Chapter XXIII on “Reserves and Surplus.” There the illegitimate use of

surplus as a dumping ground for items which it is desired to conceal was mentioned. To prevent this misuse of surplus the final section of the profit and loss statement is often shown as set forth above. Where, however, a separate statement of the surplus is included as a part of the exhibit of the condition for the fiscal period, the statement of profit and loss will, of course, end with the figure of net profit, if that profit is transferred to surplus, out of which all appropriations of profit to its various uses are made. If, however, appropriations of this period’s profits, as distinguished from the accumulated profits of other periods, are to be made for specific purposes, their disposition is best shown in a final appropriation section as a part of the current statement of profit and loss. COMPARATIVE STATEMENT OF PROFIT AND LOSS Year Year Year Ended Ended Ended 19— 19— 19— Gross Sales $...... $...... $...... Less Outward Freight, Allowances, and Returns ...... ...... ...... ------- ------- ------- Net Sales $...... $...... $...... ======= ======= ======= Inventory beginning of year $...... $...... $...... Purchases, Net ...... ...... ...... ------- ------- ------- $...... $...... $...... Less Inventory end of year ...... ...... ...... ------- ------- ------- Cost of Sales $...... $...... $...... ======= ======= ======= Gross Profit on Sales $...... $...... $...... ======= ======= ======= Selling Expenses (itemized to correspond with ledger accounts kept) $...... $...... $...... ------- ------- ------- Total Selling Expense $...... $...... $...... ======= ======= ======= General Expenses (itemized to correspond with ledger accounts kept) $...... $...... $...... ------- ------- ------- Total General Expense $...... $...... $...... ======= ======= ======= Administrative Expenses (itemized to correspond with ledger accounts kept) $...... $...... $...... ------- ------- ------- Total Administrative Expense $...... $...... $...... ======= ======= ======= Net Profit on Sales $...... $...... $...... ======= ======= ======= Other Income: Income from Investments $...... $...... $...... Interest on Notes Receivable, etc. ...... ...... ...... ------- ------- ------- Gross Income $...... $...... $...... ======= ======= ======= Deductions from Income: Interest on Bonded Debt $...... $...... $...... Interest on Notes Payable ...... ...... ...... ------- ------- ------- Total Deductions $...... $...... $...... ======= ======= ======= Net Income—Profit and Loss $...... $...... $...... Add special credits to Profit and Loss ...... ...... ...... Deduct special charges to Profit and Loss ...... ...... ...... ------- ------- ------- Profit and Loss for period $...... $...... $...... Surplus beginning of period ...... ...... ...... ------- ------- ------- $...... $...... $...... Dividends Paid ...... ...... ...... ------- ------- ------- Surplus ending of period $...... $...... $...... Content and Manner of Showing Some problems in connection with the content of the various sections of the profit and loss summary and also with the manner of showing the content will now be taken up. The first item to be considered is the handling of the deductions from sales. On the Federal Reserve form of statement not only are sales returns and allowances deducted but also outfreight charges and, in some instances, other expenses which are regarded as direct selling costs as distinguished from the indirect costs shown in the group of selling expenses. Practice is not at all uniform in this regard. It should be stated that where the policy of the business is to sell goods f.o.b. destination, the outfreight charges may be regarded as a proper deduction from the figure of gross sales, as otherwise that figure is inflated by the item of freight, the cost of which is no part of the business organization nor is it under its control. Where, however, goods are only sold occasionally f.o.b. destination, the outward freight is more properly treated as a cost of making the sale in the same way as advertising. It should therefore be included in the group of selling expenses rather than be treated as a direct deduction from sales. Supporting Schedules With the object of presenting a bird’s-eye view of the profit and loss activities for the year, it is desirable that as little detail be shown on the face of the statement as may be necessary to furnish the information desired. The profit and loss statement under this method of treatment must be supported as to its detailed content by schedules giving the full information which may at times be valuable to proprietor or manager. The first supporting schedule may well be headed “Cost of Goods Sold.” Therein should be shown the statement of inventory on hand at the beginning of the period, goods purchased during the year, inward freight and carriage costs, purchase returns and allowances, and goods on hand at the close of the year, the result being the figure carried on the profit and loss summary. Where manufacturing is also carried on, this cost of goods schedule should include a statement of manufacturing activities, set up in the following order: raw materials used in manufacture which will be derived from a statement of raw materials inventory at the beginning, purchases, inward freight, purchase returns, and raw materials on hand at the close of the period. To this figure of raw materials consumed in manufacture should be added the direct labor costs for the period, the sum of the two giving the significant figure of prime costs. The addition to this of the factory expense set up in detail gives the cost of manufacture for the period. Adjustment of Inventories An adjustment should be made somewhere in this manufacturing section of the inventories of goods in process at the beginning and end of the period. This adjustment is usually made at the end of the manufacturing statement, but the position depends largely on the cost system in use and therefore the cost elements which make up the value of goods in process. If these values include raw materials, direct labor, and factory expense, and a separation of these elements is difficult or impossible, the adjustment is perhaps best made at the close of the manufacturing statement. Where, however, the elements referred to are easily separable, the difference between the cost of materials in the opening inventory of goods in process and the closing inventory should be added to the materials used in manufacture during this period or subtracted from them, as the case may be. Likewise, the difference between the labor items in the two inventories should be added to, or subtracted from, the direct labor cost for the current period. This makes possible an exact showing of the prime cost for the period. The element of factory expense in goods in process should then be handled in the factory expense section, in this way doing away with the adjustment at the end of the statement as in the other case. While this method is more difficult and complicated, it is usually to be preferred. The cost of the finished product turned out during the period, as shown by the manufacturing section, must be added to the inventory of the finished product on hand at the beginning of the period, and from the sum of these two items must be deducted the finished product on hand at the close of the period in order to develop the cost of the manufactured product sold during the period. If, now, other commodities are bought and sold in addition to those manufactured, the cost of the goods bought and sold should be shown as for a trading business. Selling Expense and Administrative Schedules The second schedule to be shown in support of the profit and loss statement will be the selling expense schedule. Herein will be included all the customary selling expense items, the total of which is carried on the face of the profit and loss statement. It may be desirable in some instances to omit advertising costs from this group and show them on the face of the statement as a separate item. This is a particularly desirable policy either where advertising is a large item, or where results are to be shown during an advertising campaign. The third schedule is the general administrative items. It seems hardly worth while to attempt a separation of so-called general expense items from those of administration, as any basis of separation must necessarily be arbitrary. The fourth schedule will show the financial management expense and income items. These are the items which are shown on the statement under the heads of “Other Income” and “Deductions from Income.” These are the customary schedules presented. When the statement of surplus is made a part of the profit and loss statement, as is sometimes the case, and there are many detailed entries during the period direct to surplus, a final schedule should present these charges and credits to surplus during the period. Schedules for Special Needs It frequently happens that it is desirable to carry additional schedules to those explained, in order to show an analysis of certain earnings or operations which may be of special interest to the individual concern. Thus, it might be desirable to show an analysis of sales by departments, by geographical districts, or by branches. Similarly, expenses might be analyzed on the same basis. A branch organization, for example, might show all its activities, including the net operating profit by branches, the sum of the branch operating profits being taken into the combined profit and loss statement, after which appear the items of financial management expense and income. As heretofore stated, all these are problems concerning which no arbitrary ruling can be made, the organization of the business and the information desired being always the determining factor. The problem of valuation as related to the commercial balance sheet has now been completed. Some miscellaneous matters of corporation accounting and finance follow and these complete the second year’s course of study.