readily become bankrupt, even though it had a large fund for replacement. I have thought of this argument carefully and fail to see the force of it. A company can become bankrupt while having a profit and loss surplus of many millions of dollars provided the profit and loss surplus was invested in improvements to its property, securities not negotiable or in many other ways and then given a period in which it could not earn the cash for its fixed charges; but that a company could become bankrupt while having the cash in its treasury to meet its obligations, is something I have not been able to figure out, and the making of a journal entry charging operating expenses and crediting a "Replacement Account" neither lowers nor increases the cash balance one dollar; it merely lowers the amount which you show to the stockholder is to be carried to Profit and Loss or is to be distributed in dividends, and on the other side of the account lowers the value of the equipment by setting up an amount which, if not expended for the purpose for which it is created, should merely be credited to the account "Equipment," as the lessening of the value of such equipment.

I do not understand that it is contended that carriers must set aside in funds the amount of the "Replacement Account" and subsequently expend for equipment an equal amount, but that the account is a convenient one which does away with the necessity of monthly credits to the Capital Account " Equipment." Many of us have for years had experience in handling a similar account and a practice largely in vogue has been to take care of the accrued depreciation on equipment at the end of the life of such equipment by charging to operating expenses and crediting to Replacement Account" the cost or record value of the equipment actually put out of service. We probably did not take from our cash the amount so credited to the account, but as new equipment was purchased we charged to the account a sufficient sum to equalize the amount standing to the credit of that account, and afterwards charged either to Additions and Betterments, payable out of income, or to the Capital Account " Equipment" additional sums expended for equipment. The difference between that method and the one proposed is merely that we took care of the depreciation at the end of the life of the equipment, while it is now proposed that it be taken care of month by month as the estimated depreciation accrues.

What I have said about depreciation applies wholly to equipment, and while I would advocate including in operating expenses an amount for depreciation of equipment, in order to determine the actual cost of transacting business, I would for many reasons oppose any attempt to include in operating expenses any amount for depreciation of roadway and structures. While depreciation is a lowering of value, it must of necessity be an estimate up to the time when equipment or structures are put out of use, and although this account can be worked out in the case of equipment it would be an extremely difficult matter to make a satisfactory working plan covering rails, ties, bridges and other structures.

I have probably given to depreciation a disproportionate part of the time allowed me, but it is an important matter and one which is deserving of great attention.

It is not my purpose to criticise the Classification of Operating Expenses as promulgated; the Classification already has a sufficient number of critics and quite enough unfavorable things have been said, but in a very great majority, if not in practically all cases, the things which have been written-at least many of those which I have seen and I have read a number-have either been under a misapprehension or evidently without knowledge of all the facts in the case. One of the things which must be borne in mind is the fact that the classification as prescribed is intended for the use of all the various railroads of all parts of this great country. There are conflicting interests, and while there are certain things which from the standpoint of the company with which I am connected I would like to see changed, at the same time I know, through my connection with the work of the committee, that there are stronger reasons against doing what I think proper than I can urge in favor of so doing; and although it is easy for a man located in one part of our country to bitterly criticise the classification, he in all probability does so from the standpoint of one company alone and without taking into consideration that it is "government supervision," which means that the government while desiring to give the wishes of the railroads consideration requires certain information and insists on having it.

When the conflicting interests of the companies and the desires of the government are borne in mind, I think that nearly all the important criticisms which have been made can be readily answered, but there is one point concerning which not a great

deal has been said, which is also a decided innovation. It is the question of "Hire of Equipment." I should greatly like to discuss the new account, but am at a loss to know where to begin, and I think probably the reason this particular account has escaped criticism from various writers is that our critics are in a like position to me. It certainly is a wonderful account and great credit should be given to Professor Adams for having discovered at least one account which has so far escaped attack and, I might add, explanation. So much for the Classification of Operating Expenses.

We have been working under the system for eight or nine months, and notwithstanding that some think there are too many accounts, others that there are too few, yet others think the accounts are badly arranged, improper items included in certain accounts, badly grouped, improperly worded and a few other minor defects, it has been fairly satisfactory; but from my standpoint I most earnestly desire that only those changes be made in the future that are of the utmost importance, as it seems to me the one thing most to be regretted is that the classification was made at all. Unfortunately the change came at a time when, on account of the business depression, it was of the most vital importance to carriers to know the correct comparative details of their operating expense, and accurate comparisons have been almost impossible, even with a considerable additional expenditure of time and money.

The other work on which your committee has acted in an advisory capacity with Professor Adams has been the Classification of Operating Revenues, Classification of Expenditures for Road and Equipment and Classification of Locomotive-Miles, CarMiles and Train-Miles. Of these your committee suggested to Professor Adams that concerning the Locomotive-Miles, CarMiles and Train-Miles he refer the matter to the Committee on Statistics and Accounts of the American Railway Association, it being the thought that if questions should arise in connection with that order any advice or suggestions in relation thereto would very properly come under the jurisdiction of the American Railway Association.

There yet remain to be dealt with the Additions and Betterments classification, Income Account, Profit and Loss Account and that very important matter, the Balance Sheet. Of the

orders not yet promulgated it would be highly improper for me to speak, even if I were in position to do so, and until the suggestions made to Professor Adams become orders of the Commission no one is in position to criticise them.

Permit me to say a few words which I consider of the utmost importance in connection with government supervision. The work undertaken up to the present time has been in an advisory capacity with Professor Adams representing the Interstate Commerce Commission in connection with the twentieth section of the Act to Regulate Commerce (as amended), and particularly that portion which states: "The commission may in its discretion prescribe the forms of any and all reports, records and memoranda to be kept by carriers subject to the provisions of this act, including the accounts, records and memoranda of the movement of traffic as well as the receipts and expenditures of moneys."

When these accounts have been finally prescribed and the work of this Association in connection with Professor Adams has been to the end that they may be prescribed in as nearly a satisfactory form to the carriers as is compatible with the wishes of the Interstate Commerce Commission, the next step will be the further one authorized by the same section of the act, reading: "and it" (referring to the Interstate Commerce Commission) may employ special agents or examiners, who shall have authority under the order of the commission to inspect and examine any and all accounts, records and memoranda kept by such carriers."

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We realize that during the period a system of accounts is under consideration much time must be given to the subject. Within a comparatively few years the company with which I am connected issued a new Classification of Operating Expenses. We were not at that time bound by such strict laws and in writing the classification used our best judgment. All the available time of several officers, including myself, was given for well over a year in an endeavor to get a classification of expenses as nearly correct as possible, and even after all the time given it, when the classification was finally completed and distributed, a number of bulletins were issued changing or amplifying the subject matter.

Many of you have had similar experiences and the work of accounting officers during the past two years in furnishing information and acting with the Interstate Commerce Commission in an advisory capacity has been very burdensome. It had to be,

even though we had in Professor Adams, of the Interstate Com-. merce Commission, an unusually considerate man to deal with, but as a general proposition railroad accounting officers have been overloaded.

For the past two years I remember but few days when unanswered communications from the Interstate Commerce Commission were not before me which were of such a nature as required time and study. There have been times when on the Committee on Corporate, Fiscal and General Accounts I have been in Washington a week and returning to my office before the work which had accumulated during my absence could be undertaken I have received other communications from the commission, the sight of which for days worried me. Some of the requests for information which the carriers have been obliged to collate have caused them a vast amount of extra work and few, if any, of us are equipped with a sufficient force to readily furnish the data which is frequently required by the State and Interstate Commissions.

It should be borne in mind that the Interstate Commerce Commission is one of many; in fact, government supervision has at the present so expanded itself that we have many commissions, all vying with each other in requiring information from carriers, and in most of the cases the accounting department must furnish it.

If the Interstate Commerce and other commissions having similar authority would exercise the power granted to the Interstate Commerce Commission in the twentieth section of the Act to Regulate Commerce (as amended), to " employ special agents or examiners who shall have authority on the order of the commission to inspect and examine any and all accounts, records and memoranda kept by such carriers," and through them obtain the information they desire, I feel that we should all be happier. I have no question but that we are all keeping the accounts, records and memoranda to the best of our ability in accordance with the laws as understood, having nothing to conceal, being willing to open wide our doors to the authorized representatives of the Interstate or State Commissions, giving every facility for them to obtain such data as they desire; and should our accounts not be kept in accordance with the orders of the commissions and the laws, the sooner we know it the better for all.