THE EFFECT OF CHANGING PRICE LEVELS ON ACCOUNTING W I T H SPECIAL REFERENCE TO AN AUTOMOTIVE COMPANY DISSERTATION
Presented in Partial Fulfillment of the Requirements; for the Degree Doctor of Philosophy in the Graduate School of The Ohio State University by WARREN ASQUITH HOWE, B.S., M . B . A .
The Ohio State University 1954
Approved by: .ser Department of
I TABLE OF CONTENTS Chapter I.
Page INTRODUCTION The purchasing power of a dollar varies Three questions This study introduced
II.
A BRIEF HISTORICAL SURVEY OF INFLATION AND DEFLATION Panics Price level changes, 1935-53 Price levels in Germany, France and Belgium Influence of time on transactions
III.
THE INFLUENCE OF DETERMINING AND RECORDING VALUE ON INCOME Value and worth Price and value The accountant's problem Accountants and economists on value Cost as a basis An illustration Current accounting practise Comparisons Proposed modifications The American Institute of Accountants Sidney Alexander defined income Income discussed Martin Bronfenbrenner on trends Three major issues Inflation on business accounts Arthur Dean on dollar values George 0. May predicted upward trend Accounting Postulates
1 1 2 3 5 5 7 -8 9 11 11 13 14 16 17 17 19 21 24 26 27 27 28 28 29 30 31 33
ii Study Group's conclusions Carman Blough advocated cost basis Dissention in the Study Group Committee on Concepts and Standards Arguments for converting values Samuel J. Broad favors conversion Committee on Accounting Procedure Research Department Experiments with depreciation LIPO and FIFO American Accounting Association IV.
INDEX NUMBERS AND TTFIR APPLICATION Price levels and purchasing power Germany and severe inflation France adjusted using coefficients Belgium used coefficients The Netherlands used index numbers Italy’s measures were inadequate Sweden and "free depreciation" Denmark and inflation Extensive studies in England H. W. Sweeney and stabilization William Blackie favors index numbers McNichols and Boyd adjusted fixed assets Myron J. Gordon's capital gains account Joel Dean and managerial viewpoint J*M. Yang and partial conversion Broad and index numbers Paul Grady on these critical times Ralph C. Jones studied steel companies The American Accounting Association
V.
34 36 36 39 41 41 42 44 45 48 49 53 53 55 57 58 58 59 60 60 61 64 66 67 67 68 69 70 71 71 76
AN ANALYSIS OF TRE STATEMENTS OF AN AITT OMOTIVE COMPANY
Purpose of the study The approach to the problem The method of conversion to 1935-39 values Index numbers used Balance sheet adjustments Adjustments for 1941 Conversion of fixed assets
78
78 78 79 80 82 82 86
iii
Allowance for depreciation 88 Decreases to balance sheet items 90 Rate of return on total assets 90 Rate of return on common stock equity 93 Cumulative increase in net working capital 95 Cumulative increase in inventories 98 Cumulative increase in gross fixed assets 98 Profit and loss statement 101 Decreases from adjustment 101 Adjustment for 1941 101 Depreciation 105 Purchasing power loss on net monetary assets 108 Depreciation and earnings 111 Surplus 113 Loss in purchasing power of mortgage payable 117 Loss in purchasing power of preferred stock 117 Total differences through conversion to surplus 117 Inventory turnover 121 Net profit to sales 121 Sales to net wor th 124 Fixed assets turnover 124 Current ratios 124 Total liabilities to total assets 128 Net worth to total liabilities 128 Net profit to average tangible net worth ( 128 Net profit to average net working ' capital 133 Sales to average net working capital ' 133 Inventory to net working capital 136 Current debt to inventory 136 Net fixed assets to tangible net worth 136 Comparative balance sheet adjustment (1952 basis) 141 Profit and loss statement (1952 basis) 141
iv VI.
CONCLUSION Two significant observations Graphs showing absolute amounts Graphs showing ratios Inflation's impact The questions discussed Important comparisons Conclusions and recoimnendations
BIBLIOGRAPHY Books Pamphlets and bulletins Other sources
149 149 150 152 154 155 156 158 162 162 166 171
INDEX
172
AUTOBIOGRAPHY
17 6
T
TABLES Table Number
Pag©
I
Purchasing Power of a Dollar
22
II
Price Indexes
54
III
Index Numbers Used
80
IV
Comparative Balance Sheet (1935-39 basis)
83
V
Balance Sheet Adjustments for 1941
84
VI
Conversion of Fixed Assets Values
87
VII
Allowance for Depreciation
89
VIII
Decreases Resulting from Adjustments to Balance Sheet Items
91
IX
Rate of Return on Total Assets
92
X
Rate of Return on Common Stock Equity
94
XI
Cumulative Increase in Net Working Capital
96
XII
Cumulative Increase in Inventories
99
XIII
Cumulative Increase in Gross Fixed Assets
100
Profit and Loss Statement (1935-39 basis)
102
Decreases Resulting from Adjustments to Profit and LossItems
103
Profit and Loss Statement Adjustments for 1941
104
XIV XV XVI XVII
Depreciation by Year ofAcquisition
106
XVIII
Purchasing Power Losses on Net Mone tary Assets
109
vi XIX
Relationship Between Depreciation and Earnings
112
XX
Statement of Surplus
114
XXI
Conversion of Beginning Surplus to End of Year Values
115
Loss in Purchasing Power of Mortgage Payable
118
Loss in Purchasing Power of Preferred Stock
119
XXIV
Total Differences in Surplus Items
120
XXV
Inventory Turnover
122
XXVI
Net Profit to Sales
123
XXVII
Sales to Net worth
125
XXVIII
Fixed Assets Turnover
126
XXII XXIII
XXIX
Current Ratios
127
XXX
Total Liabilities to Total Assets
129
XXXI
Net Worth to Total Assets
130
XXXII
Net W o rt h to Total Liabilities
131
XXXIII XXXIV XXXV
Net Profit to Average Tangible Net Worth
132
Net Profit to Average Net Working Capital
134
Sales to Average Net Working Capital
135
XXXVI
Inventory to Net Working Capital
137
XXXVII
Current Debt to Inventory
138
XXXVIII Net Fixed Assets to Tangible Net Wor th
139
XXXIX
142
Comparative Balance Sheet
(1952 basis)
XL
Increases Resulting from Adjustments to Balance Sheet Items
XL I
Profit and Loss Statement
XLII
Increases Resulting from Adjustments to Profit and Loss Items
XLIII
Graphic Presentation of Absolute Amounts
XL IV
Graphs of Sixteen Important Ratios
XLV
Important Comparisons
(1952 basis)
1 Chapter I INTRODUCTION In the sight of the law a "dollar" is a "dollar," regardless of its purchasing power. Parties to long-term contracts, under which changes in purchasing power may affect so sub stantially the relative equities of the parties over the years, have attempted to safeguard their respective positions by various means. The
dollar is eccentric among our units of measure.
We call it a dollar regardless of how mu ch of a commodity it purchases, A yard is not a yard unless it measures thirty-six standard inches, wh ich will be the same length today, or tomorrow,
as it was yesterday. Likewise,
the
pounc^ represents the same number of ounces from one day to another. A pound of candy bought today would contain the same amount as a pound of candy bought any other day; but a dollar's worth of that same candy purchased today may be mu ch more, or less, than a dollar's worth of that same candy purchased another day. People generally have come to accept the varying purchasing power of a dollar in their daily transactions, except when there is a marked change in a short period. I Sweeney, Henry W., Stabilized A c c o u n t i n g . New York: Harper and Brothers Publishers, 1936, Foreword b y Ro y Bernard Kester, p. ix.
2 Accountant?, too, through established precedents, have recorded assets and liabilities in terms of these dollars, being aware that they do not represent the same amount of purchasing power from one time to an other, They realize that these dollar figures are sometimes misleading. Over a period of years, there have been several proposed changes in accounting procedure in an attempt to compensate for the effects of fluctuations in mone tary value and to make accounting records more meaning ful. However, none of these proposed changes has been accepted universally. Some accountants are opposed to any change because of the complications which might arise; others feel that there is not sufficient reason for a change at the present time. This raises three questions: First, what is the effect of changing price levels on accounting records? Second, how significant is the effect of changing price levels on accounting records? Third, what,
if anything,
should be done
about it? These questions are being considered in a number studies of various companies. The results vary according
3 to the companies studied. This study.was made of a company engaged primarily in the manufacture of motor vehicles. The financial reports for the fourteen year period from 1939-52, inclusive, were analyzed and adjusted to eliminate changes in the record because of fluctuations in the price level. Some suitable method of adjusting the figures given in these reports had to be devised. A table of index numbers was selected from among the various tables which had been published. Index numbers based on average consumer prices for 1935-39 were used as a base. Adaptations of these index numbers were applied to the respective accounts. Then, for com parison, the accounts were adjusted in terms of 1952 values. Comparative financial statements were prepared in which the reported amounts were exhibited along with the amounts resulting from the adjustments. To support these adjustments, additional schedules were made for fixed assets, allowance for depreciation, depreciation, and the changes in purchasing power of cash for those accounts which may be settled by cash in the near future. In order to make some of these adjustments, it was necessary to search some of the company’s original
records. The years of acquisition and the years of retirement of various fixed assets had to be determined Also, the allowance for depreciation and depreciation expense accounts had to be broken down according to the year of acquisition of the assets with which these amounts were identified. After this had been done and the comparative financial statements were prepared,
a comparison was
made. The differences between the unadjusted and the adjusted figures were determined in terms of amount and percent. These differences indicated the amount of change that had resulted from fluctuations in the price level. Vifhat caused these fluctuations in price level is a problem for economists to consider. The accountant problem is what to do with accouhting records because of the effect of changing price levels. A discussion of the procedure used in this study, the results obtained from the analysis, and some recommendations as to accounting procedure will be included in the following chapters.
5 Chapter II A BRIEF HISTORICAL SURVEY OF INFLATION AND DEFLATION A brief history of inflation and deflation is appropriate in this study of the effect of changing price levels. Wholesale prices in the United States for the period 1720-1947 were extremely high five different times -- during the Revolution ary War, the War of 1812, the Civil War, World War I, aid World War II. The cardinal lesson of price history is that war produces inflation and maladjustment of prices. i At the critical period at the end of Inflation, when deflation occurs, a panic is likely to result. A financial panic has been defined by Horton, Ripley and Schnapper as: ”A sudden and widespread fear con cerning the financial soundness of banking, insurance, and industrial and commercial institutions. It is in variably marked by hasty sale of securities and the withdrawal of bank deposits. The general rush to con* vert assets into money has usually resulted in the closing of many banks, brokerage houses, and exchanges, 2 followed by bankruptcies and business stagnation.” 1 James, Clifford L., New Outline of the Principies of Economics. New York: Barnes and Noble, Inc., 1948, p. ISO. 2 Horton, Ripley, and Schnapper, Dictionary of Modern Economics, Washington, D.C.: Public Affairs- Pr ess,
TS¥8rP7T4§:
—
6 Lippincott refers to the panics of 1819, 1873,. 1893, 1907, and 1929. The period of good times following the Civil War was brought to an end by the panic of 1873. Thereafter until almost 1879 followed one of the most trying business depressions in the hi s tory of the country. Some five thousand failures occurred alone in the panic year, and during the panic and depression period the failures aggregated 47,000, with a total loss estimated at more than one billion dollars.3 The period from 1915 to 1920 was highly inflation ary. During the early "twenties" there was a business decline. This was followed by a progressive upswing to 1929. Within this period, there were some minor shortrun cycles during which the price levels fell and then rose again. In October of 1929, there was a sudden drop accompanied by great anxiety. According to the National Bureau of Economic Research,
the low point in this decline
came in March, 1933, and then business began to rise. During that period 1929-1933, marked by economic collapse, the gross national product declined about 30$. --------- 3------
Lippincott, Isaac, Economic Development of the United S t a t e s , Third Edition. New York: D . ApplelTonCentury Company, 1933, p. 554.
Hacker and Zahler wrote of this period as follows The period 1923-29 had not initiated an economic revolution in which crisis had vanished and prosperity spiralled upward forever. On October 24 a selling wave broke over the New York Stock Exchange. During the two weeks follow ing securities’ values shrank by $25 billion. The "permanent plateau" of prosperity sank like fabled Atlantis..... More than 85,000 businesses failed in the following three years; 5,000 banks suspend ed. National income dropped from $87.4 to $74 billion between 1929 and 1930 and then to $41.7 billion in 1932.4 Business was in such a serious condition in 1932 that the President and Congress established the Recon struction Finance Corporation to aid those businesses in financial distress. On March 5, 1933, President Roosevelt declared a national holiday for all banks to prevent further runs on them. Some states had already declared bank holidays. The general price level increased each year from 1935 to 1953, with the exception of the year 1949 when there was a slight decline. Reconversion after Waorld War II was progressing when the Korean incident occurred. Up to the present time, there have been fluctuations in the price level but no major depressions following World War II. ?------
Hacker, Louis M. and Zahler, Helene S., The United States in the 20th Centur y. New York: AppletonCentury-CroftsV'lncorporated, 1952, pp. 373-374.
8 Fluctuations of the price level in other coun tries have been more pronounced than in the United States. In Germany, the price level rose a trillion fold from 5 1914-1923. In France, the rise was not so c;reat, being only 6 five and a quarter fold. In Belgium, the wholesale price level fluctuated 7 from a base of 100 in 1936-38 to 388 in 1950. Financially speaking, fortunes have been made or lost In a transaction,
depending upon the time of the
transaction In relation to periods of inflation or deflation. One who borrows at the beginning of an in flationary period has a definite advantage in that he can repay the loan in cheap dollars. One who borrows at the peak of inflation, finds himself in a disadvan tageous position paying off his loan in expensive dollars. ------- 5----Keminerer, Edwin, M o n e y . New York: Macmillan Company, 1935, p. 291. (This was translated from Statistisches Reichsamt, Zahlen Zur Geldentwernig in Deutschland 1^14 bis 1926.) 6 Sweeney, Henry W., Stabilized Accounting. New York: Harper and Brothers Publishers, lS>36. p p . 38-40. 7 Taxation and Research Committee of the Association of Certified and Corporate Accountants, Accounting for Inflation. London, England: Gee and Company, 19527 p. 104, as taken from the source: Ministere des Affaires Economiques.
9 Professor Janies "ave a good illustration as .follows : fuppo.se an oiler* brother sold a farm in 1865 for ';5,000 in cash and a -,10,000 mortgyve to a younver brother and then retired to a nearby town, Durinr the next fifteen years the younger brother agreed to pay interest at, 6 percent and t'ne principal of the mortgage. But the wholesale price of farm products declined to a point in 1879 which was less than half as hiph as in 1865. At these prices the younger brother would have needed more than twice the usual output from the farm to meet his payments. Probably by 1879 he had paid the interest and /2,500 on the principal. Apparently the younger brother now had a half interest in the farm, but the fall in prices reduced the value of the farm to half its former purchase price. His equity disappeared, and he decided to quit farming. The older brother received 87,500 plus interest and still owned the farm which he now sold for only 87,000 in cash because many other farms were being sold for debts. If the same transaction had occurred during a period of rising prices (18971913), the younger brother could easily have paid for the farm and the older brother could have pur chased much less with the '15,000 which he received for the farm. As lonnr as the general price level fluctuates, the date of one's birth is an important item in dgtermining one's success or failure in business."' In his illustration, Professor James points up the definite effect which time has on a transaction. Russell c;a o and Hattie G-reer. were lucky lenders who became wealthy as a result of their lending operations in the deflation of the latter part of the Nineteenth 9 Century. Similar operations at another time mivht have 8 James, Clifford L., Op. cit., p. 152. 9 Fisher, Herbert j/., Inflation? New York: Adelphi Company, 1933, p. 61,
10 been ruinous to them. ... a change in the price level may transfer billions of dollars worth of property from one class to another and dispossess count less individuals of their property, savings, and livelihood under a legal system based on the "due process of law." Under these conditions much economic activity becomes a grand gamble on the price level. A brief survey of inflation and deflation in the United States and in foreign countries reveals that there have been fluctuations in price levels of sufficient magnitude as to cause concern to the economist, the financier,
and the accountant, as well
as others. IVhat has been done in other countries in an attempt to solve the accounting problems arising from fluctuating price levels and the progress that is being made in the United States will be discussed in the following chapters.
TU~
James, Op. cit., p. 153
Chapter III THE INFLUENCE OF DETERMINING- AND RFCOHDING VALUE ON INC01® Value is one of the most common words In modern use, and one of the least understood ..... No one has so far succeeded in evolving a fully satisfactory gen eral theory concerning, it. 1 Everyone is interested in knowing what something is worth, but each individual has his own idea of what worth is. Webster defined worth as "that quality or sum of quali ties of a thing rendering it valuable or useful; value; importance, hence often value expressed in a standard, as 2 money; equivalent In exchange; price." He used value as a synonym of worth* He defined value as "monetary worth of the thing; marketable price; the relative worth importance,
or utility;
degree of excellence or usefulness;
status in a scale of "3 preferences or the like; estimated or assessed worth. These definitions may be satisfactory for veneral use, but for technical purposes of a specific nature, a more exact definition Is needed. The accountant, the economist, ‘the financier, the business man, each has his own concept 1 MacNeal, Kenneth, Truth in Acccuntin,g. Philadelphia, Pennsylvania: University of Pennsylvania Press, 1939, p* 85, 2 Webster, Daniel, New International Dictionary,2nd Edition, Unabridged, Springfield, Massachusetts: G.and L!. Merriam Company, 1947, p. 2955, 3 Loc, cit,, p. 2814.
12 of worth or value. While the Dictionary of Modern Economics gives twenty six
definitions of value, it gives a brief
general definition as follows: "In economics the term value is usually restricted to mean exchange value or 4 the capacity of a thing to be exchanged for other things." rv MacNeal explained economic value as follows: Economic value is a measure of the relative importance which a community, exhibiting its collect ive preferences through the market process, attaches to a particular good in comparison with other goods. In other words, the economic value of anything is its "power in exchange" which, measured in money, is its market price. The jnarket price of a thing is the price at which it is actually being bought and sold. Economic vi.ue is not necessarily the price at which the thing could be bought. Economic value is not a prophesy. It is a fact. It does not relate only to selling or only to buying, but relates to both simultaneously under conditions that actually exist. The economist is interested In valuation on a com munal basis; whereas, the accountant must consider value as It relates to an isolated individual or firm. Dr. James defines it as follows: "The value of a good or service is the quantity of other goods and services which may be 6 obtained in exchange for it." Horton, Byrne, Dictionary of Modern Economics. Washington, D.C.: Public Affairs Press’^ 1548, p. 348. 5 MacNeal, Kenneth, Truth in Accounting. Phila delphia, Penn. : University of Penn. Press, 1939, p. 85. r*
James, Clifford L., New Outline of the Principles of Economics. New York: Barnes & Noble, Inc., 1948, p. 13.
13 Entering Into the economist’s concept of value are such Influences as scarcity of the Item, exchangeability, utility, and supply and demand* Kohler, an accountant, defines value as 11the amount at which an item appears in the books or on a financial statement; cost;" or, "the attributed worth of anything expressed in money and applied to a particular asset, as the value of a specified automobile.... Without qualifi cation and clear definition, including specific and opera tionally feasible rules for measurement,
the term has only
subjective significance, and should not be confused with, 7 even though often identified with and measured by cost." Economists clearly recognize a difference between price and value. Accountants also recognize this distinc tion, but through long established practise and a lack of a better means of recording value, accountants have depended quite largely upon using price as a means of recording value. Price is the narrow term involving the amount for which an article is offered for sale, or sold. Value is the broad term which does not always involve money, necessarily. Munn and G-arcia explained the relation between 8 price and value as follows: ^Kohler, Eric L., A Dictionary for Accountants. New lork: Prentice-Iiall, Inc., 1952, pp. 442-443• ^Munn and Garcia, Encyclopedia of Banking and Finance, Cambridge, Massachusetts: The Bankers Publishing Company, 1949, pp. 702-703.
14 Value is the ratio at which commodities or services exchange; the power of one commodity or service to command other services or commodi ties in exchange. In all civilized countries for the sake of convenience, money is used as a com mon denominator, medium of exchange, or yardstick of value so that the value of other commodities and services are expressed as ratios to the stan dard money. The explanation of value, that is, why goods and services command the money prices they do, is one of the most difficult problems in economics. Price differs from value in that the former is value in money terms; moreover, a thing may have value without having a price; e.g. something which is not priced for sale. The above serves as a general definition of the term; there are many special connotations as expressed in such terms as book value, cost value, market value, sales price value, reproduction cost value, replacement value, scrap value, present value, tangible value, intangible value, capital ization of earning power, liquidation value, etc* Because the term value is so broad and true value is so difficult to determine,
accountants, whose records
should be exact, have used for their records price which is easier to establish than true value. Reconciling these price records with true values is a problem which account9 ants recognize but have not solved to their satisfaction* The problem of the accountant in the matter of valuation is an e x t r e m e l y difficult one. It is immeasureably more complex, for example, than that of the so-called ’’appraiser" who undertakes to set a value on property at a certain point of time and ^G r e e r , Howard C., How to Understand Accounting. New York: The Ronald Press, 19'S8, p. 125*
15 for certain purposes only. The accountant has to consider not only a point of time but the whole history of the enterprise, and his values are not for a specific purpose but for all purposes. His methods must be consistent for all periods but must not ignore the several possible points of view toward the worth of various property items to the enterprise. The accountant’s problem is to set a value for a particular item in terms of dollars and cents. Through custom, such a value is generally determined by resorting to a price established by purchase or sale. This requires the determination of what should be included in the pur chase price, a problem less simple than it seems0 YYith several different theories of valuation possible it might seem that the accountant would have a sufficient task in selecting one and apply ing it consistently to all situations. For reasons which have never been convincing to the average business man, however, the profession has not done this but has adopted a peculiar composite of theories which have as a sole excuse the fact that they pro duce a "conservative" result. According to this reasoning one theory of valuation is to be applied under one set of circumstances and another in others, the main purpose being at all times "never to take up future profits not yet earned, but always to anticipate, if possible, future losses not yet sustained. ^ The above statement is the conservative accounting point of view, 'while it has been generally accepted in accounting practise, it falls far short of establishing Loc. cot., p. 128
16 true value for the items considered, The emphasis is placed upon historical cost rather than upon a current value as would be determined by its present marketability or its ability to yield revenue. This po int causes a difference of opinion among accountants and economists, whose purposes in valuation differ widel y alon^ with their methods of arriving at the Value of an it em. Accountants and e conomists do not arrive at the same value for various items, A ccountants are held responsible by the economists for some of the confusion w h ich results. Economists and others have often made the gross mistake of attributing to accountants a confusion of cost and value, or of identifying cost and value. No such crude association can be shown from the facts of modern accounting pr o cedure. Others, particularly the writers on accounts, have said that accountants adopt cost less depreciation as a measure of valuation. This is muc h nearer the mark. But even if depreciation be defined in the most refined and accurate sense, with respect to that which is used in practise, the state ment is still wide of the mark. Modern accounting procedure abounds in instances that do not conform to this over-simplified description. To make this assertion about accountants* valuations wo uld make the modern balance sheet assert things that the underlying procedures do not assert and would make it omit saying many things it does assert. Cost is only one class of evidence considered; depreciation, however defined and measured is only one class of evi dence among many. In a multitude^,of cases, initial calculations greater than cost ar|^rec ogni zed .... increases in value are exhibited. -^ Cann xng , John B., The Economics of Accountancy. New York: The Ron ald Press, 1929, p. TBTJ.
17 While accountants consider depreciation which is a modification of the original cost, the;/' use cost as a basis. Greer states that '’what is needed is a strict adherence to cost as the basis of valuation, with provision elsewhere in the statement for any anticipated losses due 12 to price delines or otherwise.” Cost has always been used by accountants as the basis for valuation in accounting reports since the advent f
of double-entry accounting, although accountants recognize that it is not entirely satisfactory. A simple illustration demonstrates this problem in valuation. Assume that ten years ago a man bought a new house for ten thousand dollars. A
short time ago he sold
that same house for twenty thousand. The original purchaser, under the traditional method of accounting, would have recorded the house at his cost figure of ten thousand dollars, from which reasonable depreciation might be deducted. That same house, now ten years old, would appear on the books of the recent purchaser at a value of twenty thousand dollars. While this is correct accounting, under today's cost method, it tends to infer that the house after ten years has doubled in value. 1 2 -----
Greer, Howard C., Op. cit., p. 134.
18 A shift In supply and demand m a y have made the house relatively more valuable now
than ten years ago, but the
change in the purchasing power of a dollar has had an effect,
also. Changes in price levels,
along w i t h changes in
supply and demand, complicate the accountant's problem in recording value. This point mir-ht be more obvious if the same man had purchased one of two identical houses ten years
ago at ten thousand dollars and the other recently
at twenty thousand dollars, W i t h proper deductions for depreciation,
the one purchased first might be recorded
on the books today at approximately seven thousand dollars; while the one
just purchased woul d be recorded at twenty
thousand dollars,
although it is of comparable age and
quality. To a prospective buyer, both houses would have approximately the same vaLue, However,
on the books of the
owner, one house would be recorded at almost three times as muc h as the other. Similar distortions ma y result in corporation records. One can place practically no faith in the published reports showing the net worth of the corporation at the end of its fiscal year, for the valuations placed upon fixed assets are at best rough approximations of the truth. In periods like
19 1915-1921, when the value of money was changing rapidly, the approximations became so rough as to take away all significance from reported property v a l u e s . ^ fluctuations in price level have a definite effect upon both long-term and short-term assets and liabilities, though the effects are not exactly the same on both. Short term items, either assets or liabilities,
are effected by
the fluctuations which occur rapidly, even though a sudden change in the price level may be followed soon by a return to the point where it was before the sudden change. How ever, it would be unusual for the life of an asset or the settlement of an obligation to concur exactly with the completed cycle. Therefore,
there is a problem in the
valuation of these items. The problem in evaluating long-term assets and obligations arises from the fact that in the long run there is a definite trend for the price level to rise. The value of a dollar at the time an item was pur chased is not likely to be the same as at any other time. The current accounting practise is to record purchases and obligations in terms of dollar values at the time the l^King, Willford Isbell, The National Income and Its Purchasing P o w e r . New York: National Bureau of E c o n omic Research, 1530, p. 39.
20 transaction is completed, regardless of what happens to be the purchasing power of the dollar subsequently. Because of the variations in the value of a dollar from time to time, identical items purchased at different times would be recorded with diffex’ent values. The balance sheet shows values in dollars. Because they all appear under a common dollar sign, one m i rult: logically expect that the figures are comparable. Such is not the case. Current assets and current liabilities appear on the balance sheet in terms of dollars of recent value. Fixed assets have a wide variation in the value of the dollars in which they are recorded, according to the time of the purchase. There may be a wider range in terms of dollar values within the fixed asset items than between the recently acquired fixed assets and current assets. The same thing is true with fixed and current liabilities. Who, then, by looking at the balance sheet can evaluate the company? This same laok of standardization of dollar values appears in the profit and loss statement. The sales figure is composed of rather homogeneous dollars in as much as sales are made within a comparatively short period; but the costs of these sales are made up of different elements
21 of cost originating at different times. Labor costs, like sales, will be in terms of cur rent dollar values.
Depreciation costs, however, will be
of widely varying dollar values,
according to the time of
acquisition of each item. When these dissimilar values are added to get the cost of an item, the resulting figure is often misleading. Recording assets at cost in terms of dollar values makes it practically impossible to compare by means of their financial statements, a recently established company with one of long standing. For example, the purchasing power of a dollar,
using as a base the period 1947-1949
to equal 100, was approximately 8 8 in 1952. Using this base, the purchasing power of a dollar in 1955 would have been :1 .70 approximately,
(See Table I.) Therefore,
a company which was established in 1952 would record its fixed assets in terms of a dollar worth about eighty eight cents. If the company had been established as early as 1935,
its original assets would have been recorded in terms
of dollars worth about one dollar and seventy cents. The newer company would appear to have a greater quantity of total assets because of the higher recorded value of the assets. By the same token, it must take a greater amount of depreciation,
thus, comparatively
decreasing its profits. The older company would show a
22 Table
I
PURCHASING POWER OF A DOLLAR INDEX 1947-1949 I 100 Indexes
Year Consumer Prices
Wholesale Prices
1935 1936 1937 1938 1939
170.4 168.6 162.9 165.8 168.4
192.3 190.5 178.3 195.7 199.6
1940 1941 1942 1943 1944
166.9 159.0 143.5 135.1 133.0
195.7 176.1 155.8 149.3 147.9
1945 1946 1947 1948 1949
130.0 119.9 104.7 97.3 98.2
145.3 127.1 103.7 95.8 100.8
1950 1951 1952 1953
97.3 90.1 88.1 87.4
97.0 87.1 89.6 90.8
Source: For the years 1935-1952, Inclusive U.S. Department of Commerce Office of Business Economics, Business Statistics 1955 Biennial Edition A Supplement to Survey of Current Business. Washington, D.C.: 1953, p. 31. For 1953*t The 1953 figures were computed by the author of this paper by averaging the monthly index numbers as given in the May and December issues of the Survey of Current Business, published by the U.S. Department of C ommerce, p . 6 . ~
23 lower Investment, and, at the same decree of efficiency of operations, a greater profit because of lower deprec iation charges. Therefore,
it is extremely difficult to
compare similar companies established at different times. It is much more difficult to compare companies engaged in different types of endeavor. The dollar values Involved in the records of a steel firm, which has vast sums invested in fixed assets with exceptionally long life expectancy, would be quite
different from the dollar
values involved in the records of a chain grocery store which rents its buildings and has most of its money invested in inventories which turn over rapidly, 14 Mr, Ifaci'Teal wrote as follows: Present accounting principles prescribe that most fixed assets be carried at original cost al though this cost may be clearly more than or less than the market value of such fixed assets. Present accounting principles also prescribe that most cur rent assets be carried at original cost provided that this cost be less than the market value of such current assets. In each of these cases similar assets acquired at different costs may be carried In the same balance sheet at different values al though these assets may In every practical sense be identical. u ---------
MaclTeal, Kenneth, T r u t h in Accounting. Phila delphia, Penn.: University of Pennsylvania Press, 1939, p. 42.
24
As early as 1913, Mr. Hatfield questioned the wis dom of the unqualified use of the cost method when he wrote, "Having accepted the principle that the original valuation of assets should not exceed the cost price, and having noticed the practical and theoretical diffi culty in determining the exacb cost price, there remains the more important question as to subsequent revaluations of assets. Shall they be put down at the original acquisi tion price or at some other valuation? If at some other value, shall it be the current market price, the present value to the concern, or the price they would bring in 15 liquidation?" One proposed modification in establishing values is the use of the commodity dollar, a manipulation of the monetary system. This is sometimes referred to as a "compensated dollar," or a "rubber dollar." This was advocated as early as 1398 by Worthy P. Sterns, later endorsed by Henry Ford and Thomas A. Edison, and dis cussed in detail by Irving Fisher, who popularized the "commodity dollar." Each advocate had a different method for controlling the commodity dollar, but the one suggested by Mr. Fisher has been given the most consideration. ---------------- T 5 ---------
Hatfield, Henry Rand, Modern Accounting. Hew York: D. Appleton Company, Inc., 1913, pp. 80-81.
25 The United States was on the gold standard when Fisher was writing on this subject. He proposed that the gold content of a dollar be modified to compensate for the rise and fall of prices, thus varying the value of a dollar in gold to maintain constant prices-in-dollars of 16 other commodities. He assumed the continuing use of the gold standard. Although the United States is off the '"-old standard, the same flexibility of a dollar could be obtained by govern ment fiat. This mi-’ht be considered advantageous for account ing records in that the dollar values represented in their reports would remain fairly constant. Under this system, an article bought for a certain number of dollars today would be worth the same number of dollars less proper deductions 17 for depreciation anytime in the future. The ''commodity dollar" could only be established through government intervention. Accountants could not apply this independent of the government. However, there is a method which could accomplish much the same results ----------------I S ---------
Waugh., Albert E., Principles of Economics,New York: KcG-raw-Hill Book Company, Inc., T 5 4 7 , pp. 492-3. 17 It is assumed here that the original price was in line with current values.
and w h ic h the
co u ld
a p p lica tio n
in d ex
num bers,
b© a p p l i e d of see
p erio d ica lly
The
in com e w i l l
the
v a rio u s
m in a tio n
of
C hapter job
the
vary
le v els in g
on
w ill
F ee lin g
1920, in g
set
affect
have th at
in
up
to
d iscu ssio n
a cco u n tin g
the
is
or
of
to
d eter
in d iv id u a l.
v a lu e
p la ced
in flu en ce s
A ccountants
the
of
upon
the
d eter
has
been
risin g
th e
term in o lo g y
stud y
p ric e
A m erican A c c o u n t
stu d y in g
In stitu te to
firm
effects
and
both been
a com m ittee
n a m ely ,
in co m e. of
the
group
The A m erica n
the
w h ich
In stitu te
T h is
a
accou ntant
of
a cco rd in g
v a lu es
A sso cia tio n
th e
in com e
A n yth in g
in com e.
c la r ifie d ,
for
in te r e ste d
(For
firm s,
IV .)
item s.
The A m erican p a rticu la rly
in d iv id u a l
in d ex num bers.
An i m p o r t a n t m in e
by
of and
p ro b lem . needed
to
A ccou n tants,
in
cla r ify
be
accou nt
term s. In
th irty w h ich
1947,
th ou san d it
the
In stitu te
d o lla r s
w ou ld m a tch ,
from
for
req u ested the
th e
co n stitu tes
" in com e” and term s
a cco u n tin g , 18 fie ld s.
in
b u sin ess,
a grant
R o ck efeller
purpose
of
a sso c ia ted
eco n o m ics,
of
F o u n d a tio n ,
stu d y in g
what
th erew ith
in
and p o l i t i c a l
18 S tu d y Group on B u s in e s s Incom e o f t h e A m erica n I n s t i t u t e o f A c c o u n t a n t s , C han ging C o n c e p ts o f B u s in e s s I n c o m e . Rew Y o r k : M a c m i l l a n C o m p a n y , 1 9 5 2 , p . l 4 l .
27 A S tu d y Group P er civ a l a c tiv e
Brundage
in
th e
accou n tan ts, ness
m en,
on B u s in e s s
was
G roup,
th e
ch airm an .
com posed
la w y e r s,
Incom e was
o f m ore
eco n o m ists,
m a n y o f whom w i l l
G eorge th an
o rg a n iz ed . 0.
May w a s
forty
fin a n cie rs,
n oted
and b u s i
be
referred
to
la ter
w ere
prepared
by
th e
In
th is
d iscu ssio n , A number and
su b m itted
of
to
papers
th e
a rriv in g
at
cer ta in
w ou ld be
a ccep ta b le
S id n ey S olom on F iv e
S.
con cep ts to
th e
amount
can
d isp o se
as
w ell
He w e n t w h ich , m ix ed
in
revenue
d efin ed
th at
a
a
th e
y ea r's
person, of
th e
end
of
year
fu rth er
and c o s t
of
and
for
w h ich
G roup.
Incom e,
course
of
from
study
B ronfenbrenner,
the
tim es
p ro fit
M artin
over
o ff at 19 b e g in n in g ,”
for
and c o n c l u s i o n s
m a jo rity
on B u s in e s s
o f w ea lth of
a b a sis
and C la rk W arburton p r e p a r e d
S id n e y A lex a n d er ’’ t h e
as
A lex a n d er,
F a b rica n t,
M onographs
Group
m em bers
in
th e
th e
th e
p ric es,
s a le s . . . . .th e at
real
tim e
of
year
as
d iscu ssin g
ch a n g in g
in co m e
at
or
corp orate,
and rem ain th e
a cco u n tin g Is
in com e,
’’ i d e n t i f i e d
d iffe r e n c e sa le
as
p lu s
b etw een th e
w ith sa les
p ro fit
15 A lex a n d er, S id n ey S . , e t a l , o n B u s i n e s s I n c o m e .N ew Y o r k : A m e r i c a n A ccou n tants, 1556, p . l .
F iv e M onographs In stitu te of
or
28 lo ss
from
th e
changes
of
the
v a lu e
of
cost
Item s
betw een
20 tim e
of
a cq u isitio n He p o i n t e d
accrued,
th at
out
tim e
th at
of
an
in com e
is
d iffere n t
tim es:
w h ile,
tw o
is
reco g n ized
He
b eliev ed
when
th at
co u ld
be
it
th e
is
The
real
to
(2)
In clu sio n
an
versus
when
betw een w e a lth
as when
th ree
th e
g a in
accou n tan t,
number
down t o
versus
coun ts
d ifferen ce
b ew ild er in g
(1)
(3)
th e
rea lize d ,
narrow ed
g a in ,
s a l e . 11
eco n o m ist
is
at
in com e
and
of
a
sa le
in com e is
con cepts
m ajor
m ade. of
issu e s:
m oney m e a s u r e ,
ex clu sio n
of
ca p ita l
rea liza tio n
as
the
and
A ccrual
versus
c riterio n
for
tim in g
of
a g a in
or
lo s s . He
fe lt
that
if
agreem ent
issu e s,
many
of
th e
co u ld
be
co n tro v ersia l
reached p o in ts
on
th ese
con cern in g
th ree the
21 m easurem ent
of
M artin h is
m onograph
le v e ls,
w h ich ,
in com e
co u ld
be
B ronfenbrenner to he
a
d iscu ssio n cla im ed ,
is
se ttle d .
devoted of
the
a m ajor trends
g en era lly
p o rtio n in
risin g .
of
p ric e He
cited
-----------------2 5 ---------
A le x a n d e r , S id n e y S . e t a l , F iv e M onographs B u sin ess Incom e. New Y o r k : A m e r i c a n I n s t i t u t e o f A ccou n tants, 1950, p. 23. 21
Hoc. cit., p. 24.
on
29 a number
of
in sta n ces
from h i s t o r y
to
prove
h is
p o in t.
22 C la rk W arburton
not
agree
w ith
S olom on F a b r ic a n t
sa id ,
" O rd in ary b u s i n e s s
accou n ts
does
p ro v id e
an e x a g g e r a t e d
fits
when p r i c e
le v e ls
tio n
of
if
end each
of
p ric es,
n o tio n
g o in g
and when
it
and
every
may b e
in d u stry
fiv e
greater
than (1)
on
reasons
on
th ose
of (4)
p a id (5)
for
V a ria tio n
ca lcu la ted
mean t h e
p ro fits
of
b u sin e ss accounts 24 another:
of
one
in d u str ie s,
p h y sica l
in
assets
the
in
o p era tio n s, in
the
rate
of
turnover
of
assets, in
the
a cq u isitio n
V a ria tio n
not
in fla
of
V a ria tio n
sta b iliz a
of
im p o rta n ce
V a ria tio n
pro
im p act
among
p h y sica l (3)
of
w ill
why th e
V a ria tio n ,
b u sin ess (2)
the
Even
com es,
e f f e c t s on th e 23 in d u str y ."
liste d
of b u sin ess
up
in fla tio n ’s
He tio n
are
h im .
in
-
the
average of
in
the
ca p ita l
rate
p h y sica l
age
-
assets,
of rise
assets,
or year
in
p ric es
and
a cco u n tin g
procedures
_ _ _ _ _ _ _ ______ f o l l o w e d . ^ A l e x a n d e r , S id n e y S . , e t a l , F iv e M onographs on B u s i n e s s I n c o m e . New Y o r k : A m e r i c a n I n s t i t u t e o f A c c o u n t a n t , 19& 0, p p . 9 9 -1 0 4 and 1 6 1 - 1 6 6 . 23Ho c . c i t . , p . 1 5 6 . ^H oc.
c it.,
pp. 1 5 6 - 1 5 7 .
30 A nother
for
the
Study
o f A ccountants
was
an a t t o r n e y ,
He w a s m u c h c o n c e r n e d w i t h
the
leg a l
A m erican Dean.
resu ltin g
of
In stitu te
the
w riter s
from f l u c t u a t i o n s
many
states
sp ecifies
from
earn in gs.
If
that
earn in gs
in
p r ic es.
d iv id en d s not
out
Illeg a lly *
d i v i d e n d s may b e
p a id
th ere
was
d isto rtio n
co n sid era b le 25 He w r o t e :
can be
in
p a id
d eterm in ed
incom e
of
th e
A rthur
p rob lem s
C orporate
are
then,
Group
law
in
o n ly
p ro p erly ,
He f e l t
that
statem en ts.
The d e c l i n e i n p u r c h a s i n g pow er o f t h e d o l l a r a f f e c t s t h e m e c h a n ic s o f d e t e r m in in g b u s i n e s s in co m e; b u s i n e s s in com e i s t h e r e s u l t o f l a b o r and c a p i t a l em p loyed in th e p r o d u c t io n o f g o o d s and s e r v i c e s . T h i s m e a n s t h a t b u s i n e s s m u s t make o u t l a y s b e f o r e i t o b ta in s r e c e ip t s . T h ere i s , t h e r e f o r e , a lw a y s an i n t e r v a l o f t im e b e t w e e n s u c h o u t l a y s and s u c h r e c e i p t s , and when th e v a lu e o f th e d o l l a r c h a n g e s m a t e r i a l l y d u rin g t h a t i n t e r v a l p e r p le x in g p rob lem s are p r e s e n te d in d eter m in in g what p o r t io n o f th e r e c e i p t s r e p r e s e n t s a r e t u r n o f c a p i t a l l a i d o u t and what p o r t i o n c o n s t i t u t e s g a in or i n c o m e . .. When t h e v a l u e o f a d o l l a r c h a n g e s m a t e r i a l l y b e t w e e n t h e t im e a m a n u f a c t u r e r p u r c h a s e s raw m a t e r i a l s and th e tim e he m a r k e ts h i s f i n i s h e d p r o d u c t s , how i s h e t o c a l c u l a t e i n t e r m s o f c u r r e n t d o lla r s the c o s t o f goods so ld ? "When s u c h m o n e t a r y ch a n g es o ccu r d u rin g th e l i f e o f b u ild in g s , or p l a n t a n d e q u i p m e n t o r o f m i n e r a l d e p o s i t s , how i s h e t o a r r i v e a t t h e a n n u a l c h a r g e t o b e made a g a i n s t g r o s s r e v e n u e f o r d e p r e c i a t i o n and e x h a u s t i o n o f th ese a ssets?
----------- 25-----D e a n , A r t h u r H . , An I n q u i r y i n t o t h e N a t u r e o f B u s i n e s s Incom e u n d er P r e s e n t P r i c e L e v e l s . New Y o r k : S tu d y Group on B u s i n e s s Incom e o f t h e A m eric a n I n s t i t u t e o f A ccou n tants, 1949, pp. 3 -6 .
31 He to
su b sta n tia ted
Government
Report
of
h is
docum ents.
For
a S u bcom m ittee
E con om ic R e p o r t
o p in io n
of
on P r o f i t
in
exam p le,
part he
by r efe ren ces
quoted
the
J o i n t C om m ittee 26 H earin gs:
from th e on th e
T he U n i t e d S t a t e s D e p a r t m e n t o f Commerce e s t i m a t e s th e d i s t o r t i o n r e s u l t i n g from ch a n g es i n i n v e n t o r y v a l u a t i o n a t upward o f 5 b i l l i o n d o l l a r s i n e a c h o f t h e y e a r s 194 6 and 1 9 4 7 . T hat i s t o s a y , h a d t h e c o r p o r a t i o n s c h a r g e d t h e same s a le s p r ic e s th a t th ey d id charge in 1947, but had t h e y u n i v e r s a l l y f o llo w e d th e p r a c t i s e o f c h a r g i n g t o e x p e n s e t h e amount n e e d e d t o r e p l a c e p h y s i c a l volum e o f i n v e n t o r y u s e d u p , c o r p o r a t e ’' p r o f i t s ” w o u l d h a v e b e e n 5 . 1 b i l l i o n d o l l a r s l e s s than th e y w ere. He f e l t co n sid era tio n th eir that
to
im p ortan ce flu ctu a tin g G eorge
Group, p rice
th at
0.
p red icted le v els,
present
the
S tu d y Group
in v en to ries in
and d e p r e c i a t io n
d eterm in in g
p rice
sh ou ld g iv e
le v e ls
incom e
May, R e s e a r c h C o n s u l t a n t a co n tin u a tio n
w h ich gave
a cco u n tin g
of
the
him c o n c e r n
m ethods.
because
and th e
w ould have
careful of
effects
upon th em . for
the
Study
upward t r e n d
in resp ect 27
of
to
He w r o t e :
The g r e a t e s t s i g n i f i c a n c e i n a c c o u n t s w o u ld be a t t a i n e d i f r e v e n u e s and c h a r g e s a g a in s t rev en u es w ere s ta te d in term s o f u n it s 26D eaii, A r th u r H ., B u s i n e s s Incom e u n d er P r e s e n t L e v e l s . New Y o r k : A m e r i c a n I n s t i t u t e o f A c c o u n t a n t s , p . 8 , and S u b c o m m ittee o f t h e J o i n t C om m ittee on t h e E co n om ic R e p o r t on P r o f i t s H e a r i n g s , P r o f i t s . W a s h i n g t o n ,D .C . : Government P r in t in g O f f i c e , 1 9 4 9 , p . 3V. ^ M a y , G eorge 0 . , " B u s in e s s Incom e and P r i c e - L e v e l s - A n A c c o u n t i n g S t u d y . " N ew Y o r k : S t u d y G r o u p o n B u s i n e s s In co m e, A m erican I n s t i t u t e o f A c c o u n t a n t s , J u ly 1 , 1 9 4 9 , p p . 4 2 - 4 5 and 1 0 5 - 1 0 7 . P rice 1949,
32 o f t h e same p u r c h a s i n g p o w e r , an d t h e t r e a t m e n t o f a l l c o s t s w ere h om ogen eou s. I t m ust be con c e d e d t h a t p r e s e n t m eth od s o f incom e d e te r m in a tio n f a l l far short o f a tta in in g e ith e r o f these o b jectiv e s. By 1 9 4 9 , w hether th ey
or not
ought
w ould be
to
he was changes
tak e.
ra isin g
sh o u ld be
He f e l t
one w h ic h was
the
made
that
stated
q u estio n
the
" in
as
to
and w hat
form
i d e a l m ethod
the
same p u r c h a s i n g
p ow er." He
su ggested
m ined b y th e end o f be
each
Governm ent acco u n tin g
in d ica tiv e
of
sh ou ld r e f l e c t rather
than
that
the
th e
the
an in d e x number and p u b l i s h e d
p erio d .
change
change
change
in
in
in
T h is
s h o u ld be
p rom p tly a t
i n d e x number
gen eral p rice
the
p rice
v a lu e of
of
deter the
sh ou ld
le v el
the
and
d o lla r
a p a rticu la r
com
m od ity . H e,
too,
w as much c o n c e r n e d w i t h
in v en to ries
and
d ep recia tio n . The S tu d y G roup, study,
made
B u sin ess
report
Incom e,
Company I n cer ta in
its
four
en titled ,
w h ic h was
One o f
the
w hich
Is
th e m onetary u n it ,
p o stu la tes im p o rta n t th at w h ich
years
In
the
by the
p o stu la tes
the
ex ten siv e
in
of
M acm illan
Im portance
Incom e
flu ctu a tio n s is
of
C hanging C o n c ep ts
p u b lish ed
1 9 5 2 . They em p h asized
a cco u n tin g
p o stu la te
after
of
d eterm in a tio n . is
the
the
a cco u n tin g
m onetary
v a lu e sym bol,
of may
33 be
Ignored.
Prom t h i s
or
p ro fit
in
a eriven y e a r
may
fa ctu rin g
or
tra d in g ,
and
in
the
m onetary
u n it
v a lu e
of
ifica n ce
of
same
ourposes
for
p ro fit
are
the
tw o
typ es
for
p o stu la te
part
part
from
d u rin g of
In
the
p ro fit
assum es
is
of
th at
a b u sin ess
w ill
then
the
be
tru e,
a number
of
b u sin ess
b u sin ess
cy cles
in
the
The
sig n
by no m eans
is
th is
incom e
from manu
p erio d .
acco u n tin g
ous.
that
changes
of
w nich
over
a rise
fo llo w s
w h ich
m anence, If
"It
d eterm in a tio n 28 com m only m a d e ."
m ost
A nother
p o stu la te
incom e
that be
w ould
In w h ich
the
of
or
per
co n tin u extend
p rices
w ould
flu ctu a te. A nother rea liza tio n ; at
the
p o stu la te,
that
and th at th e
th e
recent
en tire
moment w h en r e a l i z a t i o n
u s u a l l y when t h e en tire
is,
of
sa le
d iffere n c e
the
revenue
tim e.
betw een
from
the
the sa le
costs
cost of
m ay b e
incom e
is
m ade.
No c o n s i d e r a t i o n
rep lacem en t
o rig in a l
is
o rig in ,
cost is is
from
deem ed
Under
is
to
th is
su b sta n tia lly
of a rises
p la ce,
p ostu late,
co n sid ered to
sa les take
o f m ak in g
g iv en
th at
the
the
the
sa le
p ro fit
at
fact
that
more
than
the
p ro d u ctio n .
28 S tu d y Group on B u s i n e s s Incom e o f t h e A m erican I n s t i t u t e o f A c c o u n t a n t s , C hanging C o n c e p ts o f B u s in e s s Incom e. Ne w Y o r k : T h e M a c m i l l a n C o m p a n y , 1 9 l c 2 , p p . 2 0 - 2 1 .
34 In
sum m arizing
th ey w rote,
"The
y e a r w ould be in com e of
eral
seven
of
concept,
the
In
the
and
(c)
types
in of
b a sis
tim e,
(b)
rea so n a b le in co m e.
the
of
There
the
a
ca p a b le
are
at
the
gen
m edium o f
d eterm in ation , to
for
co n fo rm ity
co n sid era tio n :
e n tities
incom e
fo r w hich
rea d ily
o f m easurem ent,
uses
incom e
m ajor p u r p o se s
em p loyed ,
req u irin g
th e m ajor
a llo ca tio n
for
con cern in g
o f b u sin ess
are
obher
elem en ts
co n clu sio n s
concept
useful
im p lem en ted ,
ex p ressio n , of
(a)
con cep ts
le a st
id ea l
d eterm in ation s
b ein g
w ith
th eir
w hich
the
m ethod
incom e
is
29 to
be
a ttrib u ted , It
Is
the
that
the
u n it
In cu rren t
the
o p in io n
m edium o f
o f revenues
means of
those
tic a l
costs,
lie
the
ch o ice
of
d o lla r
of
the
m in ed .
If
one c o u ld
the
other,
as
the
for as
la tte r
in
Id ea lly ,
of
rea d ily
the
the is
group
m onetary the
Id en tica l
as
power
p u rch a sin g
such
in com e
be put
as is
In to
p o ssib le
"As a p r a c
o f m easurem ent
ch an gin g
excess
sh o u ld be
are m easured,
w hich th e
w ould
of
g a in
n ea rly
eq u al p u rch asin g year
that
of u n its
betw een m onetary u n it s
and u n i t s
m ust be
w hich,
by w h ich rev en u es
m atter,
m a jo rity
They agree
m easured by m onetary u n it s w ith
im p lem en ta tio n ,”
the
ex p ressio n
use.
over
of
th at b ein g
seem s
to
power of
the
d eter
p ra ctise
as
o b v i o u s l y be more w i d e l y
---------------- 2 5 ---------
S t u d y G roup on B u s i n e s s Incom e o f t h e A m erica n I n s t i t u t e o f A c c o u n ta n ts , C hanging C o n cep ts o f B u s in e s s I n c o m e . New Y o r k : T h e M a c m i l l a n C o m p a n y , p p . 103-4.
35 useful; but the former has in its favor its ease of 30 application and its wide present-day acceptance.1' In the first of these, using monetary units of changing values, costs expressed in conglomerate values are matched against revenues expressed in terms of cur rent value. In the latter,
there Is an attempt to re
duce all figures to a comparable value. This ma y be done by applying an index number to the historical cost figures or by using replacement costs rather than historical costs as a basis for calculating charges against current revenue. After carefully considering the major issue, what changes in practise are called for where the assumption of reasonable stability is regarded as unwarranted, the 31 Study Group concluded as follows: For the present, it m a y well be that the primary statements of Income should continue to be made on bases now commonly accepted. But corporations whose ownership Is w i d e l y distributed should be encouraged to furnish information that will facilitate the determination of income measured in units of approximately equal purchas ing power, and to provide such information wherever it is practicable to do so as a part of the material upon w hi c h the Independent accountant expresses his opinion. ----------------TO---------
Study Group on Business Income of the American Institute of Accountants, Changing Concepts of Business Income. New York: The Macmillan (Jompany, 1'§5 -
425 73 5
H Q ,.3,69
$ 9,130 32 50 350 594
.,310,15.6
1944 REPORTED ADJUSTED 3 3,999 32 50 425 295 764
310.565
3 9,053 32 49 350
1945 REPORTED ADJUSTED 331 32 50 / r~' r
223
o yo
560
519 343
310,267
«ill,.Q42
5 3,935 32 49 350 221 330 600
HQH-5Z
1946 REPORTED ADJES! 510,326 40 176 256 303 613 562 12,771
510,3:
325 r052
320.^2
L
15 2] O 5
2
4c 3 ,6 2
1947 1943 1949 1950 1951 1952 REPORTED ADJUSTED REPORTED ADJUSTED REPORTED ADJUSTED REPORTED ADJUSTED REPORTED ADJUSTED REPORTED ADJUSTED .,10,202 ;?10,2o4 40 40 163 173 209 254 232 307 601 440 561 399 3,336 5,632 11,104 6,305
12;,57$
«
123f639
610,039 510,100 40 40 162 168 209 254 231 306 599 439 561 399 5,229 7,739 3,308 5,825 12,126 6,352
9,768 5 9,327 33 33 162 167 205 249 293 225 437 597 398 559 7,666 5,130 3,290 5,793 5,042 2 ,6a 3,970 7,535
627,65k „ 12&*4&L S22*fl2 _ $26r373
v 9,700 5 9,759 37 37 162 167 248 204 225 297 596 437 557 396 5,178 7,663 5,782 3,283 2,640 5,039 1,312 955 3,087 5,755
$37,653 $26,3.63 ,
5 9,372 34 164 236 282 538 535 7,654 5,724 4,991 1,777 1,514 9,943
: 9,479 34 160 194 213 431 331 5,172 3,250 2,614 936 312 4,393
J fc M i.
6 9,306 3 9,362 34 34 161 157 235 193 211 279 430 587 376 523 5,129 7,591 5,689 3,231 2,606 4,975 1,777 936 312 1,514 1,990 979 13,971 6,620
$31,076 ,
88 T h is
is
ex p la in e d
brought
in to
th o u g h
it
assets
were
th e
by
the
fact
th at
co n so lid a tio n
had b een
owned by
liste d
then
another
for
the
the
fir st
com pany
a cco rd in g
to
com pany w as tim e,
a l
p rev io u sly .
the
years
of
Its
a cq u isi
tio n . A lso , the
records
T hese for
had
th is
in at
1946, cost
been
le ss
w ritten
sim ila r
to
rep orted
am ounts
for
down
the
assets.
p erio d
o w n ersh ip co n sid ered the
p lu s,
(See
about
of
tim e
common In
th e
the
were
restored
d e p recia tio n
q u ick ly
and w ere
ca p ita l for
in
or
to
to
d ate.
restored
th e
th e
common th at
p referred
to
assets
eq u ity
stock was
le v e l
w ere
th e were
th e
re
the
changed
d iffe r d u rin g
a cq u ired . the
In
sin g le
resid u a l
h is
stud y,
Item
account
not
stock .
of
elim in a te
Jones, a
th at
d ep recia tio n
rep resents
as
in
in
89.)
p rice
C.
ad ju sted
a c q u isitio n
page
the
was
accou n t, for
made
R alp h
earned,
the
w ere
eq u ity
firm .
of
V II,
because
stock
asset
years
T a b le
sin ce
account
a llo w a n ce
to
common s t o c k
b a la n ce
restricted
fix ed
ad ju stm en ts
brought
The
in g
too
a llo w a n ce
the
a cco rd in g
T hese ences
assets
rea so n a b le
off
d ep recia tio n
a m anner
la te d
of
reason.
The
broken
a number
p lu s
rep resen t a ll
sur
sp e c ifica lly For
the
purpose
of
Table VII
ALLOWANCE FOR DEPRECIATION
89 i
YEAR
INDEX*
1939** 1940
9 9 .4 100.1
1941
102.8
1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952
121.5 132.2 136.5 140.5 148.0 176.1 190.9 189.8 186.4 203.2 210.3
T otal
1939 REPORTED ADJUSTED $ 1,124
8 1,130
♦ 3g3.24 S 1.130
*
Average fo r f i s c a l year.
**
1939 and p rior y ea rs.
1940 1941 1942 REPORTEDADJUSTED REPORTED ADJUSTED REPORTED ADJ1 $ 1,462 $ 1,471
* 1.462
Amounts are given fo r thousands of d o lla r s
# 1.471
$ 1,808 3
» 1.811
$ 1,819 3
8 1.822
8 2,171 $ : 6 6
8 2.183
|LJ
I
Table VII ALLOWANCE FOR DEPRECIATION By year
of a c q u isitio n
1942 1943 1944 1945 1946 BPORTED ADJUSTED REPORTED ADJUSTED REPORTED ADJUSTED REPORTED ADJUSTED REPORTED AI $ 2 ,1 7 1 6 6
$ 22,184 ,1 8 4
$ 22,755 ,7 5 5
$ 22,772 ,7 7 2
$ 33,007 ,0 0 7
$ 3,025
6 6
10 12
10 11 16
11
11 12 26
19
13 32 30
23
$ 33,299 ,2 9 9 13 19 46 57 48
$ 33,319 ,3 1 9 13 18 38 43 35
$ 44,243 ,2 4 3 17
$ 4 ,:
22 60
77 92 0
ft 2.183
$ 2 .19 6
$ 2.796
$ 2.809
$
3*993,
$ 3 .09 7
$ 3.482
$ 3.466
$ 4.511
1
1947 1950 1952 1949 1951 1948 REPORTED ADJUSTED REPORTED ADJUSTED REPORTED ADJUSTED REPORTED ADJUSTED REPORTED ADJUSTED REPORTED ADJUSTEE
$4,227 $4,253 32 32 55 53 80 66 105 79 98 134 72 51 356 241 2 1
$ 4,890 $ 4,920 43 43 76 74 81 99 100 132 176 129 88 63 536 794 182 320 16 30
I gi,.Q63 $4.874 | 6,648 | 6,144
$ 4,977 $5,007 39 39 82 84 110 91 111 147 208 152 96 135 759 1,124 688 391 185 354 2 4
$2*670
$ 6.915
$ 5,059 $ 5,090 35 35 86 84 127 154 204 154 236 173 117 164 960 1,421 547 965 580 304 121 64
$ 5,272 $ 5,304 28 28 87 89 177 215 285 377 242 177 126 177 1,761 1,190 721 1,269 439 839 123 233 88 47 8 17
$ 5,459 $ 5,492 31 31 92 89 226 275 478 362 342 251 181 129 2,090 1,412 902 1,588 1,113 583 369 194 102 191 81 164
I S>.,02g 12*651
M iiO Z
*12.373 12*854
| 8^2
90 b ein g
m ore
common
exact,
stock
the
eq u ity
author
in to
of
tw o
th is
stud y
accou nts,
sep arated
common s t o c k
and
su rp lu s• The changes am ount the
sig n ific a n c e
d u rin g
and p e r c e n t
ad ju sted
b a la n ce These
in
term s stated
am ounts total
of
by th a t
th e
rate
ad ju sted In
of
shown
those
page
92,
on
th e
rate
cred ito rs
or
d educted
v a stly
of
th e
net
E xpressed
in
d iffere n t
for
th e
V III,
of
rep orted for
91.
su b tra c tin g
the
In
1952,
T h is
assets the
the
m eans w ere
and
th e
page
d iffer
th at,
in
over
d iffere n c e
step
th e
fu rth er.
on
the
betw een
rate
retu rn ,
of
th e
retu rn
author
is
earned
o f w hether
It
is
One m u s t
in com e
is
p ercentages, th e
reported
It
shows
unadjusted
Incom e
sto ck h o ld ers. b efore
a
assets
c a lcu la tin g
reg a rd less
total
goes
total
because
term s
v a lu es.
expresses
in v estm en t
by
rep resen tin g
and
assets,
T a b le
rep orted.
th e
le v el
d iffere n c e
was $ 5 9 ,1 6 5 ,0 0 0 .
d o lla r s,
retu rn
in
d eterm in ed
b a sis
total
is
amount
p ric e in
of
am ount,
IX ,
in d ica ted
The
and eco n o m ic
T a b le
of
betw een
were from
is
effect
d ifferen ce
is
assets
1935-39
a cco u n tin g
of
item s
d ifferen ces
the
p erio d
fig u re s.
sheet
ad ju sted ence
th is
of
In
has
on t h e
fu rn ish ed
rem em ber
that
and
p ercen t. used total
by
the
in tere st
d eterm in ed . the and
rate
of
return
ad ju sted
is
fig u res.
not
91
Table VIII DECREASES RESULTING TO BALANCE SHEET
DECREASES (INCREASES*) RESULT] ASSETS Cash U.S. Securities Receivables Other monetary assets Total monetary assets Inventories
1942
1943
89 30
453 10 9,631 681
$ 3,265 916 4,005 1,970
$~7
$346
$10,775
$10,156
3
167
2,296
3,874
1939
1940
19a
$ 9
$ 7
$227
1 no n*
$
Thtal current assets
□ *
H
$513
Plant and equipment Depreciation allowance
$ 70* 6*
$ 57* 9*
$ 4* $ 11*
48 i 13*
Net property
$"64*
$”48*
$ 7
61
Leased property - net Deferred charges, etc. Total non-current assets TOTAL ASSETS
1*
teS 2 B
$
5* 116
54
$"65*
$ 48*
g |*
j~38*
fa ML
$ 10 7 18 12 113* u s*
$
$
213 13 *
226 5* 788
172
1 1,009
$13.,?42
I15.1.Q39,
$ 7 8 12 8 73*
$475 $ u , 944 106 224 545 157 439 388* 315
$11,556
U |*
m
$15.,P32
LIABILITIES AND NET WORTH Current lia b ilitie s Mortgage payable Preferred stock outstanding Common stock Surplus TOTAL LIABILITIES AND NET WORTH Amounts are given for thousands of dollars
$13,243
490 563 2,430
Table VIII RESULTING FROM ADJUSTMENTS TO BALANCE SHEET ITEMS TO CONVERT TO 1935 - 1939 BASIS 1943
1944
1945
1946
1947
1948
1949
1950
1951
1952
,265 916 .,005 .,970
$ 5,324 1,991 4,663 828
$ 8,337 3,176 750 1,871
$ 8,339 4,557
$ 3,661 4,582 3,111 2,015
$ 5,130 4,382 1 ,9 a
$ 4,234 4,528 3,266
$ 5,654 4,902 7,872 855
$ 8,047 5,025 9,572
1,235
$ 6,887 4,530 3 ,7 a 1,559
»,154
$1 2 ,8 0 6
$14,134
$15,823
$16,717
$13,369
$11,453
$12,028
$19,283
$24,542
1,874
3,567
1,467
4,549
7,491
1 0 ,6 6 6
6,834
7,270
1 4 ,6 6 2
17,004
*220.
$16,373
$15,601
$2 0 ,3 7 2
$24,208
$2 4 ,0 3 5
$18,287
$19,298
$33,945
$41^.41
213 13*
$
$
16
$ 4,531 30
$ 7,889 189
$11,187 504
$11,339 9*5
$1 1 ,2 9 0 1,370
$14,295 1,895
$17,511 2,519
226
$
459
$ 4,501
$ 7,700
$10,683
$10,384
$ 9,920
$1 2 ,4 0 0
$14,992
362
609
1,465
1,937
2,627
5*
298
4* 302
$
4*
475
4* 105
1 ,6 9 2
4* 163
4* 515
1 ,8 9 8
788
1 ,6 1 6
-,009
$ 1,914
$
560
$ 4,660
$ 8 ,2 1 1
$11,045
$10,993
$11,385
$14,337
$17,619
;,039
118^282
$1 6 ,1 6 1
$?2 *Q22
122*419.
$25.,,Q80
$29,280
$30,683
$4 8 ,2 8 2
$52*165.
.,556
$12,551
$ 9,797
$10,372
$14,257
$13,285
$ 6,871
490 563 :,430
6,072
7,124
665 5,071
702 5,662
1 ,0 5 2
1 ,2 3 6
7,536
9,802
7,029 1,319 13,447
6,170 1,253 14,986
$ 7,155 297 5,695 1,342 16,194
$21,321 294 5,575 1,448 19,644
$28,770 272 5,323 1,472 23,328
>.039
$13,287
$1 6 ,1 6 1
$2J>,P32
$2.2.1.419
$35,080
$29f280
$20*682
$48,282
Table IX RATE OF RETURN ON TOTAL ASSETS TEAR INCOME (LOSS*) 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952
$1,862* 873* 809 3,506 7,122 7,918 499 1,447* 3,368 6,529 3,424 1,605 4,585 6,084
UNADJUSTED TOTAL ASSETS $14,163 13,882 18*940 71,474 66,011 72,513 61,322 74,184 81,407 80,800 70,435 71,969 101,601 120,068
adjusted
PERCENT -00-004.3 4.9 10.8 10.9 -.8 -004.1 $.1 4.9 2.2 4.5 5.1
INCOME (LOSS*) $1,873* 876* 824 3,164 5,481 5,721 98 2,452* 1,039 3,103 1,737 510 1,844 2,673
TO 1935 - 1939 VALUES TOTAL ASSETS PERCENT $14,229 13,920 18,366 58,231 50,972 54,226 45,161 49,152 48,988 45,720 a,155 a, 286 53,319 60,903
-00-004.5 5.4 10.8 10.6 .2 —00— 2,1 6.8 4.2 1.2 3.5 4.4
Amounts are given for thousands of dollars*
684 $ 3,24!
203.2
210.3
Total
* Average for fisc a l year ending September 30, Amounts are given for thousands of dollars.
T able XVII
DEPRECIATION AND AMORTIZATION BY YEAR OF ACQUISITION (Values are adjusted to 1935 - 1939 b a s is .) 1943 1944 1945 1946 1947 SD REPORTED ADJUSTED REPORTED ADJUSTED REPORTED ADJUSTED REPORTED ADJUSTED REPORTED .6 2 '4 53
$
598 3 5 3H 887
* 1 ,8 0 4
$
602 3 5 256 671
* 1,537
$
418 3
$
16 489 1 ,3 8 1
5
421 3 5 13 370 1,012
f 2,312
$ 1,824
$
415 2 5 16 29 365 953
# 1,785
$
418 2 5 13 22 267 678
* 1,405
$
266 2 3 11 20 48 313 866
# 1,529
$
268 2 3 9 15 35 223 585
t 1,140
$
252 2 3 11 18 26 22 859 1 ,5 4 9
* 2,742
1952 1950 1951 1943 1949 PORTED ADJUSTED REPORTED ADJUSTED REPORTED ADJUSTED REPORTED ADJUSTED REPORTED ADJUSTED *
239 #
242 2
243 2
2
3
3 9 14 19
3
11
IS 26 22
346 956 1,984
3 ,6 1 0
16
234 543 1,039
$ 2 ,1 2 2
11
18 26 22 316
293 1,069 2,652
* 4,651
240 2
3 9 14 19 16 214 166
560 1,397
♦ 2 ,6 4 0
*
274 $ 2 6
13 20
32 29 348 319 319 607 1,469
$ 3,438
276 2 6 11
15 23 21
235 181 167 320
788
♦ 2,045
$
260
3 8
13 19 32 29 348 319 279 118 755 2,008
$ 4,191
$
262
3 8 11
15 23 21
235 181 146 62 405 9 88
# 2 ,3 6 0
%
209 * 1
210 1
7
7
12
10
18 32 27 342 316 276 116 82 685 1,685
14 23 19 231 179 145
# 3,808
| 2,082
61
44 337 801
107 The total amount of depreciation and amortization charges for each year is shown on the bottom line of the table. The column at the extreme left indicates the years of acquisition of the related assets. In the adjacent column, the Index number applicable to each year of acquisition is indicated. The amounts under the word "REPORTED” Indicate the portion of the total depreciation and amortization charges applicable to the fixed assets acquired in the years indicated in the column at the extreme left. The "ADJUSTED" amounts were determined by dividing the reported amounts by the index number on the same horizontal line. The years across the top of the table indicate the year of the annual report in which the reported total appears. For example,
In 1952, the total reported deprecia
tion and amortization charges were ft3,808,000.
Of this,
$209,000 was identified with the assets acquired in 1939 or earlier. The $209,000 was adjusted by dividing it by the index number applicable to 1939, which was 99.4. In like manner, $1,000 identified with assets purchased in 1940 was adjusted by dividing it by 100.1. Each of the reported amounts in the column was adjusted by dividing it by the corresponding index number. These adjustments for 1952 reduced the reported total of $3,808,000 to a value of $2,082,000, making a
d iffere n c e
through, a d ju s tm e n t
The and
com pany com b in ed
a m o rtiza tio n
a m o rtized
item s
e stim a ted
by th e
because T h is
they
th e
as
true
was
on n e t page
in
d ep recia tio n
and
fix tu res.
a very
short
a p p ro x im a tely th e
sharp
in
year,
o f m o d els.
decrease
a c q u isitio n ,
p erio d ,
one
change
The
in
many
the cases,
assets.
assets
am ounts
com puted
b a la n ce
sheet
total
com puted
of
th e
were
from
w h ile
Item s
for
exceeded b a la n ce
shown
from by
the
p u rch a sin g
in v o lv e d .
the
The
p u rch a sin g
b a la n ce
current
Is
power
(See
lo sses
T a b le
X V III,
for
of
the
power
the
year
year
to
the
on th e
current
sheet
item s
com puted
year.
the
g iv en
fig u res
assets, by an
eq u iv a len t
as
of
th e
p reced in g
b a la n ce
current
sheet
lia b ilitie s
was
am ounts
d iv id ed
convert
C olum n A w e r e
the
there
from
a cred it
a sterisk .
rep orted was
for
X VIII
co m p a ra tiv e
lia b ilitie s
in
from
When t h e
m onetary
of
A and B o f T a b le
The
In d ica ted
average
assets fir st
the
assets.
total
w h ich
colum n s
am ounts
C olum n B w a s
the
In
su b tra c tin g
m onetary
year,
the
d ie s,
w ith a
records
1 0 9 .)
w ere
tary
be
was
fo llo w in g
m onetary
its
off
o b so lete
fix ed
$ 1 ,7 2 6 ,0 0 0 .
to o ls,
com pany t o
why t h e r e
of
in
w ritten
ca lcu la tio n s
The
th e
were
year
The
jig s,
becam e
ex p la in s
amount
of
of
by
th ese the
the
of
in d ex
am ounts fir st
net
of
to th e
m one as
of
the year
Table XVIII
109
PURCHASING POWER LOSSES (ASSETS)
Table XVIII
PURCHASING POWER LOSSES ON NET 1
YEAR
1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952
A REPORTED AMOUNT AT BEGINNING OF YEAR CREDIT* ♦
18* 18* 236 1,720* 5,581* 5,432* 914 14,662 13,928 5,357 171 9,836 10,135 3,937*
B REPORTED AMOUNT AT END OF YEAR CREDIT* *
18* 236 1,720* 5,581* 5,432* 914 14,662 13,928 5,357 171 9,836 10,135 3,937* 8,033*
Amounts are given for thousands of dollars
C AVERAGE FOR YEAR #
18* 109 742* 3,650* 5,507* 2,259* 7,788 14,295 9,642 2,764 5,003 9,985 3,099 5,985*
O INDEX NUMBER FIRST OF YEAR 100.0 100.6 100.4 108.1 126.5 134.7 138.9 142.0 164.3 184.9 196.2 187.2 192.6 207.4
IN]
(
b le XVIII ,OSSES ON NET MONETARY ASSETS
BER
E INDEX NUMBER END OF YEAR 100*6
100*4108.1 126.5 134.7 136.9 1 4 2 .0
164.3 184.9 1 9 6 .2
187.2 192.6 207.4 2 1 1 .1
F ADJUSTED VALUE AS OF FIRST OF YEAR (Column C divided by column D .) $
18* 108 739* 3,376* 4,353* 1,677* 5,607 10,067 5,868 1,495 2,550 5,334 1,609 2 , 886*
G ADJUSTED VALUE AS OF END OF YEAR (Column C divided by column E. ) $
18* 108 686* 2,885* 4,088* 1 , 626* 5,464 8,700 5,215 1,409 2,672 5,184 1,494 2,835*
H LOSS QB GAIN* (Column F column G) £
-O - 0-
53* 4-91* 265* 51* 123
1,367 653 86
122* 150
115 51*
110 in terms of 1935-39 values. Then the unadjusted average was divided by the index number as of the end of the year. Column P presents the adjusted purchasing power value as of the beginning of the year.
Column G- shows
the adjusted value as of the end of the year.
Column H
indicates the loss or gain in purchasing power for the year, which was computed by subtracting G- from P.
This
represents the loss to the company as a result of its holding cash or monetary items during the year in which the price level rose. As computed on the 1935-39 basis, the loss in purchasing power of net monetary assets during the four teen year period amounted to $1,461,000. on page 103.)
(See Table XV,
Table XVIII on page 109 shows that there
was a gain in purchasing power during some years.
Whether
there was a gain or loss depended upon whether the price level rose or fell during the year and whether the mone tary assets were more or less than the current liabilities. For example,
in 1942, there was a gain of $491,000, which
resulted from an excess of current liabilities over mone tary assets and a rise in price level from 108.1 at the beginning of the year to 126.5 at the end of the year. A borrower is in an advantageous position when the
Ill p u rch a sin g 1942,
power o f
when th e
assets,
it
lia b ility
is
d ecrea sin g .
T herefore,
company had m ore
lia b ilitie s
than m onetary
had an a d v a n t a g e d id
not
seq u en tly w ith A fter v a lu es,
change,
cheaper
the
T h is
is
fou rteen
year
a su b sta n tia l
d ep recia tio n .
earned 2 .2 8
tim es
112,
1952,
to
le v e ls
d ep recia tio n . was
le ss
except
resu lted ,
the
the
in
convert
in crea sed
p u rch a sin g
power o f
T herefore,
to
T a b l e X V,
the
sub
1935-39
page
rela tio n
1 0 3 .)
of
earn in gs
ch a rg es were
as
the
reported
been reduced the
tim es
b a sis
com pared to
fact
a d eta iled
for
g rea tly ,
betw een
of
ch an gin g
incom e
and earned
on an u n a d j u s t e d b a s i s ,
was
slig h tly
that
d u rin g
in
th u s,
d e p r e c i a t io n was
by ad ju stm en ts a d o lla r
am ounts
effects
than
when i t
from t h e
in co m e w as
off
of
o f !$ 2 0 ,2 7 4 ,0 0 0
d ep recia tio n
the
degree
and 1 9 4 2 ,
p art,
p a id
in com e
(see
rela tio n sh ip
Even s o ,
1941
be
amount
b a sis.
have
on an a d j u s t e d
in
to
in
shows
both
a la rg e
in
recorded
on an u n a d j u s t e d b a s i s ,
and d e p r e c i a t i o n
p rice
co u ld
decrease
on an a d j u s t e d
elim in a tin g
the
am ount.
By a d ju s tm e n ts , come
it
p erio d ,
page In
tim es
2.6
but
that
in
d o lla rs.
a net
T a b le XIX, to
in
a d j u s t m e n t s w e r e made
t h e r e was
over
a d o lla r
the
for
of
T h is
adjusted net
a g a in
those
a n a ly sis
m ore.
in
the
years. the
p ro fit
and
Table XIX RELATIONSHIP OF EARNINGS : I DEPRECIATION TEAR PROFIT LOSS* (A) 1939 1940 19 a 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952
I 1,662* 873* 809 3,506 7,122 7,918 499 1,447* 3,368 6,529 3,424 1,605 4,585 6,084
REPORTED TIMES DEPRECIATION PROFIT AND EARNED DEPRECIATION (C/B) (B) (C) * 618 762 982 3,684 1,804 2,312 1,785 1,529 2,742 3 ,6 1 0
4,651 3,438 4,191 3,808
* 1,244* 111* 1,791 7,190 8,926 10,230 2,284 82 6,110 10,139 8,075 5,043 8,776 9,892
-0 — 0* 1.82 1.95 4.95 4.42 1.28 .05 2.23 2.80 1.74 1.47 2.09 2.60
___________ ADJUSTED_____________ PROFIT DEPRECIATION PROFIT TIMES LOSS* AND EARNED DEPRECIATION (G) (G/F) ID ill 1 1,873* 876* 824 3,164 5,481 5,721 98 2,452* 1,039 3,103 1,737 510 1,844 2,673
$
622 765 971 3,245 1,537 1,824 1,405 1,140 1,777 2,122 2,640 2,045 2,360 2,082
$ 1,251* 111* 1,795 6,409 7,018 7,545 1,503 1,312* 2,816 5,225 4,377 2,555 4,204 4,755
-0 1.85 1.98 4.57 4.14 1.07 —0“» 1.58 2.46 1.66 1.25 1.78 2.28
Amounts are given for thousands of dollars*
H W
113 lo ss
Item s
sta n tia l v a lu es.
for
decrease T h is
in fla tio n
causes
In
a
a m arked
is
to
and l o s s
of
W h ile
w ell
as
on t h e
have
b e e n made
in
the
rev e a ls
term s
of
b a la n ce
d ifferen ce
a
sub
1935-39
sh eet,
betw een
that
a cco u n tin g
p u rch a sin g a lso ,
risin g is
and
not
the
ad ju stm en t
show
b a la n ce
of
the
sh eets
XX,
page
114,
le v els,
Id le
d o lla r s
th e
it
is
b a la n ce
effect Just
because
th e
th e
cash,
statem en ts,
d o lla r .
of
the
On t h e
lo ss
elim in a te
power
p rim a ry v a lu e
T a b le
p ric e
in v estm en t.
of
to
the
is
a
su rp lu s.
su rp lu s
to
power
k in d ,
co -o rd in a te
of
p ro fit
through
ju sted ,
does
statem en ts.
statem en t
p erio d s
p u rch a sin g
p erio d
v a lu es.
sto ck h o ld ers'
th e
as
statem en t
v a lu e.
year
accounts
th is
In
creased
the
of
co m p a ra tiv e
th e
in
study
and p r o f i t
lo se
fou rteen
in d ica te s,
and eco n o m ic
su rp lu s
th is
as
of
d o lla r ,
decreased
of
a part sh eets,
changes
in
have
decrease
su rp lu s v a lu e
as
adjustm ents
assets
the
of
of
m ust
de In
be
the
the
ad
d o lla rs
In vested. T ab le vert The A) the
the
X XI,
b eg in n in g
ad ju sted
(B )
.
115,
su rp lu s
su rp lu s
was m u l t i p l i e d year
page
at
by th e
T h is
the
shows b a la n ce
th e to
m ethod
used
to
end
of
year
v a lu es.
year
(C olum n
b eg in n in g
of
th e
in d e x number
as
of
con verted
the
su rp lu s
the
fig u re
fir st in to
con
of
Table XX
STATEMENT OP Sim PLUS
114
1939
1940
REPORTED ADJUSTED
Beginning surplus » 8,097 1 8,196 Add: Variance (Credit) Credit adjustment for prior years\ Cain on common stock Cain on treasury stock 142 Gain on preferred stock 143 Shrinkage in purchasing power: 7 Mortgage 18 Preferred stook Income for the year
ft
8.239 l_ 8,364
ft
Total credits
ft
aiding surplus
Amounts are given for thousands of dollars.
ft
ft
6,317
ft
5,272
5,361
ft
23
20
20
100 212
809
ft 2,942 I ., 2,95,9 ft 1 6.192
6,192
REPORTED ADJUSTED
23
Deduct: Variance (Debit) Renegotiation of war contracts 186 $ Debit adjustments for prior years1 ft 185 ft Increase in purchasing power: Mortgage Preferred stook Dividends on preferred stook 1.862 Loss for yea r 1.873 Total debits
1941
REPORTED ADJUSTED
6.212 ft
6,337
ft
40
67
ft
.
$24
£,194 L 6,529
ft
28
67 3 6
873
m
876
l , ,.992
.6,30? 1 5 . 2 7 2 ft 5,345
ft ___ =£h
ft
6.104
L, ft
6.492
REFOR
Table XX STATEMENT OF SURPLUS FOR THE YEARS ENDING SEPTEMBER 30 (Adjustments to 1935 - 1939 basis)
1942 ED
1943
1944
1945
1946
1947
REPORTED ADJUSTED REPORTED ADJUSTED REPORTED ADJUSTED REPORTED ADJUSTED REPORTED ADJUSTED REPORTED ADJUST
61 $ 6,104$ 5,548 I 9,758 8 8,868 8 17,066 $ 14,194 I 25,326 8 19,813 * 25,825 8 17,426 $ 29,478 # 19,4' 259
56
23
196 148
89
148
1,164
2,039
252
853
5,275
3,564
1,1 4
122
00
12
24 22
350 3*306 3.164
91 5.481
7,122
I 9.758# 9.443 117.076 4 14.644 I 26.148 * 20.857 8 25.825 8 20.163
28
2£ |__ =2=1
$
=2 =
$
10 $
8
I
12
I
2
1,483
1>0
UltM S.EAt&g
liSsHSP. 1.22.7
7.91S - 5 / g l ___ 429___ 2 S __________________hM --1,0
J
258 $
189
564
413
822 I
6Q2 |_____ |
I =2=
175 $
IxML .
I..1,622
118 $ 699 2,.45? ______ 2,570 $___ 629 I
2
22 | .9^258 | ._9j>.443. j l ?,,p66 I 14,.^>6 8 25.326 I 20.255 8 25.825 8 20.163 8 29.478 8 21.942 8 32.151 L22J
1948 1949 1950 1951 1952 REPORTED ADJUSTED REPORTED ADJUSTED REPORTED ADJUSTED REPORTED ADJUSTED REPORTED ADJUSTED
321,062 # 36,680 3 24,350 3 39,749 3 24,069 3 4]-,834 $ 23,811 3 46,299 $ 26,188
$ 32,151
197 200 436
228
572
301
648
447
— 6*5.29 ._j,3L93 I 39.116
-3*424
1,737
1.& 5
617 105 107 348
639 44 342
22 168
212
10
21
4
177
399
85
512
4,535
,1,344
6.934 .. 2,673.
*24.840 I 40.676 I 26.388 3 42.399 $ 25.943 3 46.805 * 26.904 $
3
3
332
3 1,781
932
655
343
3
3 2.436 3 1.607 |
162
619
324 326 3
m
U & g il
3
813
308
I. JL&S |
101
$
565 3
303 3
506 3
249 „
109
159
76
461
219
565 1___ 2221____ 526_I ___ 242 I ___ £221___ 424
3 36.680 3 23.233 |_52iZ42 3 ?4,.?63 3 41.834 3 25.640 3 46.299 3 26.655 | 51,975 L ffj& Z
Table XXI CONVERSION OF BEGINNING SURPLUS TO END OF YEAR VALUE YEAR
A ADJUSTED SURPLUS END OF PRIOR YEAR
B INDEX FIRST OF YEAR
INTERMEDIATE VALUE FIRST OF YEAR (A X B)
D INDEX END OF YEAR
E BEGINNING SURPLUS ADJUSTED TO END OF YEAR VALUE ( C/D )
1939 19-40 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952
(B ase year) $ 6,305 5,345 6,492 9,443 14,636 20,255 20,169 21,942 22,349 23,233 24,763 25,640 26,655
100.6 100.4 108.1 126.5 134.7 138.9 142.0 164.3 184.9 196.2 187.2 192.6 207.4
Amounts are given for thousands of dollars*
% 6,343
5,366 7,018 11,945 19,715 28,134 28,631 36,051 a , 323 45,583 46,356 49,383 55,282
207.4
$ 6,317 5,361 5,548 8,868 14,194 19,813 17,426 19,498 21,062 24,350 24,069 23,811
211.1
26,188
100.4 108.1 126.5 134.7 138.9 142.0 164.3 184.9 196.2 187.2
192.6
116 v a lu es
as
of
d eterm in e th e by
end the
the
of
of
in
The and
These
of
current
year,
th is
v a lu es author
as
of
has
show
account th e
for
have
in c lu d e d w ith
but
th e
au th or
of
1935-39
th e
year
of
(C).
d o lla r s
product
end
in clu d ed
accou n ted been
in
the
current
the
(C)
was
year
b eg in n in g
as
of d iv id ed
(D).
su rp lu s
To
T h is to
(E).
d eb it
accou n ts
th e
term s
co n v ersio n
a v a ria n ce
or
in
num ber a
year
b eg in n in g
v a lu e
th e
in d ex
r esu lted end
the
th e
fe lt
a v a ria n ce
in
amount
th e of
th at
it
su rp lu s
varia n ce
adju stm en ts. th e
cred it
T hese
b eg in n in g w ould
be
account
statem en t. o th erw ise
v a ria n ces
su rp lu s b etter
un
co u ld
fig u re,
to
lis t
them
sep a ra tely . These th e
years.
v a ria n ces
H owever,
w ere
in
1946,
re la tiv e ly th ere
$ 2 ,0 3 9 ,0 0 0 ,
w h ich was
a p p ro x im a tely
In
year,
ad ju sted
the
sam e
a p u rch a sin g adjustm ent power
lo ss, 1 $ 6 7 2 ,0 0 0 .
power
th e
lo ss
h ad b e e n made th e
v a ria n ce
th at
w ou ld
was 3
of
year
have
in
m ost
a v a ria n ce percent
p ro fits
ad ju stm en t in
sm a ll
w ere
of
for
been
of sa les.
reduced
$ 1 ,3 6 7 ,0 0 0 . th is
of
If
by no
p u rch a sin g
reduced
to
P u r c h a s in g pow er l o s s on n e t m o n e ta r y a s s e t s i s c o n s id e r e d an e x p e n s e b y th e A m erican A c c o u n tin g A s s o c i a t i o n ; b u t R a lp h J o n es s a id i t so m etim es m ust be c o n s id e r e d a s u r p lu s I t e m t o a v o id in co m e d i s t o r t i o n . (R ound t a b l e d i s c u s s i o n , A m erican A c c o u n t in g A s s o c i a t i o n C o n v e n t io n , U r b a n a , I l l i n o i s , Septem ber, 1 9 5 4 .)
117 In le ss
of
tim es
of
a burden
rem ain s
the
rela tiv ely p a y a b le.
than
sam e,
S in ce
rep resents
a g a in
page the
118,
in
the
in
w h ich
to
a g a in
th is
to
case, The
g a in
as m ig h t
X X III,
page T a b le
d iffere n c es
of
the
d o lla rs
of
by
a m ortgage
p a y a b le
company d o in g
the
he
can pay o f f
a ctu a lly
repre
b o rro w in g ,
w h ich ,
com pany s t u d i e d .
lo ss
on
the
p u rch a sin g
d id
not
n ecessita te
be
the
case
the
W h ile
for
be
is
not
power
a cash
net
sim ila r
su rp lu s
It
frequent
sh ou ld
that
borrowed
power
in
the
o u tla y year
m onetary to
of
assets.
in v ested
ca p ita l
account,
a d j u s t m e n t w a s made
stock .
and
power
lo ss
in
tin g en cy
lia b ilitie s,
p u rch a sin g
the
for
at
represent
X X II,
and a c c o u n te d
stock
o f m ortgages
T a b le
co n sid ered
ferred
true
T h erefore,
was
p referred
is
d o lla r s.
it
A sim ila r
repaym ent
cheaper
or
by year,
p a yab le
is
owed
in
the
p a yab le
th in g
in
amount
borrower
the
m ortgage
T h erefore,
same
The
becom es
the
shows
Is
in d eb ted n ess
m oney u sed
p u rch asin g
money s e c u r e d
sen ts
the
The
bonded
a d efla tio n .
m ortgages
in
m ortgages
in
but
cheaper.
a decrease
the
in fla tio n ,
for
g a in
or
custom ary to
in terv a ls,
co n sid ered
redeem
red em p tio n
as
such,
lo ss
(see
Is
on pre
a con
T a b le
1 1 9 .) XXIV, for
the
page
120,
fou rteen
shows year
the
total
p erio d
for
cu m u la tiv e each
item
Table XXII LOSS IN PURCHASING POWER OF MORTGAGE PAYABLE UNADJUSTED AMOUNT AT END OF YEAR
B INDEX FIRST OF YEAR
C INDEX END OF YEAR
D ADJUSTED VALUE AT FIRST OF YEAR
E ADJUSTED VALUE AT END OF YEAR
( A /B )
( A/0 )
F LOSS OR GAIN* (M )
1939
$1,233
100.1
100.6
11,233
$1,226
$ 7
1940
1,886
100.6
100.4
1,875
1,878
1941
1,413
100.4
108.1
1,407
1,307
100
1950
617
187.2
192.6
330
320
10
1951
567
192.6
207.4
294
273
21
1952
517
207.4
211.1
249
245
4
YEAR
3*
Amounts are given for thousands of dollars.
118
Table mil SH RlN IN& KiU AG E IN PU RCHASING POWER OF PREFERRED STOCK ohK li*! rUKUtiASINli YEAR
1939 1940 1941 1942 1943 1946 1947 194* 1949 1950 1951 1952
A UNADJUSTED AMOUNT AT END OF YEAR
B INDEX FIRST OF YEAR
C INDEX END OF YEAR
D ADJUSTED VALUE AT FIRST OF YEAR ( A/B )
E ADJUSTED VALUE AT END OF YEAR ( A/B )
$ 3,009 2,987 2,987 2,602 1,904 15,515 15,515 14,335 13,245 11,845 10,765 10,115
100.0 100.6 100.4 108.1 126.5 142.0 164*3 184.9 196.2 187.2 192.6 207.4
100.6 100.4 108.1 126.5 134.7 164.3 184.9 196.2 187.2 192.6 207.4 211.1
$ 3,009 2,969 2,975 2,407 1,505 10,926 9,443 7,753 6,751 6,327 5,589 4,877
$ 2,991 2,975 2,763 2,057 1,414 9,443 8,391 7,306 7,075 6,150 5,190 4,792
F LOSS «
GAIN* (U-E) I
13
6* 212 350 91 1,052 447
324* 177 399 85
Amounts are given for thousands of dollars.
H* H CO'
120 Table XXIV TOTAL DIFFERENCES IN SURPLUS ITEMS REPORTED ADJUSTED DECREASE (INCREASE*) Beginning surplus #329,831 #224,701 $105,130 Variance 5,104* 5,104 128 Credit adjustments for prior years 220 92 4,698 Gain on common stock 6,883 2,185 1,268 1,090 Gain on treasury stock 2,358 162 1* Gain on preferred stock 163 Shrinkage in purchasing power of mortgage 142 142* Shrinkage in purchasing power of preferred stock 4,314* 4,314 19.255 Income 26.194 41,442 ,
Total
§2*4,202 #266.712
$118.191
# 1 ,3 2 2 $ 1 , 322 * Variance Renegotiation of war contracts # 258 69 189 1,077 Debit adjustments for prior years 2,500 1,423 Increase in purchasing power of mortgage 3* 3 Increase in purchasing power of preferred 330* 330 stock 1,878 2,376 Dividends on preferred stock 4,254 4.182 Loss 1.019* 5,201 .................
Total Ending surplus
1 11024
& 10.844 I
#272*.M #255., 868
Amounts a r e g iv e n f o r th o u sa n d s o f d o l l a r s a
252
121 in
th e
su rp lu s
ex ten sion s page
114.
of
statem ent. the
am ounts g i v e n
The o t h e r
reported
and a d j u s t e d to
certa in
am ounts t o
co n sid er
rela tio n sh ip s the
and t h e
study,
portant
for
each item
the
d ifferen ces
purpose,
in
how c l o s e l y
som e i m p o r t a n t r a t i o s shows
the
fig u re
in ven tory,
of a ll
it
i n v e n t o r y was n o t l i s t e d The r a t i o s on t h e use
reported
eith er
the
for
the
because
are not
( S e e T a b l e XXVI, p a g e to
d o lla r
of
b a sis,
it
was o n ly 1 . 3 2 .
fig u res
the
are
to
fig u res.
were c o n s id e r e d .
In c a lc u la t in g use
fin ish ed
a com p osite goods
in v e n t o r y tu r n o v e r were
so
close
t h a t management c o u ld
or a d j u s t e d r a t i o s w ith o u t
its
in p olicy-m ak in g*
so c l o s e
12 3 .)
p ro fit
betw een
sep a ra tely .
m a k i n g v e r y m u ch d i f f e r e n c e The r a t i o s
im
in v en to ry turnover
the
and a d j u s t e d b a s e s , unadjusted
is
correla ted
was n e c e s s a r y t o
in v en to ries,
It
ex ists
adjusted
o n an u n a d j u s t e d a n d a n a d j u s t e d b a s i s . average
amount b e t w e e n t h e
that
as com puted from th e
122,
d ifferen ces
have been g r e a t .
rela tio n sh ip
determ ine
T a b l e XXV, p a g e
the
net
i n T a b l e XX,
a d j u s t e d am ounts.
fig u res
the
the
com puted from t h e r e p o r t e d
rela tio n sh ip s
For t h i s
two c o lu m n s c o n s t i t u t e
colum n p r e s e n t s
betw een th e r e o o r te d In t h is
Th e f i r s t
for
In 1947,
s a l e s was
2 .4 3 ,
net p ro fit
to
sa les.
the rep o rted cen ts but
on an a d j u s t e d
M anagem ent's p o l i c y
in resp ect
to
Table XXV INVENTORY TURNOVER
REPORTED
YEAR
1939 1940 19U 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952
ADJUSTED
COST OF SALES
AVERAGE INVENTORY
TURN OVERS
GOST OF SALES
AVERAGE INVENTORY
TURN OVERS
$ 11,126 15,428 20,935 96,070 135,921 177,735 153,717 56,164 127,125 159,044 131,582 98,481 197,205 271,817
# 1,858 1,659 2,099 6,915 13,130 13,988 8,874 8,530 14,372 19,207 18,242 14,974 21,827 30,322
5.99 9.30 9 .97 13.89 10.35 12,71 17.32 6.58 8.85 8 .28 7.21 6.58 9.03 8.96
$ 11,193
$ 1,869 1,663 2,014 5,683 10,045 10,268 6,357 5,522 8,352 10,128 9,492 7,922 10,861 14,489
5.99 9.27 10.12 13.95 10.25 12.69 17.23 6.89 8.67 8.25 7.32 6.69 8.96 8 .9 4
15,416 20,381 79,283 102,987 130,339 109,542 38,056 72,409 83,544 69,516 53,034 97,343 129,523
Amounts are given for thousands of dollars.
122
Table XXVI NET PROFIT TO SALES
XEAR
1939 1940 19 a 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952
REPORTED NET SALES CENTS TO PROFIT DOLLARS _____________________OF SALES $ 1,862* 873* 809 3,506 7,122 7,918 499 1,447* 3,368 6,529 3,424 1,605 4,585 6,084
$ 9,264 14,555 21,744 109,426 168,023 212,840 179,765 60,527 138,478 175,811 142,726 108,176 220,191 303,615
-0 •0 " 3.72 3.20 4.24 3.72 .30 —0“ 2.43 3.71 2.40 1.48 2.08 2.00
ADJUSTED NET SALES CENTS TO PROFIT DOLLARS _________________________ OF SALES $ 1,873* 876* 824 3,164 5,481 5,721 98 2,452* 1,039 3,103 1,737 510 1,844 2,673
$ 9,320 14,540 21,152 90,063 127,098 155,927 127,947 40,897 78,636 92,096 75,198 58,034 108,362 144,372
-0 3.90 3.51 4.31 3.67 .07 1.32 3.37 2.31 .88 1.70 1.85
Amounts are given for thousands of dollars.
123
124 use and distribution of profits might be vastly different if it should realize that its profit was only one cent on the dollar instead of two. It might, also, give more attention to low profit items. In considering sales to net worth,
the adjusted
ratios were consistently lower than the reported amounts would indicate.
(See Table XXVII, page 125.) The reported
amounts would have a tendency to lead management to be too optimistic. The relation of sales to average net fixed assets is shown in Table XXVIII on page 126. It shows the fixed assets turnover to be consistently lower on the adjusted basis than on the reported basis. The greatest difference was in 1944, when the reported fi,gures indicated a turn over of 28.30 times, but the adjusted figures indicated a turnover of only 21.48 times. The difference was nearly as great In 1945. The effect that considering only the reported figures would have upon management would be that management might overestimate the efficiency of the use of the fixed assets. The current ratios on the reported and the adjusted bases were closely correlated, because the elements Involved were of current dollars of similar value. Table XXIX, page 127.)
(See
Table XXVII SALES TO NET WORTH YEAR _______________ REPORTED_________________________ SALES AVERAGE SALES PER SALES NET DOLLAR OF WORTH NET WORTH
1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952
1 9,264 14,555 21,744 109,426 168,023 212,840 179,765 60,527 138,478 175,811 142,726 108,176 220,191 303,615
#11,295 10,825 10,772 12,822 17,805 24,426 27,948 37,940 49,019 52,031 54,695 56,077 58,165 62,373
$ .82 1.34 2,02 8.53 9.44 8.71 6.43 1.60 2.82 3.38 2.61 1.93 3.79 4.87
# 9,320 14,540 21,152 90,063 127,098 155,927 127,947 40,897 78,636 92,096 75,198 58,034 108,362 144,372
AVERAGE NET
#11,378 10,893 10,802 12,176 15,414 19,817 21,898 27,428 32,608 32,053 32,593 33,257 33,216 33,978
ADJUSTED____ SALES PER DOLLAR OF WORTHNETWORTH
| .82 1.33 1.96 7.40 8 .24 7.87 5.84 1.49 2.41 2.87 2.31 1.75 3.26 4.25
Amounts are given for thousands of dollars.
125
Table XXVIII FIXED ASSETS TURNOVER YEAH
SALES ■
1939 1940 19a 1942 1943 1944 1945 1946 1947 194S 1949 1950 1951 1952
$ 9,264 14,555 21,744 109,426 168,023 212,840 179,765 60,527 138,478 175,811 142,726 108,176 220,191 303,615
REPORTED AVERAGE NET FIXED ASSETS $ 10,431 10,379 10,502 9,137 7,585 7,522 7,516 14,050 23,528 28,761 30,425 29,235 30,417 34,210
TURN OVERS .89 1.40 2.07 11.98 22.15 28.30 23.92 4.31 5.88 6.11 4.69 3.70 7 .2 4 8.88
SALES $ 9,320 14,540 21,152 90,063 127,098 155,927 127,947 40,897 78,636 92,096 75,198 58,034 108,362 144,372
ADJUSTED AVERAGE NET FIXED ASSETS % 10,495
10,435 10,522 9,103 7,442 7,258 7,135 11,570 17,427 19,570 19,891 19,083 19,257 20,514
TURN OVERS .89 1.39 2.01 9.89 17.08 21.48 17.93 3.53 4.51 4.71 3.78 3.04 5.63 7.04
Amounts are given for thousands of dollars*
126
Table XXIX CURRENT RATIOS YEAR ________________ REPORTED_________________ CURRENT CURRENT RATIO LIABILITIES ASSETS 1939 1940 19a 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952
$ 3,475 3,336 7,358 62,527 54,595 58,535 52,728 52,548 53,034 49,052 39,234 40,267 65,641 78,873
* 1,635 1,640 6,339 57,017 44,657 44,814 33,124 26,502 31,050 27,094 14,750 14,882 a , 174 54,665
2.13 2.03 1 .1 6 1.10 1.22 1.31 1.59 1.98 1.71 1.81 2.66 2.71 1.59 1.44
CURRENT ASSETS $ 3,426
3,326 6,845 49,456 40,565 42,162 37,127 32,176 28,826 25,017 20,997 20,969 31,696 37,327
ADJUSTED CURRENT LIABILITIES | 1,625 1,633 5,864 45,073 33,301 32,263 23,327 16,130 16,793 13,809 7,879 7,727 19,853 25,895
RATIO 2 .14 2 .0 4 1.17 1.10 1.22 1.31 1.59 1.99 1.72 1.81 2.66 2.71 1.60
1.44
Amounts are given for thousands of dollars.
127
As one studies the differences in amounts b e tween the reported and adjusted values, one m a y become concerned at the wide variances.
In the light of this,
one may be surprised after a study of the equity ratios On an adjusted basis, the equity ratios imply that the comoany is on a sounder basis than the ratios on the reported basis Indicate.
For example, Table XXX, page
129, shows that the creditors contributed 46 percent of the total Invested capital, as reported in 1952.
As
adjusted, for 1952, the creditors contributed 43 per cent . Table XXXI, page 130, shows that, in 1952 on a reported basis, the owners contributed 54 percent of the total invested capital.
When this was adjusted,
it was increased to 57 percent. Table XXXII, page 131, shows that, on an ad justed basis, the total liabilities represent a smaller portion of the total investment than the reported ratios would indicate. Table XXXIII, page 132, which shows the relation ship of net profit to average tangible net worth, in dicates that the rate of profit reported was greater than the rate on an adjusted basis.
For example, in
1952, the rate of profit on the reported basis was 9.75 percent; whereas, the adjusted rate was only 7.87 per-
Table XXX TOTAL LIABILITIES TO TOTAL ASSETS YEAR ______ TOTAL LIABILITIES 1939 1940 19a 1942 1943 1944 1945 1946 1947 194* 1949 1950 1951 1952
$ 2,868 3,526 7,752 57,017 44,857 44,814 33,124
26,502 31,050 27,094 14,750 15,499 a ,7 a 55,182
REPORTED______________ TOTAL RATIO ASSETS
101,601
.202 •254 .409 .798 .680 .618 .540 .357 .381 .335 .209 .215 .411
120,068
.460
*14,163 13,882 18,940 71,474 66,011 72,513 61,322 74,184 81,407
80,800 70,435 71,969
TOTAL LIABILITIES * 2,851 3,511 7,171 45,073 33,301 32,263 23,327
ADJUSTED TOTAL ASSETS *14,229 13,920 18,366 58,231 50,972 54,226
RATIO .200 .252 .390
.774
45,111
.653 .595 .517
16,130
49,152
.328
16,793 13,809 7,879 8,047
48,988
.343
45,720 a , 155 a, 286 53,319 60,903
.302
20,126 26,140
.191 .195 .377 .429
Amounts are given for thousands of dollars/
129
Table XXXI NIST WORTH TO TOTAL ASSETS REPORTED
YEAR
1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952
NET WORTH
TOTAL ASSETS
$11,295 10,356 11,188 14,457 2^,154 27,699 28,198 47,682 50,357 53,706 55,685 .56,470 59,860 64,886
$14,163 13,882 18,940 71,474 66,011 72,513 61,322 74,184 81,407 80,800 70,435 71,969 101,601 120,068
ADJUSTED RATIO .798 .746 .591 .202 .320 .382 .460 .643 .619 .665 .791 .785 .589 .540
Amounts are given for thousands of dollars*
NET WORTH
TOTAL ASSETS
RATIO
$11,378 10,409 11,195 13,158 17,671 21,963 21,834 33,022 32,195 31,911 33,276 33,239 33,193 34,763
$14,229 13,920 18,366 58,231 50,972 54,226 45,161 49,152 48,988 45,720 41,155 41,286 53,319 60,903
.800 .748 •610: .226 .347 .405 .483 .672 .657 .698 .809 .805 .623 .571
Table XXIII NET WORTH TO TOTAL LIABILITIES TEAR NET WORTH 1939 1940 19a 1942 1943 1944 1945 1946 1947 194# 1949 1950 1951 1952
111,295 10,356 11,183 14,457 21,154 27,699 28,198 47,682 50,357 53,706 55,685 56,470 59,860 64,886
REPORTED TOTAL LIABILITIES $ 2 ,8 6 8 3,526 7,752 57,017 44,857 44,814 33,124 26,502 31,050 27,094 14,750 15,499 a ,7 a 55,182
RATIO
NET WORTH
3.93 2.94 1.44 .25 .47 .62 .85 1.80 1.62 1.98 3.78 3.64 1.43 1.18
$11,378 10,409 11,195 13,158 17,671 21,963 21,834 33,022 32,195 31,911 33,276 33,239 33,193 34,763
Amounts are given for thousands of dollars.
ADJUSTED TOTAL LIABILITIES $ 2,851 3,511 7,171 45,073 33,301 32,263 23,327 16,130 16,793 13,809 7,879 8,047 20,126 26,140
RATIO 3.99 2.96 1.56 .29 .53 .68 .94 2.05 1.92 2.31 4.22 4.13 1.65 1.33
Table m i l l NET PROFIT TO TANGIBLE AVERAGE NET WORTH REPORTED______________ TEAR ___________ PROFIT TANGIBLE AVERAGE PERCENT (LOSS*) NET WORTH
PROFIT (LOSS*)
ADJUSTED TANGIBLE AVERAGE NET WORTH
PERCEI
1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952
$1,873* 876* 824 3,164 5,481 5,721 98 2,452* 1,039 3,103 1,737 510 1,844 2,673
$11,378 10,893 10,802 12,176 15,414 19,817 21,898 27,428 32,608 32,053 32,593 33,257 33,216 33,978
- 0 - 0 7.63 25.99 35.56 28.87 .45 - 0 3.19 9.68 5.33 1.53 5.55 7.87
$1,862* 873* 809 3,506 7,122 7,918 499 1,447* 3,368 6,529 3,424 1,605 4,565 6,084
$11,295 10,825 10,772 12,822 17,805 24,426 27,948 37,940 49,019 52,031 54,695 56,077 58,165 62,373
- 0 - 0 7.51 27.34 40.00 32.42 1.78 - 0 6.87 12.55 6.26 2.86 7.88 9.75
Amounts are given for thousands of dollars*
132
cent.
In 1941, the adjusted rate was
than the reported rate. justed rate was lower.
a little higher
In all other years, the ad This fact,
in conjunction with
the fact that the differences between the reported amounts of profit and the adjusted amounts were great, w oul d b9 of interest to the firm in determining poli cies.
Management should give this problem some co n
sideration when considering the distribution of dividends and w h e n considering obtaining additional funds, either through borrowing or sale of stock. If management were to consider the ratios on the reported figures, view of net profits
it would have a more optimistic
in relation to the avera e net w o r k
ing capital than it would 'nave if It were it on an adjusted basis. that
to consider
Table X X - I V , pa: e 134,
shows
the rate of profit on an adjusted basis was lower
every year except from 1941 to 1943, Table XXXV, page 135,
inclusive.
shows the relationship of
sales to average net working capital.
There is a very
close correlation between the times that the working capital has been turned over,
as reported and as adjusted.
Management could use either set of ratios without its making m u c h difference in its icolicies. The inventory makes up a large portion of the
Table XXXIV NET PROFIT TO AVERAGE NET WORKING CAPITAL YEAR _____________ REPORTED______________ AVERAGE NET PERCENT PROFIT (LOSS*) WORKING CAPITAL 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952
$1,862* 873* 809 3,506 7,122 7,918 499 1,447* 3,368 6,529 3,424 1,605 4,585 6,084
$ 1,840 1,768 1,357 3,264 7,724 11,829 16,662 22,825 24,015 21,971 23,221 24,934 24,926 24,337
0 0 59.6 107.4 92.2 66.9 3.0 - 0 14.0 29.7 14.7 6 .4 18.4 25.0
-
PROFIT (LOSS*) $1,873* 876* 824 3,164 5,481 5,721 98 2,452* 1,039 3,103 1,737 510 1,844 2,673
ADJUSTED AVERAGE NET WORKING CAPITAL I 1,851 1,772 1,337 2,682 5,823 8,581 11,849 14,923 14,039 11,620 12,113 13,130 12,542 11,637
PERCENT - 0 - 0 61.6 118.0 94.1 66.7 .8 - 0 7 .4 26.7 14.3 3.9 14.7 23.0
Amounts are given for thousands of dollars.
134
Table XXXV SALES TO AVERAGE NET WORKING CAPITAL YEAR SALES 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952
$ 9,264 14,555 21,744 109,426 168,023 212,840 179,765 60,527 133,478 175,811 142,726 108,176 220,191 303,615
REPORTED AVERAGE NET WORKING CAPITAL $ 1,840 1,768 1,357 3,264 7,724 11,829 16,662 22,825 24,015 21,971 23,221 24,934 24,926 24,337
TIMES
SALES
5.03 8.23 16.02 33.52 21.75 17.99 10.79 2.65 5.77 8.00 6.15 4.34 8.83 12.47
$ 9,320 14,540 21,152 90,063 127,098 155,927 127,947 40,897 78,636 92,096 75,198 58,034 108,362 144,372
ADJUSTED AVERAGE NET WORKING CAPITAL $ 1,851 1,772 1,337 2,682 5,823 8,581 11,849 14,923 14,039 11,620 12,113 13,130 12,542 11,637
TIMES 5.04 8.21 15.82 33.58 21,83 18.17 10.80 2.74 5.60 7.92 6.21 4.42 8.64 12.41
Amounts are given for thousands of dollars.
H W U1
136 firm's current assets.
Table XXXVI, pa ge 137, shows
the relationship of the inventory to net working capi tal.
There is a very close correlation between the per
centages determined from the reported and adjusted bases.
This is to be expected in as much as both fac
tors involved in the relationship were adjusted by approximately the same index number.
The monetary
items were adjusted by the index number as of the end of the year and the inventory was adjusted by the average index number for the last three months of the fiscal year. A part of the current debt arises from the pur chase of inventory items.
In turn, a firm will expect
to pay off its current liabilities through sale of in ventory items.
For this reason, the relationship of
current debt to inventory is an important one.
The
fact that there is close correlation between the ratios on the reported and adjusted bases, as shown in Table XXXVII, page 138, can be explained in the same manner as for Table XXXVI. tically the same.
The index numbers used were prac Management could use either the ratios
on the reported or adjusted amounts, and it would make no difference in their policy making. Table
'XXVIII, page 139, shows the relationship
of fixed assets to tangible net worth.
Whenever fixed
Table XXXVI INVENTORY TO NET WORKING CAPITAL TEAR ______________REPORTED______________ NET WORKING PERCENT INVENTORY CAPITAL 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952
$ 1,858 1,460 2,739 11,091 15,170 12,807 4,942 12,118 16,627 21,787 14,698 15,250 28,404 32,241
1 1 ,8 4 0 1,696 1,019 5,510 9,938 13,721 19,604 26,046 21,984 21,958 24,484 25,385 24,467 24,208
100.98 86.08 268.79 201.29 152.65 93.34 25.21 46.53 75.63 99.22 60.03 60.07 116.09 133.18
INVENTORY
ADJUSTED NET WORKING CAPITAL
PERCENT
$ 1,869 1,457 2,572 8,795 11,296 9,240 3,475 7,569 9,136 11,121 7,864 7,980 13,742 15,237
$ 1,851 1,693 981 4,383 7,264 9,899 13,800 16,046 12,033 11,208 13,118 13,242 11,843 11,432
100.97 86.06 262.18 200.66 155.51 93.34 25.18 47.17 75.92 99.22 59.95 60.26 116.03 133.28
Amounts are given for thousands of dollars.
137
Table XXXVII CURRENT DEBT TO INVENTORY YEAR CURRENT DEBT 1939 1940 1941 1942 1943 1944 1945 1946 1947 1946 1949 1950 1951 1952
$ 1,635 1,640 6,339 57,017 44,857 44,814 33,124 26,502 31,050 27,094 14,750 14,832 41,174 54,665
REPORTED INVENTORY
PERCENT
* 1,858 1,460 2,739 11,091 15,170 12,807 4,942 12,118 16,627 21,787 14,698 15,250 28,404 3 2 ,2 a
88.00 112.33 231.43 514.08 295.69 349.92 670.25 218.70 186.74 124.36 100.35 97.59 144.96 169.55
CURRENT DEBT 1 1,625 1,633 5,864 45,073 33,301 32,263 23,327 16,130 16,793 13,809 7,879 7,727 19,853 25,895
ADJUSTED INVENTORY
PERCEN1
$ 1,869 1,457 2,572 8,795 11,296 9,240 3,475 7,569 9,136 11,121 7,864 7,980 13,742 15,237
86.94 112.08 227.99 512.48 294.80 349.17 671.28 213.11 183.81 124.17 100.19 96.83 144.47 169.95
H W 00
Table XXXVIII NET FIXED ASSETS TO TANGIBLE NET WORTH YEAR FIXED ASSETS
1939 1940 19a 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952
HO, 431 10,327 10,677 7 ,598 7,573 7,472 7,560 20, 5a 26,515 31,008 29,842 28,628 32,207 36,214
REPORTED TANGIBLE NET WORTH
PERCENT
H i , 295 10,356 a , 188 14,457 21,154 27,699 28,198 47,682 50,357 53,706 55,685 56,470 59,860 64,886
92.35 99.72 95.43 52.56 35.80 26.98 26.81 43.07 52.65 57.74 53.59 50.70 53.80 55.81
FIXED ASSETS
HO, 495 10,375 10,670 7,537 7,347 7,170 7,101 16,040 18,815 20,325 19,458 18,708 19,807 21,222
ADJUSTED TANGIBLE NET WORTH
PERCE*
H i , 373 10,409 11,195 13,158 17,671 21,963 21,834 33,022 32,195 31,911 33,276 33,239 33,193 34,763
92.2 4 99.67 95.31 57.28 a . 58 32.65 32.52 48.57 53.44 63.69 58.47 56.28 59.67 61.05
Amounts are given for thousands of dollars.
139
140 assets ars considered, there is likely to "be consider able variance between the reported and adjusted values, because of the Influence of time and fluctuations in the orice level which are
r-.ater as time passes.
In this
table, the reported values indicate that the company is in a more liquid condition than the adjusted oeroer.tares show.
Since 1941, a smaller percentage of the
firm’s assets have been composed of fixed assets on a reported basis than on the adjusted basis.
However, the
correlations presented in this table do not indicate the wide variances that one might expect from comparing the reported and adjusted amounts. Therefore, if management should consider the variance between the ratios computed on reported figures and those on adjusted figures, it will not find the great variance that it might expect after noting the great variances between the reported and adjusted amounts for the various accounts. In addition to the conversion to 1935-39 values, a conversion was made to 1952 values for the purpose of comparison.
As was discussed in the chapter on index
numbers, some accountants recommend a conversion to values as of the beginning of the period of study, while
141 others prefer to make their conversions to current values. The author felt that it would be informative,
as well as
interesting, to convert the balance sheets and the profit and loss statements to values as of the end of the period studied in order to compare the results wi th those from the conversion to values as of the beginning. The reported amounts and the amounts resulting from adjustments to 1952 values are exhibited in the comparative balance sheet, Table XXXIX on page 142, and in the comrarative profit and loss statement, Table X L I , page 144. Following each of these tables is a table show ing the increases or decreases resulting from the conver sion to 1952 values.
(See Table XL on page 143 and
Table XLII on page 145.) In as much as all values had been converted to a common basis, that of 1935-39, it was a simple matter to adjust the accounts to 1952 values. This was accom plished by multiplying the account balances as converted to 1935-39 values by the appropriate index numbers for 1952. All monetary items, as well as mortgages payable, preferred stock and common stock, were multiplied by the index number as of the end of the fiscal year, 211.1. Inventories and deferred charges were multiplied by the average index number for the last three months of the
Table XXXIX
COMPARATIVE BALANCE SREET (1952 basis)
1939 ASSETS Cash U.S. Securities Receivables Other monetary assets Total monetary assets Inventories Total current assets
142
1940
19a
REPORTED ADJUSTED REPORTED ADJUSTED REPORTED ADJUSTED REPORT
$ 1,503
$ 3,154
$ 1,828
$ 3,844
$ 3,026
$ 5,909
$ 2,1
1U
239
48
101
1,187 406
2,318 794
45,9 3.2
$ 1,617 $ 3,393
$ 1,876
$ 3,945
$ 4,619
$ 9,021
$51,4
1.858
3.955
1.460
3.083
2.739
5,44?
11,0
0*475
t . 7*340.
$ 2,326
0*0.28
$ 7.358
$14*462
$62.5
$12,488
$26,271 3.832
$ 9,7i 2.11
Plant and equipment Depreciation allowance
$11,555 $24,447 1.124 ,..2,376
$11,789 $24,912 ...1*462 ..-2*024
Net property
$10,431 $22,071
$10,327
$21,818
$10,677 $22,439
$ 7,5'
24
50 ..... .0 2
50 24 m -1*752
71
$11.582 $24,229.
$ §,9
19,600 $14,555 $30,578
$21,744 $44,483
Expenses: Cost of sales other than depreciation and amortization Depreciation and amortization
$10,508 $22,231 618
$14,666 $30,811
1,308
762
$19,953 $40,819 982
1,609
Purchasing power loss (gain*) on net monetary assets
2,042 111
General and administrative expense** Materialized contingent and war losses Income and excess profit taxes Total expenses
EHzunn:
Met income (loss*)
$ 1, 862* $ 3, 939* $
WMLWIM l 873* $ 1.842*
&20.935 142555
%
809 11x222
** General and administrative expenses for 1939 - 1942 are combined with cost of sales. Amounts are given for thousands of dollars.
Table XLI PROFIT AND LOSS STATEMENT FOR THE YEARS ENDING SEPTEMBER 30 (VALDES ARE ADJUSTED TO 1952 BASIS) 1942 1943 1944 1945 1946 USTED REPORTED ADJUSTED REPORTED ADJUSTED REPORTED ADJUSTED REPORTED ADJUSTED REPORTED ADJUi *212.840 *3.27*9.14 *172*765 *269.072
■|4S3
*109.426 *189.402
*168,023 *267.287
>,819
* 92,386 *159,908
*134,117 *213,349 *175,423 *270,267
t,042
3,684
111*
6,819 ,
u rn .
1,804
5,247
11,802
3,232
2,312
3,836
1,785
2,955
1,529
258
107*
557*
1,033* 3,031
WO
6,824
*151,932 *227,412
4,667
7,424
4,272
6,582
4,364
6,532
4,327
6
298
473
465
717
5,665
8,479
1 ,8 5 0
2
20,015
31,839
22,450
34,588
15,520
23,230
|lQit92Q *132.248 *160*291 *255*760 *204.922 *212*832 * 3,506 S 6.654 * 7.122 * 11.527
* 7.918 * 12*021 *
*2ft?,86$ 499 *
206
367*
1947
1948
1950
1949
1951
1952
REPORTED ADJUSTED REPORTED ADJUSTED REPORTED ADJUSTED REPORTED ADJUSTED REPORTED ADJUSTED REPORTED ADJUSTED
1138.478 1165.372 $175.811 $193.678 $142.726 $158.141 $108.176 $122.045 $220.191 $227.885 $303,615 $303.615
$124,383 $148,539 $155,434 $171,230 $126,931 $140,640 $ 95,043 $107,230 $193,014 $199,758 $268,009 $268,009 2,742
3,737
3,610
4,464
4,651
180
1,373 5,788
6,913
6,454
2,197
2,625
3,784
7,110
4,168
3,438
4,301
257*
4,191
4,963
6,965
6,690
7,548
8,719
9,024
1,433
1,588
1,400
1,579
9,682
10,020
l . . i ^ 29 $ _ 6 ^ 2 j L .ii.4 24
t o S
3,808
242
315
6,287
fcmwfigQIz W lM W usL I..JJ68. 1 -2 0 8 2
5,552
4,378 108*
13,215
13,215
12,499 12,499
i M IM M kM *297.531
Lj.tSK
$ 6.084 $ 5f622
145
Table XLII INCREASES TO PROFIT AND LOSS ITEMS
INCREASES (DECREASED*) RESULTING
1939 Sales and net income credit
1 10,^ 6
1940
19 a
1942
1943
116*023, 1 22J32 $ 79.^976 L22*264 &
Expenses: Cost of sales other than deprec iation and amortization $ 11,723 $ 16,145 $ 20,866 $ 67,522 $ 79,232 Depreciation and amortization
690
847
Purchasing power loss (gain*) on net monetary assets
1,060 111*
General and administrative expense
3,140 1,033* 2,216
Materialized contingent and war losses
Net difference in income
557* 2,757 175
Income and excess profit taxes Total expenses
1,428
4,983
11,824
]
* 12.£13 * 16.992 1 21,815 f 76,828 1 94.S52 * 2.077* $
Amounts are given for thousands of dollars*
969* *
924 & 3.118 1 4.405 1=
Table XLII tfG FROM ADJUSTMENTS TO PROFIT AND LOSS ITEMS TO CONVERT TO 1952 BASIS 1944
1945
1946
1952
T01
111.5*024 * 89.307 t 25.479 | 2,4,024 » 17.867 &J£*4±5 11-2*869 t_ .7a.694 ________
S539.S
1 94,844 t 75,480 a 22,999
1947
a 24,1 5 6
1948
1949
1950
1951
a 15,796 $ 13,709 t 12,187 t 6,744 t
*461 ,/
1,170
,868
995
854
901
863
772
570
258
2,875
1 ,3 7 3
180
257*
315
242
108 *
2,310
2,168
1,822
1,125
656
678
858
252
2,814
779
12,138
7,710
154*
1,524 107*
3 ,C
305
14,8 4,C
428
384
155
179
338
SilO.961 a 89.600 1.22*182 a 28.077 a 17.870 Q 5*,l &6 S 14.402 a 8 .4 0 1 t > 4.U 3
15,*
t _ .,223* a 3.710* t ...1,183* a
3*
a
22 q
a
533* a
707* a
37,9
m.
a537.0
462 *
a
2 .8
l
146 fiscal year, 211.6.
The fixed assets accounts were multi
plied by the av rare index number for the fiscal year, 210.3.
All income ard expense items were multiplied by
the average index number for the fiscal year. Regardless of whether the 1935-39 base or the 1952 base is used, there are significant differences between the reported amounts and the adjusted values.
The more
remote the year under consideration is from the base per iod, the greater the differences are likely to be, be cause these differences are deviations from the values of the base periods.
While there have been periods of
inflation and deflation, the general
trend in price
levels has been upward; therefore, in the conversion to 1935-39 values, the greatest differences occurred in the latter part of the period.
(See Table VIII on page 91
and Table XV on page 103.) In t he conversion to 1952 values,
the differences
were greater in the earlier years of the study than in the latter years.
(See Tables XL on page 143 and XLII
on pa e 145.) The company reported total assets in 1939 of $14,163,000.
Adjusted to j.935-39 values it amounted to
$14,229,000.
Adjusted to 1952 values,
$29,965,000.
it was changed to
147 In 1952, the reported total assets were $120,068, 000.
Converted to 1935-59 values, it decreased to $60,
903,000.
In terras of 1952 dollars, it became $128,484,
000. The total assets in 1952, when converted to 1952 values, differed from the reported amount because, while most of the assets remained the same, some of the fixed assets had been acquired years before when the price level was lower.
This had to be taken into account in
making the adjustment and resulted in an increase in total assets. In terms of 1935-39 values, the sales over the fourteen year period were overstated $721,499,000.
In
terms of 1952 values, the sales for the period were under stated $539,937,000. In terms of 1935-39 values, the net income for the fourteen year period was overstated $20,274,000.
In
terms of 1952 values, the income for the same period was understated $2,882,000. One must not be confused by the fact that amounts were overstated according to one base and understated according to the other.
This is because the value of
the dollar in one base period was approximately only half its value in the other. The company’s volume of business did not remain
148 con stant same
d u rin g
rate
of
the
in crea se
years.
These
for
the
fact
the
tw o
bases.
two th at
in g
have
records
the
th is
sta tistic a lly .
The
the
v a lu es.
d iffere n c e C o n clu sio n s
presen ted
in
tio n s
acco u n tin g
for
the
A lso ,
in d ex
fact
were
was
betw een
th at
T h is
rep orts
has have
a cco u n tin g
drawn f o r
fo llo w in g
not
th is
procedure.
in
the
ch a n g in g of
been been
the
p art,
id en tic a l
on
p rice
the
account
dem onstrated ad ju sted
to
and eco n o m ic
a n a ly sis
ch apter w ith
not
throughout
in te r p r e ta tio n
company. actu al
was
resp o n sib le,
rem ains
the
there
num bers
varian ce
co m p lica ted of
show
in
factors
A sig n ific a n t le v e ls
p eriod .
some
w ill
be
recommenda
149 Chapter VI CONCLUSIONS Two significant facts have been revealed from this study.
First, there is a divergence between the
reported and adjusted amounts which increased as time passed.
Second, there was a close correlation between
many important ratios as computed on the reoorted and adjusted bases. Some imoortant differences between the reoorted and adjusted amounts, discussed in the previous chapter, are presented graphically in Table XLIII on page 150. In each of the r-raphs presented in this table, the lines showing the reported and the adjusted amounts follow a similar pattern, but the adjust -d amounts were lower, after the first few years; and the difference between the two linos became gr a ter as time passed.
This in
dicates that the effect of changing price levels is be coming an increasingly gr ater problem from an accounting and managerial point of view.
During the fourteen year
period, studied, in many accounts, the difference between the reported and the adjusted amounts is greater than the adjusted amount itself. When management is aware of the fact that the monetary assets, inventories, and fixed assets reported
150
Table XLIII GRAPHIC PRESENTATION OF AMOUNTS
Tab TOTAL MONETARY ASSETS Millions of dollars
INVENTORIES Millions of dollars
55 28 33
21
22
14
11
7 0
0
49 51 53
49 51 53
TOTAL NET WORTH Millions of dollars
75
------------ ------ -----
SALES AND NET INCOME CREDITS Millions of dollars
350 ---- ----- --------280
60
210
30 70
15
0
0
1939 U
43 45 47 49 51 53
1939 41 43 45 47 49 51 53
Cable X L III
NET FIXED ASSETS Millions of dollars
TOTAL LIABILITIES Millions of dollars 60
32 36
24
16
\ 8
12
0
0
51
1939
DEPRECIATION AND AMORTIZATION Millions of dollars 5
4
6
3
3
2
0
1
-3
O 1939
53
53
51
53
-------------- ------- ------
-6
41 43 45 47 49 51
51
NET PROFIT Millions of dollars 9
-------------- ------- ------
41 43 45 47 49
1939
41 43 45 47 49
REPORTED ADJUSTED
151 in 1952 are worth only about half the reported amount in t9rms of 1935-39 dollars, investigation,
it may want to make further
especially when the net worth accounts r e
flect the same trend. It was found that the income and expense figures followed much the same pattern of fluctuation with the result that the net profit did not show quite so wide a divergence between the reported and adjusted amounts. This indicates that the effects of inflation in the rev enue accounts have been offset,
to a degree, by inflation
in the expense accounts. vVhether or not the differences in amount between the reported and adjusted figures is alarming depends, in part, upon whether or not the inflation in one account is offset by that in the related account.
Therefore,
it
is necessary to consider the ratios computed from the re ported and adjusted figures.
Management is interested in
the amounts in the various accounts and, also,
in the re
lationship of the various accounts. Relatively,
there is little difference whether or
not the accounts are inflated If both sides of the equa tion are inflated in the same proportion.
For example,
if
current assets are doubled by inflation and current liabil ities are also doubled,
the relationship of the two accounts
152 remains the same. Table XLIV on o\t e 153 presents
In graphic form
sixteen important ratios commuted from the reported and the adjusted accounts.
On either basis, there are wide
fluctuations in the ratios from year to ye^r, but there is a close correlation between the ratios on the reported and the adjusted bases. When both of the accounts, or both groups of accounts, are of recent origin, such as current assets and current liabilities,
the ratios on the reoorted and
adjusted bases are practically identical.
This is true
because the accounts being adjusted are already stated in similar valu.es.
Therefore, there is not the great
difference in ratios that there might be if acco m t s of different aces were be inn compared. When an account of very early origin is compared with one of recent origin, there is less correlation be tween the ratios.
For example, the fixed assets turnover
ratios show a wider divergence than any other ratios be cause the value of fixed assets acquired years before is being compared with sales recorded in recent values. In periods of inflation, depreciation charges are always a matter of major concern to the firm.
It is
Interesting to note that the number of times depreciation has been earned is about the same on both bases.
Because
T able
X II V
15 3
CRAPTIS OF 16 IMPORTANT RATIOS
NET WORTH TO TOTAL ASSETS
CURRENT ASSETS TO CURRENT LIABILITIES
Percent
Percent 300
100
260
80
220
60
180 HD
20
100
0
1939 41 43 45 47 49 51 53
1939 a
TOTAL LIABILITIES TO TOTAL ASSETS
NET WORTH TO TOTAL LIABILITIES Percent
500
43 45 47 49 51 53
Peroent 100
80 300
60
200
40
100
20
0
0
1939 41 43 45 47 49 51 53
1939 a 43 45 47 49 51 53
Table XLIV
NET FIXED ASSETS TO TANGIBLE NET WORTH Percent
RATE OF RETURN ON COMMON STOCK EQUITY Percent
NET PROFIT TO SALES Percent 5
32
4
24
3
16
2
8
1
0
0
1939 41 43 45 47 49 51 53
1939 41 43 45 47 49 51 53
0 1939 41 43 45 47 49 51 !
l\ ll
l\ 11 \\
A / '/< /i
\\
f l\
\ s
!j
FIXED ASSETS TURNOVER Times 30
RATE OF RETURN ON TOTAL ASSETS Percent
NET PROFIT TO AVERAGE NET WORKING CAPITAL Percent
15
125
12
100
18
9
75
12
6
50
6
3
25 .Jl
0
1939 41 43 45 47 49 51 53
0
1939 41 43 45 47 49 51 53
1939 41 43 45 47 49 51
INVENTOR! TURNOVER
Percent
SALES TO AVERAGE NET WORKING CAPITAL Ti«es
Times
500
35
13
400
28
15
300
21
12
200
H
9
100
7
6
EARNINGS TO DEPRECIATION
0
1939 41 43 45 47 49 51 53
1939 41 43 45 47 49 51 53
3 1939 41 43 45 47 49 51
NET PROFIT TO AVERAGE TANGIBLE NET WORTH
INVENTORY TO NET WORKING CAPITAL
CURRENT DEBT TO INVENTORY
Percent 275 40
Percent 700 575
30
175
20
125
325
10
75
200
0
25
1939 41 43 45 47 49 51 53
1939 41 43 45 47 49 51 53
1939 41 43 45 47 49 51
REPORTED ADJUSTED
154 depreciation is based on the year of acquisition of the fixed assets, one might expect a wider divergence between earnings, of recent origin, and depreciation.
If this
company had had a rreater amount of very long-termed fixed assets, this ratio would show a wider difference through adjustment. The rate of return on common stock equity is of great importance.
There was a wide fluctuation from year
to year on both bases, but the fluctuations for the re ported and the adjusted ratios follow the same general pattern, with the ratios after adjustment being lower. It is important that this ratio show a reasonable rate of return for the company to be able to pay dividends ex pected, to expand through retention of earnings, and to induce additional investment in the firm.
Management
should consider the ratios on the reported amounts for this and, also, on the adjusted amounts to see if the company has actually increased its rate of return as much as the reported figures indicate. In considering the net profit and its relationship to sales, Its relationship to average tangible net worth, and to average net working capital, one finds little divergence between the reported and adjusted ratios. These ratios indicate that both sides of the equation have been effected by inflation, causing less
155 distortion in the ratios than if inflation had been peculiar to one side of the equation alone. One cannot wisely make any bold statements con cerning the effects of inflation on the income of a firm without considering both the absolute amounts and the ratios, or the relationship of these amounts to each other.
One carnot go so far as to claim that what is
true concerning the effects of inflation on one company will necessarily be true to the same degree in another, because of the difference in the industries and, specif ically, because of the difference between the amounts of fixed assets acquired at different times when the in dex numbers would be vastly different. This study attempts to answer three questions with respect to the automotive company studied. First, from the standpoint of accounting what is the effect of changing price levels on accounting records? In terms of a stabilized dollar, the amounts in the accounts over a fourteen year period were substantially and increasingly overstated, so that as time went by the difference between the recorded amounts and the adjusted amounts became more alarming.
The ratios, however, were
not vastly different as computed on the reported amounts and on the adjusted amounts. Second, how significant is the effect of changing
156 p rice that
le v e ls th is
on a c c o u n t i n g
firm
p erio d .
T h is
H owever,
the
o n ly
h a lf
has fact
d u rin g
is
out by the
a s much a s
ju sted
amount
amount
itse lf,
other than It
seem s
the is
as
a fig u re proper
lo g ic a l
to
some d e g r e e
is
the
found
to
be
there
th at
th ere
ad justed
If,
for
great
th is
at
any more
concern.
sh ould
to
ad
the
reported
is
that
and t h e
than,
order.
d isto rted
as
much a s
accounts of
the
in fla tio n
in v o lv ed
in
be
great
exten t
d isto rtio n
on
am ounts
of
g iv in g
the
and t h e
o v er-a ll
has
the
l e s s e n e d when c o m p a r a tiv e
effects
by
the
effected
to
acco u n tin g
equa
a b so lu te
am ounts
the
r a tio s
effects p ictu re
are
presen ted .
on r a t i o s of
the
com
p o sitio n . T ab le
com p arison s sig n ific a n c e the
a ll
co n sid ered ,
p a n y 's
in
im p act
som ewhat
B oth be
the
are
amount
in
assum e
in d ica te. exten t
is
am ount,
fig u res.
ap p ro x im a tely
the
or more
year
in fla tio n .
However,
tio n ,
is
ad justed
d o lla rs to
show
fourteen
been
rep orted
in v estig a tio n
the
of
d isto rted the
th is
has
reported
much a s ,
c o n c e r n when r e c o r d s effects
exp an sion
betw een is
reason, tw ice
borne
p h y sica l
d ifferen ce
The r e c o r d s
expanded
W hen a r e c o r d the
records?
XLV o n p a g e for
the
of the
a cco u n tin g
157
fou rteen effect
records.
of
presen ts year
some
p eriod
ch an gin g
im p ortan t
show ing
p rice
the
le v e ls
on
m ust
157
Table XLV IMPORTANT COMPARISONS FOR THE FOURTEEN TEAR PERIOD Sales Depreciation and amortization Average number of times depreciation and amortization were earned Net profit Dividends Percent of earnings paid out in dividends Income available for common stock equity Average rate of return on common stock equity Increase in common stook equity Increase in net working capital
REPORTED
ADJUSTED
.,8 6 5 ,143,000
$1,143,642,000
$35,916,000
$24,539,000
2.1 times
1.8 times
$41,267,000
$20,993,000
,.,254,000
>,376,000
10.3%
11.3%
$37,013,000
9.1%
$46,485,000
1 ,216
%
$18,617,000
6.7%
$21,584,000
518
%
158 Third, what, if anything, should be done about it?
After careful study and analysis, the following con
clusions and recommenda'cions are presented; 1.
The use of traditional accounting records
and statements based on historical cost should be con tinued.
A sudden and drastic departure from cost is un
necessary at this time and. would result in confusion. In this country,
the price levels have not
fluctuated with sufficient violence to warrant the aban donment of the monetary postulate.
Cost Is still the
least arbitrary and most exact method to date for es tablishing accounting values.
The cost method has some
weaknesses in that It aoes not provide adequately for re placements in times of Inflation.
These replacements
should bo provided for by reserves, rather than by a de parture from the original cost basis. 2.
Supplementary statements on an adjusted basis
would have value in that they would indicate with a great er degree of accuracy than personal judgment what the im pact of inflation has been upon a company’s records.
They
would aid the company In policy-making on a more scientific basis than would be possible otherwise. For example, this company has been wise in using a conservative dividend policy.
Even so, however, it
paid out a vreater percentage of its earnings in dividends
159 on an adjusted basis than the reported figures show. This means that, while the company's records show no cause foe grave concern at the present time, the r e sults of the adjustments
indicate that the company
should study carefully its dividend policy and, perhaps, be more conservative in the future.
This is particularly
true if the indicated trend of increasing price levels should continue over a long period of time, or if there should be a period of sudden, violent inflation. Management would find adjusted statements inite help in public relations
a de f
in that these statements
would serve to explain, with some concrete evidence, to stockholders
and w a g e - e a r n e r s , its conservative measures
in respect to wage rates and dividend oolicies. Another use of these adjusted reports would be to compare one period of the company's operations w i t h another. This would be possible because the adjusted reports e x press values in dollars of comparable value, rather than in dollars of varying values as in the traditional state ment s . These supplementary statements on an adjusted basis have some limitations w hich prevent their being accepted as the orimary statements of accounting at this time.
Also,
they must be interpreted with care.
The
purpose of these adjusted statements is to eliminate from
160 the records the distortion resulting from price level changes.
However, the method of nreparing these
justed statements, at this time, lackin'
in standardization.
ad
is highly arbitrary and
tor example, the selection
of index numbers, the selection of the base period,
and
the selection of the method of conversion are all arbi trary matters.
As yet, there have been no univ rsally
established criteria for the elimination of price level changes from the records. 3.
The issue should not be considered closed.
Experience in other; countries has been that violent fluctuations have necessitated radical changes accounting practise.
in
W i t h changing economic conditions,
accountants should be alert to the necessity of changing their methods when the need arises ana w h e n there is a better method available.
The time may come when some
standardization of measures to eliminate the effects of changing orice levels from the records will make it po s sible and advisable to change their methods to reveal more nearly the firm's true economic condition. Experiments along this line should be encouraged, as has been done recently; but,
in these experiments the
adjustments have not been complete. In the final analysis,
the greatest interpretive
value is attainable only whe n the adjustment is complete.
\ 'X
161 T h is the
m eans
that
a
rela tio n sh ip
both
before
and
p a rtia l
C.
Jones,
in
the
have
in
the
have
made
accou n ts
w ith
th is
p rob lem
to
accou n ts;
T h is
have
ra tio s,
on
rep orted
in
g iv in g
fin a n cia l
c o n d itio n .
study have
been
a co m p o site
l
oth ers,
adjustm ents
rela tio n sh ip s
Im portant
co n sid ered ,
exp erim en ted
accou n ts
as
be
m ade.
p ortan t
am ounts
m ust
and t h a t
been
co m p lete
a ll
ad ju sted
have
accou n ts.
th at
m ust he
adjustm ents
adjustm ents
v a rio u s
fu rth er,
of
after
Some who made
u nts
of
has
been
as
the
been
in
ca rr ied
of
and
term s
ad ju sted ,
p ictu re
R a lp h
am ounts
ad ju sted
expressed and
lik e
have
the
im
of
w h ich firm ’s
is
162 BIBLIOGRAPHY BOOKS
A le x a n d e r , S id n ey S . , B ro n fe n b r e n n e r , F a b r ic a n t, and W a r b u r to n , F iv e M onographs on B u s i n e s s Incom e. Ne w Y o r k : A m erican I n s t i t u t e o f A ccou n tants, 1950. A m ericana C o r p o r a t io n , E n c y c lo p e d ia A m e r ic a n a , York: A m ericana C o r p o r a t io n , 1 9 5 0 .
New
B abson,
R o g er W ., L f I n f l a t i o n C om es. Ne w Y o r k : F r e d e r ic k A . S t o k e s Company, 1 9 4 3 .
Bogen,
J. I ., R onald
Braun,
Carl n ia :
F i n a n c i a l H a n d b o o k . Ne w Y o r k : P ress, 1948.
The
F ., O b je c tiv e A c c o u n tin g . A lh am b ra, C . F . S r a u n 5c C o m p a n y , 1 9 5 3 .
C a n n in g , John B . , The E co n o m ics York: The R o n a ld P r e s s ,
C a lifo r
o f A ccou n tancy. T^2^
Ne w
C o m m ittee on A c c o u n t in g P r o c e d u r e , R e s t a t e m e n t and R e v is io n o f A cco u n tin g R esea rch B u l l e t i n s . New York: A m erican I n s t i t u t e o f A c c o u n t a n t s , 1 9 5 3 . C roxton
Dean,
Due,
and Cowden, ed G e n e r a l York: P re n tice-H a ll, 1§43.
A r th u r , B u s i n e s s Incom e u n d er L ev els. N e w Y o r lE l A m erican an ts, 1949. John F . , I n t e r m e d i a t e E con om ic Illin o is" : R i c h a r d D” I r w i n ,
F ish er,
H e r b e r t W ., I n f l a t i o n ? Company, 1 9 3 3 .
F ish er,
Irv in g , Company,
S ta b le 1934.
M oney.
S ta tistic s.
New
P resen t P rice I n s t i t u t e - "o ? A c c o u n t
A n a ly sis. C h icago, In c ., 1947.
New Y o r k :
N ew Y o r k :
A d elp h I
A d elp h i
163 F ish er,
Irv in g , Company,
T he M oney 1928.
F o u lk e,
Roy A . , E d itio n .
B eh in d th e New Y o r k :
1952.
F o u lk e,
Illu sio n .
New Y o r k :
A d elp h i
S cen es o f B u s in e s s , R ev ised D u n anH- B r a d s t r e e t , I n c . ,
R o y A . , P r a c t i c a l P1i n a n e i a l S t a t e m e n t A n a l y s i s , Second E d itio n . Few Y o r k : M cG raw -H ill Book Company! 1 9 5 0 .
G i l b e r t , M ilt o n , C u r re n cy D ep rec i a t i o n and M onetary P o lic y . P h ila d e lp h ia , P en n sy lv a n ia : U n iv ersity o f P en n sy lv a n ia P r e s s , 1939. G ilm a n ,
S tep h en , A n a ly zin g F in a n c ia l S ta te m e n ts . Y ork: The R o n a ld P r e s s , 1 9 3 6 .
G ordon,
R obert A aron, B u sin ess F lu c tu a tio n s . Harper & B ro th ers P u b lis h e r s , 1 9 5 2 .
G rant,
Eugene L. New Y o r k :
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and R u s s e ll A sso cia tio n Septem ber,
" 46th Annual R e p o r t.”
TOPICAL INDEX A ccou n tin g p o s t u la t e s 3 2 , 33 A lex a n d er, S id n ey S . 2 7 , 28 A llow an ce fo r d e p r e c ia t io n 88 A m erican A c c o u n tin g A s s o c i a t i o n 2 6 , 4 9 - 5 2 , 116 A m erican I n s t i t u t e o f A c c o u n ta n ts S tu d y Group on B u s i n e s s Incom e 26-40 C om m ittee on A c c o u n t in g P r o c e d u r e 4 2 , 48 C om m ittee on C o n c e p ts and S t a n d a r d s 39 R e s e a r c h D epartm ent 4 4 , 48 R esearch B u lle tin s 4 2 , 43 A ssets 1 9 , 2 0 , 2 3 , 8 6 , 9 8 , 1 2 9 , 130 A s s o c i a t i o n o f C e r t i f i e d and C o r p o r a te A c c o u n t a n t s 8 , 56-61 B a i l e y , G eorge D, 36 B a r k in , S olom on 36 B elgiu m 8 , 58 B la c k ie , W illia m 66 B l o u g h , Carman 3 6 , 44 B ro a d , Sam uel J . 4 0 , 4 2 , 70 B r o n fe n b r e n n e r , M artin 2 7 , 28 Brubaker, O tis 46 Brundage, P e r c iv a l 2 7 , 3 8 , 39 C ann ing, John B. 16 C h r y sler C o rp o ra tio n 4 5 , 47 C o efficien t 5 7 , 59 C om m ittee on A c c o u n t in g P r o c e d u r e 42 Common s t o c k e q u i t y 93 C om p arative B a la n c e S h e e t 8 2 , 9 0 , 1 4 2 , 143 C on clu sio n s A. A ,A . 50 A .I.A . 4 2 , 43 Broad, S .J , 40 Brundage 38 Jones 74 May, G e o r g e 0 . 3 2 , 39 T h is stu d y 149 S tu d y Group 35 C ost b a s is 17 C o n v ersio n o f f ix e d a s s e t s 86 Current r a t io s 124 D e a n , A r t h u r H. 3 0 , 31 Dean, J o e l 68 D efla tio n 5-10 Denmark 60 D ep recia tio n 17 a ccelera ted 46
172
and e a r n i n g s 111 by year o f a c q u isitio n exp erim en ts 45 " free" d e p r e c ia tio n 60 LIFO a n d FIFO 48
173: 105
D o lla r com m od ity 2 4 , 25 "rubber" 24 duP ont, E . I . de N em ours an d Company 4 5 , 47 E n glan d 61 F a b r i c a n t , S olom on 2 7 , 29 FIFO 48 F i s h e r , H e r b e r t W. 9 F ish e r , Irv in g 24 France 8 , 57 Germany 5 5 , 56 G old S ta n d a rd 23 G o r d o n , M yron J . 67 G oudeket, A. 58 G rady, Paul 71 G r e e r , H ow ard G. 1 4 , 17 H acker and Z a h le r 7 H a t f i e l d , H enry Rand 24 H o rto n , Byrne 5 , 12 H o r to n , R ip le y , and S ch n a p p er 5 Hong Kong 69 Incom e 11-49 d efin ed 27 d isto rtio n 31 id ea l concept 34 m ech an ics o f d e te r m in a tio n 30 In d e x num bers 53-149 a p p lie d to t h is stud y 78-149 In fla tio n 1-150 h isto ry 5-10 r e a s o n s f o r im p a ct on b u s i n e s s 29 I n s t i t u t e o f C hartered A ccou n tants 61-63 In ven tory 97 adjustm ents 97 and. c u r r e n t d e b t 138 cu m u la tiv e in c r e a s e 98 tu rn over 124 Ita ly 59 Jam es, C lif f o r d L. 5 , 9 , 1 0 , 1 2 , 53 J o n e s , R a lp h C. 7 1 -7 7 , 7 8 , 116 D ir e c t o r o f A .A .A . s tu d y 76 Form ula f o r p u r c h a s in g pow er l o s s 73 R e s u l t s o f h i s stu d y o f s t e e l com p an ies
76
Kemmerer, E dw in 8 , 55 K in g , E a r le C. 34 174 K ing, W illf o r d I s b e l l 19 K o h ler, E r ic 13 L i a b i l i t i e s and n e t w o r th 128 current l i a b i l i t i e s 20 to to ta l a sse ts 128 L I b b e y - O w e n s - F o r d G l a s s Company 45 LIFO 4 5 , 48 L ip p in co tt, Isaac 6 L u n d v a l l , A . E„ 3 7 M acN eal, K en n eth 1 1 , 1 2 , 14 May, G e o r g e 0 , 3 1 , 39-42 M e r r ill F ou n d ation 76 M c N ic h o ls and Boyd 67 M onetary p o s t u l a t e 32 Munn a n d G a r c i a 13 N a t i o n a l B u reau o f E conom ic R e s e a r c h 6 N eth erla n d s 58 P a n ics 5 P a t o n , W. A . 70 Perm anence, p o s tu la te o f 33 P o s tu la te s o f accou n tin g 33 P r i c e and v a l u e 13 P r i c e , W a t e r h o u s e an d Company 46 P r o f i t and L o ss S t a t e m e n t s 1935-39 b a s is 101 1952 b a s is 144 P ro fit, net to s a le s '123 to average ta n g ib le n e t w orth 1 2 8 , 132 s a le s to n .p , 124 P u r c h a sin g power o f a d o l l a r 21, 1-76. l o s s e s on n e t m o n e t a r y a s s e t s 108 on m o r tg a g e p a y a b le 117 on p r e f e r r e d s t o c k 117 R a tio s Current a s s e ts to cu rren t l i a b i l i t i e s 1 2 4 , 127 C urrent debt to in v en to ry 136 , 138 E a rn in g s to d e p r e c ia t io n 1 1 1 , 112 F ixed a s s e t s tu rnover 1 2 4 , 126 I n v e n to r y to n e t w ork in g c a p i t a l 1 3 6 , 137 In ven tory turnover 12 1, 122 N et f ix e d a s s e t s to ta n g ib le n e t w orth 1 3 6 , 139 Net p r o f it to average ta n g ib le n e t w orth 1 2 8 , 132 N et p r o f i t to a v era g e n e t w ork in g c a p i t a l 133, 134 N et p r o f it to s a le s 1 2 1 , 123
N et w orth to t o t a l a s s e t s 1 2 8 , 130 Net w orth to t o t a l l i a b i l i t i e s 1 2 8 , 131 R a t e o f r e t u r n o n common s t o c k e q u i t y 8 3 , 94 R a te o f r e t u r n on t o t a l a s s e t s 9 0 , 92 S a le s t o a v era g e n e t w ork in g c a p i t a l 1 3 3 , 135 T ota l l i a b i l i t i e s to t o t a l a s s e ts 1 2 4 , 129 R ea liza tio n p o stu la te 33 R e y n o l d ' s J . H. , T o b a c c o Company 45 R o c k e f e ll e r F ou n d ation 26 S a les and n e t p r o f i t 123 * to n et w orth 124 t o n e t w ork in g c a p i t a l 136 S m ith , C h a rles 37 S m ith , Frank P . 77 Snyder, C arl 65 S o c i e t y o f I n c o r p o r a t e d A c c o u n t a n t s and A u d i t o r s 64 S o lo m o n s, D avid 6 1 , 6 2 , 6 3 , 64 S p e a r s , H a r v e y M* 47 S u rp lu s 113 Sweden 59 S w e e n e y , H e n r y W. 8 , 5 6 , 64 Trends in p r ic e l e v e l 28 U . S . D e p a r t m e n t o f Commerce 3 1 , 81 U. S. S t e e l C o rp o ra tio n 4 5 , 46 V a lu e d e fin e d by eco n o m ists 12 d efin ed by accountants 13 -versu s p rice 1 2 , 13 W arburton, C la rk 27 W augh, A l b e r t E . 25 W erntz, W illia m 37 W i l c o x , Edward B . 37 W orking c a p i t a l cu m u la tiv e in c r e a s e 98 in v en to ry to n et w .c . 136 n et p r o fit to n et w .c . 1 3 3 , 134 s a le s to n et w .c . 135 W orth d efin ed 11 n et fix e d a s se ts to ta n g ib le n et w. 136 n et p r o fit to average ta n g ib le n et w. 128 n et w. to t o t a l a s se ts 128 n et w. to to ta l l i a b i l i t i e s 128 Y a n g , J.M . 69
176 AUTOBIOGRAPHY I, Jarren Asquith Howe, './as born near Custar, Ohio, June 16, 1910. I received my secondary school education in the Jackson Township public school at Hoytvllle, Ohio. My undergraduate training was obtained at Bowlin??; Green State University,
from which I received
the degree Bachelor of Science in Business Administra tion in 1943. Prom the University of Toledo, I received the degree Raster of Business Administration in 1946. I was a member of the faculty of the University of Toledo from February, 1946, to September, 1954, when I left there to teach Accounting at Bowling Green State University. Prior to 1943, I engaged in farming. From 1943 to 1946, I was employed in industrial accounting in Toledo and attended evening sessions at the University of Toledo. February 2, 1936, I married Edith Lucille Miller, teacher, who has the degree Bachelor of Science in Elemtary Education and Master of Arts in Psychology. Ye have two adopted daughters. Our home is in Bowling Green, Ohio.
