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of the Rogers and Montreal companies had been printed separately instead of being amalgamated with that of the parent company. The report says that this condensed balance sheet was “prepared solely for the purposes of information"; but instead of giving information it in part conceals it.

Another minor point is found in the “ Profit and Loss" section, namely, "Add sundry items, $68,724.57.” This is small compared with the total profit and loss surplus for the year, but why should "Sundry items" be added? There is no explanation of this item in any part of the report.

The Revenue Accounts suggest a possible explanation of the amalgamation of the Montreal and Rogers companies' balance sheets with that of the American Locomotive Company and its constituents. There was a great falling off in the latter's earnings during the preceding year. A portion of the company's "Summary of Operations” for the last three years is reproduced as follows:

1903-04

1904-05 1905-06 Gross earnings

.$33,068,750.56 $24,150,201.66 $42,547,876.40 Manufacturing, maintenance and

administrative expenses....... 27,404,985.40 19,796,533.49 36,085,370.74

Net earnings

$5,663,765.16 $4,353,667.57 $6,462,505.66 Interest on securities of con

stituent companies, bills payable, etc...

238,226.07 112,186.35 281,812.19

Profit .....

$5,425,539.99 $4,241,481.22 $6,180,693.47 The “summary" for 1905-06 includes the gross and net earnings of the Rogers and Montreal companies, which are not included in the summaries for the preceding years. The important point in this comparative table is the remarkable falling off in the earnings of the American Locomotive Company and its eight constituents during the year 1904-05, and the more remarkable recovery during the year 1905-06. How much of these “

gross earnings " and expenses for the latter year are ascribable to the parent organization, and how much to the Rogers and Montreal companies? The stated net earnings for the year just completed are so large that the American Locomotive Company has paid not only the customary 7 per cent. dividend on its preferred stock, but 174 per cent. on its common stock as well, besides carrying $1,116,628.81 to its surplus account after expending and appropriating for future expenditures over $3,000,000 for additions and betterments to the plants. Was all this the result principally of the operation of the American Locomotive Company and its eight constituents, or were the Rogers and Montreal companies material factors in determining the income of the year? All of this is information in which the stockholder is interested. He would be able to obtain much more information from the report if the balance sheets and revenue accounts of the Rogers and Montreal companies had been stated separately.

The report would give more needed information, again, if, instead of presenting a “summary of operations” in which earnings and expenses are stated as lump sums, the revenue accounts were exhibited in the customary three divisions, namely, manufacturing, trading, or contract, and administration, or profit and loss accounts, showing the cost of making goods, the costs of selling and receipts from sales, and cost of general administration respectively. The various items of cost, namely labor, materials, superintendence, depreciation, bad debts, et cetera, could be shown, and the stockholder could form a better judgment as to the efficiency and fidelity of the management. Every member of a firm would expect to receive such a statement, which would be furnished him, not merely on the authority of the managers of the firm, but certified by an independent public accountant as well. Why should not every stockholder of a corporation receive a similar report?

The last point to be noticed in the reports of the American Locomotive Company is the large amount of additions and betterments the cost of which has been deducted from surplus income instead of being charged against capital. Not only has the company accumulated a stated profit and loss surplus of $6,605,372.87 during the five years of its existence, but it has been installing improved machinery, constructing new buildings, and acquiring control of new plants, charging the cost thereof against the revenues of the year. In this way it has an unstated surplus of $8,055,130.67; that is, it is a surplus provided the so-called additions and betterments are really such.

The writer has no quarrel with the practice followed by industrial companies of putting a large portion of each year's profits into betterments instead of paying them out in dividends; but the practice of charging the cost of such betterments against earnings and thereby concealing them in the company's accounts seems questionable. Such betterments if real (and if they are not real they should not be characterized as betterments) should be included among the assets and represented in the surplus account, so that the company may be made to account to its stockholders for them at all times; if they are not represented in the company's accounts then all sorts of opportunities are offered for “ devious” work on the part of the company's officers and agents.

In conclusion, the report of the American Locomotive Company does not present the information in sufficient detail to enable the stockholder to form an approximately accurate judgment as to the efficiency and fidelity of the company's management, nor a quantitative judgment as to the financial results.

Reports of the Distillers' Securities Corporation. The reports of the Distillers' Securities Corporation come to hand. These are little four-page circulars, the first two pages of which state in words what one reads in the income statement and balance sheet which occupy the last two pages.

The income statement in the report for 1905-06 begins with “Gross profits from all sources,” but does not enumerate the sources. The statements in previous reports commence with the item: “Total receipts from

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sale of product and all other sources," and follows this with, “cost of production, distribution, operating expenses, and all other items except those detailed below” (interest, taxes, rentals, etc.). This information was too detailed, so "on account of taxes and for other business reasons” the management deemed it “prudent to no longer make the amount of sales public.

For the purpose of throwing light on the efficiency and fidelity of the management, or of doing other than merely announce the financial result of the year, the report has little value. In the balance sheet the “Current Assets” are stated at $20,355,588.53; of these, cash constitutes but little more than $1,000,000, while the principal items are “Accounts and Bills Receivable,” $11,041,074.69, and “Securities (being principally stocks in companies owned by the parent or constituent companies), $5,439,203.38. It would seem that the last item could not properly be termed a current asset "; these securities cannot be turned into cash for the purpose of paying the company's debts without cutting off from it a large number of small producing or selling companies which are necessary in its business. In view of the fact that the sales for the year 1904-05 were about $71,210,000 and those of the preceding year about $79,170,000, the item, “ Accounts and Bills Payable," seems large; it is probably more than one-seventh of the entire receipts from sales. If the company is in the habit of selling on sixty and ninety days' time, however, these may all be "current and represent the trade receivables” of the company, as stated in its report.

If we may assume that the gross receipts from sales for the last year amounted to about $75,000,000, then these receipts are about five times the amount of the “current assets,” exclusive of the item of “Securities ”; that is, the company has turned over its working capital about five times during the

year. This may be sufficient for a manufacturing concern; it would not be sufficient for a mercantile concern. The gross profit, stated at $4,054,815.40, means a profit of 5.4 per cent on the turn over, after paying all costs of selling the product.

The company's current liabilities, representing “Accounts and Bills Payable,” amount to $4,774,021.57, for the payment of which the company holds about $1,000,000 in cash and $11,000,000 in “ Accounts and Bills Receivable." If the latter are good and mature rapidly enough, the provision for the payment of this floating debt is ample. But this debt seems large-it is more than $800,000 larger than that of the preceding year—and its continued growth may menace the solvency of the corporation.

The company has also begun to build up a concealed surplus. In addition to the usual allowances for “additions, maintenance and repairs" (which amount to only $220,117.63, or about 572 per cent of the “ Property Account"), the sum of $1,061,117.78 has been written off this property account and deducted from “Surplus." In conclusion, not only does the company's report do little more than state the financial results of the year's operations, but this result is not vouched for by any independent authority.

"A Real Problem in Costs."

Boston, Mass., 1906. TO THE EDITORS:

The trouble with most people is that they are confused by surface appearances and are unable to get back to the simple basis that underlies all undertakings.

The questions and the hypothetical basis in the article in the April number of THE JOURNAL OF ACCOUNTANCY under the above caption reveals this state of a mind overwhelmed by the magnitude rather than occupied with the basis of the facts to be evolved.

If the various operations entailed in the conduct of any great business were separated to show but one item for each operation, there would not be the confusion in regard to manner of handling that now exists.

If there were but one man, working upon one operation, in one shop, with but one machine, during one whole month, there is no one so blind as not to be able to deduce the cost of material. the cost of the labor, the indirect cost, upon that piece of work, and not only this, but to make true comparison with the cost of similar work upon some previous occasion.

Reduce this time to one day and the problem is equally simple; reduce it still further to the smallest fraction of the material and the smallest division of time recognized in the pay-roll and the problem is not complicated, nor is it complicated any more if there are thousands of men and innumerable pieces of material, provided only that the segregation of items is properly effected so that there may be no confusion in the different aggregations.

The moment that this principle is fully recognized the necessity for an individual unit record of each fact, or operation, is very clear, and thenceforward, if one has the courage of his convictions, the path is straight and plain; there only remains the determination of the system which will best secure accurate data and permit of its most economical accumulation and tabulation so that the final results may be made manifest. Applying this principle the answers may be:

First; that it is impossible to load any result by percentages under a system of individual accounting, and to mix the selling and manufacturing expense is like endeavoring to mix oil and

water, which can be done only under pressure with resulting complexity in result. And to indiscriminately bundle together expenses of different elements and apply to unlike accounts affords no basis for any intelligent comparisons, and comparisons are the touch-stones of modern business enterprises.

Second; how can there be any valid formula for inventory value, other than individual cost-plus interest—divided by the life, plus all improvements, or repairs, that tend to extend that life, all accidental breakages, and ordinary repairs, necessary to make good the assumed life, being chargeable to shop expenses? Surely there is no other if the principle of the individual unit is accepted.

Third; under this principle it is obvious that the time of the workmen must be secured, not by the day, nor by the hour, but coincident with the operation to which it applies, whether that operation be productive or non-productive.

Fourth; having secured all the individual unit records, their aggregations, properly correlated, will mutually check themselves and no system is perfect that does not assure the correctness of each part in the balance sheet of the whole.

Applying the foregoing it is necessary to adopt that method which best furnishes the individual record, for instance:

In the receipt of material, a consecutively numbered slip should record each item received with all the necessary detail to identify it later; this record entered in consecutive order upon a classification sheet for that class of material,

against which

may

be placed the necessary entries from the invoice when the same comes to hand. This sheet will then show the total receipts of that material, with price paid, only the totals of which need go to the general ledger. This method makes impossible the omission of even the smallest item upon the invoices paid and with a simplicity and surety that are ordinarily lacking.

To assure proper accounting of the distribution of material none should be disbursed except upon individual requisitions, or orders, which orders should provide for the showing of wastes due to leakage or working, and for the stock returned unused; such tickets sorted and tabulated, mainly through the simple sorting of the tickets and aggregation of same, furnishes the total out of material account, as well as the charges to production; the difference between the received and the disbursed schedules is

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