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of labor, caused an increase of wealth. A bar of iron, which as pig is worth 34 cent per pound, will be more than doubled in value if converted into steel rails; in the shape of blacksmiths' tools it will sell for ten times the pig value; made into surgical instruments it will be worth one hundred to one thousand times the original value; while as watch springs or similar delicate articles it may be increased almost a million fold. These increases in value are not alone because of the added labor, but also because the more difficult the operation of production, the more restrictive the supply and consequently the higher the price which the manufacturer is able to secure.

An appreciation may and usually does take place because of a change of ownership. A small anvil costs the manufacturer $2.50 to produce; it is sold through jobbers at a gross profit of 30%; the jobber sells to the retailer at an advance of from 5% to 10%; and the anvil is finally purchased by the blacksmith at a figure which will allow a gross profit to the retailer of 10% to 20%. Exactly the same article, with not a single change in character, and with only a slightly increased cost for transportation, cartage, etc. (say 20 cents), simply by passing along from the manufacturer to the consumer, has appreciated in book value due to the addition of profits as follows:

Value to the manufacturer (at cost).............$2.50
Value to the jobber (at cost).

.... 3.25
Value to the retailer (at cost, being 5%. above

jobber's price, plus 20 cents freight, cartage,
etc.) .......

.... 3.61
Value to the blacksmith (at cost, being 20% above

cost to the retailer)...... .......... 4.33 Changes in general or trade conditions will also produce appreciation of values. Probably the more important general or trade conditions which result in permanent increases in the monetary worth of assets are development, growth and discovery. Our own Western and Southern States furnish abundant instances of the rapid increase in values arising from these sources. Taking Texas as an example of development along agricultural lines, we find that the assessed valuation of all the property included in this state in the year 1851 was but $69,739,851. In 1901 the assessed valuation had increased to $856,202,283. The reason is apparent if we compare the production of cotton, corn, wheat, etc., of recent years with those of fifty years ago and also notice the growth of the stock raising industry.

Those who, for the last ten years, have kept in touch with the real estate markets in the central cities know that land values have multiplied many times in abundant instances simply because of the growth of the cities. In Philadelphia the most noticeable increase has probably been directly east of City Hall on Market Street, but values have increased greatly in that same vicinity on Chestnut, Walnut and Arch streets. A conservative illustration of the rise in values may be found in the case of a property near Twelfth and Walnut, which ten years ago was offered for sale at $58,000. To-day it is held for $125,000. The increase of wealth due largely to discovery is illustrated by the State of California, or by the growth of South Africa about the year 1870, due to the discovery of diamonds in the Kimberley district.

An example of a somewhat different character may be cited in the case of the little tract of 114 acres on the island of Trinidad, practically valueless thirty years ago. To-day, because of the discovery of a process of utilizing asphalt in the paving of streets, for roofing purposes, etc., the control of the little asphalt lake could not be obtained from the New Trinidad Lake Asphalt Company for millions. Instances of the more common rise in land values may be found along practically every extension of railroad and in every town in which new industries are being located.

Among the general and trade conditions tending toward increases in values of a more or less permanent nature may be mentioned a diminishing supply coupled with a constant or steadily increasing demand; the combination of capital and the combination of labor. Take the present cost of construction of buildings as compared with the cost ten or twenty years ago. The labor unions have increased the price of unskilled labor; the trades unions—carpenters, masons, plumbers, iron workers, etc.,-have made the cost of skilled labor much greater; the widespread combination of hitherto rival manufacturers by mergers or into holding companies has resulted in raising the price of raw material and supplies ; while the fact that the forests close at hand have all been cut down and the visible supply of lumber is diminishing has brought it about, that lumber for which $15.00 to $18.00 per thousand was paid ten years ago sells to-day for $25.00 to $30.00. Every item entering into the construction of buildings costs much

more to-day than ten or twenty years ago. It is a fact that buildings erected at that time could not be reproduced to-day for anything like the same amount of money. The same conditions have affected the cost of other fixed assets and brought about practically the same results. There are other causes which operate to increase values, such as the present era of prosperity, and the education of the masses which creates a demand for better conditions, and at the same time results in raising the price of wages in general.

Coming to the consideration of the second part of the subject, we inquire under what conditions it is legitimate to record on the books appreciations in values. Business men do not, as a rule, show on their books the fluctuations in market prices, even at inventory periods. The principle of locating profits in the year of sale and not in the year of purchase is quite generally adhered to, as is also the rule of applying market prices instead of cost prices only whenever the former are lower than the latter. In certain businesses, however, all the product of the season is covered by contracts secured before the opening of the season. These contracts allow the buyer the option of taking the quantity specified in such amounts and at such times within the season as is desired. The price is fixed and a minimum quantity specified. The manufacturer makes up his stock almost entirely on the basis of these contracts. It may happen that the closing period comes just at the time when the stock on hand is heaviest. With these manufacturers the legal question as to the time when ownership passes from them to the buyer does not carry much weight. To their minds, it makes no difference whether the goods are properly packed, labeled and set apart ready for shipment. They hold contracts from responsible parties covering the goods on hand, the expense of securing these contract orders has all been charged to the current period, and, with apparently good reason, these manufacturers maintain that, if an amount sufficient to cover storage and insurance, shipping and collection expenses, including bad debts, discounts, etc., and possibly a slight charge for general administration expense, is deducted from the contract price, they are locating their profits in the proper period by inventorying the goods on hand at the difference between contract price and the deductions, consequently above cost price, which really results in an appreciation before the sale is actually consummated.

In such a case, while, on the ground of conservatism, an accountant might advise that the safest course to be pursued is to take profit for sales when the charge is made, and apply cost values only to all uncompleted or unshipped stock of merchandise, nevertheless, under conditions which do not give rise to suspicions regarding the honesty of the manufacturer, or a deeper motive concerning the valuation than appears on the surface, it may be proper to allow the appreciated values to be used. In view of the numerous indeterminable accidents and contingencies in business affairs, however, it is wise to recommend that the profits on such stock in trade should not be drawn out of the business.

Another condition somewhat analogous to the foregoing arises in consolidated companies. The product of one constituent company may make up the bulk of the raw material of other affiliated organizations. On shipments of production between companies, in order to show correct results of the individual plants, it is proper to allow the delivering company to make a profit. To the entire organization as a unit, however, such transfers of material from one plant to another plant cannot be considered as sales, and the profit thereon should not be taken by the consolidated company until the receiving plant has disposed of the intercompany material to outside parties. This is an extremely difficult thing for many companies to handle because they have no proper cost systems. When inventory period comes, if these articles are taken at the billing price of the delivering plant, this price is of course in excess of the cost to the company as a whole. We find here an illustration of false appreciation of stock on hand.

When a bona fide sale is made to a responsible purchaser, even before the asset received in exchange for the article disposed of is converted into cash, it is legitimate for the vendor to record on his books any appreciation of his financial worth; and for the reason that the vendee cannot be supposed to know the cost value of the article to the vendor, he may rightly place the value paid by him on the purchase.

A condition closely resembling a sale is the admission of a new partner or the formation of a merger. It sometimes happens at such a time, that because of conditions such as were mentioned earlier, as well as owing to an over-liberality in the way of providing for depreciation, the present cost values of the assets of the firm or company are greatly in excess of the values as carried on

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the books. In one case, the factory site, carried at cost on the books, had tripled in value, as shown by a conservative appraisement made by a reliable expert real estate firm; the buildings account having been depreciated 5% each year was much below actual value; a large part of the machinery, equipment and fixtures was home-made and had borne no part of administration expense, and having been heavily depreciated each year on the books, the real value was actually one-third in excess of the book accounts.

With proper safeguards it is proper in such a case to allow the book accounts to be so written up as to show the real conservative values. The safeguards which might be recommended are: first, the appraisement of the plant and equipment by a reliable expert appraiser, the items to be properly classified and the appraisement to go into sufficient details regarding construction, etc., to be conclusive as to values; and second, in the case of a large merger, the appointment of a body of thoroughly qualified and reputable men to constitute a valuation committee, who, together with an experienced accountant, should examine into the correctness of the values as appraised, to which values it is desired to adjust the accounts.

The practice of some companies and accountants of throwing everything into a plant account, so that this one item covers, not only real estate, building, machinery, tools, etc., but also good will, all possibly at greatly inflated values, should certainly not be encouraged even when there is no water injected, for the reason that it is a step in the way of loose accounting and improper methods. Unless the account is afterwards analyzed or an appraisement made it is impossible to treat it intelligently as to depreciation.

Under normal conditions, when there is no ulterior motive, upon proper disinterested expert authority, and in cases where there has been a steady rise in values covering a long period, particularly in the construction of buildings, or again where property, machinery or equipment of any character has been acquired at exceptionally low prices, it is proper to adjust the book accounts of such fixed assets to show present conservative cost values. For fire insurance purposes, it is important that the values of the buildings, machinery, tools, furniture and fixtures, and equipment of all kinds should appear on the books from year to year at actual conservative values, or as nearly at such values as possible. When

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