they were ostensibly created, the 107 facts should be reflected In the statement of income and profit and loss for the period, by showing the amounts in the profit and loss credits as transfers from fixed sixrplus or reserves and taking up the charges in the section properly affected. The same principle applies to credits to fixed surplus or reserves; for example, if a company has credited directly to fixed siirplus or to a reserve for depreciation a profit from the redemption of its bonds at a discount, the profit and the provision for depre- ciation should be shown in the statement of income and profit and loss. As fully explained in Chapter I, under the hesul of Surplus, in the case of a partnership or sole proprietorship the statement usually ends with net income, unless undivided profits are carried separate from the fixed capital, or a siam- mary of the capital account is added to the statement* In the latter case the statement is entitled, "Statement of Income and Capital Accoxmt . " STATEMENTS COVERING MORE THAN ONE PERIOD When there is no radical change in the character of the business or the classification of accounts, it is appro- priate for most businesses to present comparative statements. In an audit report this may also be \andertaken if the accounts have been audited by the same accountant for the preceding period of the same dxxration, xinless it is known that compara- tive statements are not desired by the client. Very often the client would appreciate comparisons even though the ac- 108 countant might have to qxialify the statement with regard to the figures for the prior period by reason of not having audited the accounts for that period. A comparative statement is one which shews the figures for one period and the increases and decreases as compared v/ith the figures for another period, which may or may not themselves be exhibited. The changes may be shown in two col\amns, increase and decrease, or in one column, increases in black and decreases in red. The latter method has been fotmd to be satisfactory in most oases. If the figures for the prior period axe shown, the statement may be entitled,' e.g., ''Statement of Income and Profit and Loss for the Tears Ended December 31, 1919 and 1918, and Comparison." If the 1918 figures are omitted, the title is "Statement of Income and Profit and Loss for the Year Ended December 31, 1919, and Comparison with the Preceding Year," or, to use an odd period, "Statement of Income and Profit and Loss for the Four Months Ended December 31, 1919, and Comparison with the Corresponding Period in the Preceding Year." Most people like to see the figures for the prior period. Two or more periods may be shov/n in a statement with* out its being comparative in the sense employed here, even though the sole purpose of exhibiting the fig\ares for the prior periods is to show their relation to those of the cxirrent period. Such a statement, for three periods, might be entitled "Statement of Income and Profit and Loss for the Years Ended December 31, 1919, 1918, and 1917." 109 In the prepaxation of a statement covering two or more periods, with or without comparison, when the primary interest is in the latest period, that period should be at the left and the most remote at the right, as indicated in the above title. When the periods appear to be eq\ially important, it seems logical to arrange the colximns in the reverse order, the earliest period at the left. When the figures for the latest period are of primary interest, as they usually are, effect should be given to any changes in the classification of accounts or in other conditions which are reflected in the latest figures by adjusting the figures for the prior period or periods in accordance with the changed conditions, so as to present a true comparison. In regular periodical audit reports this adjustment of prior « figures should not extend to changing the surplus at the end of the prior period, but it is often desirable to do so in special statements for the purpose of applying surplus adjustments of one period to the proper accounts of the periods actually af- fected. It is sometimes desirable to shov/ the percentages of increase or decrease as compared with the preceding period. When this information is given it is generally in addition to the amovmts of increases or decreases, and is shown in a column or coliomns parallel to those amounts. The arrangement of the coliimn headings is usually somev/hat as follows: 110 Year Ended December 31, 1919 1918 ♦Typed in red. Increase or ♦Decrease Amount Per Cent When an examination has been made for, say, three years, and the statement shows each of the years and the total, it may be called, e.g., "Statement of Income auid Profit and Loss for the Three Years Ended December 31, 1919." If the state- ment covers the period from July 1, 1917, to December 31, 1919, . and also exhibits the average per annxjun, it may be entitled "Statement of Income and Profit and Loss, by Periods, from July 1, 1917, to December 31, 1919, and Averdge per Annum." OPERATIONS OF DEPARTMSHTS. ETC. There are a niimber of ways of showing operations by departments, branches, stores, etc. The determining factors in the choice of a method are the number of operating units, their relative importance, the similarity of their operations, and the length to which the distribution of expenses and other charges is carried. Breweries, for example, generally make a fairly com- plete separation between the operations of the keg department and the bottling department, down to net income or even to sur- plus, and the operations of the departments are quite dissim- ilar; therefore, it is appropriate to make separate statements down to whatever point is desired by the person for whom the report is prepared. If the separation is made down to net in- Ill corns, the balances will be carried to a Summary of Profit and Loss or to the balance sheet; if to surplus, the balances will be carried to the balance sheet, which will probably be stated by departments as well. If the segregation of operations applies only to gross profit, and there are not more than two or three departments, the simplest, and therefore the best, method of exhibiting the operations by departments is somewhat as follows: WHOLESALE DEPARTMENT: Net Sales Cost of Groods Sold Gross Profit RETAIL DEPARTMENT: Net Sales: Cash Credit Total Cost of GrOods Sold Gross Profit TOTAL GROSS PROFIT EXPENSES - etc. In the case of a business having not more than two or three departments, where the distribution to departments is car- ried farther than gross profit, it is often appropriate to make the one statement columnar. For example, the operations of a public utility corporation having gas and electric departments might be shown thus: 112 Total Gas Electric Gross Earnings $100,000 $60,000 $40,000 Operating Expenses (in as much de- tail as necessary) 70,000 40, 000 30, 000 Net Earnings $ 30, 000 $20,000 $10, 000 Other Income Credits 5,000 Gross Income $ 35, 000 Income Charges 10,000 Net Income $ 25,000 The foregoing method may be employed regardless of the length to which the distribution of charges and credits is carried, if the items applicable to the several departments are reasonably uniform; but if there are a number of operating \inits it is usually better to make a schedule of department operations, usually without a total column, carrying the final figures to the exhibit as Gross Profit, Department Profit, Profit from Operations, or Net Income, of the several depart- ments • Such a schedule might be entitled Department Opera- tions, and the exhibit. Summary of Income and Profit and Loss. As stated before, if the operations are dissimilar it is better to make separate schedules. This will often apply if there are interdepartmental transfers, which should be elimi- nated if all operations are shovm in one statement. STATISTICS. ETC, In businesses which produce or deal in only one commodity, or in which certain departments are confined to one 113 commodity, it is practically as important to state averages par \mit as it is to state aunounts. In that class are virtually all companies deriving their product from natural resources, gas and electric companies, etc. Most large companies prepare such * statistics themselves, and therefore, the public accountant is not called upon to do so; but many business men do not realize their value to the extent of having them prepared by their own forces, and so it is often appropriate for the professional auditors to include them in their report. It is well, however, not to devote a great amount of time to such work without con- sulting the client, as computations carried to considerable de- tail may not be considered worth their cost. Statistics of this character are usually shown in coliamns parallel with the amounts to which they relate. They may represent averages per unit produced, or sold, or both; or, for example, in the case of transportation companies, averages per train mile, per car mile, per ton mile, etc. The same principle governs regarding ratios relat- ing to the operations of commercial businesses, except that the ratios are almost invariably appropriate to some degree. In most manufacturing and trading businesses the executives are interested in the ratio to sales of the cost, expenses, and profit; and perhaps also in the ratio to cost of the ex- penses and profit. These ratios are usually shown for the totals of each class of expenses, unless there appears to be some special reason for showing details. 114 Following is an illustration of the method of showing such ratios in a statement for one period only: Net Sales $100,000.00 Cost of Goods Sold 80,000,00 Ratio to Net Sales 80.00^ . Gross Profit $ 20,000.00 Ratio to Net Sales 20.00?^ Ratio to Cost of Goods Sold.... 25.00^ Selling Expenses. 5,000.00 Ratio to Net Sales 5.00fj Ratio to Cost of Goods Sold.... 6.25^ , Selling Profit $ 15,000.00 General Ejqpenses. • 4,000.00 Ratio to Net Sales •. 4.00% Ratio to Cost of Goods Sold.... 5.00^ Profit from Operations $ 11,000.00 Ratio to Net Sales 11.00% Ratio to Cost of Goods Sold.... 13.75/b Other Income Credits 3.000.00 Gross Income. $ 14,000.00 Income Charges 2.000.00 Net Income $ 12.000.00 The following illustrates the method of showing the same ratios in a statement covering two or more periods: 115 1919 1918 Net Sales $100,000.00 $80,000.00 Cost of Goods Sold 80,000.00 60,000.00 Ratio to Net Sales 80.00^ 75.005^ Gross Prof it $20,000.00 $20,000.00 Ratio to Net Sales 2O.OO5S 25.00^ Ratio to Cost of Goods Sold 25.00^ 33.33 3.33^ Profit from Operations $ 11,000.00 $15,000.00 Ratio to Net Sales ll.OO^i 18.75% Ratio to Cost of Goods Sold 13.75^ 25.00fo Other Income Credits 3^000.00 2.000.00 Gross Income $ 14,000.00 $17,000.00 Income Charges 2,000.00 1,000.00 Net Income $ 12^000.00 $16,000.00 ♦ ♦ ♦ ♦ « In an audit report q\aalif ications regarding state- ments are usisally expressed in the comments or certificate, but in those oases where rectification of the accounts would effect a material difference in the figures presented, the qualifica- tion should be made on the face of the statement. The most frequent cause for qualification is the failure to provide for income and excess profits taxes, adeqxiate depreciation, or ex- pected losses. It may be equally desirable to comment upon 116 exodssive provision for such ohargoe or the tinder statement of earnings. These matters are ustually covered in footnotes, but may in some oases be brought out in the items affected - for ex- ample, the surplus may be stated as "before providing for Federal taxes." As to such taxes or similar items, if practicable, the estimated aunoiint should be incliided in the remarks, so that the reader will not be left entirely in the dark as to the effect of their omission upon the accoiints. Too much emphasis cannot be laid upon the nacessity for adapting the statements to peculiar conditions. It is sel- dom that one form in its entirety can be used for two different businesses. Even in the same class of business, conducted under the same general plan, the classification of accooints may be very different, or one executive may not be interested in de- tails to the extent that another is, or the purpose of the ex- amination may be different, or there may be a loss instead of a profit - any of which might necessitate different treatment. Judicious use should be made of schedules for the pre- sentation of details which if shown in the exhibit would make that statement cximbersome and might obscure some major point; the same applies to the employment of statements to support items of schedules. In an audit report it is appropriate in many cases to furnish details in the comments. It will occasionally be found that information regard- ing operations may be more vividly presented in the chart than in the statement form. This applies particularly to comparisons 117 of sales, costs, expenses, etc., between the several items and over a niiinber of periods. The significance of the comparisons is impressed upon the mind more vividly by means of the converging or diverging curves than by an array of figures or even percent- ages • The charts are also well adapted to the exposition of a plan of organization or procedure. However, they are seldom used in audit reports. Their peculiar value in the presentation of operating statistics lies in their being kept up to date for the use of executives. In other words, their most useful piirpose is to show the current record of the business. The audit report, on the other hand, is a review of past periods and does not usual- ly go into details to the same extent that the internal records do, or should. For this reason, the subject of graphic charts is not elaborated upon in this volume. Those wishing to pursue the study of such methods are referred to "Graphic Methods for Pre- senting Facts," by Brinton. ♦ « ♦ « « In the following pages are specimen income and profit and loss statements which have been designed to exemplify many of the forms in common usage, and also to show the classification of items generally employed in such oases. Form 16 is a statement of income and profit and loss of a manufacturing company, for a single period, showing con- siderable detail of the cost of goods sold. Form 17 is a similar statement for a gas and electric company 118 Form 18 is a statement for a trading business, intro- ducing some new features, including the manner of shoiving a loss from operations and a deficit at the end of the period. Form 19 is a statement for a contracting company, by semiannual periods, for a year, introducing also the use of supporting schedules. Form 20 exemplifies a method of exhibiting the opera- tions of a commission and trading business, in which certain statistical information is shown. Form 21 is a summary of income of a stock brokerage firm, showing the distribution of net income. Form 22 is a statement of income of a sole proprietor in the retail business, including a summary of the proprietor's capital aocoxmt for the period. Form 23 is a statement of income and Form 24 a state- ment of "surplus and deficit" of a hospital. Form 25 is a comparative summary of income and profit and loss of a manufacturing company, in three columns, with several interesting features. Form 26 la a comparative statement in which the amounts for the preceding period are not shown. Form 27 is a statement for two periods and comparison by percentages. Form 28 is a statement for three separate periods. Some features of the classification of items are interesting. 119 Form 29 is a six-coluznn arrangement of a comparative statement. The advantages and disadvantages of this form, as compared with the three-col\imn arrangement, are discussed under the head of Form 12, Chapter II. Form 30 is a statement for three years and aver?vge per annum. It also contains some detail of cost of goods sold. Form 31 Is a statement of operations of a company by departments, with eliminations. It is assumed that the opera- tions of each restaurant, and the total thereof, are shown in the supporting schedule. 120 FORM 16 THE. BLANK MAITUFACTURINQ CO^IPANY STATEMENT OF INCOME AND PROFIT AND LOSS FOR THE YEAR ENDED DECEMBER 31, 1919 96,843.31 120, 225 > 27 GROSS SALES, DEDUCTIONS FROM SALES: Retxirns and Allowances, $ Outward Freight, _ Total, NET SALES, COST OF GOODS SOLD: Manufaotured Goods: Materials and Supplies Purchased $2,255,875.61 Less Increase in Inventory, 193 > 417 > 62 Materials and Supplies Consximed, $2,062,457.99 Inward Freight and Cartage...... 17,696.35 Salaries and Wages, 1, 718, 004 .09 General Manufacturing Expense,.. 125,980.15 Depreciation, 389, 543.30 Decrease in Inventory of Work in Process, 104.212.96 Total Cost of Manufacture, $4,417,894.84 Less Increase in Inventory of Finished Goods, 12.101.49 Total Manufactured Goods, $4,405,793.35 $5,693,756.29 217,068.58 $5,476,687.71 Purchased Goods, 53,488.54 Total Cost of Goods Sold, GROSS PROFIT FROM SALES, SELLING EXPENSES: Salaries, $ Commissions, . • Traveling and Entertainment, Advertising, General, _ Total, SELLING PROFIT, GENERAL EXPENSES: 4.459>281.89 $1,017,405.82 123,745.85 50,550.91 24,251.13 29,313.72 31.922.43 259.784.04 $ 757,621.78 ... Salaries, $ Professional Fees and Expenses, Other, Total, 52,164.37 8,396.74 34.347.97 94.909.08 NET PROFIT FROM SALES - (Forward) , $ 662, 712 . 70 EXHIBIT "B'' (Continued) - 1. 121 FORM 16 THE BLANK MANUFACTURING COMPANY STATEMENT OF INCOME AND PROFIT AND LOSS, ETC, ^ NET PROFIT FROM SALES r (Forward), $ 662,712.70 OTHER INCOME CREDITS: Income from Investments, $ 16, 284 .41 Other Interest, 12,119,25 Cash Dlscciints on Purchases, 11,900*23 Miscallaneous, 5>020.94 Total, • • . . 45> 324.83 GROSS INCOME, $ 708,037.53 INCOME CHARGES: Provision for Federal Taxes, $ 200,000.00 Cash Discounts on Sales, 120,317.92 Interest on Notes Payable, 26,707.25 Doubtful Accounts Written Off, .... 7,412.72 Miscellaneous, 19,286.29 Total, 373,724.18 NET INCOME, $ 334,313.35 SURPLUS, JANUARY 1, 1919, 678,250,60 OTHER PROFIT AND LOSS CREDITS: Adjustments Applicable to Prior Period, $ 14,454.27 Profit from Sale of Real Estate,.. 18>025.35 Total, 32,479. 62 GROSS SURPLUS, $1,045,043.57 PROFIT AND LOSS CHARGES: Dividends, $ 300,000.00 Loss on Machinery Scrapped, 45,242.43 Additional Federal Taxes for the Years 1913 to 1917, inclusive, . . 75,614>91 Total, 420>857.34 SURPLUS, DECEMBER 31, 1919, $ 624,186.23 EXHIBIT "B« (Concluded) - 2. 122 FORM 17 THE BLANK GAS & ELECTRIC COMPANY STATEMENT OF INCOME AND PROFIT AND LOSS FOR THE YEAR ENDED DECEMBER 31> 1919 OPERATING REVENUE: Electric Department^ $790^126.93 Gas Department, • 340>323>02 Total, $1, 130, 449 ,95 OPERATING EXPENSES AND TAXES: Electric Department: Operating Expenses: Production, $406, 144.31 Transmission, 23, 140 .39 Electric Storage, 465. 73 Distribution, 24,029.18 Utilization, 6,521.70 Commercial, 14, 613 • 14 New Business, 2,053.30 General, 56.392.12 Total, $533,359.87 Ratio to Operating Revenue, • ... 67.51^ Taxes, 20,476.54 Total Electric Depart- ment, $553,836.41 Ratio to Operating Revenue, 70*09^ Gas Department: Operating Expenses: Production, $170,349.76 Transmission ajid Distribution, 11,677.96 Commercial, 8,888.75 New Business, 1, 138 •67 General, 20.197.72 Total, $212,252.86 Ratio to Operating Revenue, ... . 62.37^ Taxes, 13.106.54 Total Gas Department, . . . $225,359.40 Ratio to Operating Revenue, 66.22^ ^_,___ Total Operating Expenses and Taxes, 779,195.81 Ratio to Operat ing Revenue, 68 .94^ OPERATING INCOME - (Forward), $ 351,254.14 EXHIBIT "B" (Continued) - 1. 123 FORM 17 THE BLANK GAS & ELECTRIC COMPANY STATEMENT OF INCOME AND PROFIT AND LOSS, ETC, OPERATING INCOME - (Forward), $ OTHER INCOME CREDITS: Rentals of Land and Equipment, • $ 15, 180.72 Electric Merchandise and Jobbing Revenue,. 2,355.03 Profit 'on Labor and Materials Sold, 342.07 Interest on Bonds in Sinking Fund, 4,354.05 Interest on Liberty Loan Bonds, 832.07 Interest on Notes Receivable, Bank Bal- ances, etc . , 2>319.26 Total, GROSS INCOME, $ INCOME CHARGES: Interest on Funded Debt, $127,650.98 Interest on Floating Debt, 41,981.00 Amortization of Debt Discount and Expense, 17,773.86 Rent of Right of Way, 3, 289 . 50 Rent of Equipment, 2,577.70 Total, • • » NET INCOME, J PROFIT AND LOSS CREDITS: Disco\int on Bonds Purchased for Sinking Fund, $ 6,475.00 Miscellaneous Items Applicable to Prior Period (Net), 2,519.05 ^ Total, GROSS SURPLUS FOR THE YEAR, f PROFIT AND LOSS CHARGES: , . Loss on Property Retired, . I .^r...;r./ $ 35,290.86 Adjustment of Amortization of Debt Dis- co\mt and Expense - Prior Period, 4,824.35 Dividends: Preferred Stock, 70,000.00 Common Stock, 50^000.00 Total, SURPLUS FOR THE YEAR, J SURPLUS, JANUARY 1, 1919, _ SURPLUS, DECEMBER 31, 1919, $_ 351,254.14 25 > 383. 20 376, 637,34 193. 273 > 04 183,364.30 8.794.05 192,158.35 160.115.21 32,043.14 59,361.19 91,404.33 EXHIBIT "B" (Conclxaded) - 2 124 FORM 18 BLANK & COMPANY. INC> STATEMENT OF INCOME AND PROFIT AND LOSS FROM THE DATE OF INCORPORATION, JULY 6> 1919. TO DECEMBER 31, 1919 GROSS SALES, $380, 240 .60 LESS RETURNS AND ALLOWANCES, ^ 574.$5 NET SALES, • • $379, 666 .05 COST OF GOODS SOLD: Purchases, .••••.••••••••••••• $354, 724.39 Freight, Drayage, ajid Express on P\irchases, . 2> 661.69 Total, $357,386.08 Less Inventory, December 31, 1919, 52Q.ifiQ ^ ^^ Total Cost of Goods Sold, 356,495.48 GROSS PROFIT, $ 23,170.57 SELLING AND GENERAL EXPENSES: Officers' Salaries, $14,250.00 Salesmen's Salaries and Commissions, 2,393.03 Traveling Expenses, • 1,376.40 Office Salaries, • 2, 166 .35 Office Rent, 1,085.00 Stationery, Printing, and Postage, 1,022.42 Telephone and Telegraph, 1,266.78 Subscriptions and Advertising, 281.25 Depreciation of Furniture and Fixtures, 278.81 Miscellaneous, 249 1 72^ Total, .....r 24.369,76 LOSS FROM OPERATIONS, $1# 199 .19 INCOME CHARGES: Cash Discounts on Sales, $ 2,986.89 Uncollectible Accounts, 2, 728.51 Discounts on Traide Acceptances, 266 .81 Interest on Acboxints Payable, . 97.35 Settlement on Account of Inability to Fill Sales Order, 300,00 Total,.. 6,379.56 GROSS DEFICIT, $ 7,578.75 INCOME CREDITS: Cash Discotints on Purchases, $ 3,332.03 Selling Commissions, 675.79 Interest on Bank Balances, 145.22 Total, * 4 > 153.04 DEFICIT, DECEMBER 31, 1919, $ 3>425.71 EXHIBIT '^B" 125 FORM 19 BLANK CONTRACTING CQIIPANY STATEMENT OF INCOME AND PROFIT AND LOSS. BY PERIODS, FOR THE YEAR ENDED APRIL 30, 1919 TOTAL . . . .SIX MONTHS ENDED. . . . APRIL 30, OCTOBER 31, 1919 1918 CROSS EARNINGS ON CONTRACTS COMPLETED DUR- ING THE PERIOD - Schedule #1, $914,932^27 $525,690.22 $389,242.05 COST OF CONTRACTS - Schedule #1, $750,553.74 $441,723.14 $308,830.60 Less Excess Charges for Plant Rental orer Expense, 27,050.02 13,232.98 13,817.04 Net Cost of Contracts, $723,503.72 $428,490.16 $295,013.56 GROSS PROFIT, $191,428.55 $ 97,200.06 $ 94,228.49 GENERAL EXPENSES: Officers' and Office Salaries, $ 26,352.14 $ 14,640.08 $ 11,712.06 New York Office Rent and Expenses, 4,624.37 2,293.72 2,330.65 Branch Office Rent and Expenses, 266.62 69.95 196.67 Advertising and Entertaining, 5,371.62 3,130.97 2,240.65 Traveling, 1,368.93 540.42 828.51 Taxes (Other than Income and Excess Profits Taxes), 618.67 366.61 252,06 Insurance, 357.75 329.54 28.21 Legal and Auditing Expenses, 3,412.66 1,867.30 1,545.36 Depreciation - Normal: Plant Equipment, 9,573.93 5,579.03 3,994.90 Stoall Tools, 5,424.65 4,647.85 776.80 Office Furniture, 184.95 99.47 85.48 Bonuses to Employees, 13,937.60 6,241.80 7,695.80 D6nations, 648.75 420.65 228.10 Miscellaneous, 2,682.92 1.074.96 1,607.96 Total, $ 74,825.56 $ 41,302.35 $ 33,523.21 NET PROFIT, $116,602.99 $ 55,897.71 $ 60,705.28 OTHER INCOME CREDITS: Interest on Investments, $ 762.16 $ 533.37 $ 228.79 Interest on Accounts Receivable, 299.14 299.14 Cash Discounts on Purchases, 196.25 127.21 69.04 Profit on Exchange, 111.52 66.20 45.32 Royalties, 132.87 132,87 Total, $ 1,501.94 $ 1,158.79 $ 343.15 GROSS INCOME - ( For?rard) , $118,104.93 $ 57,056.50 $ 61,048.43 EXHIBIT "B" (Continued) - 1. 126 FORM 19 THE BLANK CONTRACTING COMPANY STATELIENT OF INCOME AND PROFIT AND LOSS, ETC, . . • .SIX MONTHS ENDED. . . . APRIL 30, OCTOBER 31, — ^ - ^ TO TAL 1919 1918 GROSS INCOME - (Forward) , $118/104>93 $ 57,056.50 $ 61,048,43 INCOME CHARGES: Interest on Notes Payable, $ 485.61 $ 253.59 $ 232.02 Amortisation of Patent - Year Ended April 30, 1919, 26,572.82 26,572.82 Provision for Extraordinary Depreciation on Aooount of Abnormal Conditions: Plant Equipment, 9,573.93 9,573.93 Small Tools, 5,424.65 5,424.65 Unoolleotible Aoooxmts, 10,416.01 6,391.01 4,025.00 Total, $ 52,473.02 $ 48,216.00 $ 4,257.02 NET INCOME, $ 65,631.91 $ 8,840.50 $ 56,791.41 SURPLUS AT BEGINNING OF PERIOD, 273,116.19 275,308.63 273,116.19 OTHER PROFIT AND LOSS CREDITS: Interest on Investments Applicable to Prior Periods, 276.14 276.14 Credits on Contracts Applicable to Prior Periods - Sctfedule #2, 19,677.76 11,002.07 8,675.69 C210SS SURPLUS, $358,702.00 $295,151.20 $338,859.43 PROFIT AND LOSS CHARGES: Dividends, $ 60,000.00 $ 10,000.00 $ 50,000.00 Cost of Contracts Applicable to Prior Periods - Schedule #2, 31,103.17 17,558.37 13,550.80 Amortization of Patent - Year Ended April 30, 1918, 26,572.82 26,572.82 Total, $117,681.99 $ 54,131.19 $ 63,550.80 SURPLUS AT END OF PERIOD, $241,020.01 $241,020.01 $275,308.63 NOTE: No provision has been made for Federal Income and Excess Profits Taxes for the year, which are estimated at approximately $10,000.00. EXHIBIT "B" (Conoludsd) - 2. 127 FORM 20 THE TEXTILE TRADING COMPANY STATEMENT OF INCOME AND PROFIT AND LOSS FOR THE YEAR ENDED DECEMBER 31, 1919 ..NET SALES AMOUNT ^ OF TOTAL ..•.GROSS PROFIT* ^ OF ALIOUNT TOTAL TRADING OPERATIONS, .. • $ 8, 514, 046 .93 ICOMMISSION OPERATIONS: Mill "A", - 14,592,267.22 Mill "B", 3,213,754.91 Other Mills, 4,750,819.54 27.40 $ 901,325.26 61.30 46.97 10.34 15.29 314,674.54 94,112.43 160,367.06 21.40 6.40 10.90 TOTAL, $31,070,886.60 100.00 $1,470,479.29 100.00 ICKOSS PROFIT, AS ABOVE, $1,470,479.29 [SELLING AND GENERAL EXPENSES: Salaries, $428,980.41 Brokerage .and Comnissions, 166,560.81 Advertising, Branch Office Expenses, Insurance, Samples , Traveling, .^. . .# Repairs to Building, Depreciation of Building, Depreciation of Furniture and Fixtures, Office Supplies, Telephone and Telegraph, Postage, Credit and Collection Expenses, ! . Taxes (Other than Federal Income and Profits Taxes ) , Professional Services, //. Sample Books and Cases, Engraving and Lithographing, Miscellaneous, Total,. PROFIT FROM OPERATIONS, J )THER INCOME CREDITS: Interest on Investment Securities, $ 7,547.15 Interest on Mill Accounts, 21 314.92 Interest on Bank Balances, ; 2*868.67 Profit from Cancellation of Contracts, 8,129.68 Miscellaneous, 2 619.04 Total, !!.!!.'!!.'!. !...!.. _ INCQBffi - (Forward) , ; | 11,842.98 25,390.67 8,536.00 5,645.97 11,818.03 5,305.12 11,118.70 5,170.17 9,448.94 17,642.73 5,808.05 5,859.38 5,193.77 17,348.43 2,576.33 3,263.80 14.001.05 761.511.34 708,967.95 LOSS 42.479.46 751,447.41 Based upon inventory at cost, before adjustment to meirket values. EXHIBIT "B» (Continued) - 1. 128 FORM 20 THE TEXTILE TRADING COMPANY STATEMENT OF INCOME AND PROFIT AND LOSS, ETC. CaiOSS INCOME - (Forward), $ 761.447-41 INCOME CHARGES: foj.,^-^f. x Cash Dlsooxinte on Sales, $ 40,531.02 Interest on Notes Payable, 49,965.77 Interest on Aooounts of Officers and anployees, .. . 1,731.26 Loss from Sale of Liberty Loan Bonds, 1,205.17 Loss through Theft of Liberty Loan Bonds, 3,759.20 Loss in Adjustment of Inventory to Market Values,. 92,367.04 Income and Profits Taxes for the Year 1913, 426.775.13 ^m •.^^rs.^ Total, 616,334.59 NET INCOME, $ 135 112 82 SURPLUS, JANUARY 1, 1919, 1 299 107 16 OTHER PROFIT AND LOSS CREDITS: Proportion of Depreciation of Building Chargeable to Surpl\i8 from Appreciation of Building, $ 4,678.21 Recovery on Claims, Applicable to Prior Years,.... 9,401.46 Insurance Policies on Lives of Officers taken over by them at cash surrender values, 3.527.02 Total, 17.606.69 ®°g,S^"^s ^lAsllze'.li DIVIDENDS, 100 . 000 . 00 SURPLUS, DECEMBER 31, 1919, $1,351, 826.67 NOTE: No provision has been made for Federal Income and Excess Profits Taxes for the year, which are estimated at ap- proximately $200,000.00 EXHIBIT "B" (Concluded) - 2. 129 FORM JOHN DOE & COMPANY SUMMARY OF INCOME oFOR THE YEAR ENDED DECEMBER 51, 1919 INCOME: Commissions, ••. • $127,576.58 Interest and Carrying Charges - Net, 27,444.30 Net Profit on Investment Sec\irities, 4,635.18 Total, $159, 656 .06 EXPENSES AND OTHER CHARGES: General Expenses, $ 59, 536.55 Partners ' Salaries, 20, 000 .00 Interest on Partners' Capital and Personal Aocoiints: John Doe, $23,414.27 Richard Roe, 8,922.16 32,356.45 Total, 111,872.98 NET INCOME, . $ 47,785.08 DISTRIBUTION OF NET INCOME: John Doe - 2/5, $ 51,855.39 Richard Roe - 1/3, 15,927.69 $ 47,785.08 130 FORM 22 JOHN DOE STATEMENT OP INCOME AND CAPITAL ACCOUNT FOR THE YEAR ENDED DECEMBER 31. 1919 SALES: Cash, $75, 119 .24 Credit, 23.912.65 Total, $99, 031 . 89 COST OF GOODS SOLD: Merchandise Inventory, Janiiary 1, 1919, $22,212.01 Purchases, 56,595.24 Freight, Express, and Cartage, 1.131.53 Total, $79,938.78 Less Merchandise Inventory, December 31, 1919. 27.319.50 Total Cost of Goods Sold, 52.619.28 GROSS TRADING PROFIT, $46,412.61 EXPENSES: Wages, $11, 946.27 Rent, 3, 000 .00 Salary of Proprietor, 6, 000 .00 Store Supplies, , 2,627.09 Operat ion of Delivery Care, 1, 245 .63 Depreciation of Delivery Cars, 200 .00 Stat ionery and Postage, 298 . 14 General, 1.020.33 Total, . . 26.337.46 NET TRADING PROFIT, $20,075.15 INTEREST PAID, . . / 427.62 NET INCOME, CARRIED TO CAPITAL ACCOUNT, $19,647.53 CAPITAL ACCOUNT BAUNCE, JANUARY 1, 1919, $29,457 .06 CREDITS: Salary, $ 6,000.00 Net Income, as above, 19, 647.53 Income from Outside Investments, 812.49 26,460.02 Total, $55,917.08 CHARGES: Cash Withdrawals, $12, 750 . 51 Income Tax for Year 1918, 3.212.15 15.962.66 BALANCE, DECEMBER 31, 1919, $39.954.42 131 FORM 23 THE BLANK HOSPITAL INCOME ACCOUNT FOR THE YEAR ENDED APRIL 30. 1920 HOSPITAL REVENUE: Private Room Patients, $ 59,451«55 Ward Pay Patients, 43, 576 •QS City Patients, 17, 626.00 Special Nursing,. 45,834.25 X-Ray Service and Treatment, 18, 142.83 Radium Treatment, 1, 275 .00 Operating Room Fees, 3, 970 .00 Out-patient Department, • . • 14, 251.89 Ambulance Fees, 317.50 Fees from P\apil Ntirses, 3, 725 .00 Miscellaneous, 2,762.90 Total, •.... $210,933.85 OTHER INCOME: Income from Investments of Unrestricted Funds, $286,387.39 Donations, 48,492.98 Income from Fund for Educational and Scientific Work, 40,492.67 Appropriations from Special Funds for Stated Purposes, 29, 776 .45 Rentals of Real Estate, Less Expenses, 6,575.11 Interest on Bank Balances, 1.996.62 Total, 413,721.22 GROSS INCOME, $624,655.07 EXPENSES: Administration, $ 55, 731.05 Professional Care of Patients: Salaries and Wages, 96, 106 .21 Medical and Surgical Supplies, 35,979.45 Uniforms and Equipment for Nurses, 4, 696 .50 Out-patient Department, 12,022.17 Laboratories, 29,116.63 X-Ray Service, 14, 013 .31 Ambulance, 612 . 70 Housekeeping, 37,427.63 Kitchen, 14,071.26 Laxindry, 10,950.23 Steward's Department, 147,491.42 Educational and Scientific Work, 23,807.79 General House and Property Expenses, 95,902.14 Corporation E:q)enses, 12,398.39 Current Expendit\ires from Special Funds for Stated Purposes, 9.656.85 Total, 599^983.73 NET INCOME FOR THE YEAR, $ 24,671.34 EXHIBIT "B" 132 FORM 24 THE BLANK HOSPITAL SURPLUS AND DEFICIT ACCOUNT FOR THE YEAR ENDED APRIL 30. 1920 DEFICIT, MAY 1, 1919, $257,048.37 CHARGES: Expenditures for Additions and Improve- ments Transferred to Capital Aoootmt: Furniture and Fixtures, $ 2,316.93 Machinery and Tools, 6, 403 .09 Apparatus and Instruments, 7,421.35 Library, 1> 636.63 Net Loss from Sales of Investment Securities, Uncollectible Accounts with Patients Written Off, . Amount Credited to Fund for Educational and Scientific Work on Account of Expenses Er- roneously Charged to that Fund in preceding year, 17,778,00 62,727.78 619.35 1,234.17 GROSS DEFICIT, $339,407.67 CREDITS: Net Income for the Year, per Exhibit "B«, $24,671.34 Profit from Sale of Real Estate, 14,727.87 Unclaimed Excess Payments by Patients Written Off, 212.19 Transfer of Balance of Reserve which is no longer required, 6^750.00 Total, 46,361.40 DEFICIT, APRIL 30, 1920, $293,046.27 EXHIBIT ^C 133 FORM 25 THE BLANK COMPAITY SUL£IARy OF INCOME AND PROFIT AND LOSS FOR THE YEARS ENDED DECELIBER 31, 1919 AND 1918, AND COMPARISON . .YEAR ENDED DECELIBER 31, . • 1919 1918 INCREASE ♦DECREASE SIOSS SALES: New York, , Boston, Chicago , Total, Less Trsuie Discounts, Returns, Allowances, and Freight, NET SALES, 7, . ! COST OF GOODS SOLD, GROSS PROFIT, SELLING AND GENERAL EXPENSES: New York, boston, Chicago, Total, NET PROFIT, OTHER INCOME: Dividends on Stocks Owned, Profit from Sale of Light and Power, Miscellaneous, Total, GROSS INCOME, INCOLIE CHARGES: Cash Discounts on Sales, Interest - Net, Uncollect ible Accounts, Income and Excess Profits Taxes, •••. Miscellaneous , Total, NET INCOME, PROFIT AND LOSS CREDITS: Premium on Sale of Common Stock, .... Discount on Purchase of Preferred Stock, Total, GROSS SURPLUS FOR THE YEAR, IPROFIT AND LOSS CHANGES - DIVIDENDS,.. PROFIT AND LOSS SURPLUS FOR THE YEAR, . |PROFIT Ai^ID LOSS SURPLUS AT BEGINNING OF THE YEAR, IPROFIT AND LOSS SURPLUS AT END OF THE YEAR, ♦ Typed in red. $2,622,238.55 $2,280,906.72 $ 341,331.83 1,507,908.85 1,217,995.33 289,913.52 2,843,764.22 2.398.156.11 445,608.11 $6,973,911.62 $5,897,058.16 $1,076,853.46 1.091,770.48 840,836.57 250.933.91 $5,882,141.14 $S,0S6,221.58 $ 625,919.55 4,258,727.75 3,898.751.99 359.975.76 $1,623.413.39 $1,157,469.60 $ 465i943T79 $ 354,324.78 $ 267,708.44 $ 86,616.32 150.564.22 123,945.65 26,618.57 397.228.23 360.875.66 36.352.57 902.117.21 $ ?52;S2&.?5 $ 149.587.46 ?2i:296.1S $ 404;S38.S5 $ 316:35^:33 $ 8,250.00 $ 8,239.65 3,750.00 $ 6,121.12 ■ - 5.281.20 ♦ $ 21.181.66 $ 1S!152.32 $ 6.029.34 $ 742:477. 64 $ 420 052.17 | 322.385.67 4^692.01 4,500.00 2,118.53 589 . 19 104,827.11 $ 113,877.45 14,665.61 76,921.04 3.604.93 f 313.896.14 428, 581. 7(?' 89,809.44 $ 115,066.93 ♦ 18,612.91 ♦ 49 , 673 . 56 2,012.40 275 175.24' 15,017.67 1,189.48 3,947.30 27,247.48 1.592.53 38.720.90 $ 37,500.00 144,816.93 $ 263:664. 7r $ 37,500.00 500 . 00 38.000.00 466,581.76 $ 144,916.83 235 . OOP .00 117 , 500 . 00 500.00 38.000.00 321,664.77 ^ — ^ ^ ,^^^.^^ 117.500.00 $ 231,581.70 $ 27,416.83 $ 204,164.77 1.318.075.73 1.290,658.80 27,416.93 $1,549,657.43 $1,318,075.73 $ 231,581.70 NOTE: Appreciation of property during the year has been treated as Special Surplus, as shown in Exhibit "A". EXHIBIT "B" FORM 26 THE BLANK MANUFACTURINS COMPANY STATEMENT OF INCOME AND PROFIT AND LOSS FOR THE YEAR ENDED DECEMBER 31, 1919, AND COMPARISON WITH THE PRECEDING YEAR 134 YEAR ENDED DECFJ4BER 31, 1919 INCREASE ♦DECREASE GROSS SALES: Manufactured Goods, $2,909, 713.79 $550,498,75 Purchased Goods, 224,317.04 » 36,312,49 Total, $3,134,030.83 $514, 186 ,26 RETURNS AND ALLOWANCES, 267,914.93 81.328,83 NET SALES, $2> 866. 115 ,90 $432, 857,43 COST OF GOODS SOLD: Manufactured Goods, $2,038,609,35 $205,666,92 Purchased Goods, 156, 329 ,04 ♦ 27, 012 ,40 Shipping Expenses, 49,835,82 5,835,45 Total, $2,244,774,21 $184,489,97 GROSS PROFIT, $ 621,341,69 $248,367,46 SELLING EXPENSES: Advertising, $ 75,625,33 $ 49,249,93 Salaries, 41, 809 ,28 5, 882 ,27 Commissions, 26,112,04 6,899.99 Traveling, 9, 652 .43 2, 129 .51 Miscellaneous, 5.329.48 ♦ 282.99 Total, $ 158,528.56 $ 63,873.71 GENERAL EXPENSES: Salaries of Officers, $ 45, 000 .00 Salaries of Clerks, 52,852.24 ♦$ 1,246.72 Stationery, Printing, and Postage, 7,137.13 422,84 Telephone and Telegraph, 3,295,92 211,97 Corporation Taxes, 4,627,15 ♦ 485.75 Legal and Auditing, • 2,401,97 ♦ 613,75 Contributions, 5,600,00 ♦ 3,300,00 Miscellaneous, 8,962,57 3,340,56 Total, $ 129,876.98 »$ 1,670.85 TOTAL SELLING AND GENERAL EXPENSES, . $ 288,405,54 $ 62,207,86 PROFIT FROM 0PERATI02IS - (Forward),. $ 332,936,15 $186,159,60 Typed in red. (Continued) - 1, 135 FORU 26 THE BLANK IfANUFACTURING COMPANY STATEMENT OF INCOME AND PROFIT AND LOSS, ETC. PROFIT FROM OPERATIONS - (Forward),. OTHER INCOME CREDITS: Cash Discounts on Piirohases, Interest Earned, Total, GROSS INCOME, INCOME CHARGES: Income and Excess Profits Taxes,.. Interest on Notes Payable, Total, NET INCOME, SURPLUS AT BEGINNING OF THE YEAR, . . . CKOSS SURPLUS, DIVIDENDS, II YEAR ENDED DECEMBER 31, 1919 INCREASE ♦DECREASE i 332.936.15 $186.159.60 6,712.91 9.026.17 * $ 593 .49 " 204.08 15.739.08 *$ 610759 348. 675 .23 $185. 549"T01 $ 65,912.40 23.171.53 S 89.083.93 I 259,591.30 1.123.587.45 $1, 383, 178 . 75 $ 50,800.39 3.834.65 $ 54.635.02 ,123.587.45 , 383, 178 . 75 300.000.00 $130,913.99 * 71.322.69 $ 59,591.30 100,000.00 SURPLUS AT END OF THE YEAR, $1.083.178.75 *$ 40,408.70 • Typed In red. (Concluded) - 2. 136 FORM 27 THE BLANK MERCANTILE COMPANY STATEMENT OF INCOME AND PROFIT AND LOSS FOR THE YEARS ENDED DECEMBER 31, 1919 AND 1918, AND COMPARISON BY PERCENTAGES YEAR ENDED DECEMBER 31, 1919 1918 :T SALES, $549,637.10 $351,060.67 (ST OF GOODS SOLD,... 302,050.62 222,154.53 Ratio to Net Sales, 55< 63% LOSS PROFIT, $247,586.48 $128,906.14 •ARTMENT EXPENSES: Salaries and Wages, $ 88,259.38 $ 48,479.75 Rent, 21,721.67 19,820.87 Light and Heat, 2,751.61 2,247.30 Delivery aiid Wrapping, 3, 517 .49 2, 533 .92 Advertising, 19,893.82 13,405.49 Insxiranoe, 2,327.40 1,446.20 Depreciation, 2,478.61 2,078.15 Miscellaneous, 5.036.20 6.972.69 Total, $145,986.18 $ 96,984.37 Ratio to Net Sales, 27^ 27% Ratio to Cost of Goods Sold,.... 48% 44% •ARTMENT PROFIT, $101,600.30 $ 31,921.77 IHERAL EXPENSES: Executive and Office Salaries,.. $ 24,420.61 $ 12,094.67 Office Rent, 750.00 834.07 Stationery and Postage, 1,218.07 916.52 Telephone and Telegraph, 392.05 374.21 Legal and Auditing, 1,256.59 982.57 Depreciation of Office Equipment 295.55 220.71 Property and Capital Stock Taxes 2,231.00 1,488.00 Miscellaneous, 3,296.55 2.709.22 Total, $ 33,860.42 $ 19,619.97 Ratio to Net Sales, 6-i 6^ Ratio to Cost of Goods Sold,.... Ufa 9^ tOFIT FROM OPERATIONS - (Forv?ard), $ 67,739.88 $ 12,301.80 PERCENT- AGE OF INCREASE OR ♦DECREASE 57 36 *13 92 82 10 22 39 48 61 19 ♦28 50 218 102 ♦10 33 5 28 34 50 22 73 22 451 • Typed In red. (Continued) - 1. 137 FORM 27 THE BLANK MERCANTILE COMPANY STATEMENT OF INCOMZ AND PROFIT AND LOSS, ETC. YEAR ENDED DECEMBER 31, 1919 1918 PROFIT FROM OPERATIONS - (Forward) $ 67,739.88 $ 12,301.80 OTHER INCOME CREDITS - DISCOUNT AND INTEREST, 12.475.41 7.417.98 GROSS INCOME, $ 80. $15.25 $ iS! 71577? INCOME CHARGES: Interest, $ 7,575.11 $ 4,726.15 Uncollectible Accounts, 448.40 271.20 Loss from Sale of Liberty Loan Bonds, 328.20 Income and Profits Taxes, 15.121.64 2.764.29 Total, $ 23.473.35 $ 7.761.64 NET INCOME, $ 36,741.54. $ llJSSS.U SURPLUS AT BEGINNING OF THE YEAR, . 8.045.11 4.086.97 GROSS SURPLUS, $ 64,787.05 $ 15,045.11 DIVIDENDS, 24,000.00 8.000.00 SURPLUS AT END OF THE YEAR, $ 40,787.05 $ 8.045.11 ♦ Typed In red. PERCENT- AGE OF INCREASE OR ♦DECREASE 451 68 307 60 65 447 T7T 97 305 200 407 (Concluded) - 2. 138 FORLI 28 Ttff glfAtlS gflfiffltfg ff SUl.tIARy OF IITCOLIE MID PROFIT AND LOSS FOR THE YEARS ENDED DECEMBER 31. 1919^ 1918, AND 1917 , . . . .YEAR ENDED DECELIBER 31, ... . 1919 1918 1917 DEPARTMENT PROFITS: Erewery - Schedule #1, $ 99,869.81 $ 88,864.07 $126,026.52 Ice Plant - Schedule #2, 16,503.26 20,748.49 19,095.37 Bottling Department - Schedule #3, 1,268.83 1,746.80 2.197.49 Total, $ 117,641.90 $ 111,359.36 $147,319.38 GENERAL EXPENSES: Salaries of Officers, $ 29,313.66 $ 29,327.26 $28,976.58 Directors' Fees, 700.00 680.00 640.00 Taxes and Licenses (Not including Income and Profits Taxes), 3,640.40 3,980.00 3,810.63 Insurance, 487.67 314.34 299.78 Depreciation of Office Furniture and Fixtures, 152.04 152.03 152.04 Miscellaneous, 475.00 581.40 325.00 Total, $ 34,768.77 $ 35,035.03 $ 34,204.03 PROFIT FROM OPERATIONS, $ 82,873.13 $ 76,324.33 $113,115.35 OTIER INCOME CREDITS: Net Income from Investment Real Estate: Rentals, $ 52,152.21 $ 42,161.38 $ 35,028.64 Less * Repairs, Taxes, Insurance, etc.,... $ 8,962.79 $ 7,427.97 $ 5,225.04 Depreciation, 23.028.31 20.678.98 15.767.95 Totii, $ 3i!^6i.io $ iSlibe.ss $ 2o!592.96 Net Income, $ 20,161.11 $ 14,054.43 $ 14,035.65 Interest and Dividends on Investment Securities, 6,196.61 3,994.51 3,146.67 Interest on Notes Receivable, 12,847.14 15,949.22 15,309.85 Interest on Bank Balances, 1,797.56 2,062.74 2,645.52 Profit from Sales of Investment Securities, 103 . 76 275.00 100 . 00 Total, $ 41,106.18 $ 36,335.90 $ 35,237.69 GROSS INC02.IE, $ 123,979.31 $ 112,660.23 $148,353.04 INCOME CHARGES: Interest on Mortgages Payable, $ 1,245.39 $ 621.53 Notes and Accounts Written Off - Net,.. 11,968.64 2,336.27 $ 4,627.93 Adjustment of Book Value of Investment Real Estate, 3,879.28 585.06 Federal Income and Profits Taxes for the Preceding Year, 22.354.67 15,092.14 12,553.19 Total, $ 35,568.70 $ 21,929.22 $ 17,766.18 NET INCOME, $ 88,410.61 $ 90,731.01 $130,586..86 SURPLUS AT BEGINNING OF THE YEAR, 1,013,423.36 937,692.35 847,105.49 GROSS SURPLUS, $1,101,833.97 $1,028,423.36 $977,692.35 DIVIDENDS DECL.ARED AITD PAID, 45,000.00 15,000.00 40,000.00 SURPLUS AT END OF THE YEAR, $1,056,833.97 $1,013,423.36 $937,692.35 NOTE: No provision has been made for Federal Income and Excess Profits Taxes for the year ended December 31, 1919. EXHIBIT "B" FORM 29 y^E BLAinC COMPANY SUMMARY OF INCOME AND PROFIT AND LOSS FOR TK£ YEARS ENDED DECiaiBER 51, 1919 AND 1918, AND COMPARISON YEAR Ein)ED DECEI£BER 31, 1919 1918 INCREASE OR *DECREASE Naw York • $2 , 622 , 238 . 55 BMton /. 1507,908.85 cKi :::::::..:.: 2,843,764.22 Total, LESS TRADE DISCOUNTS, RETURNS, ALLOWANCES, AND FREIGHT, NET SALES, COST OF GOODS SOLD, CHIOSS PROFIT, SELLING AND GENERAL EXPENSES: . ,=^ ,o^ ^e New York, • • ?t^'iil-5| Boston 150,o64.2ii cMoa^ ::::.:.: 397.228.23 Total, NET PROFIT, OTHER INCOME: . ^ ^_- .-. Dividends on Stocks Oiraad, * f 'SS aS Profit from Sals of Light and Power, T*|5?'S? Miscellaneous, 4,692.01 Total, GROSS INCOME, INCOME CHARCaiS: . * ,r.^ oo-r m Cash Discounts on Sales, $ *?t*!?;' J« Interest - Net ^^'fll'J? Uncollectible Accounts, it'^o^rJ Income and Excess Profits Teuces, '1 i"2t Miscellaneous, 3,604.93 Total, NET INCOME, PROFIT AND LOSS CREDITS: . ,^ ^^^ ^^ Premium on Sale of Comoaon Stock, $ 37,500.00 Discount on Purchase of Preferred Stock,.. 500.00 Total, SURPLUS FOR THE YEAR AVAILABLE FOR DIVIDENDS DIVIDENDS, SURPLUS FOR THE YEAR, SURPLUS AT BEGINNING OF THE YEAR, SURPLUS AT END OF THE YEAR, * Typed in red. $6,973,911.62 1.091.770.48 $5,882,141.14 4.258.727.75 $1,623,413.39 $2,280,906.72 1,217,995.33 2.398,156.11 902,117.21 $ ta;i96.i8 21.181.66 $ 742,477.84 313.896.14 $ 428,581.70 38.000.00 $ 466,581.70 235.000.00 $ 231,581.70 1,318,075.73 $1.549,657.43 $5,897,058.16 840.836.57 $5,056,221.59 3.898.751.99 $1,157,469.60 $341,331.83 289,913.52 445,608.11 267,708.44 123,945.65 360.875.66 3,750.00 6,121.12 5.281.20 89,809.44 115,066.93 18,612.91 49,673.56 2.012.40 752.529.75 $ 404^939.85 15.152.32 $ 420,092.17 $1,076,853.46 250.933.91 $ 8^5) did. S3 359.975.76 $ 465,943.79 275.175.24 $ 144,916.93 $ 86,616.32 26,618.57 36.352.57 4,500.00 2,118.53 ♦ 589 . 19 $ 15,017.67 ♦ 1,189.48 ♦ 3,947.30 27,247.48 1.592.53 149.587.46 $ 316,356.33 $ 37,500.00 500.00 $ 144,916.93 117.500.00 $ 27,416.93 1,290,658.80 $1,318,075.73 6.029.34 322,385.67 38.720.90 $ 285!664.77 38.000.00 $ 321,664.77 117.500.00 $ 204,164.77 27,416.93 $ 231,581.70 CO FORM 29 yHE BLAIIK COMPANY SUMMARY OF INCOME AND PROFIT AND LOSS FOR THE Y2AR3 ENDED DECEaJBER 51, 1919 AND 1918, AND COMPARISON YEAR Ein)ED DECEMBER 31, 1919 1918 INCREASE OR ♦DECREASE w«« YorV $2 , 622 , 238 • 55 cKi 2.643,764.22 Total, LESS TRADE DISCOUNTS, RETURNS, ALLOWANCES, AND FREIGHT, NET SALES, COST OF GOODS SOLD, C210SS PROFIT, SELLING AND GENERAL EXPENSES: cS^o^;::::::::::::::;::::::::.: 397:228,23 Total, NET PROFIT, • OTHER INCOME: ^ ^ ^-. ^-. Dlvldtfnds on Stooks Ownad, I f '15S oS Profit fpoa Sale of Light and Power, T'liS'S? Mlaoellaneous, 4,682.01 Total, GROSS INCOME, INCOME CHARGES: . * n^>. oot -ii Cash Dlecounts on Sales, 5 *?t*f5I' Ji Interest - Net, ^^'fll't? Unoolleotlble Acoounte, it'to^^l Income and Excess Profits Taxes, 'S'l^J'st Miscellaneous , 3,604.93 Total, NET INCOME, PROFIT AND LOSS CREDITS: . Premium on Sale of Common Stock, $ 37,500.00 Discount on Purchase of Preferred Stock,.. 500.00 Total, SURPLUS FOR THE YEAR AVAILABLE FOR DIVIDENDS DIVIDEiroS, SURPLUS FOR THE YEAR, SURPLUS AT BEGINNING OF THE YEAR, SURPLUS AT END OF THE YEAR, ^ Typed in red. $6,973,911.62 1.091.770.48 $5,882,141.14 4.258.727.75 $1,623,413.39 $2,280,906.72 1,217,995.33 2.398,156.11 r 902,117.21 721,296.18 21.181,66 $ 742,477,84 313.896.14 $ 428,581.70 38.000.00 $ 466,581.70 235,000.00 $ 231,581.70 1.318,075.73 $1.549,657.43 $5,897,058.16 840.836.57 $5,056,221.59 3.898.751.99 $1,157,469.60 $341,331.83 289,913.52 445,608.11 267,708.44 123,945.65 360.875.66 3,750.00 6,121.12 5,281.20 89,809.44 115,066.93 18,612.91 49,673.56 2.012.40 752,529.75 $ 404^939.85 15.152.32 $ 420,092.17 r $1,076,853.46 250,933.91 $ 825,919.55 359.975.76 $ 465,943.78 275.175.24 144,916.93 $ 86,616.32 26,618.57 36.352.57 $ 4,500.00 2,118.53 ♦ 589 . 19 $ 15,017.67 ♦ 1,189.48 ♦ 3,947.30 27,247.48 1.592.53 $ 144,916.93 117.500.00 $ 27,416.93 1,290,658.80 $1,318,075.73 149.587.46 $ 316,356.33 6.029.34 $ 3^2,385.67 $ 37,500.00 500.00 38.720.90 $ 2831664. 77 38.000.00 $ 321,664.77 117,500.00 $ 204,164.77 27,416.93 $ 231,581.70 CD FORM 30 THE BLANK MANUFACTURING COMPANY STATEMENT OF INCOME AND PROFIT AND LOSS FOR THE THREE YEARS ENDED DECEI.IBER 31, 1919, AND AVERAGE PER ANNUM AVERAGE PER ANNUM TOTAL YEAR ENDED DECEMBER 31, 1919 1918 1917 GROSS SALES, $2,723,334.53 RETURNS AND ALLOWANCES, . 192,000.69 NET SALES, •• $2.531,333784 COST OF GOODS SOLD: Materials Consumed, $1,319,819.80 $8,170,003.59 576.002.06 $7.594,001.53 $3,134,030.83 267.914.93 $2.866,115790 $2,619,844.57 186.586.10 $2.433,258747" $2,416^128.19 121.501.03 $S.254 627.1 ^ Direct Labor , Indirect Labor, Power, Heat, and Light, Repairs , .*.... Depreciation, Insursuace , Property Taxes, 406,876.37 68,166.46 26,824.35 66 , 894 . 59 25,558.88 7,015.13 7,806.49 Factory Office Expenses, i?*l=f '?! Miscellaneous Factory Expenses, aS^'^,; .^ Total, $1,966,538.42 Less Increase in Inventory of Finished Goods and Work in Process, — ^^5,369.92 Cost of Manufactured Goods Sold, $1,921, 168. oO Cost of Purchased Goods Sold, 92,487 .20 Shipping Expenses, 44,450.81 $3,959 1,220 204 80 200 76 21 23 37 74 $5,899 ,459.54 ,629.10 ,499.39 ,473.04 ,683.78 ,676.63 ,045.40 ,419.47 ,856.94 .871.97 ,615,26 $1,159,151.29 340,429.16 63 , 195 . 25 26,219.41 58,212.91 22,314.95 6,629.24 7,527.01 9,316.44 23.512.04 $2,222)821.56 $1,960^286. 00 $1,716,507.70 $1,476,872.60 482,231.83 74,112.09 30,127.41 69,533.45 29,219.67 7,823.62 8,075.54 15,612.94 29.212.41 $1,323,435.65 397,968.11 67,192.05 24,126.22 72,937.42 25,142.01 6,592.54 7,816.92 12,927.56 22.147.52 136 . 109 . 76 Total Cost of Goods Sold, {2 . 058 . 106751 $5,763,505.50 277,461.60 133.352.43 ;6. 174. 31^753 184.212.21 $2,038,609.35 156,329.04 49.835.82 ;2. 244. 774.21 84^617.42 36.514.97 * ■ $1,923,771.03 $1,801, 125. li: 92,512.84 28,619.72 44.000.37 39.516.24 2.060 264.24 gl.5g9^gj:>0|^ GROSS PROFIT, SELLING EXPENSES: 4?3:i27:33 ii:4i6:682:oo $ ' 621:341.66 1 '372:574.23 $ ^rgstsgo^ I Advertising, $ Salaries, Commiss ions , Traveling Expenses , Miscellaneous, 42,039.88 38,816.29 22,222.22 7,962.77 5.339.07 $ ioikl, i 116:380.23"^ SELLING PROFIT, $ 356 . 847 . 10 GENERAL EXPENSED : ^ Salaries of Officers, # Salar ies of Clerks , Stationery, Printing, and Postage^ Telephone and Telegraph, CoriJoratlon Taxes , • Legal 8Uid Audit ing, Contributions, Miscellaneous, - Total, $ 126,119.64 116,448.86 66,666.67 23,888.31 16.017.20 349.140.6"8 $ 75,625.33 41,809.28 26,112.04 9,652.43 5.329.48 $ 26,375.40 33,927.01 19,212.05 7,522.92 5.612.47 24,118.91 38,712.57 21,342.56 6,712.96 5.075.25 $ 158!S28.S6 $ 54'649.e5 $ ^^ 51962. 27 $1.070:541.32 $ 462:813.13 $ 278,324.38 $ 329,403. CT I 42,500.00 51,864.02 6,959.65 3,162.33 4,796.78 2,711.40 5,250.00 6j^099.95 $ 127,500.00 155,592.05 20,878.96 9,547.01 14,390.34 8,134.19 15,750.00 18.299.86 $ 45,000.00 52,852.24 7,137.13 3,295.92 4,627.15 2,401.97 5,600.00 8.962.57 $ 123:364.13 $ 370.092.41 $ 129.876.98 $ 45,000.00 $ 54,098.96 6,714.29 3,083.95 5,112.90 • 3,015.72 8,900.00 5.622.01 131.547.83 f 37,500.00 48,640.65 7,027.54 3,167.14 4,650.29 2,716.50 1,250.00 3.715.28 108.667.60 NET PROFIT FROM SALES - (Forward), $ 233,482.97 $ 700,448.91 $ 332,936.15 $ 146,776.55 $ 220,736.21 § Typed in red, (Continued) - 1. THE BLANK MANUFACTURING COMPANY STATiaiENT OF INCOME AND PROFIT AND LOSS, ETC. AVERAGE PER ANinJl^I TOTAL YEAR ENDED DECEMBER 31, 1919 1918 1917 NET PROFIT FROM SALES - (Forward) , $ 233,482.97 $ 700,448.91 $ 332,936.15 $ 146,776.55 $ 220,756.21 OTHER INCOME CREDITS: Settlement with United States Government for Cancellation of Contracts, $ 8,580.02 $ 25,740.07 $ 25,740.07 Cash Discounts on Purchases, 6,148.27 18,444.80 6,712.91 $ 6,119.42 $ 5,612.47 Xntepest * Liberty Loan Bonds, 1,946.04 5,838.12 3,204.40 2,117.68 516.04 Bank Balances, 3,157.61 9,472.83 2,809.32 4,293.01 2,370.50 Notes and Accounts Receivable, 3,359.85 10,079.54 3,012.45 3,819.56 3,247.53 Dividend on Stock of A. B. Company, 133.33 400.00 200.00 200.00 Prof it from Sale of Raw Material, 406.57 1,219.72 1,152.22 67.50 Miscellaneous, 883.71 2.651.12 640.72 516.21 1.294.19 Total, i 24.615.4C) $ 73.846.20 $ 43.672.09 S 17.133.38 $ 13.040.73 GROSS INCOliE, i 258,098.37 $ 774,295.11 j 376,608.24 j 163,909.93 j 255,77g7TO INCOME CHARGES: Income and Excess Profits Taxes, $ 32,983.14 $ 98,949.41 $ 65,912.40 $ 15,112.01 $ 17,925.00 Interest on Notes Payable, 16,574.77 49,724.32 23,171.53 19,336.90 7,215.89 Amortization of War Facilities, 11,545.66 34,636.99 34,636.99 Uncollectible Accounts, Less Recoveries,.... 2,921.25 8,763.74 2,908.42 4,212.57 1,642.75 Loss from Sale of Liberty Loan Bonds, 340.00 1,020.00 1,020.00 # Miscellaneous, 751.83 2.255.50 1.275.32 814.00 __ j-^g.lg Total, $ 65.116.65 $ 195.349.96 $ 127.904.66 $ 40,495.48 $ 26,949.8g NET INCOME, $ 192,981.72 $ 578,945.15 $ 248,703.58 $ 123,414.45 $ 206,827.12 SURPLUS AT BEGINNING OF THE PERIOD, 1,214,666.91 1,123,587.45 1,238,606.50 1,214,666.91 PROFIT AND LOSS CREDITS - MISCELLANEOUS AD- JUSTMENTS APPLICABLE TO PRIOR PERIODS, 17.560.55 1.267.58 ♦ 819.50 17.112.47 GROSS SURPLUS, $1,811,172.61 $1,373,558.61 $1,361,201.45 $1,438,606.50 PROFIT AND LOSS CHARGES: Loss from Sale of Plant Property, $ 37,614.00 $ 37,614.00 Dividends, 700.000.00 $ 300.000.00 200,000.00 $ 200,000.00 Total, $ 737,614.00 j 300,000.00 $ 237,614.00 $ 200,000."^" SURPLUS AT END OF THE PERIOD, $1,073,558.61 $1,073,558.61 $1,123,587.45 $1,238,606.50 ♦ Typed in red. (Concluded) - 2. M 142 FORM 31 THE PLANK BAKERY & R£GTAURAt(T CQiMPAIfY STATEMENT OF INCOME AND PROFIT AND LOSS, BY DEPARTMEKTS, FOR THE SIX MONTHS ENDED APRIL 30, 1920 TOTAL ELIMI NA- TIONS BAKERY RESTAURANTS - Schedule #1 ISALES, $1,489,079.24 $164,517.95 $1,324,551.29 ITRANSFERS: Food Supplies, * $585,240.84 585,240.84 Crockery and Other Supplies, ■ 42.619.22 42.619.22 (TOTAL SALES AND TRANSFERS, $1,489,079.24 $627,660.06 $792,378.01 $1,324,561.29 ICOST AND EXPENSES: Food Supplies, $ 691,671.85 $585, 240. 84. $621, 219,42 $ 655,693.27 Crockery Supplies, 27,810.93 24,017.22 22,612.14 29,216.01 Silverware Supplies, 2,478.09 1,796.14 1,201.29 3,072.94 Storeroom Sundries, 29,131.11 16,605.86 26,715.41 19,221.56 Linen, 23,974.52 23,974.52 Salaries of Xanagera, 29,685.54 29,685.54 Wages 203 , 143 . 7 1 53 , 017 . 52 140 , 126 . 19 Rent (Less Rental from Sub-tenajits) , . . . 68,629.51 3,000.00 65,629.51 Advertising, 6,092.50 1,525.00 4,567.50 Heat, Light, and Power, 44,903.66 14,274.18 30,629.66 Water, ' 5,654.74 1,428.43 4, 226 .31 Refrigeration, 11,042.02 306.68 10,735.34 Laundry, 14,341.69 1,219,24 13,122:65 Telephone Service, 2,360.08 238.68 2,121.40 Insurance, 5,285.94 2,573.75 2,712. 19 Repairs, 19,276.07 3, 133.29 16, 142.7b Depreciation of Furniture and Fixtures, 19,184.02 1,957.04 17,226.96 Automobile Expenses, including Depre- ciation, 5,031.56 4,632.05 399.51 Amortization of Improvements to Leased Property, 9,825.70 1,710.94 8,114.76 Taxes (Other than Income and Excess Profits Taxes), 9,554.00 2,366.00 7,166.00 Insurance, 5,372.71 986.58 4,386.13 Miscellaneous Operating Expenses, 7,810.90 1,264.43 6,546.47 Salaries of Officers, 23,130.48 4,015.17 19,115.31 General Office Expenses, 8,292.95 1,439.55 6,853.40 Legal and Auditing Expenses, 4,116.91 1,541.06 2,575.85 Miscellaneous General Expenses, 9.528.45 2,716.44 6,812.01 Total, SI. 287. 330. 04 $627.860.06 $785,114.29 $1, 136,075 .61 >ROFIT FROM OPERATIONS. ^ 201,749.20 $ 7,263.72 $ 1$4'48dT48 ITHER INCOME CREDITS - CASH DISCOTOTS, — _ INTEREST, AND SUITDRY COI/HIISSIONS, 8.497.46 >ROSS INCOME, I 210,246.66 :NC0ME CHARGES - INTEREST AND FEDERAL TAXES, 57.019.62 [lET INCOME, $ 153,227.04 SURPLUS, NOVEMBER 1, 1919,... $107,868.48 Less Adjustments Applicable to Prior Period - Net,... 29.618.19 78.250.29 tOSS SURPLUS, $ 231,477.33 IIVIDENDS, 50.000.00 JURPLUS, APRIL 30, 1920, $ 181,477.33 143 CHAPTER IV CONSOLIDATED STATEMENTS There has recently been so much discussion of the sub- ject of consolidation of the accounts of affiliated companies, especially with regard to consolidated tax retxirns, that it seems hardly necessary to undertake to prove the desirability or ne- cessity for the preparation of consolidated financial statements for groups of cofl5>anies in order to exhibit true conditions. Statements showing the financial condition and operations of a holding or parent company, even if accompanied by data bearing upon the value of its investments in subsidiary companies, or by complete statements for those companies, do not accomplish the result to be desired, which is to disclose the accounts of the group of companies as an entity, conforming to actual operating conditions* Under present conditions of inter-corporate relations in this country, perhaps most of the corporations a majority of whose capital stocks are owned by other corporations are in effect merely branches of the latter, having been organized or continued as separate corporations merely for reasons of ex- pediency. It follows, therefore, that to exhibit the true con- dition of the companies all inter-company balances in asset and liability accounts should be eliminated, and the actual assets and liabilities of the subsidiary companies should be substitut- ed for the representative investment account or accounts on the books of the parent company; also, to exhibit the actual opera- 144 tlons of the group, all inter-company transactions should be eliminated. Consolidation of the accounts is appropriate whenever the ovmership in one company is all, or substantially all, vested in another company. In doubtful cases, where the ownership is between, say, fifty per cent and ninety-five per cent, judgment must be exercised as to v/hether the true conditions are better expressed by individual or consolidated statements. It is also appropriate in some cases to consolidate the accounts of companies which are not related directly by stock ownership but are controlled by the same interests. This involves merely the elimination of inter-company balances and transactions and the combination of the other accoxants. In technical accounting parlance, the word "consoli- dated" is confined to the accounts of two or more legally sepa- rate businesses. The term should not be applied to the accounts of the several branches or departments of one business. There are two classes of consolidated statements. Those of one class exhibit merely the result of the consolida- tion and those of the other show on one sheet the accounts of each of the companies, the eliminations, and the consolidated total. The former are usxoally entitled "Consolidated Balance Sheet" and "Statement (or Summary, or Condensed Statement) of Consolidated Income and Profit and Loss;" the latter, "Balance Sheets and Consolidation" and "Statements of Income and Profit and Loss and Consolidation." The choice of these forms obvi- 145 ously depends upon the purpose for which they are prepared: In some cases only the aggregate figures are desired; in other cases, when statements for one or more of the constituent com- panies are desired, it is expedient to show the operation of con- solidation rather than to prepare separate statements for the consolidation and for the companies individually. In theory, all inter-company balances receivable and payable should be eliminated in consolidated statements, but in actual practice there are often current open items of relatively Inconsiderable amount which are in transit between companies or which have not been cleared in the regular course of business, the adjustment of which by the accountant is not essential. If taken up on the books such minor adjustments would unnecessarily interfere with the clerical routine; and if not taken up on the books, they would have the generally undesirable effect of mak- ing the statement different from the books. Therefore, it is usually better to eliminate the smaller balance, leaving the remainder of the larger balance in Accounts Receivable or Ac- counts Payable. In exceptional cases the uneliminated amoxints may be specifically described as such in the consolidated bal- ance sheet. If it is necessary in the preparation of an audit report to make adjustments in the preparation of statements, which are not taken up on the bocks, the details should be in- cluded in the report or in a supplemental memorandum. Any difference between the amounts carriad by one company as an asset and by another company as a liability, in 146 respect of the same indebtedness^ should be adjusted. If^ for example^ company "A" has borrowed from company "Bj " and the latter company has for some reason written off part of the asset account (or of the book value of notes if notes have been given) in the preparation of a consolidated balance sheet the consoli- dated surplus should be increased by means of a red figure in the elimination coltjunn^ so that the entire amount of the lia- bility carried on the books of company "A" may be eliminated. If instead of reducing the asset account company "B" had estab- lished a reserve^ the amotint of the reserve would be eliminated against the increase in surplus. In a consolidated profit and loss statement j accom- panying a consolidated balance sheets effect should also be given to any adjustment of surplus such as the foregoing. If the adjustment of surplus is a reversal of a charge or credit during the period covered by the statement and shown therein^ the increase or decrease of the surplus at the end of the period will usually be s\ifficiently explained by being offset against that item; otherwise it is generally necessary to ex- plain the adjustment in a footnote. The procedure in the case of bonds of one company purchased by another at a discount is the same as for differ- ences in accounts or notes as explained above^ unless the issu- ing company sold the bonds at a discount and is carrying in its accoxints some part of such discoiint as a deferred charge to profit and loss. As an illustration^ let it be assumed that 147 company "A" owns $100,000«00 par value of bonds of company "B, " which were ptxrohased for $95,000.00 and are carried at cost; the bonds were sold by company "B" to underwriters at 90j the term of the bonds is twenty years, of which two have elapsed, so that, as to the $100,000,00 of bonds in question, company "B" is carrying unamortlsed bond discount of $9,000.00. The elimina- tions in this case would be as follows: Bond' Investment $ 95,000.00 Unamortized Bond Discount.. 9.000.00 $104,000.00 Liabilities: Bonds- $100,000.00 Surplus 4.000.00 104,000.00 In the foregoing example, company "B" is regarded, for the purpose of the consolidation, as having a net liability on account of these bonds of only $91,000.00; for this claim against the property of company "B, " company "A" has paid $95,000.00, or $4,000.00 more than the bonds are now worth, which amoiont must be treated as a loss. If the bonds had been purchased by company "A," at the seune price at the date of issue, the difference between the accounts of the two companies to be adjusted by charge against surplus, representing the excess of the payment by company "A" over the cash received by company "B, " would have been $5,000.00. However, $1,000.00 has already been charged to surplus through amortization of bond discount. As stated, the foregoing example is predicated upon the as8\imption that company "A" continues to carry the bonds at 148 cost. Of oourse^ that company mlgbt have kept Its accounts properly^ so that the book value of the bonds would be Increasel periodically by credits to profit and loss« with a view to carry- ing them at pstr at maturity^ in which case the book value might closely approximate the par value less the unextinguished dis- count on the books of company "B." In any events the procedure exemplified in the foregoing will be found to apply^ with such adaptation as may be necessary. If^ for example^ the bonds had been purchased by company "A" at 90^ the other conditions being the same as above^ there would be six increase in the consoli- dated surplus of $1^000*00^ instead of a decrease of $4 ^000. 00* The most troublesome feature in the preparation of consolidated balance sheets is the adjusting of the difference between the value at which the stocks of subsidiary companies are carried on the books of the parent company amd their book value at the date of acquisition; i.e.^ their par value (or stated value^ in the case of stocks without par value) and the surplus at that time. It seems clear that the surplus at the date of ac- quisition should be taken into consideration^ as (assuming for the present that all the stock is acquired) all the net assets of the subsidiary company^ represented by the stated value of the capital stock and the surplus^ were acquired. Take a hypothetical case where the stock is $100^000.00 and the surplus $50^000.00^ the net assets^ represented by the stockj being purchased for $150^000.00. It would manifestly 149 be lllogloal to state that the parent company made a profit of $50,000.00 In the pxxrohaae. If any part of the surplus of $50,000.00 is paid out in dividends it is in effect a refund of part of the purchase price of the stock and should be credited to the investment account on the books of the holding company. It follows, then, that the par value of the stock plus the s\ir- plus at the date of acquisition should be eliminated against the investment acco\int on the books of the holding company. If the holding company paid more than $150,000.00 for the stock, it paid for good-will; therefore, any excess of the investment val\aation of the stock over the par value and the surplus at the date of acquisition should be treated in the con- solidation as good-will. If the holding company paid less than $150,000.00 for the stock, the excess of $150,000.00 over the cost is a profit, but not one that should be shown in a state- ment as derived from operations; therefore, any excess of the par value of the stock plus the surplus at the date of acquisi- tion over the investment value on the books of the holding com- pany should be treated as capital surplus, unless the holding company has set up a valuation of good-will directly or indirect- ly in connection with the pxirchase, in which latter case the excess should be deducted from the good-will. When it is stated on the one hand that good-will should be charged, and on the other hand that capital surplus should be credited, it is not intended to prescribe the use of those terms exclusively. The only essential point is that the 150 faots be disclosed aa clearly as practicable. It would be appropriate to describe the balance sheet asset item specifically in some such language as "Excess of Cost (or Investment Value) of Stock of Subsidiary Company over its Value on the Books of that Company at Date of Acquisition," and the liability item as "Ex- cess of Par Value of Stock of Subsidiary Company and Surplus at Date of Acquisition over its Cost (or Investment Valuation)." In many cases the amount of the surplus of the sub- sidiary at the date of acquisition is such a small proportion of the total surplus at the date of the balance sheet that no mis- understanding could result from not disturbing the surplus but eliminating only the par value of the stock. In this, as in the elimination of inter-company balances, practical considerations, rather than pure theory, should govern, especially if there is any objection on the part of the company officials to reducing the consolidated surplus. If the amount is considerable and there is objection to the elimination, practically the same effect can be obtained by showing two classes of surplus: one including the earnings of the subsidiary as a part of the con- solidation and the other representing its earnings prior to its entering into the consolidation. In some cases practically correct results may be ob- tained by a method which is apparently incorrect but which may be employed on account of its relative simplicity. For illus- tration, let the following faots be assumed: 151 Par value of capital stock of subsidiary com- pany - all acquired $ 50»25S*22 Surplus at date of acquisition "'S' S*^^ Cost of stock to holding company 70, 000.00 Combined surplus at date of balance sheet.... 120,000.00 As the holding company acquired net assets of $80,000.00 at a cost of $70,000,00, there would be a capital siirplus of $10,000.00. The free consolidated surplus at the date of the balance sheet would be $90,000.00 ($120,000.00 less $30,000.00). The two surplus items mi^t properly be shown on the balance sheet as follows: Surplus: Profit and Loss Surplus, per Exhibit "B"... $ 90,000.00 Excess of net assets of subsidiary company at date of acquisition over cost of stock to holding company 10.000.00 Total Surplus $100^000.00 The alternative method of producing practically the sajne result is as follows: Sxirplus: Surplus per Exhibit "B" (including $30,000.00 surplus of subsidiary com- pany at date of acquisition by holding company) $120, 000.00 Less excess of cost over par value of stock of subsidiary company 20^000.00 Net S\irplus $100,000.00 The foregoing references to Exhibit "B" are based upon the assumption that in the first example the surplus of the subsidiary at the date of acquisition has been dropped from 152 that statement, and that in the second example it has not. The latter method exemplified above could not be em- ployed if the surplus of the subsidiary at the date of acquisi- tion were $10,000.00 instead of $30,000.00 - in other words, if the net assets of the subsidiary were less than the cost to the holding company. In such a case the difference would represent good-will, which should not generally be deducted from the sur- plus. In determining the date of acquisition when the stock has been purchased at different dates it seems to be proper to take the date when control was acquired, or when the last con- siderable block of stock was purchased. In all cases it may be necessary to select the nearest date when the books were closed. When the interest of the holding company in the sub- sidiary is less than the whole, the procedure differs, as it is then necessary to show in the balance sheet the interest of the minority stockholders of the subsidiary to the extent of the par value of their stock, and it is desirable to show also their interest in the surplus of the subsidiary or their share of its deficit. Assuming that the subsidiary has a surplus, the minori- ty interest may be shov/n by either of these methods: (1) Capital Stock: Holding Company Subsidiary Company - Minority Stock Held by the Public Total Surplus: Applicable to Stock of Holding Company 153 Applicable to Minority Stock of Subsidiary Company Total (2) Minority Stockholders of Subsidiary Company: Capital Stock Surplus Total Equity of Stockholders of Holding Company: Capital Stock Surplus Total ( In determining the interest of minority stockholders when preferred stock is involved, the value of the preferred stock is usually taken at the par value plus accrued dividends to date. The value will be different If the preferred is en- titled to any share In the profits in excess of the 'stated divi- dend rate. In eliminating the investment account for the stock of the subsidiary when less than the whole of its stock is owned, only the holding company's proportion of the surplus at the date of acquisition ceui be considered; but the minority stockholders' interest in that siirplus must be recognized. The following facts are assumed for the piirpose of exemplifying the procedure under such conditions: Capital stock of subsidiary company, $100,000*00 Surplus of subsidiary company at date of acquisition, 50,000*00 Proportion of stock acquired by holding company, • • • . • 90> Value of stock acquired by holding company 135,000.00 Cost to holding company, 160,000*00 Surplus of subsidiary company at date of balance sheet, 70,000.00 154 In the consolidation the liability to the minority stockholders will be shown as follows: Capital Stock, $10,000.00 Surplus, 7^000>00 Total, $17,000.00 An asset of $25,000.00 will be set up, designated as "Good-Will," or as "Excess of Cost of Stock of Subsidiary Compa- ny over its Par Value and the Surplus Applicable Thereto." The eliminations from the specific asset and liability items will be as follows: Asset - Investment Account, $160,000.00 Liabilities: Capital Stock, $100, 000 .00 Surplus (balance at date of acquisi- tion plus 10^;^ of increase),....... 52,000.00 152,000.00 Net Asset, •..• $ 8,000.00 for which will be substituted: Asset - Grood-Will (excess of investment account over value at date of acquisition), $ 25,000.00 Liabilit iss - Minority Stockholders, 17,000.00 Net Asset, $ 8,000.00 From the standpoint of the balance sheet alone the fore- going solution is complete, but consideration should be given to the effect upon the profit and loss statement, in which the sur- plus is carried forward from year to year. It will be seen that we have a minority interest of $5,000.00 in the sxirplus at the date of acquisition by the holding company. If the entire sur- 155 plus of $70,000.00 were shown In the profit and loss statement, deduction could not be made therefrom of the interest of the holding cooipajiy in the surplus at the date of acquisition, viz., $45,000.00, as that would leave $25,000.00 as the surplus earned since acquisition, divisible into 1,000 shares, whereas only $20,000.00 was earned during that period and $5,000.00 is divi- sible into 100 shares. Therefore, the entire surplus at the date of acquisition, $50,000.00, should be eliminated from the profit emd loss statement and oajrried in separate accounts, $45,000.00 being carried as surplus pertaining to the majority stock and $5,000.00 as surplus pertaining to the minority stock. Then, if full details of the division of surplus are to be shown on the balance sheet, reference being meuie to the profit and loss statement, it should be shown somewhat as follows, ass\aming that the surplus of the holding company from other sources is $100,000.00: Surplus: Profit and Loss Surplus: Applicable to Stock of Holding Company, $118,000.00 Applicable to Minority Stock of Subsidiary Com- pany, 2,000.00 Total per Exhibit "B", $120,000.00 Surplus of Subsidiary Company at Date of Acquisi- tion Applicable to Minority Stock, 5^000.00 Total surplus, $125^000.00 When goods are sold by one affiliated company to an- other at a profit to the seller, it is necessary to eliminate not only the inter-company sales and purchases but also the pro- fit taken by the seller on such of the goods as remain in the 156 hands cf the buyer, thereby reducing the consolidated surplus. This may be effected in the form of an elimination from the total surplus, and the creation of a reserve, in the consoli- dated figures only, by means of a red figure in the elimination column. In correctly stating the profits for a period, con- sideration should also be given to the inflation of the consoli- dated inventory at the beginning of the period, the surplus being reduced in the ssime manner as at the end. In all audit reports containing consolidated state- ments, the names of the subsidiary companies should be shown so that there can be no misunderstanding as to what companies are included. This information is generally given in the presen- tation, but if there are only tv/o or three names they may also be shown in the headings of the statements. Of course, the latter procedure is not necessary in statements showing the de- tails of consolidation, when the names are shown in the column headings. ♦ ♦ ♦ ♦ ♦ Following are specimen forms of consolidated state- ments, designed to show the application of the principles enunci- ated in the foregoing. Form 32 is a consolidated balance sheat (after apply- ing eliminations) and comparison with a prior date. Form 33 shows the balance sheets of each of the compa- nies and the eliminations, resulting in the consolidation shown in Form 32. These forms exemplify one method of showing the 157 Interest of minority stockholders In the capital stock and sur- plus^ and also the eiddltlon to Intangible values of the excess of cost of stocks of subsidiaries over their par value - which has been assxamed In this case to be approximately their actual value as shown by the books of the subsidiaries at the time of acquisition by the parent company. There Is also Illustrated in these balance sheets and in the accompanying income and pro- fit and loss statements (Forms 34 and 35) » the procedure in eliminating differences between asset values ajid face values of inter-company indebtedness. The eliminations in this form, sjid in Forms 37 and 38, axe ntimbered for the convenience of the reader in locating the corresponding items. Forms 34 and 35 are, respectively, aiumnaries of in- come and of profit and loss of each of the companies and consoli- dation, supporting Forms 32 and 33. Here are exemplified various eliminations of inter-oompajiy charges and credits, including the reversal of a charge representing provision for loss on notes of a subsidiary and the addition to surplus of the difference be- tween the book value of bonds of a subsidiary owned by the parent company over their par value less the related proportion of ion- amortized bond discount. Form 36 is a consolidated balance sheet exemplifying particularly the treatment of surplus of subsidiary companies at the dates of acquisition when there is a minority Interest in the subsidiaries and when it is desired to render a statement 158 of Income and profit and loss showing the surplus earned by the consolidated companies. Form 37 shov78 the balance sheets of three companies and consolidation, in which is illustrated another method of applying the difference between cost and actual value (as shown by the books) of stocks of subsidiary companies. In this balance sheet and the accompanying statement of Income and pro- fit and loss (Form 38) are shown the deduction from the deficit at the date of the balance sheet of the deficit and surplus of subsidiaries at the dates of acquisition. Form 38 shows the statements of income and profit and loss and consolidation supporting Form 37. It contains several eliminations affecting the operating accoiints. 159 FORM 32 BLANK RAILROAD & ELECTRIC CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEET, DECEMBER 31, 1919, AND COMPARISON WITH DECEMBER 31, 1918 DECiaiBER 31, INCREASE 1919 ♦DECREASE ASSETS PROPERTY, FRANCHISES, ETC., $6.395.378,49 $481.312,50 SECURITIES OWNED, $ 278,514,01 $ 50.000,00 SINKING FUNDS - CASH AND ACCRUED INTEREST, J 24.020,10 *$ 3!762,50 CURRENT ASSETS: CaBh, $ 212,771.26 $ 19,612.71 Notes Reoeivable, 58,119,17 13,212,95 Aooounta Reoeivable, Less Reserve, 80,019,32 * 23,514,23 Aoorued Interest Reoeivable, 82,166,92 5,327.00 Materials and Supplies, 453.664,59 95,026,18 Total Current Assets, 9 886,741,26 $109,664,61 DEFERRED CHARGES: Unamortized Debt Discount and Expense, $ 162,302,37 *$ 12,516,54 Work Under Construction, 23,088.79 18,124.90 Prepaid Insurance, Teixes, eto, , ^^9*?9-*Jl _ -1*^^^*^? Total Deferred Charges, $ 236,300,53 9 13,233,4g TOTAL, ; $7,820,954,39 $650.448.09 LIABILITIES [CAPITAL STOCK: Blank Railroad & Eleotrlo Corporation,,,, $2,500,000.00 Minority Stook of Subsidiary Coinpfiuiies, 175.500,00 ♦$ 15.200.00 Total Capital Stook, $2,675,50 0.00 ♦$ 15, 200,0 [FUNDED DEBT (Less Bonds Held in Sinking Funds): — Blank Railroad & Eleotrlo Corporation, $1,762,000.00 $154,000.00 Subsidiary Companies -Bonds Held by Public, 1^095.000.00 ♦ 45.000.00 Total Funded Debt, »2, 857, 000. 00 $109.000,00 [CURRENT LIABILITIES: Notes Payable, $ ^42,082,00 $120,375.00 Accounts Payable, 664,696.52 209,316.92 Accrued Interest, Taxes, etc., 176 . 907 .49 89 . 653 . 04 Total Current Liabilities, $l,183>86.6l $4l&.344.66 :SERVES : Renewals and Replacements, $ 639,701,25 $ 52,326.19 Injxiries and Damages, 32.727,89 ♦ 5.041,15 Total Reserves, $ 672,429,14 $ 47,285.04 [SURPLUS, PER EXHIBIT "D": Applicable to Stock of Blank Railroaul & Electric Corporation, $ 405,024.32 $ 83,706.97 Applicable to Minority Stocks of Subsidiary Com- panies, 27.314,92 6-311.12 Total Surplus, $ 432,339.24 $ 90,018.09 TOTAL, $7,820,954.39 $650,448,09 * Typed in red. EXHIBIT ''A^ 160 FORU 33 BLANK RA ILROAD & ELECTRIC CORPORATION AITD SUBSIDIARY COMPANIES BALANCE SHEETS, DECE:.aER 31, 1919, AND CONSOLIDATION .CONSOLIDATION TOTAL ELIMINATIONS BLANK RAILROAD & ELECTRIC CORPORATION SUBSIDIARY ItAII SUBSIDIARY "B" ASSETS PROPERTY, FRANCHISES, ETC. , STOCKS OF SUBSIDIARY CCilPANIES, BONDS OF- SUBSIDIARY "A", OTHER SECURITIES, SIIIXING FJITDS - CASH AND ACCRUED INTEREST,.. CURREIIT ASSETS: Cash, Note© Receivable, Accounts Receivable, Less Reserve, ........ Accrued Interest Receivable, Materials and Supplies, ■ Total Current Assets, DUE FROM AFFILIATED COMPANIES: Notes , . Accounts and Accrued Interest, Total Due from Affiliated Com- psuiies , , DEFERRED CHARGES; Unamortized Debt Discount and Expense, Work Under Construction, Prepaid Insurance, Taxes, etc., Total Deferred Charges, $6,595,378.49 (l)*$ 593,071.25 ^} g^'^i^'g?^'^5 $2.167.571.25 d) $i;^04:50Q.6C) $i:204!500.iro $4,463.902.51 $1.338,404.73 P 75.514.01 ^4, 016.16 $ 212,771.26 58,119.17 80,019.32 82,166.92 453 . 664 . 59 $ 886,7417^ 203.100.00 • $ 56.3?g:ijr 13,6S0.06 $ 6.427.56 98,885.63 $ 71,304.90 42,500.00 74,285.96 80,050.00 1,400.00 319,324.68 19,072.00 3,912.46 42,580.73 15,619.17 5,733.36 716.92 134,339.91 $ 178,835.63 $ 50 6,815.54 $ 198;990.0 g (3) $ 450,729.62 (4) 293.914.82 398,229.62 $ 52,500.00 211,065.34 43,212.71 $ $ 744,644.44 $ 609,314.96 $ 95,712.71 $ 39,616.77 39,616.77 TOTAL * ^of'52!-?I ^^^ * 66,307.50 $ 82,563.08 $ 104,927.50 $ 41,119.29 ^3, 086. 79 23,088.79 A of2'?An'^I ^ 4.728.00 44.003.44 2.177.93 $ 236,300.53 $ 66,307.50 $ 87,291.08 $ 172!ol6.73 $ 43\2^7.2^ $7,620,954.39 $3,589,951.94 $4,464,393.00 $5,305,220.06 $1,645,295.27 LIABILITIES CAPITAL STOCK: Blank Railroad & Electric Corporation, Subsidiary Companies, Total Capital Stock, !!!!!!! FUNDED DEBT (Less Bonds Held in Sinking Funds): Blank Railroad & Electric Corporation Subs idiary Companies , \ Total Funded Debt !..!!!!!!!!!!!!!! CURRENT LIABILITIES: Notes Payable, Accounts Payable, !!!.'!!!!!!!] Accruea Interest , Taxes , etc .,...*!."!.'.'.'!!.*!!!!] Total Current Liabilities, [.[[ DUE TO AFFILIATED COMPANIES: Notes , Accounts and Accrued Interest, !...!!!!!!!!.'!!.'! r,^^„r>„ Total Due to Affiliated Companies, RESERVES: * Renewals and Replacements , Injur ies and Damages , '.*.!.'!!!!,'!!!!! Total Reserves , , ,,] SURPLUS, PER EXHIBIT "D«, $2,500,000.00 . 175.500.00 $2,675.500.00 ,,^ . . $2,500,000.00 175.500.00 (1) $1.574.500.00 $1.574.500.00 $2 . 500 . OOOTOO $1,762,000.00 ;i.25TD.000.00 ;i, 250. 000.00 500.000.00 500,066.66 $1,762,000.00 , 1.095.000.00 (2) $1.263.000.00 $^,^7:666.00 $l!263!000.00 $l,762.OO0.CO $ 542,082.00 664,696.52 . 176.907.49 $1,185,686.01 ;i, 986. 000. 00 ;1,S66,006.1S5" 572,000.00 372; 000,60 $ (5) $ 509,155.95 (4) 295.914.82 $ 282,082.00 $ 60,000.00 549,982.71 112,182.27 101.595.25 17.192.50 $ 60.851.28 $ 955,459.66 $ 186,574777 2,551.54 58.519.74 $ 659,701.25 52.727.89 I 672.4SS.l4 $ 805,050775 $ 512,516.42 $ 196,819.51 57.250.55 192.564.71 64,519.58 37,i^50.55 $ 564,661.13 $ 26ltl3gT0g" $ 420,088.54 $ 219,612.91 25.967.75 8,760.14 ''^44,0 56.09 $ 228,375.05 165: 022. 66 $ 52.40g73B TOTAL, ♦ Typed in red. 452,558.24 (a)*$ 50,568.81 $ 104.511.16 $ $7,820,954.59 $5.589,951.94 $4,464,595.00 $5,505,220.06 $1,645,295.27 (a) Increase in surplus, comprising: (5) Increase from notes, $58,406.51 (2) Decrease from bonds, etc.,,. 7.807.50 Net Increase, $50,598.81 EXHIBIT "B" FORM 34 BLANK RAILROAD & ELECTRIC CORPORATION AND SUBSIDIARY COMPANIES SUMMARIES OF INCOME FOR THE YEAR ENDED DECEMBER 31. 1919. AND CONSOLIDATION CONSOLIDATION TOTAL ELIMINATIONS •BLANK RAILROAD & ELECTRIC CORPORATION SUBSIDIARY "A" SUBSIDIARY $ 32,619.27 RAILT7AY DEPARTMENT: Groes Eaxnlnga, $553,101.59 Operating Expenses auad Taxes, 363,308.85 Net Earnings, $189,792.74 LIGHT AND POTi'ER DEPARTMENT: Gross Earnings, $852,431.82 Operating Expenses ajod Taxes, 391,571.17 Net Earnings , $460,860.65 NET EARNINGS FROM OPERATIONS, $650,653.39 ADMINISTRATIVE AND GENERAL EXPENSES, 32,619.27 NET EARNINGS, $618,034.12 OTHER INCOME CREDITS: Dividends on Stocks Ovmed, $ 3,380.50 Interest on Bonds Owned, 9,256 .00 Interest on Notes and Accounts Receivable,.... 8,820.11 Rentals, 12,564.64 Unclaimed Wages Written Off, 409.31 Total, $ 34,430.56 CROSS INCOME, $652,464.68 INCOME CHARGES: Interest on Bonds, $141,640.00 Interest on Notes and Accounts Payable, 37,025.29 Amortization of Debt Discount and Expense,.... 8,530.71 Notes and Accounts Receivable Written Off,..., 11,524.51 Provision for Renewals and Replacements, 70,000.00 Income and Excess Profits Taxes (Estimated),.. 100.000.00 Total, $368,720.51 NET INCOME, $283 , 744 . 17 ♦ Typed in red. *^ Proportion applicable to bonds of Subsidiary "A" held by the Blank Railroad & Electric Corporation. $312,337.54 $240,764.05 235.256.50 128.052.35 $ 77,081.04 $112,711.70 $656,265.20 261,225.39 $196,166.62 130.345.78 $395,039.81 $ 65*820.84 $472,120.85 $178,532.54 ♦$ 32,619.27 $472,120.85 $178,532.54 $125,960.00 63,150.00 34,612.98 $129,340.50 68,540.00 35,213.43 $ 3,297.50 5,792.01 12,564.64 392.50 $ 568.50 2,427.65 16.81 $223,722.98 $233,093.93 $ 22,046.65 $ 3,012.96 $223,722.98 $200,474.66 $494,167.50 $181,545.50 $ 63,150.00 34,612.98 •♦ 3,985.83 $ 90,050.00 $ 95,750.00 $ 18,990.00 52,319.22 19,319.05 4,912.15 6,132.04 1,472.35 7,612.07 3,912.44 50,000.00 20,000.00 70,000.00 30,000.00 $101,748.81 $ 94,962.15 $281.813.33 $ 93.693.64 $121,974.17 $105,512.51 $212,354.17 $ 87,851.66 o> EXHIBIT "C" FORM 35 BLANK RAILROAD & ELECTRIC CORPQRATIQII AND SUBSIDIARY COLIPAITIES iSTATEMENTS OF PROFIT AND LOSS FOR THE YEAR EIIDED DECELIBER 31^ 1919, AIID CDITSQLIDATIQIT ....CONSOLIDATION TOTAL ELI1.IINATI0NS BLAinC RAILROAD & ELECTRIC CORPORATION SUBSIDIARY "A" SUBSIDIARY «»B" SURPLUS, JANUARY 1, 1919, PROFIT AND LOSS CREDITS: Net Income for the Yeaur, per Exhibit "C",.... Sinking Fund Reserves Reverted to Surplus, ••• Discount on Bonds Purchased for Sinking Fund, Profit from Sale of Property, Interest on Notes and Accoxints - Prior Period Miscellaneous Credits Applicable to Prior Periods, .,..•♦ , Total, GROSS SURPLUS, PROFIT AND LOSS CHARGES: Interest on Notes and Accounts - Prior Period Income and Excess Profits Teixes for the Year 1S18, Provision for Loss on Notes of Subsidiary Companies , Total, SURPLUS AVAILABLE FOR DIVIDENDS, DIVIDENDS, SURPLUS, DECELIBER 31, 1919: Applicable to Stock of Blank Railroad & Electric Corporation, Applicable to Minority Stocks of Subsidiary Compajiies, $342,321.15 (a)$ 11,793.33 $132,027.14 $147,754.39 $ 74,332.95 $283,744.17 74,194.08 6,741.66 8,539.79 1,781.18 ^375.000.88 ►717.322. 03 $120,942.79 1120.942.79 ;596,379.24 164.040.00 $121,974.17 2,613.77 $105,512.51 69,494.08 3,070.00 2,613.77 t 124. 587. 94 1136,381.27 1180.690.36 $212,354.17 1,652.44 8,539.79 1.727.98 ^3 12, 717. 50 ;224.274.38 ^372,028.77 $ 2,613.77 58,406.31 $ 2,613.77 84,392,12 61.020.08 58.406.31 75,361.19 125. 950. GO 58.406.31 ^254,311.19 150.000.00 ^285,022.68 100,000.00 $405,024.32 (b)*$ 50,598.81 27,314.92 $104,311.19 $166,367.18 18,655.70 TOTAL, $ 87,851.66 4,700,00 2,018.22 53.20 94.624.08 ;168,957.03 $ 36,550.67 87.005.es $^36,550.67 $132;406.36 40,000.00 $ 63,747.14 8,659.22 $432^9.24 ♦$ 50,598.81 $104,311.19 $185,022.88 $ 92,406.36 (a) (b) Typed in red. Represents the excess of the cost of bonds of Subsidiary "A" held by the Blank Railroad & Electric Corporation over their par value, less proportion of unamorti^ised discount at January 1, 1919. Comprised adjustments as follows: Increase - Reversal of provision for loss on notes of Subsidiary Companies, $58,406.31 Decrease - Excess of cost of bonds of Subsidiary Com- panies over their par value and unamortized discount at December 31, 1919, 7.807.50 Net Increase , , $50,598.81 EXHIBIT "D" 0> ro mmmmfm i i I '■'u i m' m'a^iimmimm^mm'mtm 163 FORM 36 BLANK MINING & MILLING COMPANY AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEET, DECEMBER 31^ 1919 ASSETS CAPITAL ASSETS: Ore ReBerves and Mineral Rights, $23,766,225.37 Less Reserve for Deple- tion, 6.832 >308. 73 $16,933,916.64 Real Estate, Mine Buildings, Machinery, etc., $9,092,608.57 Less Reserve for Depre- ciation, 527.082.91 Railroad Property and LIABILITIES 8,565,525.66 Equipment, $ 3,216,577.76 Less Reserve for Depre- ciation, 357,275.44 2.859.302.32 Total Capital Assets, $28,358,744.62 SINKING FUND ASSETS - CASH AND ACCRUED INTEREST (Bonds De- ducted from Funded Debt , per Contra) , . • • 30,316.23 CURRENT ASSETS: Cash, $ 947,781.88 United States Treasury Certificates of Indebtedness , Liberty Loan Bonds and Notes - Par Value,. Accounts and Notds Receiv- able, $ 1,417,529.68 Less Reserve for Losses,. 29.612.41 Finished Product, Work In Process, and Materials and Supplies , 1,200,000.00 2,200,000.00 1,387,917.27 1,684.364.56 Total Current Assets, DEFERRED CHARGES, 7,420,063.71 68,337.70 TOTAL, $35,877,962.26 CAPITAL STOCK: Blank Mining & Milling Company: Preferred - 100,000 Shares of $100.00 each, Conznon -- 400,000 Shares without Par Value , Subsidiary Companies - Minority Stocks Held by the Public, $10,000,000.00 19,625,000.00 123.500.00 Total Capital Stock, $29,748,500.00 FUNDED DEBT: Subsidiary Company First Mortgage, 5^ Bonds, Due 1947, Less Bonds Held by Sinking Fund Trustees and In Treasury, $ 3,000,000.00 763.000.00 Total Funded Debt, CURRENT LIABILITIES: Accounts and Wages Payable, $ 586,952 .68 Accrued Taxes, 225,314.96 Accrued Interest, 31,328.13 Total Current Liabilities, DEFERRED CREDITS, RESERVE FOR CONTINGENCIES, SURPLUS: Profit and Loss Siirplxis: Applicable to Stock of Blank Mining & Milling Company, Applicable to Minority Stock of Sub- sidiary Companies, Total, per Exhibit "B", Surplus of Subsidiary Companies at Dates of Acquisition Applicable to Minority Stock, Excess of Pax Value of Stocks of Sub- sidiary Companies Owned, together with Surplus at dates of Acquisition Appli- cable Thereto, Over Cost , $ 1,894,979.48 29,750.62 $ 1,924,730.10 32,517.14 355.709.33 Total Surplus, 2,237,000.00 843,595.77 12,065.90 723,844.02 TOTAL, 2.312,956.57 to5.877.962.26 EXHIBIT*^ F0R2.I 37 BLANK GAS & ELECTRIC COMPANY kllD SUBSIDIARY COMPANIES ■~— — — ■ BALANCE SHEETS, DECEMBER 31, 1919. AND CONSOLIDATION — ASSETS — , . . .CONSOLIDATION TOTAL ELIMINATIONS BLANK GAS & ELECTRIC COMPANY SUBSIDIARY "A" SUBSIDIARY «B" PROPERTY, FRANCHISES, ETC . , $6,577,136.94 $5,219.413.31 $106.500.00 ' $1,251,223.63 SECURITIES OF SUBSIDIARY COI^ANIES, Uj$717,258.75 $ 717.258.75 OTHER SECURITIES, "5 29,253.03 1 29 '253. 03 CURRENT ASSETS: - Cash, $ 54,805.50 $ 35,300.98 $11,850.33 $ 7,654.19 Cash on Deposit to Pay Coupons, 8,694.50 8,694.50 Notes Receivable, 9,397.29 (2)$ 54,112,16 14,261.37 49,248.08 Accounts Receivable: Consumers, 237,594.24 216,803.02 12,751.75 8,039.47 Other, 21,727.17 17,939.26 1,604.43 2,183.48 Accrued Interest, 315.47 (3) 4,760.51 2,242.94 2,833.04 Materials and Supplies , 120.807.40 ^ 85.954.30 34.853.10 Total Current Assets , S 453.341.57 S 56.872.67 $ 381.196.37 $ 26.206.51 $ 104,811.36 SPECIAL DEPOSITS, $ 25.042.17 $ 16,34STTr" $ 6,700.00 SI17KING FUNDS - CASH AND ACCRUED INTEREST (Bonds Acquired through Sinking Funds are deducted from Funded Debt) , \ . . $ 7,457.38 $ 6.667.88 $ 789.50 DUE FROM AFFILIATED COMPAITIES: Blank Gas & Electric Company, (4)$ 1,146.56 $ 319.42 $ 827.14 Subsidiary "A", (4) 26,948.11 $ 26,885.61 62.50 Subsidiary "B", ' (4) 7,422.60 6,333 .38 1,089.22 Total Due from Affiliated ~~" Companies, $ 35,517.27 $ 33,2 18.99 $ 1,406.64 $ 889.64 DEFERRED CHARGES: * — Unamortized Debt Discount and Expense, $ 430,996.14 $ 417,713.40 $ 13,282.74 Unamortized Difference between Appraisal and Book Value of Property, 26,797.37 ' 28,797.37 Reorganization Expense, 175,415.10 175,415.10 Prepaid Insurance, Interest, and Taxes, 1,061.57 690.05 $ 219.27 152.25 Total Deferred Charges, $ 636:270,15 $ 56^^,816.55 $ 5l6.27 5 42,232.36 DEFICIT: • * * Deficit, per Exhibit "B", $ 80,302.55 (l)$ 10,612.94 $ 62,580.38 ♦$ 18,368.60 $ 46,703.71 Less Excess of Book Value of Net Assets of Sub- sidiary Companies at Dates of Acquisition Over Cost of Their Stocks, 37.528.31 (D* 37.528.31 Net Deficit, $ 42,774.24 $ 48,141.25 $ 62,580.38 *$ 18,366.60 $ 46,703.71 TOTAL, $7,771,275.51 $859,789.94 $7,059,749.43 $115,965.82 $1,455,350.20 ♦ Typed in red. t EXHIBIT "A" (Continued) - 1. FORM 37 BLANK GAS & ELECTRIC COHPAlfJT, ETC. BALANCE SHEET, DECEMBER 31, IS 19, ETC. LIABILITIES — ...CONSOLIDATION TOTAL ELIMINATIONS BLANK GAS. & ELECTRIC COMPANY SUBSIDIARY "A" SUBSIDIARY «B" 1 ) $200. 000. 00 1 )S510.400.00 !ti 3,612.07 1,148.44 PREFERRED CAPITAL STOCK (Shares $100.00 each),... ^ 500.000.00 C0L2J0N CAPITAL STOCK (Shares $100.00 eaxsh) , $ 755.500.00 FUNDED DEBT (Less Bonds Held in Sinking Funds),.. $5.485.000,00 CURRENT LIABILITIES: , ^ Notes Payable, $ 653,479.94 (2)$ 54,112.16 Acoounts Payable, 210,849.82 Consumers' Deposits, 34,611.73 Matured Funded Debt, 1,750.00 Matured Interest on Funded Debt, 18,762.27 Accrued Acoounts: Interest on Funded Debt, 50,430.84 Interest on Notes Payable, 5,981.26 Taxes, 22,122.36 Rents, 7.890.37 Total Current Liabilities,... $1,005.878.59 DUE TO AFFILIATED COMPANIES: Blank Gas & Electric Company, Subsidiary "A", Subsidiary "B", .' Total Due to Affiliated Com- panies , . RESERVES: Extraordinary Maintenajioe, $ 2,773.33 Doubtful Acoounts, 9,207 .64 Construction for Consumers 12.915.95 Total Reserves, $ 24,896.92 TOTAL, $7,771,275.51 500.000.00 1)$ 55.000.00 $4.850,000.00 755.500.00 $ 75.000.00 "ir 200.000.00 435. 400. Og 650 ; 066. 60 $ 56,872.67 $ $ 654,000.00 186,136.98 21,863.21 1,750.00 8,062.27 46,638.75 5,636.21 12,691.82 7.236.97 944,016.21 $ 2,650.00 3,053.58 5,480.08 209.49 481.98 653.40 50,942.10 21,659.26 7,268.44 10,700.00 7,404.16' 1,284.00 8,948.56 $ 12,528.53 $ 168,206T52 4}$ 33,218.99 4) 1,408.64 4) 889.64 $ 319.42 827. U $ 26,885.61 62.50 $ 6,333.38 1,089.22 $ 35,517.27 $ 1,146.56 $ 26,948.11 $ 7,422.60 629.04 6,083.91 2.373.71 9,086.66 $ 1,341.22 147.96 $ 1,469.16 2,144.29 1,782.51 10.394.28 g u]z^i.m $859,789.94 $7,059,749.43 $115,965.82 $1,455,350.20 NOTE: No provision has been made for depr eolation of property, or for Federal Taxes for the year 1919. en CH EXHIBIT "A" (Conoluded) - 2. FQRLI 38 BLANK GAS & ELECTRIC COMPANY AND SUBSIDIARY COMPANIES STATEMENTS OF INCOME AND PROFIT AND LOSS FOR THE YEAR ENDED DECEMBER 31^ 1919^ AND CONSOLIDATION CONSOLIDATION TOTAL ELIMINATIONS BLANK GAS & ELECTRIC COMPANY SUBSIDIARY "A" SUBSIDIARY «B" OPERATING REVENUE: Eleotrlo Department , Gas Department , Total, • OPERATING EXPENSES AlTD TAXES: Eleotrlo Department: Operating Expenses: Production, Transmission, Distribution, . . ., Utilization, Commercial, New Business , General , • Total, Taxes , Total Eleotrlo Department Gas Department: Operating Expenses: Production, Transmission and Distribution,.... Commerolal, New Business, General , • • • Total, Taxes , Total Gas Department , • . . • Total Operating Ex- penses and Taxes,. OPERATING INCOME, OTHER INCOME: Rental of Plant , Miscellaneous Rentals , Dividends , Interest on Notes Receivable, Interest on Securities Owned, Other Interest , • Total, (2.) (2) ' 227.05 ^ $214.867.17 $287,713.66 $1,418,2^5.76 $256,66(:).&3 $2 14:667.1? $1,390,719.88 (1) $287, 486. 81 $1,418,225.76 $259,980.93 214.640.12 $1,665,366":^ 605, 30, 35, 10, 20, 87. 526.27 237.11 050 . 14 726.23 778.23 558.20 148 . 81 (1) $282, 412. 11 $ $ 794, 32 024.99 345.66 (2) 227.05 $282,639.16 826,370.65 $262,638.16 698, 30, 32, 6, 1: 78. 144.31 140.39 029.18 6?1.70 913.14 053.30 392 . 12 864, 23. 887, 494.14 476.54 970.68 $189,794.07 96.72 3,020.96 3,904.53 3,865.09 2,504.90 8>983.74 $212)170.01 8.669.12 $221,039.13" $ 130,349.76 12,677.96 8,888.75 1,738.67 19.863.02 (1)$ 6.334.70 $ 1731516.16 $ 6)334.70 12.506.54 $ 166)024.70 $ 6,334.70 $130,349.76 12,677.96 8,888.75 1,738.67 26.197.72 $l7d)852.6d 12 . 506 . 54 $192,359.40' 11.012.395.35 ; 592,96435" 5,600.00 5,376.83 403 . 19 1,166.56 943.25 $ 13,489783 $288.973.86 887.970.68 530)25$. 06 ;221.039.13 \ 36)941.60 1192.359.40 22:S07.77 [3)$ 17,580.72 1) 1,260.00 ;4) 15,000.00 5) 2,954.22 .6) 2,750.00 $ 23,180.72 1,897.48 15,000.00 1,735.46 3,916.56 $ 935.65 $ 39,544.94 $ 46,665.^7 T 70.00 $ 4,669.35 1,621.95 7.60 70.00 $ 6,298.90 GROSS INCOME -(Forward), $ 606,454.48 $38,284.94 $ 576,920.95 $39,011.80 $28,806.67 ♦ Typed In red. EXHIBIT "B" (Continued) - 1. FORM 38 BLANK GAS & ELECTRIC COl^ANY, ETC. STATEMENTS OF INCOME AlU) PROFIT AND LOSS, ETC. CONSOLIDATION TOTAL ELIMINATIONS BLANK GAS & ELECTRIC COMPANY SUBSIDIARY "A" SUBSIDIARY «B" $ 38,284.94 $ 575,920.95 $ 39,011>80 $ 28,806.67 $ 17,580.72 ;3)$ 17,580.72 $ 6) 2,750.00 !5) 2,954.22 $ 23.284.54 i 15,000.00 26,258.44 225,650.98 54,981.00 3,178.52 29,773.86 339.842.80" 237) 076. 15 83.86 126.57 17.791.15 2i;225.65 * GROSS INCOME - (Forward) , $ 606,454.48 DEDUCTIONS FROM INCOME: ^ «« ««« .. Rent of Plant, $ 26,258.44 Interest on Funded Debt, 263,708.75 Interest on Notes Payable, .*... 54,012.24 Other Interest, 3,439.22 Amortization of Debt Discount and Ex- pense, 30,116.03 Amortization of Difference between Ap- praisal and Book Value of Property, . 2.713.04 Total, S 380.247.72 NET INCOME, $ 226,206.76 PROFIT AND LOSS CREDIT - DISCOUNT ON BONDS PURCHASED FOR SINKING FUND, ^ ^?g!'99 C210SS SURPLUS FOR THE YEAR, $ 231,575.76 PROFIT AND LOSS CHARGES: ^ ^^ ^^^ ^^ . __ .._ ^^ Loss on Property Retired, $ 29,290.86 $ 29,290.86 nivldandA (4)$ 15.000.00 U 15.000.00 Dividends Titiii ! i! ...!!! 1. ii ! & ^^g-^9Q'g^ ^ 15.000.00 $ 29. 260.66 I ISlo O^^TO SURPLUS FOR THE YEAR, '. *"l2?lfll2 DEFICIT, JANUARY 1, 1919, . ^93, 200.39 DEFICIT, DECMBER 31, 1919, $ 90,915.49 LESS DEFICIT AT DATE OF ACQUISITION BY BLANK GAS & ELECTRIC COMPANY, 10,612.94 NET DEFICIT, DECEMBER 31, 1919, $ 80,302.55 $ 40,807.77 1,901.60 134.13 342 . 17 2.713.04 45.898.71 17;C92.04 4.675.00 694.00 $ 15,600.00 $ 24l!753 .lS $ 21,226.63 *$ 16,396. 04 I 212:462.29 1 6:220.65 *$ 16,398.04 275.042.67 * 12.147.95 30.305.67 ■? 62;580.38 *$ 18;366.60 $ 461703.71 ♦ 22.034.58 32.647.52 $ 62,580.38 $ 3,665.98 $ 14,056.19 ♦ Typed in red. NOTE: No provision has been made during the year for depre- ciation or for Federal taxes. 1,000.00 H. B. MbGlnnaaa, " 5-1/25& 5,000.00 Kearney & Davia, ■ 5J 500.00 T. L. Miller, Feb. 27, 1918 ejt 2,300.00 H. B. O'Connor, Not. 3, 1917 55^ 10,800.00 J. C. Hewitt (25 notea due monthly) Apr .6, 1918, to Apr. 6, 1920 6^ 7,300.00 A. Wolf (11 notea due queirterly) , • . May 14,1919,to Not. 14, 1921 6^ 5,500.00 8. E. Mergner, Feb. 5, 1921 5> 5,000.00 J. W. Geyer. Demand 6^ 1,000.00 M. 0. Me inking (53 notea due month- ly), Not. 6, 1919, to Apr. 6, 1924 6^ 5,350.00 O'Donnell & O'Hanlon, Mar. 6, 1921 &f> 11,000.00 J« C. Bender (Balance of note for $200.00), Demand Qfo 68.50 L. M. Colton, Feb. 26, 1920 6^6 537.45 L. Hellwig,'. Jan. 15, 1920 6% 2,500.00 Chaa. and Elizabeth Nea line, *. Deo. 16, 1922 5% 5.500.00 TOTAL, $82.814.74 Real Eat ate Mortgage Chattel Mortgage 20 Shared Blemk Savings Bank Stock Chattel Mortgage Real Eat ate Mortgage Not aeoured Paid-up Life Inauranoe Policy for $2,500.00 Endorsement of L. J. Daly, R. Daly, and J. C. 0*Donnell Real Eatate Mortgage M Not secured Chattel Mortgage Endorsement of Berger & Blumenthal Not aecured - Employee SaTings bank book - Balance $650.00 Endorsement of L. M. Joraa Real Eatate Mortgage EXHIBIT "A" SCHEDULE #1 fO 173 FORM 40 THE BLANK COMPANY INVESTMENT SECURITIES. DECEMBER 31, 1919 DESCRIPTION PAR VALUE BOOK VALUE ESTIMTED MARKET VALUE BONDS: American Telephone & Telegraph Company 6s, 1922, $5,000.00 $ 4,962,50 $ 4,950,00 Baltimore & Ohio Railroad Con- vertible 4-1/28, 1953, 15,000.00 12,456.25 8,550.00 Lehigh Valley Railroad 68, 1928 5,000.00 5,077.50 5,000.00 Missouri Pacific Railroad Gen- eral 4s, 1975, 10,000.00 6,418.75 5,525.00 Pennsylvania Railroad General 5s, 1968, 10,000.00 9,625.00 8,962.50 Public Service Corporation of New Jersey General 5s, 1959, 5,000.00 4,718.75 2,975.00 Southern Railway Development and General 4s, 1956, 15,000.00 11,217.50 9,150.00 United Kingdom of Great Britain and Ireland 5-1/28, 1921,... 5,000.00 4,925.00 4,775.00 United States Liberty Loan Bonds : First Converted 4-1/48, 10,000.00 10,000.00 9,350.00 Second Converted 4-1/48, ... . 10,000.00 10,000.00 9,220.00 Third 4-1/48, 20,000.00 20,000.00 18,956.00 Fourth 4-1/48, 20,000.00 20,000.00 18,440.00 Victory 4-3/45i Notes, 25,000.00 25,000.00 24,735.00 Total Bonds, $144,401.25 $130,588.50 STOCKS: John Doe & Company, Inc., 29 Shares, $2,900.00 $ 2,900.00*$ 3,500.00 New York Central Railroad Com- pany, 100 Shares, 10, 000 .00 7, 450 .00 6, 950 .00 Pennsylvania Railroad Company, 100 Shares, 5,000.00 5,347.50 4,025.00 United States Steel Corpora- tion Preferred, 50 Shares,.. 5,000.00 5,500.00 5,687.50 Total Stocks, $ 21,197.50 $ 20,162.50 TOTAL, $165,598.75 $150.751.00 ♦ Information furnished by the President of the Blank Company. EXHIBIT "A" SCHEDULE #1 174 FORM 41 THE BLAHK COMPANY PROPERTY, LESS RESERVES FOR DEPRECIATION, DECEMBER 31, 1919 GROSS BOOK DEPRECIATION NET BOOK VALUE RESERVES VALUE PROVIDENCE: Land, $ 150,000.00 $150,000.00 Buildings, 327,261.00 $70,257.35 257,003.65 Machinery, 146,074.78 97,373.35 48,701.43 Power Plant Equipment , 43, 032 .22 18, 178 . 27 24, 853 .95 Factory Furniture, Fixt\ixeB, and Appliances , 48,673.15 23,809.20 24,863.95 Seml-dxirable Tools - Inven- tory, 22,935.69 22,935.69 Office Furniture and Appli- ances, 29,200.22 15,103.42 14,096.80 Automobile Trucks - Inven- tory, 6,350.00 6,350.00 Horses, Wagons, and Harness - Inventory, 3,215.00 3,215.00 Total, $ 776, 742 .06 $224, 721 . 59 $552, 020 .47 HARTFORD: " Land, $ 28,250.00 $28,250.00 Buildings, 59,215.26 $ 4,726.41 54,488.85 Machinery, 144,773.63 39,918.87 104,854.76 Factory Furnitvire, Fixtures, and Appliances, 14,476.16 4,862.42 9,613.74 Semi-dxirable Tools - Inven- tory, 8,182.99 8,182.99 Office Furniture and Appli- ances, 670.54 172.20 498.34 Total, $ 255,568.58 $ 49,679.90 $205,888.68 TOTAL, $1, 032', 310 . 64 $274, 401 .49 $757, 909 . 15 EXHIBIT "A" SCHEDULE #1 FORM 42 BLANK PAPER MANUFACTURING COMPANY COST OF SALES, PAPER MILL, FOR THE YEAR ENDED DECEMBER 31, 1919 175 TONS AMOUNT COST OF PRODUCTION: Materials: Sulphite, Oto Make, 1,285.851 $ 94, 863 ,62 Sulphite, Purohased, 55.583 3,610.79 Ground Wood, Own Make, 1,637.650 48,583.18 Ground Wood, Pxirohased, 1,231.537 38,792.10 Paper Stook, 170.975 6,572.06 Wrappers, 20.995 889.82 Alum, 54 .900 2, 122 .58 Color, 883.95 Size, 3.446 187 . 02 Total Materials, 4,460.937 $195,505712" Conversion: ,^±=3=10. Superintendence, $ 4,735.63 Labor, 21,346.12 Felts and Jaokets, 9,908.33 Canvas, 2,056.44 Wires , 3,409 .34 Belting euid Hose, 2,165.75 Lubricants, 612.09 Finishing - Labor and Material, 1,854.42 Repairs - Labor and Material, 18,893 .34 Steam Production: Coal, 3.509.939 20,493 .75 Labor and Other Expenses, 6,708.83 Electric Light and Power Purchased, 1,590.07 Depreciation, 7,532.34 General Mill Expenses, 3.609.15 Total Conversion, $104, 915. 60 Total Cost of Production, 3,592.871 $300,420.72 LESS TRANSFERS: To Sheet Converting Department, 454.211 $ 35,805.18 To Roll Converting Department, 910.892 86,686.47 To Folded Converting Department, 652.2 75 61,426.31 Total, 2,017.378 $183,917.96 REMAINDER - COST OF PRODUCTION, PAPER MILL, .. . 1,575.493 $116,502.76 LESS INCREASE IN INVENTORY, 9.298 1.344.53 COST OF SALES, 1,566.195 $115,158.23 STATISTICS Tons Stock Used, 4,460.937 Paper Produced, 3,592.871 Loss on Stock in Conversion, 868.066 Ratio to Stock Used, 19.46^ Coal Used Per Ton of Paper Produced ,977 EXHIBIT "B" SCHEDULE #1 176 FORLI 45 THE BLAITK HOTEL DEPARTIvIENT OPERATIONS FOR THJ YEAR ENDED MAY 31, 1920, AND COMPARISON V:iTH THE PRECEDING YEAR YEAR niDED i:tcpj:ase LIAY 31,1S20 ♦DECREASE ROQIiS REVEIRJE, $164,998.43 $30,358.82 EXPENSES : V;ag38 - Housekeeper, ilaids. Cleaners, etc., $ 11,239.31 $ 954.28 Linen, 6,147.32 2,924.15 Furnishings, 6,389.03 2,645.24 Laundry, 3,427.09 1,218.10 Board of Employees, 8,540.25 817.42 Miscellaneous, 3,612.91 1.044.79 Total, $ 39,355.91 $ 9,603.98 NET PROFIT, $125,642.52 $20,754.84 RESTAURANT^ SALES, $147,956.33 $46,034.83 COST OF FOOD SOLD, 95.685.28 12.569.82 GROSS PROFIT, $ 52,271. 05 $33>65.01 Ratio to Cost, 54.63fJ 32.01fi EXPENSES: Wages : Chef, Cooks, Bakers, Butchers, etc. $ 12,646.11 $ 2,570.17 Waiters, Checkers, Paixtrymen, etc., 16,085.23 3,146.42 Kitchen Fuel, 2,819.58 27.60 Laundry, 2,281.99 437.31 China, Glass, and Silver, 1,741.37 377.57 Linen, 1,751.63 1,022.65 Printing, 759.30 ♦ 47 .53 Flowers, 624.19 36.20 Music, 2,047.10 312.74 Board of Employees, 12,658.30 1,312.11 Miscellaneous, 3.260.79 ♦ 195.82 Total, $ 56,675.59 $ 8,999.42 NET LOSS, $ 4,404.54 ♦$24,465.59 CIGAR STAND SAIJES, $ 6,089.75 $ 627.54 COST OF GOODS SOLD, 3,917.8 5 ♦ 75.05 GROSS PROFIT, $ a^lTl.SO $ 703.59 Ratio to Cost, 55. 43^^ 18.67^^ EXPENSES - WAGES, BOARD OF ELIPLOYFES, AND LICENSE, 649.00 86.12 NET PROFIT, $ 1,522.90 $ 617.47 • Typed in red. EXPIIBIT "B" SCHEDULE #1 (Continued) - 1. FOmi 43 TEE BLANK HOTEL DEPARTIvIENT OPERATIONS FOR THE YEAR ENDED MAY 31, 1920, ETC 177 YEAR ENDED INCREASE MAY 31,1920 *DECREASE BAR SALES, $ 75, 533 . 71 $48, 937 . 81 COST OF GOODS SOLD, 21,295,33 11,257.16 GROSS PROFIT, $ 54,238.38 $37,680.65 Ratio to Cost, 254.70fg Qd.Jd'fo EXPENSES: Wages, • $ License , • Board of Employees , Glassware, etc., Laundry, Miscellaneous, • • 5,325.41 $ 1,500.00 931.55 560.24 ♦ 116.59 327.64 762.50 83.67 92.14 19.58 47.62 821.23 Total, $ 8,761.43 $ NET PROFIT, $ 45,476.95 $36,859.42 NEWS STAND SALES, COST OF GOODS SOLD, GROSS PROFIT, Ratio to Cost, EXPENSES - WAGES AND BOARD OF EMPLOYEES $ 1,719.55 *$ 1,608.70 $ 110.85 *$ 6.885i ♦ 327.16 267.07 82.93 350.00 23.31^5 37.75 NET LOSS, $ 216.31 $ 387.75 TELEPHONE REVENUE, $ 6,435.01 $ 618.72 EXPENSES: Tolls and Service, $ 5,940.76 $ 467.19 Less Amount Charged to General Ex- penses, 1,895.65 41.87 Remainder, $ 4,045.11 $ 425 . 32 Wages, 1,746.55 219.22 Boeird of Employees , 574.10 59.73 Total, - $ 6,365.76 $ 704.27 85.55 NET PROFIT, $ 69.25 ♦$ ♦ Typed in red. EXHIBIT "B" SCHEDULE #1 (Concluded) - 2, FORM 44 THE BLANK COMPANY DEPARTMENT OPERATIONS FOR THE YEAR ENDED MAY 31, 1920 TOTAL It All .DEPARTMENTS, "B" "0" "D" NET SALES, $3,691,253.28 $2,229,402.22 $1,127,616.85 $230,830.59 Ratio to Total, lOO.OOfg 60.39f> 30.55fa 6.25^ COST OF GOODS SOLD: Materials, $2,462,793.12 $1,673,839.42 $ 562,769.86 $167,535.01 Containers and Labels, 74,442,91 50,763.72 15,532.54 6,029.02 Freight Inward, 25,283.42 17,275.32 5,677.64 1,725.29 Drayage Inward, ♦fa) 4,235.19 2,901.12 952.92 275.28 Receiving Expenses, (a) 4,628.77 2,206.50 1,548.20 440.20 Labor, 165,465.78 97,232.45 54,457.03 7,579.33 Repairs to Mixing Machinery, 15,355.89 11,482.83 3,286.67 204.53 Depreciation of Mixing Machinery, 3,464.53 2,720.00 612.93 56.18 Miscellaneous Supplies and Expenses, 2,300.54 1,548.32 623.67 99.25 Total, $2,757,970.15 $1,859,969.68 $ 645,461.46 $183,944.09 GROSS PROFIT, $ 933,283.13 $ 369,432.54 $ 482,155.39 $46,886.50 Ratio to Net Sales, 25.28f9 16.57fj 42.75^ 20.31^ Ratio to Cost of Goods Sold, 33.84^ 19.86^ 74.70^ 25.48^ SELLING AND DELIVERY EXPENSES: Salesmen's Salaries and Coimiss ions, $ 147,560.70 $ 89,601.20 $ 44,192.85 $ 9,406.50 Traveling Expenses, 65,713.64 39,786.79 21,521.62 3,264.58 Advertising, (b) 89,176.55 30,029.45 47,404.01 7,324.94 Shipping Department Expenses, Cc) 7,683.92 4,641.08 2,343.60 476.40 Drayage Outward, ♦ (c) 4,235.19 2,558.07 1,291.74 262.59 Total, $ 314,370.00 $ 166,616.59 $ 116,753.82 $ 20,735.01 DEPARTMENT PROFIT, $ 618,913.13 $ 202,815.95 $ 365,401.57 $26,151.49 Ratio to Total, lOO.OOf* 32.77^ 59.04^ 4.225i Ratio to Net Sales, 16.76^ 9.10^ 32.40^ 11.32fo Ratio to Total Cost and Selling and De- livery Expenses, 20.14fg lO.OOfa 47.93^. 12.77f. ♦ Total expense arbitrarily divided equally between inward and outward. a) Apportionment to departments based upon the ratio of the purchases of each to the total. b) Apportionment to departments as estimated by the company. c) Apportionment to departments based upon the ratio of the net sales of each to the total. $103,403.62 2.81^ $ 58,648.83 2,117.63 605 . 17 105.87 433.87 6,198.97 361.86 75.42 29.30 $ 68,594.92 $ 34,808.70 33.66^ 50.74^ $ 4,360.15 1,140.65 4,418.15 222.84 122.79 $ 10,264.58 $ 24,544.12 3.97^ 23 . 735i 31.12fg EXHIBIT "B« SCHEDULE #1 00 179 FORM 45 THE BMHK COMPANY STATEMENT OF CASH RECEIPTS AND DISBURSEMENTS FOR THE MONTH OF MAY, 1920 BALANCE ON DEPOSIT, MAY 1, 1S20, $ 25,476.67 RECEIPTS: Accounts Receivable, $128, 133.56 Cash Sales, 14,019,95 Rentals, 650 .00 Sale of Scrap, 121.28 Interest on Bank Balances, 267.42 Collections for Telephone Calls 37.50 Railroad Claims, 269 .04 Refiind of Overpayment of Ex- penses, 76.09 Total Receipts, • 145,574,84 Total, $169,051.51 DISBURSEMENTS: Purchase Ledger, $ 76, 224 . 13 Wages, 39,425.96 Rent, 2, 500 .00 Taxes, 1,916.47 Water, 312.92 Contribution, 500.00 Sundry Expenses, 2,319.22 Total Disbursements, 123,198.70 BALANCE ON DEPOSIT, MAY 31, 1920: National Bank of Commerce, $ 39,112.41 Bankers Trust Company, 6,740.40 $ 45,852.81 180 FORM 46 THE BLANK ASSOCIATION STATEMENT OF CASH RECEIPTS AND DISBURSEMENTS FOR THE MOUTH OF MAY, 1920, AND THE SIX MONTHS ENDED IJLAY^dl, 1920 SIX MONTHS MONTH OF ENDED MAY, 1920 MAY 31, 1920 BALANCE AT BEGINNING OF PERIOD, $18, 971^82 $ 56,159.96 RECEIPTS: General Subscriptlona, $37,484,79 $197,360.89 Membership Fees, 1,980.00 2,620.00 Loans on Notes Payable, 30,000.00 Interest on Liberty Loan Bonds and Bank Balances, 348,57 1,097,48 Employees - On Subscriptions for Liberty Loan Bonds, 14.00 164,00 Total Receipts, $39,827,36 $231,242.37 Total, $58,799,18 $267,402.33 DISBURSEMENTS: Extension Department, $ 8,927.72 $ 50,338,58 Campaign Department, 2,576.50 19,663.29 Publicity Coxacittee, 4,281.73 25,066,58 Finance Committee, 5,029.28 21,219.17 Foreign Organizations, . , . , 3,756,89 Advances for Traveling Expenses (Less Expenditures Transferred to Other Accounts) , 550.00 1,100,00 Conventions, 19,635,08 Administrative, 2,171.03 13,525,53 Central Office: Salaries, 3,999,25 20,783.68 Telephone and Telegraph, 5,459.59 14,865.42 Office Supplies, 151.07 1,483.20 Printing and Stationery, 94.18 2,351.61 Postage, 277,88 1,696.59 Office Equipment, 29.75 1,764.31 Miscellaneous, 24.17 213.20 Advances to Chicago Bureau, ♦ 538,16 1 000.00 Chicago Bureau Expenses, 6,028.80 28*543 .*80 Nots3 Paid, 5,000,00 25,000.00 Interest on Notes, 854,17 2 435 47 Total, $44,916.96 $254 '442! 40 Less Charges to Expense Accounts as above for postage in excess of actual disbursements therefor, ♦ 30^ 87 391^42 Total Disbursements $44,947,83 $253,550.98 BALANCE AT END OF PERIOD, $13,851.35 $ 13.651.35 Typed in red. 181 FORM 47 THE BLANK PROPAGANDA SOCIETY STATEMENT OF CASH RECEIPTS AND DISBURSEMENTS FROM SEPTEMBER 11, 1919, TO APRIL 30, 1920 ♦TOTAL NEW YORK OFFICE WASHINGTON OFFICE RECEIPTS: Contributions: National Headquarters, $32,184,57 $32,184.57 Washington, 25,091.90 25,091.90 Special Campaign, 15 > 100,00 15.100.00 Total, $72,376.47 $72,376.47 Advances by New York Office, $23,592.67 Interest on Deposits, 12.15 12.15 Misoellsuieous, 50.55 5Qf$$ Total Receipts, $72,439.17 $72,427.02 $23,604.82 DISBURSEMENTS: Field Work: Advances, $ 520.00 $ 160.00 $ 360.00 Personal Expenses, 2,294.10 1,191.20 1,102.90 Meeting Expenses, 14,137.96 14,015.16 142.80 Campaign Expenses, 1,220.13 256.20 963.93 Salaries, 2,458.33 1,633.33 825.00 Display Advertising, 455.00 455.00 Total, 7 $21,105.52 $17,710.89 $ 3,394.63 Literature, 15,814.06 8,235.54 7,578.52 Office Rent and Supplies, 1,573.17 641.18 931.99 Office Salaries, 5,176.07 3,057.36 2,118.71 Addressing Clerks' Salaries,. 2,054.44 2,054.44 Office Equipment, 941.75 425.00 516.75 General Publicity, 4,798.50 4,788.50 10.00 Advances to Washington Office, 23,592.67 Miscellaneous, 2,518.90 1,833.80 685 . 10 Total Disbursements, $53,982.41 $60,284.94 $17,290.14 BALANCE, APRIL 30, 1920: On Deposit: Guaranty Trust Company, New York,.... $12,142.08 $12,142.08 Riggs National Bank, Washington, 6,139.66 $ 6,139.66 On Hand, 175.02 175.02 TOTAL, $18,456.76 $12,142.08 $ 6,314.68 ♦ Not including inter-office transfers. NOTE: The ViUshington office was opened November 20, 1919. 182 FORM 48 THE BLANK SOCIETY STATEMENT OF CASH RECEIPTS AND DISBURSEMENTS FOR THE YEAR ENDED DECEMBER 31, 1919 RECEIPTS OF INCOME: Dues, $17, 100 .00 Special Contribution for Payment of Ejqpenses, 1,000.00 Interest on Securities, 890.50 Interest on Bank Balances, 67.58 Total, $19,058.08 DISBURSEMENTS OF EXPENSES: Salaries, $ 8,525.16 Printing, Stationery, and Postage, Office Rent, Telephone, etc.,... Traveling E]q)enses of Secretary, Office Equipment, Annual Dinner - Net Cost, Interest on Loans, 3,412.94 1,967.52 312.90 167.25 1,267.14 212.50 Total, NET INCOME, 15.865.41 $ 3,192.67 OTHER RECEIPTS: Membership Fees, Loan, Collections from Employees on Liberty Loan Bond Subscript Ions, $ 600.00 5,000.00 350.00 Total, 5.950.00 Total, $ 9, 142.67 OTHER DISBURSEMENTS: Purchases of Securities, Paxtlal Payment of Loan, $ 4,237.50 3,000.00 Total, 7.237.50 EXCESS OF RECEIPTS OVER DISBURSEMENTS FOR THE YEAR, $ 1,905.17 BALANCE, JANUARY 1, 1919, 816 .90 BALANCE, DECEMBER 31, 1919 - ON DEPOSIT WITH THE EQUITABLE TRUST COMPANY OF NEW YORK, $ 2.722.07 183 FORM 49 THE BLANK COMPANY JOURITAL ENTRIES NECESSARY TO ADJUST THE BOOKS AS OF DECEMBER 31, 1919, TO CONFORM TO EXHIBIT "A" LAND, $ 375.45 TO BUILDINGS, $ 375 ,45 For transfer of charge to the latter ac- count, Aiigust 31, 1919, Voucher 8357 • 4i4t4c^4i4<4(4(4(««4(«#4t« MANUFACTURING EXPENSE, 30, 141.30 TO MACHINERY, For reversal of charges by the Cost De- partment, on factory orders, to the latter account, covering new machines installed during the year 1919, as these machines had already been charged to the Machinery account direct from the purchase invoices. (No adjustment of finished goods inventory is considered necessary.) ^9|c4ii|i]|i>t(4>3((#4t4i4t«4i«4> 30,141.30 BUILDINGS, TO RESERVE FOR DEPRECIATION OF BUILD- INGS, For transfer from the former acco\int of credits on account of depreciation. 3,995,46 3,995.46 EXHIBIT "C" (Continued) - 1. 184 FORM 49 THE BLANK COMPANY JOURI^AL ENTRIES NECESSARY TO ADJUST THE BOOKS. ETC, , DEPRECIATION OF AUTOMOBILE TRUCKS, $ 1, 250 .00 TO AUTOMOBILE TRUCKS, For reversal of the entry whereby the book value of an automobile truck was ap- preciated. He 4i)tc ♦ ♦ ♦ 4< ♦ ♦ ♦ ♦ 4> ♦ 4< ♦ AMORTIZATION OF PATENTS, 514 .48 TO RESERVE FOR AMORTIZATION OF PATENTS, For correction of amortization for the year 1919. $ 1,250.00 514.48 EXHIBIT "C" (Concluded) - 2. FORM 50 185 THE BLANK MERCANTILE COMPANY STATEMENT OF ASSETS AND LIABILITIES AT JUNE 21, 1919; REALIZATION AND LIQUIDATION THEREOF TO DECEMBER 31, 1919; AND ASSETS NOT REALIZED AND LIABILITIES NOT LIQUIDATED AT DECEMBER 31, 1919 — ASSETS — NET INCREASE BALANCE, THROUGSi JUNE 21, 1919 OPERATIONS(l) PROFIT OR "LOSS IN AMOUNT REALIZATION REALIZED AMOUNT TAKEN BALANCE, OVER B7 DECEMBER 31 « SUCCESSOR 1919 CASH, $ 42,273.82 NOTES RECEIVABLE, 369,081.47 ACCOUNTS RECEIVABLE: Customers, 312,701.78 $ 5,212.90 A. B. & Company, 83,246.94 The C. D. Company, 14,297.06 ACCRUED INTEREST RECEIVABLE, 1,659.26 212.95 MERCHANDISE, 173,398.20 INVESTMENT SECURITIES: G. H. Company First Mortgage Bonds, 45,078.62 I. J. & Company Preferred Stock, 12,330.89 FURIIITURE AND FIXTURES, 2, 762.50 THE SUCCESSOR COLIPANY, 113 , 845 . 85 TOTAL, $1,056,830.54 $119,271.70 $ 38,760.91 $ 3,512.91 ♦$ 6,750.19 290,626.53 $ 71,704.75 3,562.43 56,317.04 891.48 169 . 11 246,817.53 83,246.94 1,659.26 176,200.98 45,970.10 12,500.00 67,534.72 212.95 53,514.26 2,762.50 14,297.06 113,845.85 $47,065.01 $895,782.25 $195,729.18 $131,655.82 — LIABILITIES — BALANCE, JUNE 21, 1919 NET INCREASE THROUGH OPERATIONS(l) DECREASE THROUGH REALIZATION AND LIQUIDATION AMOUNT BALANCE, AMOUNT ASSUMED BY DECEMBER 31, LIQUIDATED SUCCESSOR . 1919 OTES PAYABLE, $ ACCEPTAIICES PAYABLE, ACCOUNTS PAYABLE: Trade Creditors , K. L. & Company, Inc . , The M. & N. Company, ACCRUED TAXES, ACCRUED SALARIES, ETC • , CAPITAL STOCK, SURPLUS, 137,649.27 87 , 102 . 74 106,862.61 18,624.42 4,376.70 17,909.21 3,216.47 500,000.00 181,089.12 $5,216.95 $400,000.00 (2) 158,356.40 $137,649.27 56,312.68 55,769.34 18,624.42 3,167.04 15,412.72 3,216.47 $30,790.06 51,093.27 $ 1,209.66 7,713.44 100^000. 00 22,732.72 TOTAL, $1,056,830.54 $5,216.95 $558,356.40 $290,151.94 $81,883.33 $131,655.82 (1) Not including temporary increases subsequently offset by the movement of cash. (2) Decrease in Surplus: Distributions to Stockholders, $175,000.00 Expenses, Less Sundry Credits, 30.421.41 Total, $205,421.41 Less Net Profit from Realization of Assets, as above, 47.065.01 Net Decrease, • $158^356.40 m Typed in red. 186 CHAPTER YI COMMENTS For the great majority of accountants the comments un- doubtedly constitute the most difficult part of an audit report. Even to those possessing facility of expression the preparation of the comments is often very perplexing. This part of the re- port requires the exercise of judgment and discrimination to a degree not us\ially demanded in the preparation of the statements, practically the sole requirement for which is accounting technique. It may be stated as a postulate that comments should be limited to essentials. A multiplicity of perfunctory comments may obscure points it is especially desired to bring to the at- tention of the client. As importance is relative rather than absolute, the determination of what is important or essential de- mands the exercise of good judgment. Among things to be con- sidered are the size of the business; the familiarity of the recipients of the report with the practices and methods of pro- fessional accountants; any peculiar circumstances regarding the purpose or object of the audit; and what may be known of the characteristics of the person or persons primarily interested in the report. It is perhaps superfluous to say that the report should usxially be more detailed, as to both comments and state- ments, for a small business than for a large one. This is due not only to the fact that the audit of a smaller business is likely to be more detailed, but also that the executive of a 187 large business, or anyone else who may have occasion to read the report on the company, is usually intarssted only in the larger phases of its affairs. When a report is addressed to a person who is known to be unfamiliar with the methods of professional auditors it is usually desirable, regardless of the size of the business, * to comment in some detail upon the extent and method of verifi- cation of the several accounts. V/here a client is thoroughly familiar with such matters, as is usually the case in a large business, the assertion that the accounts have been audited is sufficient and it is unnecessary to go into detail regarding the particular items. However, it will be found that many clients prefer to have some mention made, either in the com- ments or in the certificate, of the verification of cash and other assets readily convertible into cash. This is easily understood, as verification of such items involves not only the integrity of the accounts but the honesty of officers and em- ployees. In other words, those charged with the custody of liquid assets are very likely to want the audit report to give them a clean bill of health. The character of the comments, no less than the state- ments, should be adapted to any peculiar features of the engage- ment. For example, if it be known that a report is to be sub- mitted to prospective lenders, the comments should deal particu- larly with current assets and liabilities, and should not include observations on the accounting system, information regarding errors disclosed but rectified, etc. In a report designed for a 186 prospective pxirohaser of the business it is often appropriate to include comments on its history, organization, and personnel. When certain definite information is sought it is usually desirable to summarize in the comments the information shown by exhibits and schedules, in order to bring out the salient facts. The accountant can usually render considerable assistance to his client by stating his conclusions instead of merely furnishing the client with the necessary data in the form of statements for the formulation of his own conclusions. This, however, does not mean that statement matter should merely be repeated. Regardless of what might appear to be the general re- quirements in an engagement, in the preparation of both state- ments and comments recognition should be given to any peculi- arities or even idiosyncrasies of the individuals to whom the report is to be rendered. For exsunple, it may be known that some person attaches a great deal of importance to the cash receipts and disbursements of a business, notwithstanding that the accounts are kept on an accrual basis. In that case it is, of course, in order to render a summary of receipts and dis- bursements, even though the classification of disbursements may be practically meaningless. It may also be known that a certain individual is especially interested in some department of the business - that it is, in fact, his hobby. In such a case a paragraph relating to the operation of that department may well be inserted in the comments. 189 In most reports designed to fuynlsh information to the client himself, it is generally thovight appropriate to include some comment on the adequacy of the accounting system and the efficiency of the office personnel. Of course, in an ordinary audit opportunity is not usually afforded for conclusive investi- gation along these lines, but such impressions as may be gathered are likely to be interesting to the client, especially if it is the first engagement. In what order should comments be arranged? Since most comments relate to the items of the statements, usually explain- ing their composition, changes in them during the avidlt period, or the extent or method of verification, it seems logical to arrange the comments in the order of the appearance of the items in the statements, Exhibit "A" talcing precedence over Exhibit "B, " etc. Remarks of a general nature may then conclude the comments, mless they are of an introductory nature, as a de- scription of the organization of the business, in which case they should be placed at the beginning of the comments. At this point it seems appropriate to state that the accountant may not safely ignore the importance of good language and style. An excellent dissertation on this subject is con- tained In an article by Mr, Horatio N. Drury appearing in "The Pace Student" for October, 1919, from which the following is quoted: "Paragraphs should be neither so long as to make it difficult to grasp the central idea, nor so short as to give the impression of a fragmentary de- 190 velopment of the thought. In many paragraphs, short topic sentences, sentences of summary, and sentences of transition can be used to ad- vantage • Long, round-about sentences should be avoided. Short, simply framed sentences are the easiest to understand, though as to the length of the sentence, the principle of variety should not be lost sight of; and, of course, there should never be any question about the grammatical correctness of a sentence. "As for words and phrases, the principle of simplicity obtains here as well. Heavy, polysyllabic words and cumbersome turns of phrase should give way to simple idioms and Anglo-Saxon words wherever possible. Colloqui- alisms and slang, it is needless to say, are always out of place in a report. Simplicity of style never requires the use of an expression that is not in reputable standing. Then, too, a midway course should be steered between pro- lixity of style, on the one hand, and imdue brevity, on the other. The facts should be made clear, but in as few words as possible. "As respects the tone of a report*, a few cautions may be helpful. Sarcasm and flippancy lower the tone of a report and should always be avoided. Dignity and impersonality of tone are to be striven for; ajid these qualities caji be secxired only when the acco\mtant expresses him- self in his report succinctly and directly, and in accordance with the canons of good taste. It is facts, not the embellishments of the facts, that clients look for and must have if they are to mend their technical and managerial mistakes of omission and commission." The desirability of impersonality of expression may well be emphasized. The effect of many reports has bean spoiled by the reiteration of the personal* pronoun. The use of captions is an import ajit feature of the pre- paration of text matter in a report. Some system should be adopted whereby the reader may be enabled to differentiate be- tween principal and siibsidiary captions. It makes little differ- 191 ence how this is done, but for the present purpose the following will be adopted: principal captions - capitals, centered, double underscore (hereinafter termed "center captions"); subsidiary to center captions - capitals, flush with left margin, without underscore (hereinafter termed "side captions"); subsidiary to side captions - capitals and small letters, indented two spaces from left margin, single underscore (hereinafter termed "sub- side captions"). To illustrate, assume that it is desired to comment upon this group of balance sheet items: INVESTMENTS, . • • $ 50,000.00 CURRENT ASSETS: Cash: General Funds, Coupon and Dividend Ac- counts, Accounts Receivable: Customers, • • Officers and Employees, • • $ 70,000.00 30,000.00 150,000.00 50,000.00 Total Current Assets, 300, 000.00 The following captions may be employed: IMVESTMENTS - $50.000.00 CURRENT ASSETS CASH General F\inds - $70,000.00 Coupon and Dividend Aoootints - $30,000.00 ACCOUNTS RECEIVABLE Customers - $150,000.00 Officers and Employees - $50,000.00 192 While it may be necessary to employ as many captions as the above, it is desirable to simplify the arrangement as much as practicable. In certain cases, for the sake of simplici- ty, the caption Current Assets may be omitted altogether; or if some general comment on all of the constituent items is made, or the comment on each item is limited to one paragraph, that caption may be retained and the subsidiary captions omitted. It is seldom necessai'y to employ the captions subsidiary to Cash, but it may be appropriate to use them if there are ex- tensive comments which do not apply to both items of Cash. The sajne principle applies to the captions under Accounts Receivable. Furthermore, it may not be necessary to comment upon some of the items at all. If, for example, under the head of Accounts Re- ceivable it is desired to cover only the customers' accounts, it is. wise to use the caption "Accounts Receivable - Customers - $150,000.00." When commenting upon items appearing in the balance sheet or any other statement it is usually well to include the amounts of the items in the captions, as above. It is unneces- sary to show the totals of groups such as Current Assets. It is sometimes desirable to consolidate the presen- tation and comments. There are also cases where it seems desir- able to include comments on particular items of a statement as part of that statement, that is, to make elaborate footnotes explanatory of, or qualifying, the several items. It may be well to caution against making assertions in the report that may lay the accountant open to prosecution for 193 libel. This is a pertinent matter in connection with reports on alleged fraud. In doubtful cases the accountant should consult an attorney, or be very careful to qualify any accusations of guilt he may make. Comments on Balance Sheet Items Following is an outline of the points which may be covered in fairly complete comments on the audit of a manufactur- ing or mercantile corporation: Cash . Unless the cash balance is detailed in the bal- ance sheet, the comments may show the composition of the balance, as to the amo\ints on deposit and on hand, either in total or in detail. It is seldom necessary to give more detail of cash on hand than the amount of each of the fimds. If any considerable amount of cash is represented by time certificates of deposit, that fact should be disclosed in the balance sheet. It should usually be stated whether or not the cash balances have been verified, and if so, in what manner, as by obtaining certifications from depositaries and by count of the cash on hand at a certain date. If there are certificates of deposit, it is in order to state that they have been inspected. If the working funds at the time of the count include an inordinate aniount of advances or expense items, that should be brought out in the comrnents unless the accounts are adjusted; and even then it may be desirable to mention the condition with 194 respect to advances. When the audit is made some time after the date of the balance sheets It Is usiaally impossible to determine what the composition of petty cash fxmds was at that date^ but it is appropriate^ if necessary^ to comment upon the condition of the f\2nds at the time of the count. Cash on deposit for restricted purposes^ such as interest and dividend accountSj sinking f\md deposits^ escrow deposits^ surety deposits^ etc., will of course be verified and may be commented upon in the same manner as current funds, but such deposits should not be classified as current assets xinless they represent funds for payment of current liabilities. Hotes and Acceptances Receivable. It is in order to state, in more or less detail, that these Instruments were in- spected, were found to have been collected subsequent to the date of the balance sheet, or were otherwise aoco\mted for. If the notes are secured it may be stated that the collateral has been inspected. If any of the items are past due, or are known to have been renewed from time to time, the fact should be mentioned. In this connection, it is appropriate to remark in the comments upon the adequacy of the reserve for doubtful notes. Accounts Receivable . Accounts receivable should usually be plainly designated in the balance sheet as to custom- ers' accounts and others, and should therefore require no com- ment in that regard. If accounts other than customers* are 195 shown in one item. It is often desirable to give their datails in the comments, together with any necessary remarks regarding their collectibility. It should not be necessary to state that the trial balances of the subsidiary ledgers have been checked unless the aggregate of the detail accounts is, or has been, out of balance with the controlling account. If the accounts have not been verified except to the extent of determining that the aggre- gate of the details has been found to be in agreement with the amount shown by the general ledger, it may be desirable to state the fact . If requests for confirmation have been sent to debtors, some information should be given in the comments regarding the proportion confirmed, both as to number of accounts so confirmed and their amount, and any important exceptions taken by the debtors. Some comment should usually be made on the condition of the customers' accounts with respect to their age and proba- ble collectibility - to give some indication of the actual value of the accounts and of the promptness with which col- lections are made. For this purpose it is seldom necessary to furnish a complete tabulation of the accounts by dates, but it is appropriate, in many cases, to sximmarize by periods the balances considerably in arrears. For example, it may be stated that "Included in the accounts at December 31, 1919, are charges dated as follows: 196 July 1 to September 30, 1919, $10,000.00 April 1 to June 30,1919, 5,000.00 January 1 to Maroh 31, 1919, 2, 000 .00 Prior to January 1, 1919, 1,000.00" While such information as the foregoing may be called for. It is generally unwise for an accountant to express an un- qualified opinion regarding the collectibility of apparently doubtful accounts without having discussed them with the person handling credits. It may be stated that "The accounts were reviewed with the credit man, in whose opinion all are col- lectible", provided the accountant has no reason to disagree with the credit man; however, it is better, if possible, to make a more positive assertion, e. g.: "The accounts were re- viewed with the credit man, and it appears that all but $ are collectible." Of course it is highly desirable, if possible, to state that "The accounts are current and appear to be col- lectible." It is well to show a comparison of the amount of doubt- ful accotants with the amoiant of the reserve against such accounts Accrued Interest (And Similar Items) Receivable . It appears to be unnecessary for the auditor to comment upon such items unless there are unusual circumstances, as, for example, when the client's computation has been found incorrect and not rectified. Inventories . Unless stated in the balance sheet, information should be given as to whether physical inventories 197 have been taken; also as to the prices used - whether they repre- sent cost (acttxal or estimated)/ market values, or are arbitrary. If physical inventories have not been taken, something should be said regarding the apparent accuracy of the book inventories as to quantities, and the system employed as to values. Such values usually represent cost, but they may be the latest cost or the average cost over a certain period. It is in order to state whether the accountant assiomes any responsibility for the quantitative feature of the inventory, and the extent of verification of computations and prices. If there is any evidence of the inclusion of obsolete goods at full prices that fact should be stated. Securities . It is appropriate to remark that securi- ties o\7ned or held for others (such as employees' Liberty Loan bonds) have been inspected or have been confirmed by pledgees or depositaries » In the case of temporary investments, if the market value is materially over or under the book value that fact should be mentioned, unless it is disclosed by the balance sheet or schedule. As to securities of subsidiary companies, unless a consolidated balance sheet is rendered, it is desirable, if practicable, to give some information regarding the value of the securities as disclosed by the books or reports of the sub- sidiary companies. Sinking Fiind . If the sinking fund provisions of mortgages are not being complied with, the fact should be the 198 subject of oomment. The verification of secixrities and cash in the sinking fund, by certification of the trustee, may be mentioned. Property . Unless the property is summarized, in the balance sheet or in a schedule by classes and locations, it may be well to give a sximmary in the comments. If the items of such classification are few, they are usually given in the balance sheet, and sometimes also in the comments; if many, they are usually shown in a schedule or not at all. It is often appropriate also to show a comparison of the depreciation reserves with the corresponding property accounts. Many clients like to be informed regarding the changes in the property accotants diiring the aiodit period. The detail to which this is carried out depends obviously upon the size of the business. If an appropriation system is maintained, it is inter- esting to compare the expenditures for additions to property with the amounts appropriated therefor. If the rates of depreciation are subject to criticism the fact should be noted in the comments. If the property ac- coxints have not been examined prior to the c\irrent audit period it is in order to make a qualifying assertion to that effect. Grood-Will, Patents, Trade-Marks, Etc. Usually ac- counts of this character require comment only in cases where some special interest attaches to the question of the considera- tion given by the company for such assets, where amortization 199 has not been computed correctly, or where there has been a charge to the account during the audit period. Deferred Charges,. In the case of ordinary advance pay- ments of expenses such as insurance, interest, and taxes, and also in the case of such items as discount on bonds, no comment seems necessary iinless there has been a considerable change dur- ing the period, or unless there is an xmadjusted difference of considerable atmount between the computations of the accountant and those of the company. As to expenditures which are being amortized over indefinite periods, such as organization expenses, or items held in suspense, some explanation or qualification may be necessary. Notes and Acceptances Payable. Unless a schedule of these liabilities is rendered, showing full details, it is usually appropriate to give in the comments some information re- garding their maturities, the rate of interest, and any col- lateral security. The information may be given in the form of a s\immary. However, these details may have no practical value if considerable time has elapsed between the date of the balance sheet and the rendering of the report. Mention may be made of the verification of the amounts by confirmation of the payees, if confirmations have been obtained. Accounts Payable . It is not necessary in most cases to state that the detail accounts payable are in agreement with the control. Of course. If they are not in agreement, the facts 200 should be stated. If the balance sheet Item includes any con- siderable amount representing other than trade acooijuits, it may be desirable to show its composition in the comments* Dividends Payable , It may be desirable to give in the comments details of this item as to whether common or preferred^ when declared, and when payable. Accrued Accoiaits (Payable) . It may be wise in some cases to explain the items under this caption, especially if the accountant has set them up himself. It may be ejqplained that the amount of accrued wages is a certain proportion of the pay-roll for a certain week. The class of taxes represented in the accrued account and whether the liability has been definite- ly determined or has been estimated upon a certain basis may also be pointed out. Any differences between the accountant's and the company's computations not sufficiently ixoportant to require rectification, may be made the subject of comment. Funded Debt . It is in order to comment upon the verifica.tion of secxirities issued and those in the treasury. r If there has been a change in the situation during the period under review it may be well to explain the change. Deferred Credits . The comments, if any, to be made on these items will depend upon the circumstances in each particxilar case, the principle being that the balance sheet description of the items may be supplemented by the comments for adequate explanation or q\aalification. 201 Reserves for Depreciation . The location of the com- ments on these reserves Is governed by the treatment of the reserves in the balance sheet; the subject should be covered under the head of the corresponding asset accounts If the re- serves are deducted; otherwise, under the head of liabilities • The comments will usually state the rates of depreci- ation for the several classes of property and summarize any charges to the reserves on account of replacements. They may also state whether the rates were applied to the book balances at the beginning or at the end of the period. While accountants are not expected to be engineers or appraisers they are not warranted in overlooking deficient or excessive provision for depreciation; and if the rates used, or their application, is grossly irregular the accountant should protect himself by a qualification in the comments, if not in the balance sheet itself. It may be mentioned at this point that it is often appropriate to direct attention to the comments by reference to them in the items of the statements. This is usually done by the expression, in parentheses, "See comments." Reserve for Doubtful Accounts . The principal point to be covered with regard to this reserve is its adequacy as indicated by the review of the accounts to which it relates. It may also be desirable to state the basis for the credits to the reserve and give information regarding the accounts written off against it during the period imder review. All this may be appropriately covered under the caption Accounts Receivable. 202 Reaerve for Taxes, in the opinion of the author, a provision for taxss not due is an accrued liability rather than a reserve, and the only justification for ever treating it as a reserve is on the ground of expediency. However, if it is shown in -.he balance sheet as a reserve the comments may amplify the description by explaining for what taxes provision is aade and the basijj for computation or estimate. Reserve fo r Sinking Fund . In the opinion of the writer, whenever such a reserve is encountered the accountant should call attention to the fallacy and the ultimate effect of carrying it, which have been fully discussed under the same caption in Chapter II. Reserve fo r Contingencies . Comment should be made upon the necessity, if any, for this reserve. For example, it may be stated that there is certain litigation pending or that the company is contingently liable in respect of certain en- dorsements or guaranties. Any charges to the reserve during the audit period should be explained. Any such reserve should be created by charges to Profit and Loss or Surplus; if not, the facts should be clearly stated In the report. Capital Stock. Something may be said regarding the verification or examination of the capital stock. It may be statad that the number of shares outstanding at the date of the balance sheet was verified by certification of the registrar 203 or transfer agent; that the certificate book and stock ledger were examined and foxind to show the number of shares called for by the general ledger; or that the transfers diiring the period were checked. If there is treasury stock it is in order to state that the certificates therefor were inspected. Any changes during the period in the capital stock outstanding, issued, or subscribed for will generally be com- mented upon. The consideration received by the company for new stock issues may be mentioned. S\xrplus . Surplus may appear in "che balance sheet as one or two items. If the entire surplus represents earn- ings, it is usually designated merely as Surplus; if not, the items are usually described by some such terms as Capital Sxirplus and Profit and Loss Surplus. This subject has been discussed more fully in Chapter II. As to Capital Surplus, it is important that the re- port give, either in the balance sheet or in the comments, full information regarding the source of the surplus. The com- ments should also furnish an explanation of any changes in the acco\int during the audit period. The Surplus or Profit and Loss Surplus as shown on the balance sheet seldom requires comment, sufficient information be- ing given in the supporting Statement of Income and Profit and Loss or in the summary contained in the balance sheet itself. However, it may be desirable to direct the client's special attention to certain charges or credits for the period, which 204 may or may not appear in the statements, or to furnish certain com-- parative figures or siimmaries by percentages, etc. - all of which may appropriately be given under the head of Operations, Some of these will be exemplified later. If adjustments have been made in the preparation of the statements, which have not been entered on the books, it is well to furnish at least a reconcilement of the amounts of surplus as shown by the books and by the balance sheet. Such adjustments are often shown in a separate exhibit, in the form of journal entries or other- wise, but frequently the same practical object can be accomplished in a more concise manner by explaining in the comments the changes that have been made in the surplus as shown by the books. Complete Comments Following appears an illustration of fairly extensive comments on a complete audit of the accoxints of a manufacturing corporation, prepared for the sole purpose of exemplifying the treatment of specific subjects and without any regard for cohesion or consistency. JOHN DOE & COMPANY, INC . COMLIENTS ON THE AUDIT FOR THE YEAR ENDED DECEMBER 51, 1919 CASH - $10,549.27 The cash balance at December 31, 1919, consisted of the following: On hand: New York office, $ 500 .00 Chicago office, 100.00 On deposit: .Hanover Nat ional Bank, New York, 5, 526 . 59 First National Bank, Chicago, 2,422.68 In transit from Chicago to New York, 2,000.00 Total, $10, 549 .27 205 The cash on hand at New York was verified by count on Jan\iary 6, 1920. The Chicago working f\ind was not verified ex- cept by reference to a report from that office. The balances on deposit were verified by certifications obtained from the banks, and the cash in transit was found to have been deposited in New York on January 3, 1920. We suggest that consideration be given to restoring to the cash account the amounts of several pay-roll checks which have been outstanding for more than three years. We understand that the payees have left the employ of the Company and that no claim for payment has been made. WORKING FUNDS - $2.000.00 The working funds are in the hands of salesmen, as evidenced by their reports on file. All expenses had been cleared at December 31, 1919^^ but as reports are made weekly it frequently happens that expenses are not charged in the proper month. We suggest that reports be made on the 10th, 20th, and last day of each month. NOTES AND ACCEPTANCES RECEIVABLE - $25,652.74 The notes and acceptances at December 31, 1919, were inspected by us, with the exception of those which had been col- lected from January 1 to 15, 1920. All are trade obligations, but two notes, aggregating $1,046,27, are past due. We are in- formed that these are regarded as collectible. 206 ACCOUNTS RECEIVABLE CUSTOMERS - $105,326.27 The customers were not requested to confirm their balances. The accounts were reviewed in detail and were discussed with the Treasurer as to their collectibility. It appears that the probable losses will not exceed $5,000.00, which is well within the amount of the reserve provided for that purpose. OTHERS - $5,976.43 These accounts are as follows: C. D., employee - loan, $1,000.00 Sundry employees - on account of Liberty Loan bond subscriptions, 3, 250.00 Debit balances in Accounts Payable ledger, representing overpayments, 427.56 Railroad claims, 1,298.87 Total, $5,976.43 The loan to C. D. is secured by a life insurance policy for $3,000.00 assigned to the Company, the cash surrender value of which is $1,126.47. Interest is being charged on the loan at 6%, The amount of $3,250.00 due from employees on their sub- scriptions for Liberty Loan bonds was found to be supported by the detail records. Following is a summary of the accounts represent- ing employees' subscriptions which had not been closed at December 31, 1919: Total Third Loan Fourth Victory Loan Loan Bonds subscribed for by em- ployees and purchased by the Company, $20,000.00 $5,000.00 $7,000.00 $8,000.00 Payments by employees, ... . 16,750.00 4,750.00 6,500.00 5,500.00 Balance due from employees, 3,250.00 250.00 ^500.00 2,500.00 Bonds delivered to employees 16,500.00 4,700.00 6,400.00 5,400.00 Bonds held for delivery upon completion of payments, . 3,500.00 300.00 600.00 2,600.00 207 We inspected the bonds held, aggregating $3,500.00, as shown above. The railroad claims are current, excepting two aggregat- ing $325.46, which were filed in 1918 and which have not been, prosecuted as diligently as possible. All of the claims appear to be valid. MARKETABLE SECURITIES - $93.000.00 The securities carried as temporary investments are as follows: Par Value Book Value United States Liberty Loan bonds and notes: Second, A^o, $25,000-00 $23,800.00 Fourth, 4-1/4^, 20,000.00 19,200.00 " Victory, 4-3/4^, 25,000.00 25,000.00 United States Treasury 4-1/2^ Certificates of Indebtedness, due May 15, 1920, 25,000.00 25.000.00 Total, $95> OOP .00 $93, 000 .00 The above book values represent cost. The securities were inspected by us, with the exception of the Victory Loan notes, which are pledged as security for a note payable of $20,000.00. INVENTORIES - $325,167.29 » Physical inventories of finished goods, work in process, and materials and supplies were taken by employees of the Company as of December 31, 1919, and priced at cost as shown by the records. 208 The book costs of finished goods appear to be slight- ly excessive, as credits to the Finished Goods Inventory account during the year based upon such costs resulted in a reduction of the book inventory at the end of the year to approximately $50,000.00 below the physical inventory, which amount is about 3fo x>f the recorded cost of goods sold. However, any over- valuation of finished goods is probably fully offset by an undervaluation of work in process, in the pricing of which no consideration is given to factory overhead expenses. Te recom- mend that the unit costs established for finished goods be reviewed with a view to their reduction in some cases, and that hereafter in the valuation of work in process all elements of factory cost be included. The inventory prices of materials and supplies, and the computations of all inventories, were tested by us. i:tvestme:its - $125,341.39 The certificates for the 1,000 shares of capital stock of the E. F. Company (the entire issue) were examined by us. We have not audited the accounts of that Company, but a report on file shows a surplus of $32,659.87 at December 31, 1919, and net income of $20,000.00 for the year 1919. Divi- dends amounting to 10^, $10,000.00, were received during the year. The item Real Estate, $25,341.89, represents business property in Bridgeport, Connecticut, which was taken over during 209 the year in settlement of notes receivable and interest, aggre- gating the amount at which the property is valued. The deed to the property was examined SINKING FUND - $58.347,65 The securities and cash in the sinking fund at December 31, 1919, were verified by certification obtained from the trustee. Following is a siimmary of the cash transactions of the trustee during the year: Balance uninvested, January 1, 1919, $ 678.24 Paid by the Company, in accordance with the terms of the mortgage, 12> 500.00 Total, $13,178.24 Purchases of the Company's bonds - $13, 000 .00 at 95fa, 12.350.00 Balance uninvested, December 31, 1919,.... $ 828.24 The discoxmt of $650.00 on the bonds purchased during the year was credit ied to Profit and Loss, as shovm by Exhibit PROPERTY (less reserves for depreciation) - $226^000. 00 We examined the larger entries in the property ac- counts from the organization of the Company in 1910, and audited in detail the entries during the year 1919. Except as other- wise noted, the balances appear to represent the cost of the property no7/ in service. The property is sxxmmarized by locations and book values as follows: 210 Total Chicago Boston New York Land,,. $ 75,000.00 $ 50,000.00 $ 25,000.00 Buildings, 125,000.00 75,000.00 50,000.00 Machinery and f ac- tory equipment, .. 100,000.00 50,000.00 30,000.00 $20,000.00 Automobiles, horses, and wagons, 5,000.00 2,000.00 1,000.00 2,000.00 Office furnit tire and appliances, . . 5,000.00 1,000.00 1,000>00 3,000.00 Total, $310,000.00 $178,000.00 $3.07,000.00 $25,000.00 LAND The book value of the land at Chicago was appreciated $20,000,00 during the year 1916 by credit to surplus. We are informed that this action was based upon an independent appraisal, and that the present valuation, $50,000.00, is regarded as conservative. BUILDINGS During the year 1919 a new fovmdry building was constructed at Boston, at a cost of $15,000.00, which is $2,500.00 in excess of the appropriation by the Directors. Considerable improvements were made to the Chicago machine shop building and were charged to the Repairs account. Attention is directed to the fact that under the Federal income tax law such charges cannot properly be treated as expenses; they should there- fore be capitalized and written off by periodical depreciation. MACHINERY AND FACTORY EQUIPMENT The entries in these accounts during the year 1919 are s\immarized as follows: 211 Chicago Boston Charges: Generator and installation, $10,000.00 Lathes, 3,000,00 $2,000.00 Miscellaneous new equipment, . '. • • 1.000.00 500 >00 Total, $14, 000 .00 $2, 500 .00 Credits: Sale of old lathes, • $ 500 .00 $ 300 .00 Loss on old lathes, charged to Reserve for Depreciation, 1.500.00 1.200.00 Total, $ 2^000.00 $1,500.00 Net Increase, $12, 000 .00 $1. 000 .00 AUTOMOBILES, HORSES, AND WAGONS The only change in these acco\ints during the year 1919 was for the pxirohase in New York of a new truck for $1,000.00, an old truck which cost $800.00 being turned in as part payment at a valua- tion of $300.00. The net charge to the account was $700.00, no con- sideration having been given to the loss of $500.00 on the old truck. This account should, therefore, be credited, and the corresponding Reserve for Depreciation charged, with $500.00. V/e have made no ad- justment, as we are informed that the matter will be rectified on the books in the month of January, 1920. RESERVES FOR DEPRECIATION Following is a summary of these reserves at December 31, 1919, and the rates of depreciation for the year 1919, applied to the balances of the respective property accounts at the beginning of the year: Per Amount Cent Buildings, $20, 000 .00 2-1/2 Machinery and factory equipment, 60,000.00 10 Automobiles, horses, and wagons, 2, 500.00 20 Office f\arniture and appliances, 1,500.00 10 Total, $84^000.00 212 The rate of depreciation of machinery md factory equipment appears to be excessive, as the amount of the reserve is now SOf. of the gross book value, and a considerable part of the machinery, etc., is comparatively new, We recommend that the reserve accounts be analyzed by loca- tions, and that separate reserves be carried, corresponding to the asset accounts. PATENTS - $114^000.00 The cost of patents has been amorti25ed by charging to ex- penses each year l/l7th of the original valuation. Consideration has not been given, however, to the proportion of value expired at the time certain patents were acquired. The original and present book values of the several patents, and the amounts written off as amortization, are as follows: Pat ent ftgit Original Valuation $ 68,000.00 51,000.00 34,000.00 17,000,00 • .Amortization. . . . 1919 Total' $ 4,000*00 3,000.00 2,000.00 1,000.00 $24,000.00 27,000.00 4,000.00 1,000.00 Present Valuation $ 44,000-00 24,000.00 30,000.00 13,000.00 Total, . . $170, 000 .00 $10, 000 .00 $56,000.00 $114,000.00 The correct amortization for the year 1S19, and to December 31, 1919, is computed as follows: Patent "A" "3" Year of Purchase 1913 1910 1917 1918 Year of Expir- ation 1923 1927 1932 1935 Amortization Per Annum 1/10 1/17 1/15 1/17 Year 1919 $ 6,800.00 3,000.00 2,266.67 1,000.00 To Decem- ber 31, 1919 $40,800.00 27,000.00 4,533.33 1,000.00 Total, $13;066.67 $73,333.33 213 From the foregoing it will be seen that the book value of patents should be reduoed $17^333.33 as of December 31^ 1919^ of which amount $3^066.67 is chargeable against the income for the year ended on that date* No adjustment of this difference has been made by us^ but we recommend that the accoxints be cor- rected during the year 1920. DEFERRED CHARGES TAXES PAID IN ADVANCE - $2,000.00 The balance of this account on the books is $500.00. We have made an adjiistment, as shown in Exhibit "C", setting up the proportion, $1,500.00, of Federal capital stock taxes for the year ending June 30, 1920, paid in advance at December 31, 1919. UNAMORTIZED DISCOUNT ON BONDS - $36,000.00 Following is a s\immary of this account for the year: Balance, January 1, 1919, $28, 400 .00 Discount on $200,000.00 first mortgage bonds sold at 95, 10.000.00 Total, $38,400.00 Less amortization - charged to income,... 2^400.00 Balance, December 31, 1919, $36^000.00 This balance of $36,000.00 represents the proportion of the total discount, $48,000.00, applicable to the remaining term of the bonds, fifteen years. REAL ESTATE OPTION - $500.00 This item represents a payment for an option to pur- chase certain real estate, which expires Febriiary 15, 1920. We 214 are informed that the company does not expect to exercise its option. UNAMORTIZED ORGANIZATION EXPENSES - $10,000.00 The organization expenses, which originally amounted to $40,000.00, are being aunortized by charges to Profit and Loss of $5,000.00 per annum. NOTES AND ACCEPTANCES PAYABLE - $121,346.27 These liabilities are summarized by payees and mat\irities as follows: Bank loans: Guaranty Trust Company, New York - Febrixary, 1920, . . Old Colony Trust Company, Boston: January, 1920, $25, 000 .00 March, 1920, 25^000^00 Trade acceptances - January and February, 1920, $ 50,000.00 50,000.00 21.346.27 Total, $121,346.27 The amounts of the bank loans were confirmed by the payees. Interest on those loans is at the rate of 5-1/2^. ACCOUNTS PAYABLE - $237.925.20 The composition of accoxints payable at December 31, 1919, is as follows: Unpaid Vouchers: Balance of general ledger accoxint, $215,346.94 Debit balances included therein treated by us as accounts receivable, 4,56&.94 Credit balances in accounts receivable treated by us as accounts payable, Purchase invoices not vouchered, but materials in- cluded in inventory - adjustment as shown in Exhibit "C", Taxes due, transferred by us from Accrued Taxes, $219,909.88 2,963.47 12,427.32 2,624.53 Total, $237,925.20 215 The net credit balances of \mpald vouchers as shoi^vn X:y the detail records aggregated $215,637,81, or $290.87 more than the balance of the controlling account in the general ledger. This difference has not been thoroxighly investigated by us, but it appears that the controlling account is correct. We recom- mend that the entries for payments of vouchers from October 1 to December 31, 1919, be checked as soon as possible. It was noted that there are several vouchers entered in 1918 which have not been paid. As to two of these, viz., #324t, $125.00, and #5964, $78.52, no explanation could be given. These matters should be investigated ACCRUED WAGES - $5>427.23 As the company, in closing its accounts, does not take into consideration accrued wages, we have set up a liability for one-half of the pay-roll for the week ended Jan\iary 3, 1920. ACGKUED INCOME AND EXCESS PROFITS TAXES - $25,000.00 The amoiint of this accrual represents the company's estimate of Federal taxes for the year ended December 31, 1919. The company will join in a consolidated tax return with other companies controlled by the same interests, and we are therefore unable to verify the adequacy of the provision. FIRST MORTGAGE. Si BONDS - $500^000.00 The amount of bonds outstanding at December 31, 1919, was verified by certification obtained from the trustee. 216 During the year, $200,000.00 of bonds were executed aifd sold at 95. This completed the authorized issue. RESERVE FOR DOUBTFUL ACCOUNTS - $8,250.00 • The balance of this reserve increased $3,250.00 during the year, as follows: Credits: Provision - ifo of gross sales, $10,000.00 Recoveries on aoooxints pre- viously written off, 850 . 00 $10,850.00 Charges - uncollectible accounts written of f> 7,600.00 Net Increase, $ 3,250.00 RESERVE FOR CONTINGENCIES - $100.000.00 This reserve was established during the year to provide against any loss that may be sustained through a possible adverse decision in a pending suit against the company for damages of $75,000.00 for alleged infringement of a patent. Ue are informed by the President that the amoxuit of $100,000.00 is ample provi- sion for any contingency that may arise which is not otherwise specifically provided for. PREFERRED CAPITAL STOCK - $500,000.00 COMMON CAPITAL STOCK - $375,000.00 The number of shares of preferred and common capital stock issued at December 31, 1919, v/as verified by certification obtained from the registrar. During the year 100 shares of treasury common stock were sold at par, for cash. Certificates for the 250 shares re- 217 maining in the treasury at December 31, 1919, v/ere inspected by us. INCREASE IN CAPITAL EMPLOYED IN THE BUSINESS The capital employed in the business was increased $128,018.67 during the year, as follows: Increase in assets: Current assets, less reserves against accounts receivable, $227, 652 ,49 Investments, 34, 958 .00 Property, less reserves for depreciation, 3,247.65 Deferred charges, 1^920.59 Total, $267,778.73 Less increase in liabilities and reserve for cont ingencies, 139, 760.06 Net increase in capital employed in the business, $128,018.67 Derived from: Increase in capital stock outstanding,.. $ 10,000.00 Surplus for the year, after providing for deprecia- tion, estimated Federal taxes, and contingencies, . $168,018.67 Less dividends declared and paid, 50,000.00 118,018.67 Total, $128,018.67 OPERATIONS Follov/ing are the percentages of increase in some of the major items of Exhibit "B" for the year 1919, as compared with the corresponding items for the year 1918: Net sales, , Cost of goods sold, Gross profit, Selling expenses, Per Cent. 26.47 15.63 69.83 6.52 218 General expenses: Salaries, 11.13 Other, • 4 . 32 Profit from operations, 96 .59 Income oredits, 8.56 Income charges, 17 .95 Net income, 126 • 17 The increase in the number of implements sold during the year, as compared with the preceding year, was 1249, or 5 •27^. The approximate turnover of finished goods and materi- als during the years 1919 and 1918 is shown as follows: 1919 1918 Finished goods inventory: Beginning of year, $150,000.00 $100,000.00 End of ydar, 200,000.00 150,000.00 Average, 175,000.00 125,000.00 Cost of goods sold, 700,000 .00 625, 000.00 Turnover of finished goods - times, 4 5 Raw materials inventory: Beginning of year, 50, 000 .00 30, 000 .00 End of year,.. 70,000.00 50,000.00 Average, 60,000.00 40,000.00 Value of materials in goods manufactured 300,000.00 240,000.00 Tiirnover of raw materials - times, ...... 5 6 The comparatively slow movement of stocks of finished goods and materials d\iring the year 1919, as shown above, which is due to unsettled labor and transportation conditions, \indoubt- edly explains to a large degree the increase in interest charges during the year. INSURANCE :The fire insurance in force at December 31, 1919, was as follows: 219 Buildings, Machinery and other equipment Merchandise, $100,000.00 100,000.00 200,000.00 The Inventory value of merchandise at that date viras approximately $325, 000 •00. As the policies carry the 80fo co- insurance clause, in event of partial loss the company could re- cover only about 10/13 of such loss. IThils the ins\irance on buildings, machinery, etc., is adequate to reimburse the company for the cost of the property less depreciation, that is, the net book value, it is probable that the company is not protected to the amount of the replace- ment value of the property, in view of the advance in costs. We recommend that this matter be investigated. It may be advis- able to have the property appraised. The liability insurance carried appears to be adequate. GENERAL We did not have access to the minutes of the meetings of stockholders and directors. The accounts and records are well kept v^ith the excep- tion of the voucher register; as to that, we are informed that there are extenuating, circumstances. The accounting system ap- pears to be subject to criticism only in respect of the lack of co-ordination between the general accounting and cost records. In our opinion the cost system should be made an integral part of the general accounting scheme. ^ m * * * 220 Condensed Comments The following is a condensation of the complete com- ments immediately preceding, prepared upon the assiimption that the client is not himself interested in most of the information contained therein, and that he desires to submit the report to a prospective lender. JOHN DOE & COMPAMY. IffC. COLIMENTS ON THE AUDIT FOR THE YEAR ENDED DECEMBER 31, 1919 GENERAL All the usual and necessary verifications of the ac- coxints incident to a complete audit were made by us, except that we did not have access to the minute book. NOTES AND ACCEPTANCES RECEIVABLE ACCOUNTS RECEIVABLE The notes and acceptances are all trade obligations, and, with the exception of $1,046.27, none is past due. The customers' acco\ints are reasonably current. It appears that such loss as may be sustained in the collection of any of these items will not exceed the amount provided in the reserve for doubtful accounts. Of the $5,976.43 of accounts receivable other than with customers, $4,250.00 represents secured advances to em- ployees and $1,298.87 represents claims against railroads. 221 MARKETABIiE SECURITIES These securities are as follows: United States Liberty Loan bonds and notes^ par value $70,000.00 - cost, $68, 000 ,00 United States Treasury 4-1/2^ Certificates of Indebtedness, due May 15, 1920 -* par value, 25,000.00 Total, $93,000.00 United States Victory Loan notes amounting to $25,000.00 are pledged as collateral to a note payable of $20, 000. 00 • INVENTORIES Physical inventories of finished goods, work in process, and materials and supplies were taken by employees of the company as of December 31, 1919, and priced at cost as shown by the records. The computations were verified by us, and the prices found to be approximately correct. INVESTMENTS The company owns all the stock of the E, F. Company, which is carried at par value, $100^000.00. We have not audited the accounts of that company, but a report on file shows a sxir- plus of $32,659.87 at December 31, 1919, and net income of $20,000.00 for the year 1919, one-half of which was paid in dividends. The real estate carried as an investment is business property in Bridgeport, Connecticut, which was taken over in settlement of a debt, at the amount of which the property is carried on the books. 222 PROPERTY The oompany has been conservative in its capital charges and provision for depreciation. It appears that the gross book values do not exceed the cost of the property^ except ing the land at Chicago^ valued on the books at $50^000.00^ which includes $20^CX}0*00 representing appreciation in the year 1916, PATENTS The company's patents are carried on the books at cost less amortization. However^ in the coznputation of amor- tization consideration has not been given to the proportion of value expired at the time certain patents were acquired. Ad- justment of these errors would effect a reduction of $17,333.33 in the book value at December 31, 1919, and of $3,066.67 in the net income for the year 1919 as shown by Exhibit "B." NOTES AHD ACCEPTANCES PAYABLE The notes and acceptances payable are siimmarized by classes and maturities as follows: Bank loans: January, 1920, $25,000.00 February, 1920, 50, 000 .00 March, 1920, 25, 000 .00 Trade acceptances - January and February, 1920, 21,346.27 Total, $121^346.27 223 ACCRUED INCOME AND EXCESS PROFITS TAXES The amoiint of this accrual represents the company's estimate of Federal taxes for the year ended December 31, 1919. The company will join in a consolidated tax return with other companies controlled by the same interests, and we are therefore unable to verify the adequacy of the provision* RESERVE FOR CONTINGENO'lES 7/e are informed by the President of the company that the amount of this reserve, $100,000.00, is ample provision for any contingency that may arise v/hich is not otherwise specifical- ly provided for. The only contingency which has been brought to our attention, other than on account of discounted notes receiv- able, as shov/n in Exhibit **A, ** is a suit against the company for damages of $75,000.00 for alleged infringement of a patent. 224 CHAPTER YII CERTIFICATES GENERAL REUARI^S Formal oertificates In an audit report may be made a separate part of the report, or may be appended to the balance sheet or other statement, or may form a part of the presentation, depending upon the circumstances of the case. It has been the experience of the author that when the client desires a formal certificate he usually wants it short and concise. This appears to be a good reason for separating the certificate from the pre- sentation or comments. If a complete audit has been made, and two or more statements are included in the report, it will generally be found preferable to render the certificate separate- ly. If only one statement is rendered, as in a balance sheet audit, it is usiially desirable to append the certificate to the statement certified. VARIETY OF FORMS Following is a simple form of separate certificate: JOHN DOE & COMPAIIY CERTIFICATE OF AUDIT I have audited the accounts of John Doe & Company for the year ended December 31, 1919, and I HEREBY CERTIFY that, in my opinion, the accompanying Bal- 225 anca Sheet as of December 31, 1919, and Statement of Income and Profit and Loss for the year ended that date are correct. (Signed) Richard Roe Certified Public Accountant • New York, March 10, 1920. Material qualifications regarding the verification of accounts should be embodied in the certificate, as the client is justified in publishing the certificate without the accompanying comments. If no specific qixalifications are included, the only alternative is to insert in the certificate "subject to the ac- companying comments". But this is very unsatisfactory. Follow- ing is a form exemplifying the inclusion of specific qualifica- tions in the certificate rendered separately: New York, March 10, 1320. Mr. John Doe, President, John Doe & Company, Inc., New York. Dear Sir: I have audited the accounts of John Doe & Company, Inc., for the year ended December 31, 1919, and I HEREBY CERTIFY that, in my opinion, subject to no provision having been made for depreciation of property or for 226 Federal taxes for the year» the aocompanylng Balance Sheet and Statement of Income and Profit and Loss correctly exhibit, re- spectively, the financial condition of the Company at December 31, 1919, and the results of its operations for the year ended that date. (Signed) Richard Roe Certified Public Accountant. It is sometimes desired to make specific reference in the certificate to certain features of the audit; also to bring out the fact that the books are in agreement with the accoiints as stated. These points are exemplified in the following: New York, March 10, 1920. To the Stockholders of John Doe & Company, Inc. I have made an audit of the accounts of your Company for the year ended December 31, 1919, including verification of all accounts representing cash and securities as of December 31, 1919, either by physical examination of such assets or by ob- taining certifications of depositaries and trustees as to their custody, and also including detailed examination of all charges to capital accounts during the year; and I Certify that, in my opinion, the accompanying Balance Sheet and Statement of Income and Profit and Loss are correct, and that the books are in agreement therewith. (Signed) Richard Roe Certified Public Accountant. 227 Following are forms of the audit oertifioate typed at » the bottom of a balance sheet: CERTIFICATE OF AUDIT I have audited the accounts of John Doe & Company for the year ended December 31, 1919, and certify that, in my opinion. the above Balance Sheet is correct. (Signed) Richard Roe Certified Public Accountant. New York, March 10, 1920. CERTIFICATE OF AUDIT Having audited the accounts of John Doe & Company for the year ended December 31, 1919, and for several years prior thereto, I certify that the above Balance Sheet and the accompanying State- ment of Income and Profit and Loss are correct. (Signed) Richard Roe Certified Public Acco\intant. New York, March 10, 1920. CERTIFICATE We have examined the accounts of The Black & White Company as of December 31, 1919. 228 No provision has ^caen made for doprecie^ticn, for Federal taxes, or for such loss as may be sustained on account of pending litigation. WS HEREBY CERTIFY that, with the foregoing exceptions, and subject to the Company's valuation of inventories, in our opinion, the above Balance Sheet is correct. (Signed) Gray & Bro;7n Certified Public Accountants New York, March 10, 1920. CERTIFICATE We have audited the accounts of Black, \7hite & Company as of December 31, 1S19; have tested the computations and prices of the inventories, which were, taken by employees of the Company and valued at cost; have verified the cash balances and securities; have exsimined all charges to property accounts; and WE CERTIFY that, in our opinion, the above Balance Sheet is a true and correct statement of the Company *s financial condition at December 31, IS 19, and that the books of the Company are in agreement therewith. (Signed) Gray & Brown Certified Public Accountants Nev; York, March 10, 1920 • 229 It will be seen that there Is a great variety of forms of certificate in use. The form -should be adapted in each case to the peculiar conditions. It will frequently be fo\xnd that the by-laws of a company require that a certified public accountant be employed and that he shall report upon certain specific matters or in certain language. For exsunple, one company re- quires that the certificate state that the "balance sheet is a full and fair balance sheet, and properly drawn up so as to ex- hibit a true and correct view of the state of the corporation's affairs." The English form 'of certificate which is used in re- ports on audits of companies reads in part somewhat as follows: "We certify that, in our opinion, the attached balance sheet is properly drawn up so as to exhibit a true and correct view of the state of the company's affairs, according to the best of our information and the explanations given to us, and as shown by the books of the company." qUALIFICATIONS The expression "in our opinion" is in quite general use. It hardly eunounts to a qualification, as it is utterly impossible for any one to express more than an opinion regard- ing most balance sheets. The phrase may be dispensed with if desired, unless the statement which is being certified to con- tains some item which particularly represents the accountant's opinion. Most clients regard the expression as innocuous, and therefore, unobjectionable. 230 Vhen certifying to the oorreotnese of a statement It Is considered proper to regard as part of the statement any footnotes and other e3q)lanatory or qualifying remarks appearing thereon. Qualifications regarding Inventories may be taken to Illustrate this practice. It Is comparatively seldom that auditors are en- gaged to supervise the taking of physical Inventories^ so that In most cases It Is Iznpractlcable for the auditor to form a very con- clusive opinion regarding the accxxracy of the Inventories as to quant It lesj ajfid It may be necessary for him to relieve himself of responsibility on this point by Inserting a qualification In the certificate. Some accountants always qualify the certificate as to the quantitative feature of Inventories; others make no mention of It, believing that they are not expected to verify quantities and that every one reading the report Is charged with knowledge of the usual practice In that respect; and still others Indicate any qualifications In the balance sheet Item. It appears that the best practice In most cases Is to q\iallfy the balance sheet Item whenever any qualification Is regarded as necessary. Assuming that It Is Impossible without the expenditure of a great deal of time to form an Intelligent opinion regarding the approximate correctness of the quantitative feature of the Inventory as a whole or In certain parts, and that Inquiry con- cerning the method pursued In the taking of the Inventory does not convince of Its accuracy, the question still remains as to the expediency of qualifying the report In view of the under- 231 standing with the client and the size of the business. 1/ the accountant decides that he should protect himself, or others, and If he has no special reason for doubting the accuracy of the inventories, he may state the items in the balance sheet which is being certified somer/hat as follows: Inventories as Taken by the Company: Finished Goods Work in Process Materials and Supplies. If, in axldition, the accountant has been unable to form an opinion regarding the accuracy of the Inventory prices, or if he has been definitely Instructed not to undertake their veri- fication, he may state the balance sheet caption thus: "Inven- tories as taken and valued by the company." If physical in- ventories have not been taken, the item may be expressed as "Inventories - Book Value." The practice of qiaalifying the balance sheet itself may apply to any of its items, and will be found quite effec- tive. There are cases, however, when it seems necessary to emphasize qualifications by repeating them in the certificate. 232 CmPTER YIII PRESENTATIONS TWO GENSRAL PRACTICES There are two general practices with regard to the form of presentation of audit report s. In both, the client is formally advised that the audit has been made and a table of contents of the report, as to statements, is given. Perhaps the majority of acco\inting firms then follow immediately with their comments (which are often concluded with a certificate), all appearing above the signature. Manifestly, the comments will then be read before the statements, which are regarded by the great majority of acco\intants as the most important part of their reports^ v/ith the possible exception of their certifi- cates. The alternative method, which is preferred by the author, is to submit the comments as a separate part of the re- port, completing the presentation with the signature without inclusion of the comments except by reference in the table of contents. By this method greater prominence is given to the statements without relegating the text matter to an inconspicu- ous place. This procedure is, of course, subject to change in exceptional cases; in fact, exceptions are so common in almost all phases of .the subject that it is sometimes difficult to see above them to what is regarded as the rule. Whichever method is adopted, the part of the report appearing above the signature should contain a terse description 233 of the work done and show what is rendered therewith. This latter should be so explicit that no misunderstanding can possibly arise concerning what constitutes the report. The subject of safeguards is covered more fully in Chapter IX. When the first part of the report is limited to a formal statement of what has been done and v/hat accompanies it as compris- ing the report, it is variously described as the letter, introduc- tion, or presentation. The word ''presentation" seems to be most appropriate and is employed in this work. FORMS OF PRESENTATION In the succeeding pages are illustrated a number of forms of presentation, designed to show the treatment under vary- ing conditions as to the number and character of statements rendered and the scope and purpose of the work performed. Following is a form of presentation that may be used, with amplification if necessary, in the great majority of cases: New York, March 10, 1920. Messrs. John Doe & Company, Nev; York. Dear Sirs: Pursuant to engagement, I have made an audit of your accounts for the year ended December 31, 1919, and submit here- with six pages of comir.ents and the following described exhibits: EXHIBIT ''A" - BALANCE SHEET, DECEMBER 31, 1919. 234 "B" - STATELCENT OF INCOME AND PROFIT AND LOSS FOR THE YEAR ENDED DECEIlIBER 31, 1919. Yours truly, (Signed) Richard Roe, Certified Public Accotintant. The following illustrates a more elaborate report as to statements, and also exemplifies the procedure in case only cer- tain qiaalifying comments are to be rendered: New York, March 10, 1920. A Mr, John Doe, President, John Doe & Company, Inc., New York. Dear Sir: In accordance with your request, I have audited the ac- counts of John Doe & Company, Inc., for the year ended December 31, IS 19, and submit herewith my certificate and the following described exhibits, schedules, and statement: EXHIBIT "A" - BALANCE SHEET, DECEMBER 31, 1919. Schedule — ^ #1 - Receipts and Expenditures on Uncompleted Contracts. 2 - Notes Payable. "B" - SUMLURY OF INCOMi: AND PROFIT AlID LOSS FOR THE YEAR ENDED DECElffiER 31, 1919. Schedule #1 - Profit on Completed Contracts. 2 - General Expenses. Statement #1 - Branch Office Expenses. 235 "C - JOURNAL ENTRIES NECESSARY TO ADJUST THE BOOKS AS OF DECEMBER 31, 1919, TO CON- FORM TO EXHIBIT "A". The Company's equipment was revalued by its officers as of December 31, 1919, resulting in a credit to Profit and Loss of $100,000.00. It appears that this appreciation repre- sents the increase in replacement values due to abnormal condi- tions. The valuation of materials and supplies as of December 31, 1919, is as shown by the books, no physical inventory having been taken. Tests of the inventory records indicate that they are approximately correct. Yours truly, (Signed) Richard Roe, Certified Public Accountant. Following is a form of presentation covering the audit of a group of companies: New York, March 10, 1920. Mr. John Doe, President, The A. B. Corporation, Nev; York. Dear Sir: Pursuant to engagement, I have audited, for the period from July 1, 1918, to December 31, 1919, the books and accounts of The A. B. Corporation and its subsidiary companies. The C. D, 236 Company and E. F. & Company, Inc. (tha latter from the commence- ment of tuslneas, March 15, 1919), and submit herewith seven pages of comments, my certificate, and the following described exhibits: THE A. B. CORPORATION AND SUBSIDIARY COMPANIES EXHIBIT "A" - CONSOLIDATED BALANCE SHEET, DECEMBER 31, 1919. "B" - SUMMARY OF CONSOLIDATED IHCOIIE AND PROFIT AND LOSS, BY PERIODS, FROM JULY 1, 1918, TO DECEMBER 31, 191S. THE C. D. COMPANY "C" - BALANCE SHEET, DECEMBER 31, 1919, AND JUNE 30, 1918, AND COMPARISON. "D" - STATEMENT OF INCOME AND PROFIT AND LOSS, BY PERIODS, FROM JULY 1, 1918, TO DECEMBER 31, 1919. E. F. & COLTANY, INC. "E" - BALANCE SHEET, DECEMBER 31, 1919. - STATEMENT OF INCOME AND PROFIT AND LOSS, FROM THE COMMENCEMENT OF BUSINESS, MARCH 15, 1919, TO DECEMBER 31, 1919. Yours truly, (signed) Richard Roe, Certified Public Accountant. 237 Following is a form of presentation covering a balance sheet audit, where only one statement is rendered: New York, March 10, 1920 • Messrs. Black and VThite, New York, Dear Sirs: Pursuant to engagement, we have made an audit of your accounts as of December 31, 1919, and submit herewith three pages of comments and a - BALANCE SHEET, DECEMBER 31, 1919. Yours truly. (Signed) Gray & Brown The following illustrates the manner of showing, with- out any comments, exhibits and schedules with different dates: New York, March 10, 1920. The Black & White Company, New York. Dear Sirs: Pursuant to engagement, we have audited the accounts of The A. B. Corporation for the year ended December 31, 1919, and submit herewith our certificate and the following described exhibits and schedules: V 238 EXHIBIT "A" - BALANCE SHEET, DECEMBER 31, 1919 AND 1918, AND COMPARISON. Schedule #1 - Investment Securitiea, December 31, 1919. "B'» - STATEMENT OF INCOME AND PROFIT AND LOSS FOR THE YEARS ENDED DECEMBER 31, 1919 AND 1918, AND COMPARISON. Schedule #1 - Cost of Groods Sold for the Year Ended December 31, 1919. Yours trulyi (Signed) Gray & Brown, The following form stoggests further variations: New York, March 10, 1920. Messrs. Black & Uhite, Nsv/ York. Dear Sirs: Pursuant to engagement, we have made an examination for the pxirpose of verifying your assets and liabilities as of December 31, 1919, and submit herewith the following described exhibits and schedule: EXHIBIT "A" - BALANCE SHEET, DECEMBER 31, 1919, WITH CERTIFICATE. Schedule #1 - Bonds, StQCks, and Other Securities Owned. cases: 239 "B" - STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1919 (Prepared from the books without verification) . Yours truly, (Signed) Gray & Brown, Certified Public Acooxintants A form similar to the following may be used in certain New York, June 10, 1920. Messrs. John Doe and Richard Roe, Aiiditing Committee, The Blank Trust Company, New York. Dear Sirs: In accordance with yo\ir request, we have collaborated with you in examining the accounts of The Blank Trust Company as of the close of business May 27, 1920. We coointed the cash and cash items on hajid and ascertained that the cash items were properly disposed of; we verified the cash balances and collec- tion items in the accoxints due to and from other banks and trust companies; we inspected the evidences of loans and the collateral thereto as called for by the records, and foimd that all collateral loans are properly secured, as indicated by the most reliable quotations available (those other than pub- lished quotations having been discussed with you); we verified the investment securities and found that the market value was 240 $27^633.19 less than the book value j we ascertained that the aggregates of the several classes of deposits as shown by the general books were in agreement with the detail account s^ but did not request* oonf iraation of the balances by the depositors; we accounted for all securities and other property held in trust and for safe-keeping as shown by the records. The records are suited to the needs of the company^ and are well kept. We submit herewith a Statement of Financial Condition at the close of business May 27^ 1920. Yours truly, (Signed) Gray 8^ Brown. The following form illustrates the method of qualify- ing the report with respect to the source of the information contained in the statements: New York, March 10, 1920. The A. B. Corporation, New York. Dear Sirs: Pursuant to engagement, we have audited, for the year ended December 31, 1919, the books and accounts of The A. B. * Corporation, and have audited the Nevv York books and accounts of its subsidiary companies. The C. D. Company and S. F. & Company, 241 Inc., accepting the reports of foreign representatives and other accountants relating to their operations. V7s submit herewith six pag3s of comments and the following described exhibits: EXHIBIT "A" - CONSOLIDATED BALANCE SHEET, DECELIBER 31, 1919. "B" - SUMMARY OF CONSOLIDATED INCOME AND PROFIT AND LOSS FOR TliE YEAR ENDED DECEMBER 31, 1919. Yours truly, (signed) Gray & Brown INDEXING OF PARTS OF REPORT Some accountants, especially in elaborate reports, number each page and index the several parts on the presenta- tion, somewhat as follows (the full descriptions of the state- ments being also shown): Certificate Page 1 Comments 2-10 Exhibit "A" 11 Schedule #1 12-13 Schedule #2 14-15 Exhibit "B" 16 In the great majority of reports the extra labor in- volved in .this procedure appears to be unwarranted, especially 242 if the designations of folded statements be also shown on the outside. If a report is to be rendered in which there are no statements, but voliiminous text matter, the whole report should be made in the form of a letter, signed at the end. 243 CHAPTER IX MECHANICAL FEATURES AND OFFICE PROCEDURE SAFEGUARDS AGAINST MISUSE OF REPORTS Much has been said and written concerning the safe- guarding .of audit reports against their misuse by imscrupulous persons. Some accountants employ various kinds of seals on their reports so that no part thereof may be extracted without mutilating the sheet oa^ breaking the seal; others have imprinted on each sheet of the statements words to the effect that such statements must be considered only in conjunction with the ac- companying comments and that they may be used separately only by permission of the accountaut. While some of these safeguards may be effective and also consistent with the professional charac- ter of the reports, in the opinion of the authot adequate pro- tection for all interests concerned may be obtained by making the introduction to a report, which is signed by the account- ant, explicit as to the composition of the report. As a further precaution, however, each sheet of the report may be water- marked or imprinted with the naune of the accountant. If a detached statement is submitted to a third person as having been received from a professional accountant, that person may know that the statement is authentic if the sheet is water-marked or inqprinted with the name of the acco\intant, but unless the practice of thus marking the sheets is general and is » ■■ widely known, he may not be able to detect a spurious statement 244 that is not so markedj however. In any event, it seems that ordinary business caution would lead the third person to demand evidence that the statement was not improperly extracted from a report that might contain qualifications, by insistence upon seeing the signature of the acco\intant. The author has yet to hear of a case where such inqproper use has been made of part of a signed report of a professional accountant. If the question were serious perhaps it would be advisable not to use any mark of identification on the paper, as there would then be no evi- dence that the statement was prepared by an accountant. It is likely that nearly all cases of misuse of ac- countants' statements by xinscrupulous or careless persons arise from misplaced confidence by the aocoiintants in giving out statements informally - perhaps pencil drafts for bookkeeping purposes - which are typewritten and submitted as having been prepared by the acco\mtant. While in such cases no fault can be attributed to the accountant, in the opinion of the author nothing that might possibly be construed as a report should be rendered except over the accountant's signature, with appro- priate qualifications if necessary. In short, the only practical safeguard lies in the accountant's attaching his signature to nothing for which he does not assume responsibility, and to everything which might be construed as a report, including all carbon copies. As previously stated, if a certificate is appended to a statement the client could not be criticized for exhibit- 245 ing the certified statement as the report of the accountant, for the reason that any material qualifications should be contained in the certificate. PAPER AND BINDING It is entirely a matter of personal preference as to what kind of paper shall be used and how reports shall be bound. However, the paper should be thin enough to make several good carbon copies and still be of sufficiently good quality to with- stand erasures and to permit of v/riting with a pen. Onion-skin paper has proved to be satisfactory. Various sizes of paper are in use by accountants, ranging from letter size, 8-1/2" x 11% to about 9-1/4" x 13« and 8-1/2^ x 14". When the reports are bound at the top an 8-1/2 inch sheet is generally used; if they are bound at the side at least a half-inch more margin must be left, so that a nine-inch sheet is none too wide. T7ell-proportioned sizes are 9" X 12" to 14" if bound at the side, and 8-1/2" x 12" to 14" if bound at the top. It is thought that fourteen inches is a good length, as most statements seem to require that much space without crowding. In the determination of the size of the paper, consideration should be given to economy in pur- chasing; 8-1/2" X 11" or 14" and multiples thereof are stock sizes. The majority of accovmtants bind their reports at the sile, v/ith a paper cover and eyelet fasteners. Some use 246 leather covers. Imprinted in gold. There are many different de- vices and methods of folding covers for seciirely fastening the sheets, which will not be discussed in detail. Whether the bind- ing be at the side or the top, it is necessary, in using large sheets which must be folded, to cut off part of the sheet for binding, the only difference being that in one case they are folded from the bottom and in the other from the side. OFFICE PROCEDURE It is desirable in all cases to have the report reviewed and criticized by some person other than the accountant who has written it. TThen the several parts of the report have been type- written they should be carefully compared with the rough draft. It has been found to be good practice to use the last carbon copy as an office copy on which to indicate corrections for the typist and the checking as to mathematical accuracy and otherwise. It is a good rule not to permit the typist to make corrections while all copies are in the machine as there is a possibility of fail- . ure to correct some of the copies. After comparing, every com- putation in the report should be checked on the office or "prov- ing" copy. In some cases it is desirable to check computations such as percentages before typing, but unusual care should then be exercised in comparing. Every figure appearing in comments, certificates, or footnotes to statements, which is not susceptible of verification by mathematical process, as v;ell as all dates, should be checked 247 to authoritative sources - the statements or working papers. All references in one statement to another, such as the siirplus at the end of the period and the totals of schedules, should be checked. In comparative statements, the prior figures, or com- parisons therev/ith, should be checked to the preceding report if any. The contents of the report as to the number of pages of comments and the titles of statements, as shown in the presenta- tion, should be checked. All corrections of typing should be checked, care being exercised to see that all copies have been corrected. In short, every possible precaution should be taken to insure accuracy of the report, as a clerical or typographical error may make a very bad impression upon the client. Some accountants use red ink in ruling typewritten statements, horizontally and perpendicularly, and in underscor- ing the captions. In the opinion of the author, horizontal linos made by the typewriter, including underscores where neces- sary, present a better appearance, and no perpendicular lines are required. Imprinting in red on the carbon copies, as well as on the original^ may be done by inserting pieces of red carbon. It is desirable to type reference characters in red, as black characters, especially on the carbon copies, are not conspicuous. The designation of the Exhibit, Schedule, or Statement should be typed on the outside of folded statements. It is important to keep a record in the office showing the disposal of each copy of the report . \ Date Due I OCT 1 - t931 (i2ooDEffc'C;fep ir 'JUL ^■^n$^ !NEH ^?il?l».iK^"SlTY LIBRARIES 0041390741 A I*,' END OF TITLE