Knowledge that Transforms

Reviews the book "The Book of the Stock Exchange," by F.E. Armstrong.

Reviews the book "Practical Credit Analysis," Eugene S. Benjamin.

This article focuses on the sources of capital surplus. Capital surplus may be defined as an excess of contributed capital over legal capital. American courts have developed many theories, among them the "trust fund," "the fraud," and the "holding-out" doctrines, to support the established rule that the legal capital of a corporation may not be reduced except through formal amendment of the corporate charter or as a result of operating losses in excess of accumulated surplus. In the eyes of the law any net worth in excess of legal capital is surplus, and in the absence of statutory provisions to the contrary, may be used by the board of directors for any desired purpose. These concepts of contributed capital and legal capital are of fundamental importance to the accountant. It seems hardly necessary to emphasize before a group of accountants the importance of distinguishing between contributed capital and earned capital. But to the lawyer and the courts, legal capital is the important fact, and no matter how much the accountant disapproves of certain legal definitions of capital he must recognize that the force of law makes them facts, and that these facts should be shown on his financial statements.

The article presents a discussion on the Retail Method of Inventory. The purpose of this method is to provide a simple, practical control over the merchandising activities of a business. It may be called a modern method of accounting in the sense that its primary purpose is not to record what has happened, but to provide an effective control over what is going to happen. The basic idea is to gain control of the element of profit in an article at the time it is bought and to retain control until the profit is realized by the sale of the article. Another purpose of the Retail Method is to arrive at the true value of merchandise inventories. The two purposes mentioned are today generally regarded as the most important. It appears, however, that the Retail Method originated solely for the purpose of providing a perpetual book inventory. This it does, of course. In fact the simplicity of a running inventory record on the retail basis is alone a sufficient reason for using the retail method.

When the National Industrial Recovery Act (NIRA) gave the U.S. President power to impose requirements for the making of reports and the keeping of accounts, when it banned unfair competitive practices and indicated that destructive price cutting was one of them, and when the codes of fair competition almost from the first provided for uniform systems of accounting for industries and specified that selling products or services below cost was destructive price cutting, accountants began to sit up and take notice. The NIRA does not, of course, constitute the first time that accounting has been given recognition as a means of facilitating the relations of government to private industry. One needs only to point to the uniform accounting systems devised by the Interstate Commerce Commission and the several state utilities commissions for railroads and utilities. The several Revenue Acts enacted since 1913 have in effect required all taxpayers and potential taxpayers to keep such records as would make possible an accurate determination of the liability for income taxes.

Reviews the book "The Economics of Recovery," by Leonard P. Ayres.

This article discusses some aspects of standard costs. There are many kinds of industry which readily lend themselves to the use of standards and some in which the use of standards is the only practical way by which cost accounting data can be assembled without increasing the cost of production to a prohibitive figure or delaying the production procedure by endless weighings, or counting. This has been recognized for many years and the practical accountant used formulas, or bills of material, or normal averages for years before the present publicity was so brilliantly focused on so-called "Standard Costs." It is unfortunate that profession has used so much salesmanship and so little common sense in amplifying the possibilities of comparison which the use of standards makes possible. The installation of cost methods which will be successful in a given plant must first of all, irrespective of accounting theories, be designed for the use of the particular executives associated with the plant in question.

Reviews the book "Accountants' Reports," by William H. Bell.

There is an increasing tendency for the U.S. statutory law to rest dividend declarations upon the existence of an excess of assets after excluding appraisal increases. This is accompanied by a tendency to drop the traditional common law test of the existence of undivided profits. The growing preference therefore seems to be for an indirect control over dividends by rules which say in effect, maintain capital and all excess assets may be disbursed as dividends. This type of rule creates the problem of defining the capital which is to be maintained. On the other hand, a direct approach to dividend control would favor a rule which would say in effect, no dividend disbursement may be made beyond the amount of the accumulated, undivided profits. The problem then would become one of defining profits for dividend purposes. Presumably either method could be made to work satisfactorily provided only that respective definitions were comprehensive and their interpretations clear enough to furnish trustworthy controls in all instances. But recent changes in corporation statutes have not shown much tendency to produce an adequate definition of the capital fund to be maintained before dividends may be declared.

Economists and accountants have looked at the prospect of inflation from different basic points of view. Some have thought principally of the effects that inflation will have upon business profits, hence upon employment and power to pay debts. Others have thought principally of effects upon real wages and the standard of living. And others have concentrated their attentions on effects upon accumulated capital, such as savings, or upon stock-market prices or public finance. But none seem to have given any thought at all to the effect that inflation is sure to have upon the ability of the economic key men to choose wise courses of economic action for people. In practical business life these key men are managers of business enterprises, whether large or small. These men may be filling roles of entrepreneurs, or they may be merely paid servants of real entrepreneurs. But in any case the direction of economic activity and the amount and intensity of it, are determined by these men. If they decide to produce more or less of certain products and services, then land, labor and capital will be employed for those purposes.