Introduction

What Cash Includes Stamps Remitted as Cash Temporary Cash Disbursements Disposition of Cash Funds Cash Held Abroad Accounts and Notes Receivable Objection to the Title, Accounts Receivable Risk for Credit Losses Risk and Length of Credit Period Analysis of Customers’ Accounts as the Basis for Estimate of Bad Debts Basis of Estimate of Bad Debts Discounts and Collection Costs Valuation of Other Receivable Items on Open Account Loss on Notes Receivable Interest on Notes Receivable Balance Sheet Titles for Notes Receivable XIII MERCHANDISE STOCK-IN-TRADE 225 Definition and Scope of Term Valuation at Market or Cost Price Objections to Valuation at Less than Cost Anticipation of Profits or Losses Undesirable Method of Treatment and Summary Depreciation of Stock-in-Trade Full Costs of Stock-in-Trade The Distribution of Costs Over Stock-in-Trade The Pricing of the Inventory Valuation of Manufacturing Inventory Contracts and Length of Cost Period Valuation of Scrap Inventory-Taking Perpetual Inventory XIV TEMPORARY INVESTMENTS; ACCRUED AND DEFERRED ITEMS 241 TEMPORARY INVESTMENTS Nature of Temporary Investments Valuation of Temporary Investments Reserve for Investment Fluctuations “Stock Rights” on Investments Cost of Investments Valuation of Bonds Valuation of Unissued Stock Valuation of Treasury Stock Summary of Valuation Formula ACCRUED AND DEFERRED ITEMS Nature of Accrued Income Inadequacy of Cash Method of Handling Accruals Correct Method of Handling Accruals Showing of Accrued Items on Balance Sheet Valuation of Accrued Items Accounting for Accrued Income Illustration of Different Methods of Recording Accrued Items Prepaid Items—Definitions and Kinds Valuation of Prepaid Items Danger of Overvaluation Accounting for Deferred Debit and Other Items XV PERMANENT INVESTMENTS 258 Nature of Permanent Investments Permanent Investments as an Aid to Operation Valuation of Permanent Investments Holding Company and Subsidiary Enterprises Controlling Investments Advances to Subsidiary Concerns Rules for Valuation Investments in Partial Holdings Investments Producing No Income Bond Values and Market Interest Rates Nature of Bond Discount or Premium Record of Bond Investments Amortization of Bond Discount and Premium Formulas for Compound Interest Formulas for Annuities Formulas for Bond Valuation Valuation of Sinking Funds Valuation of Investments in Land XVI MACHINERY AND TOOLS, FURNITURE AND FIXTURES, AND OTHER EQUIPMENT 279 General Considerations Distinction between Personalty and Real Property Machinery and Tools Accounting Records Operation of Machine Accounts Valuation of Machinery and Tools Estimate of Depreciation History of Machine Standards of Operation Abnormal Operation Map of Machine Location Methods of Application of Depreciation Basis of Valuation Scrap Material Accounting for Tools Depreciation on Hand Tools Valuation of Home-Made Machinery and Tools Expenditure for Rearrangement of Machinery Definition of Furniture and Fixtures Valuation of Furniture and Fixtures Delivery Equipment—Definition and Valuation Carriers and Containers—Valuation Patterns, Molds, etc.—Valuation Disposal of Assets XVII BUILDINGS, LAND, AND WASTING ASSETS 297 Definition of Real Property Cost of Buildings Valuation of Buildings Betterments on Leased Buildings Application of Depreciation Accounting for Land Valuation of Land Depreciation or Appreciation of Land Appreciation of Land Values Depreciation in Land Values Valuation of Land Investments Mortgages on Land Donated Land Land as Stock-in-Trade Wasting Assets—Definition and Characteristics Dividends May Include Return of Capital Basis of Depletion Charge Application of Income Tax to Wasting Assets Depreciation on Buildings and Machinery of a Wasting Asset Unusual Risks Water Rights Leaseholds XVIII INTANGIBLE ASSETS—PATENTS, FRANCHISES, GOOD-WILL 316 General Considerations Patents a Monopoly Grant Purchase of Patents Patents Developed Within the Plant Patents Purchased and Not Used Elements of Depreciation on Patents Service Life of Patents Booking Depreciation on Patents Accounting Classification of Depreciation on Patents Royalties Relation of Depreciation Rate to Cost of Manufacture Sale Price of Patents Copyrights Trade Secrets Trade-Marks Franchises—Definition and Kinds Depreciation on Franchises Organization Expenses Good-Will—Definition and Nature Local and Personal Character of Good-Will Difficulty of Valuing Good-Will Creation of Good-Will by Advertising Valuation of Good-Will Based on Normal Profits Valuation of Good-Will Based on Excess Profits Valuation of Good-Will Based on Capitalization of Profits False Good-Will to Cover Capital Deficiency Periodic Revaluation of Good-Will XIX LIABILITIES ON THE BALANCE SHEET; CURRENT AND CONTINGENT LIABILITIES 339 Form and Valuation Arrangement on Balance Sheet Items Within Groups Cancellation of Liabilities Against Assets Inventory of Liabilities Contingent Liabilities CURRENT LIABILITIES Loans from Bank General Classification of Notes Accounts Payable Accrued Expenses Booking of Accrued Expenses Deferred Credits NATURE OF CONTINGENT LIABILITIES Statement of Contingent Liabilities Notes and Drafts Transferred Guarantees as a Contingent Liability Long-Term Leases Purchases for Future Delivery Pending Lawsuits Stock Not Fully Paid Accumulated Dividends on Preferred Stock Signature to Surety Bond XX FIXED LIABILITIES—BONDS AND MORTGAGES 356 Nature of Fixed Liabilities Purpose of Fixed Liabilities Corporation Bonds Nature of Bonds Difference Between Bond and Real Estate Mortgages Kinds of Corporation Bonds Authority for the Issue of Bonds Financial Considerations Involved in Issue Bonds versus Stock Issues Accounting for Bond Issue Entry of Issue on Books Entry of Premium or Discount on Books Entry of Interest Payments on Books Relation of Bond Interest to Premium or Discount Example of True Interest Cost Presentation on Balance Sheet Other Fixed Liabilities XXI CAPITAL STOCK AND ITS VALUATION 372 Problems in Valuation Kinds of Stock Par, Real, and Market Values Value Dependent upon Earning Capacity Increase of Book Capitalization Capitalization on Cost The Law and Stock Issues Treatment of Discount or Premium Valuation of Stock Issued for Property Valuation of Treasury Stock Redemption and Reduction of Capital Stock Dividend Stock Stock Issued as a Bonus Unissued and Treasury Stock on the Balance Sheet Preferred Stock Covered by Redemption Contract XXII PROFITS 387 Difficulty of Determining Profits Economic Definition Legal Definition Accounting Definition Methods of Determining Profits The Problem a Question of Valuation Effect of Asset Losses on Future Profits Legal Decisions as to Asset Losses Loss Charged Against Current Profits Loss Treated as Deferred Expense Charge Loss Charged to Capital Profit on Work in Progress Goods Made for Stock but Not Sold Goods Made to Order Profits on Long-Term Contracts Profit on Goods Awaiting Delivery Interdepartment Profits Profits Due to Appreciation of Assets Capital Profits XXIII SURPLUS AND RESERVES 407 Definition Creation of Margin Disposition of Profits Reserves Different Meanings of Reserves Reserve for Bad Debts Under- and Over-Estimate of Reserves Depletion Reserves Operating Reserves for Accrued Costs Collection Costs Not under Contract Sales Discounts on the Balance Sheet Distinction Between Reserves and Accrued Items Contingent Reserves Deferred Income—Misuse of Term Proprietorship Reserves Secret Reserves Argument for Secret Reserve Argument Against Secret Reserve Earmarking of Reserves Continuity of Reserve Policy Covered Reserves Classification of Reserves Legitimate Use of Surplus Account Statement of Surplus XXIV DIVIDENDS 428