Accounting theory and practice, Volume 2 (of 3) : a textbook for colleges and…

CHAPTER XXIII

849 words | Chapter 123

SURPLUS AND RESERVES Definition Under the corporate form of organization, “surplus” in its broadest sense represents the difference between the net worth of the business and the capital stock issued and outstanding. Because of the legal requirement that the value of the capital stock be shown always at the original amount—which is usually par—any increments or decrements in value because of profits or losses made and reinvested in the enterprise must be shown under separate heads. Thus surplus—or deficit—is the general term to indicate this increase in value. In England the term “rest” is used in almost this same sense. “Margin” is also a title occasionally seen. Because of a much narrower technical meaning given to surplus, the general adoption of another term with the broader connotation above given would serve a really useful purpose. Of the titles in use, margin seems best to express the exact shade of meaning. In the interest of a standard terminology, the highest accounting authorities are coming to restrict surplus to that portion of the margin available for dividends and in that sense the word will be used in this chapter. Contrary uses of the word are frequently met. In banking institutions the surplus is almost as inviolable as the capital stock itself and is never used for dividend purposes. In government-controlled or supervised institutions, these special uses of the term have become too well established by law and custom ever to hope for a change in the interest of general uniformity. Creation of Margin The sources of the margin have for the most part been already indicated. The chief source is the net profit for the period as determined by the Profit and Loss account balance. What enters into that balance has been discussed in Chapter XXII, where it was also pointed out that under some circumstances it may be entirely legitimate to carry some temporary proprietorship items directly to a vested proprietorship account instead of by way of the summary account. Thus there may be other sources of margin than the current balance of Profit and Loss—extraordinary items whose inclusion with current summaries of operation would render those summaries useless as a guide for judging comparative results of various periods. _Capital Stock Premiums._ Sometimes, for the purpose of creating a margin at the inception of an enterprise a fund is contributed beyond the par value of the capital stock issued. This is accomplished by purchase of the stock at a premium, and is frequently seen in banking institutions, where it serves as an easy and speedy way to satisfy the law’s requirements for the accumulation of a “surplus.” The effect of this is to give the institution a better standing than it would otherwise have. The reduction of the capital stock outstanding without full recompense to the stockholder also results in the creation of margin. This is often done in reorganizations when fewer shares of the new stock are given than were held of the old. The effect, then, is to set up a book profit against which may be charged the existing deficit, and so secure a balance between the real net worth and the par of the new stock issue. _Stock Donation._ Another source of margin is a stock donation. This may result in only a book profit. It is exceedingly difficult and generally impossible to determine the true value of many speculative ventures, such as mining enterprises. As a general rule, capitalization based on opinion is usually overcapitalization. While a stock donation may have no relation to real values and is merely a method of securing working capital, its effect when the stock is sold is to increase the cash asset and show a profit of an equal amount. Some authorities hold that instead of retaining the profit on the books, the logical thing is to reduce the carrying values of the speculative assets by the amount of the realized profit on stock donation. There would be more reason for this treatment were there any real relationship between the amount of the stock donation and the overvaluation of the assets. Since usually there is none and the whole undertaking is speculative, there is no valid objection to showing the realized profit, as the public is sufficiently warned by the nature of the enterprise. All stock donation is not of this sort, however. Occasionally a very real profit results which should be treated as a margin item. _Stock Assessments, etc._ Similar to a stock donation is a stock assessment. In cases of reorganization or of impending bankruptcy, a pro rata assessment is levied on the outstanding shares. Being a donation, it constitutes a proprietorship increase item and becomes a part of the margin. This method is frequently used for the purpose of wiping out a deficit, an impairment of capital, and is, of course, a _real_ profit as distinguished from a _book_ profit. Similarly, additional payments made by common shareholders to convert their holdings into preferred shares are a realized profit and should be recorded as part of the margin. _Capital Profits and Bonuses._ Capital profits, as discussed in

Chapters

1. Chapter 1 2. Introduction of System 3. 1. PROPORTIONAL METHODS 4. 2. VARIABLE PERCENTAGE METHODS 5. 3. COMPOUND INTEREST METHODS 6. 4. MISCELLANEOUS METHODS 7. 1. PROPORTIONAL METHODS 8. 2. VARIABLE PERCENTAGE METHODS 9. 3. COMPOUND INTEREST METHODS 10. 4. MISCELLANEOUS METHODS 11. Introduction 12. Introduction 13. CHAPTER I 14. 5. Debenture 15. CHAPTER II 16. Introduction of System 17. Chapter XXXVI, a cash discount is usually treated as a financial 18. 6. Indexing vouchers. 19. 4. It localizes responsibility by showing authority for 20. 5. It secures a receipted bill for all disbursements of cash. 21. 1. Clumsy provision for returns and allowances, partial 22. 3. The giving out of information about the business 23. CHAPTER III 24. CHAPTER IV 25. 2. Deferred Charges to | 2. Deferred Income 26. 5. Fixed Assets | 27. 4. For publication or report to regulating or 28. 6. For advertising purposes to float new issues 29. CHAPTER V 30. 12. Liquidation or forced-sale value, etc. 31. 1. For the current assets, the principle of valuation may be stated 32. 2. The principle of valuation involved in deferred charges to operation 33. 3. For the fixed assets, the principle of valuation generally 34. CHAPTER VI 35. 2. The managerial policy as to repairs, maintenance, 36. 3. The past performance and expected future performance 37. 4. All other factors locally present which may affect 38. Chapter XIII.) 39. CHAPTER VII 40. 5. Crystallization[25] 41. CHAPTER VIII 42. 2. Rates of depreciation and their relation to repairs, 43. 5. Financing depreciation and some related problems. 44. Chapter IX. 45. 4. Normal climatic conditions. 46. 5. Probable misuse and neglect brought about by the 47. 6. Probable change in ownership and consequent 48. 7. Probable change in the requirements of the market, 49. 2. Installed operating and generating machinery 50. 3. Fixed equipment including boilers and piping 51. Chapter X of the effect of the various methods used for calculating 52. CHAPTER IX 53. 4. Miscellaneous Methods 54. 4. Under some methods, an arbitrary interest rate 55. 1. PROPORTIONAL METHODS 56. 2. VARIABLE PERCENTAGE METHODS 57. 3. COMPOUND INTEREST METHODS 58. 4. MISCELLANEOUS METHODS 59. CHAPTER X 60. 2. Inadequacy, which is lack of capacity to do the 61. 3. Obsolescence, which represents the inability to 62. 1. PROPORTIONAL METHODS 63. 2. VARIABLE PERCENTAGE METHODS 64. 3. COMPOUND INTEREST METHODS 65. 4. MISCELLANEOUS METHODS 66. Chapter XI. 67. CHAPTER XI 68. 2. Estimate of life in periods, working hours, service 69. 5. Periodic appraisal value. 70. 3. Profits of the past may be reserved in the business 71. CHAPTER XII 72. Introduction 73. 4. Bank 74. 1. Cash deposited to cover breakage or damage to 75. 2. Moneys advanced to subsidiaries, salesmen, and other 76. 3. Claims against creditors for returned or damaged 77. 4. Prepayments on purchase or expense contracts, as 78. 5. Unpaid calls or instalments on stock subscription 79. 6. Claims against absconding officers for property 80. 1. In the case of a new concern where there is no past 81. 2. In the case of an outsider—a professional auditor 82. 3. Periodically, in any business, as a check on the 83. 1. The amount of outstanding trade debt at the time 84. 2. The amount of sales on credit made during the 85. 3. The total sales, both cash and credit, for the present 86. CHAPTER XIII 87. 1. Carry the market valuation, whether more or less 88. 2. In case market value is less than cost, set up a reserve 89. 3. Carry in an inner column in the body of the balance 90. Chapter XXVI of this book, where a full presentation of the case for 91. CHAPTER XIV 92. CHAPTER XV 93. 1. By practically full ownership of the subsidiary 94. 3. Through the agency of advances, particularly when, 95. CHAPTER XVI 96. Chapter IX, is the one most widely employed. It is to be preferred to 97. CHAPTER XVII 98. 1. If the building is purchased outright for cash, whatever costs 99. 2. If the building is bought by the issue of stocks or bonds, the 100. 3. When buildings are put up by the concern itself, full cost may 101. Chapter XVI, any increase or decrease in the value of the land cannot 102. CHAPTER XVIII 103. 1. _Time Lapse._ There is no such thing as wear and tear on a patent 104. 2. _Supersession._ If no other causes than time lapse were operative, 105. 3. _Obsolescence._ Akin to the element of supersession is that of 106. 1. Lump sum payments to the state or some division 107. 2. The full purchase price paid another company for 108. 3. Legal and other fees in connection with securing 109. 4. Any other legitimate expenses, such as the cost of 110. CHAPTER XIX 111. 6. Merchandise Inventory 112. Chapter XX, in the discussion of the liability, bonds. 113. CHAPTER XX 114. 1. The character of the issuing corporation under 115. 2. The security of the bonds under which come: 116. 3. The purpose of the issue, as: 117. 4. The conditions incident upon payment of principal 118. 4. A bond sold at par to be redeemed at a premium on maturity. 119. CHAPTER XXI 120. CHAPTER XXII 121. 2. Profits realized on sales of fixed assets should be first applied 122. 3. A sufficient surplus should be accumulated (in addition to the 123. CHAPTER XXIII 124. Chapter XXII, have their proper place of record direct into some margin 125. Chapter XXV on sinking funds for a full discussion of the merits and 126. 2. Reserves created to provide an additional capital 127. 3. Reserves created to provide for equalizing dividends 128. 1. Valuation Reserves 129. 5. Market Fluctuations Reserves, etc. 130. 2. Proprietorship Reserves 131. 3. Reserves for Working Capital, etc. 132. CHAPTER XXIV 133. Introduction 134. CHAPTER XXV 135. 1. The sinking fund, then, under suitable title, may appear only among 136. 2. The balance sheet may record the sinking fund status among the 137. 3. There may appear on the balance sheet as the only evidence of a 138. 4. There may be no record of the sinking fund transactions shown on 139. 1. Those dealing with the original and subsequent 140. 2. Those required to book the trustee’s periodic 141. 3. Those to show the redemption of the debt and the final 142. CHAPTER XXVI 143. 1. The difficulty of determining the rate at which 144. 2. Inasmuch as the amount of investment in current 145. 3. If interest is to be charged, how shall the offsetting 146. 4. The introduction in production costs of a more or 147. 5. As the business world is accustomed to consider 148. CHAPTER XXVII 149. Chapter XXIII on “Reserves and Surplus.” There the illegitimate use of 150. CHAPTER XXVIII 151. 1. To convey, transfer, conceal, or remove, or to permit 152. 2. To transfer while insolvent any portion of the property 153. 3. To make a general assignment for the benefit of 154. 4. For the debtor to admit in writing his inability to 155. 5. To suffer or permit, while insolvent, any creditor to 156. 1898. The courts of the Federal Government have jurisdiction in these 157. CHAPTER XXIX 158. 1. Agreement by the directors of the various companies 159. 2. Assent of the stockholders of each company to the 160. 3. Filing of certified copies of the agreement, with the 161. 4. The exchange and issuance of new stock for the 162. 1. A uniform accounting system for all the companies 163. 2. The reserves for depreciation should be based on 164. 3. Costs should be determined in the same way if the 165. 4. The apportionment of labor, factory expense, and 166. 5. Only real items of cost should be included under the 167. 6. The same methods of inventory-taking, both of 168. 7. The amount of orders on hand should be considered. 169. CHAPTER XXX 170. 2. A proper rate of turnover on the merchandise 171. 3. Economical management. 172. 3. Facilities for centralizing and comparing such

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