Page images
PDF
EPUB

COMMENTS.

A glance at the above problems will at once reveal the difference in standard between the 1906 examination paper, part of which was given with solutions in the September number of THE JOURNAL, and the present examination paper. There are, however, a few details in the make up of the problems which deserve comment.

In the second problem the accounts in the Trial Balance are arranged in rather hap-hazard shape. It would be more desirable to have them arranged so as to facilitate the preparation of business and financial statements, viz.: Real Accounts, Nominal Accounts, Customers and Creditors, or some similar arrangement.

[ocr errors]
[ocr errors]

In the third problem, the language, reading: 100 shares are placed in the treasury for future disposition and, "Each incorporator then donates 30 shares," etc., is misleading, especially when one considers that there is no class of stock so ill defined as Treasury Stock." From the wording one would infer that the board acknowledges in this instance 250 shares as treasury stock, which would not be consistent with modern accounting principles.

In the eighth problem not all the facts are presented, resulting in the omission of the Deficiency Account, which account would be desirable in order to prove the accuracy of the Statement of Affairs.

With regard to the solution of the second problem, the amounts appearing in the Profit and Loss Statement as well as in the Balance Sheet, are those arrived at after the adjustment entries are respectively added or subtracted.

In solving the third problem no attention was paid to the stock put aside for future disposition, as it is merely unsubscribed stock. To quote Rahill on this: "It is clear that the amount of stock the incorporators or promoters reserve to be sold at some future time as the needs of the company may require is not an asset, but is issued against an asset; its issue involves the creation of a liability in proportion to the asset exchanged for it," hence we cannot call it Treasury Stock.

In the solution of the eighth problem no Deficiency Account is given for reasons mentioned above.

A St. Paul subscriber submits the following hypothetical question as a fruitful topic for discussion:

"Two large jobbing houses in same line of business take inventory and close their books; one at the end of fiscal year as of July 31st, and the other as of December 31st. Each of them takes stock at a close market or replacement value. Now, in July, 1907, the market was strong and prospects were firm with rising prices, and the firm of A. B. & Co. closed their books showing a large inventory and a large gross profit.

"When X. Y. & Z. took their inventory in December, the prospects were up in the air and the market on the decline; they, therefore, took stock on a conservative and low basis, closing their books at a smaller percentage of gross profit than normal. Is not this an argument for a perpetual inventory and that invoice price of merchandise shall hold good as long as on hand?

66

'In some lines it is possible to mark the prime cost on each article, and when inventory is taken it must agree with the books; if a decided decline is encountered at any time, the total amount is charged off on the books and the cost price changed. I know that every firm is a law unto itself when it comes to pricing inventory, but what is the professional interpretation on the subject? In this particular illustration it seems to be a question of the time of stock taking; next year conditions might be reversed."

[merged small][ocr errors][merged small][ocr errors]

debate. In an attempt to break the way for intelligent discussion, the editor of this department takes the liberty of quoting in substance an extract from a French pamphlet entitled, "The Four Principles of Commercial Accounting," by E. Mansuy:

THE PERPETUAL INVENTORY.

For many merchants, especially retailers, the inventory is a complicated and cumbersome operation; so some of them welcome with favor the pretension advertised by different accountants, a short time after the promulgation of the commercial code, of perpetuating the inventory in such a manner that, after having taken it once, it would not any more be necessary to take it over. It would be a suppression pure and simple not only of the annual inventory prescribed by the law, but also of all periodical inventories. The manager of the house would not have any more to disturb himself about making an inventory of the situation every year, as prescribed by the code, nor every two years as ordered by the ordinance, nor any period more or less long; his accountant would avoid this tiresome task by keeping his books in such a manner that the inventory would come out perpetually from the daily records.

In theory it would seem to give more than the law requires, since it furnishes, at every instant, the state of the situation, which is legally required not more often than yearly; in reality, however, it evades the law and suppresses the inventory. Because, there is no need to look into the claim in order to understand that it cannot be otherwise than false; it will suffice to be acquainted with the import of the words to know that inventory cannot be perpetual. Like all sophistry, the theory of the permanent inventory is founded on the employment of false expressions of words distorted from their true meaning. We may sum up this theory, in the words of the theorist:

"Except for the Merchandise Account, all the books of a commercial house continually establish the condition of its affairs. The accounts, as a whole, would represent therefore permanently the exact situation of the house if the Merchandise Account did not offer a regrettable irregularity. In effect, the incoming merchandise is entered at the purchase price, and the outgoing at the selling price, so that contrarily to that which has a place for other values, the balances of the merchandise accounts do not represent at all what remains in the warehouse. It is a unique anomaly that one is compelled to take an inventory of the merchandise, when one wants to know what is the condition of the business. We suppress this irregularity by establishing a Merchandise Account, whose balance represents the value of the merchandise in the warehouse, the same as the balance of the cash account represents the value of the specie, the same way as the balance of the bills receivable represents the amount of the bills in the pocket-book, etc., etc., and since all the accounts represent exactly the importance of the interest in play, their aggregate sets off continually the condition of the business.

Summing up, what is the inventory? It is a statement of the active and passive. The accounts are constructed for the purpose of that showing and the Merchandise Account above would make an exception. Let us have it made regular, and then the whole of the accounts, the active and the passive will result in a permanent inventory."

This reasoning is entirely false. Firstly, because the balance of an account is not an inventory and cannot replace an inventory. Then, because the debits of accounts mentioning the active entries reveal only the value of the entry of these elements and there is nothing in the ordinary books which would reveal the variations of this value before going out; so that, except the Cash Account, all the accounts have need of being rectified periodically. There is but one commercial matter, the account or accounts of which would reveal exactly by their balance the exact value at every moment, namely, money. This is because money

does not change in value, being itself conventionally, the measure of that quality. But it does not result at all that the balance of the cash account may be considered as an inventory. The balance of an account results from a certain combination of the books; the inventory is an element establishing an entirely different result.

Thus as an exception, the Cash Account alone presents, when it is exact, the balance equal to the amount which would represent an inventory; but the balance is not an inventory.

This difference between a balance of an account and an inventory is so much easier to grasp when we reflect that the specie, the sole value of which the account shows certainly to exist, is precisely that material which we most often inventory. Is it not a veritable inventory which the cashier makes, when in the evening before leaving his office he counts carefully the money which he finds in his box; in the meantime he has his cash book, the balance of which would be able to tell him that, but this balance reveals to him that which should be in the box, while by counting his cash he verifies substantially the actual balance which is entirely different. Without the cash account, all the accounts, without any other exception, reveal only the value of the entry on the debit side, and as the value of things is a very variable quality, especially when they are in the trade, it results from it that their balances give an amount of this value which may turn out completely illusory after a certain time. Thus the accounts of my debtors show me the amount of that which is due me, but do not tell me at all about the quantity of this debit which may turn out irrecoverable on account of bad business. The accounts of values reveal that which has entered the house, but they do not reveal the diminution of value which these articles may have suffered after their entrance, by consequence of a multitude of circumstances. This alone is an inventory; it is the examination of articles one by one that will disclose the situation. If we add all the differences between the conditions presented by the accounts, and the actual conditions which result daily from the modifications of the debit created, or in other words, add in an indirect manner the debit and credit interests, the rents, salaries of the employees, the commissions on business, on profits, etc., we understand how profound is the error into which those plunge who claim that the daily books may suffice to establish the complete standing of the business, by solely modifying the manner of keeping the merchandise account.

But this modification of the Merchandise Account is itself an impossibility in a majority of cases, and in every case a singular illusion.

The Journal of Accountancy

Published Monthly under the auspices of the
American Association of Public Accountants

Vol. 5

MARCH, 1908

Our Currency System.

No. 5

[The four following papers reproduce the notable discussion. of the Currency before the Economic Club of New York on the evening of February 5, 1908.]

Evils of Excessive Credit Expansion.

BY VICTOR MORAWETZ.

The currency question of to-day is essentially different from the currency question which agitated the country and brought us to the verge of a financial revolution twelve years ago. Then the question was what should be the standard of value in the United States? The question was whether we should open our mints to the free coinage of silver into dollars of 4121⁄2 grains 9-10 fine, although 4122 grains of silver at that time were worth only about sixty cents, according to the then existing standard of value. Many persons feared, rightly or wrongly, that the effect of authorizing the free coinage of these silver dollars would be to make existing debts payable in dollars of a reduced value and reduced purchasing power, and to make silver the standard of value in the United States, as in China, and at that time in Mexico and India, instead of gold, as in the other leading civilized countries of the earth. The people of the United States decided by their votes in favor of keeping gold as their standard of value, and I hope-I confidently believe-that the leaders of the Democratic party do not propose to reopen that question, but are ready to maintain the gold standard of value now prevailing. For when

no great moral principle is involved it often becomes the duty of good citizenship to accept the decision of the majority, though believing that the majority was mistaken. To reopen this question as to the standard of value would be so disastrous to the whole country that I feel confident that the leaders of the silver party, as well as those who support the present standard of value, are anxious to bury that question in oblivion.

The currency question of to-day is simply a question of sound banking. It is a question of bank credits and bank reserves. The entire currency of the country consists of about three thousand million dollars. Of this sum not more than three-fifths is ever in actual circulation among the people. The rest, or about twelve thousand million dollars, is held by the Government and by the banks as a reserve for the payment of their debts. The fluctuations of the amount of currency in actual circulation are caused principally by the annual needs in the West and South for cash, to make payments incidental to harvesting and moving the crops in the Autumn, and these fluctuations rarely amount to more than $200,000,000, or about 7 per cent. of the entire currency. No currency plan would increase or diminish in the least the amount of currency in actual circulation among the people. Any one who has a bank account, or who has property to sell, or who has credit enabling him to borrow, can always obtain currency from the banks, unless the banks break their contracts with their depositors and violate their legal duty by refusing to pay the checks of their depositors in currency on demand. If the currency of the country were doubled in volume, this would not put a dollar into the pocket of any man who does not pay for it in labor or in property; and the amount of currency in actual circulation would not be increased by a dollar. Neither you nor I would carry about in our pockets more currency than we carry at present. Even Mr. Carnegie would not carry more than his usual number of car fares. The whole excess of currency over the amount which the people want to carry about or keep in their cash boxes for convenience as a circulating medium would be deposited in the banks and trust companies. The cash held by the banks and trust companies is called their reserves, and these reserves are merely the surplus of currency left over after supplying the wants of the people for currency as a circulating medium. It follows, therefore, that as the amount of currency used for actual circulation

« ՆախորդըՇարունակել »