Balance sheet

“ A balance sheet which shows on its face that cognizance is taken of uncollectible accounts and of the loss in fixed assets due to depreciation, is much more valuable as a financial statement than one lacking that information, provided of course it is to be used to indicate that consideration has been taken of those elements. Excepting for the general remark that regard must always be had to the purpose for which the balance sheet is drawn up, no hard-and-fast rule can be laid down in the matter of the relative fullness of detail with which it should be made. ”

“ Regardless of the origin of the two types and their respective merits, a balance sheet is everywhere used to show assets, liabilities, and net worth, and less and less regard is being paid to debit and credit or left and right sides, technical form giving place to an elasticity in the method of showing adapted to accomplish definite purposes. ”

“ The balance sheet is occupying an increasingly large place in all affairs of business and even of state, because the state is taking cognizance of business as never before. All phases of commercial activity are under the microscope. In these war times the government is tapping every available source of revenue. Kinds of property, property values, profits, rates of profit on capital invested—all are under investigation and the publicity resulting therefrom should make for a better conduct of future business. ”

“ Thus, a balance sheet to be presented to the banker as the basis of a loan should be carefully classified so as to show clearly the financial condition, and sufficient detail should be given to indicate the basis used in valuing the various items. A balance sheet drawn up for publication may, on the other hand, contain less detailed information and less attention need be given to its form. A balance sheet drawn up for use within the business itself may well contain very full information and its form should be such as will accurately portray the status of affairs. ”

“ Only those profit and loss items which are realized or settled in cash are not dependent upon the valuation of related assets, and even here, in so far as cash must under some circumstances be valued, these may be, at least remotely, dependent upon valuation. As, therefore, the balance sheet is primarily an expression of opinion and judgment, rather than a statement of fact, so also in large measure must the profit and loss summary be regarded as an expression of opinion. ”

“ In compiling a balance sheet it is not sufficient to give simply the figures of proprietorship or net worth; schedules of assets and liabilities must be drawn up to show the items making up that net worth. From the viewpoint of a prospective investor or purchaser, a banker to whom the business has applied for a loan, or a concern considering the advisability of extending it credit on a bill of goods, it makes all the difference in the world to know that with a net value of $10,000 the business has assets of $15,000 and liabilities of $5,000 ”

“ The statement is often made that a balance sheet showing depreciation reserves points to a conservative policy in the treatment of plant properties. Usually such a balance sheet affords little or no basis for expressing a judgment as to conservatism or the lack of it. All that it does show is that recognition is made of the fact of depreciation. ”

“ In the matter of classification and arrangement of the items under these main groups there is room for greater diversity both in practice and in theory. The need and purpose of classification and arrangement is obvious. While any statement, list, or schedule which shows assets, liabilities, and net worth may properly be called a balance sheet, only by a careful grouping and formulation of the items can their mutual interrelations and proper dependence be shown. ”

“ Make your assumptions reasonable as to the turnover and the ratios of expenses and profit to sales. Assume a merchandise turnover of 5, and a gross profit of 40% of sales. From these determine roughly the cost of goods sold, the purchases, and the sales figures. Make reasonable provision for bad debts, depreciation, interest, etc., in accordance with the balance sheet requirements. Make the other expense items whatever amounts are necessary to produce the same net profits as is shown by the comparative balance sheet. ”

“ You are instructed to prepare a balance sheet for Alexander as at June 30, 19—, a year after the balance sheet first given, together with statement showing profit or loss for the year and the distribution of same. You are also required to write up Alexander’s capital account for the year to June 30, 19—.
No value is to be placed on the good-will. ”

“ Against this argument it may be pointed out that the current period carrying the customers’ accounts which are subject to discount fails to show its liability, based on the sales agreement, to accept something less than the face amount of the claims. A balance sheet in which no suitable provision is made therefor is one which does not reflect the true status of all items, and to that extent is not a good balance sheet. ”

“ Why not, therefore, leave it off the balance sheet statement entirely? It is true that an investor, a creditor, or a stockholder is interested in the main only in the condition of the business as shown by its present assets and liabilities. Unissued stock has no value till placed on the market; all that it shows is that certain legal requirements have been met authorizing its issue and to that extent it has a contingent value which may become a real source of capital to the corporation if additional funds become necessary. ”

“ Occasionally an entirely incorrect showing, from the viewpoint of strict form, is seen when not only are the depreciation reserves—usually in one item—shown on the right side of the balance sheet but are set up in the Net Worth section, seemingly as a part of the surplus or other true profit reserves. ”

“ Exchequer bills, mortgages on large landed estates, allotments of new loans, were all favourable modes of investment. Even since [268] money has been plentiful, the large capital of the old offices has enabled them to gain a higher interest, because money lent in large sums for a lengthened period will always command a higher rate of interest than small sums for a short period. Thus one old office announces, in its balance-sheet, that it is receiving 4 1/2 per cent. on its investments; and probably other offices, with similar funds, are similarly fortunate. ”

“ Particularly bad and harmful is overvaluation of the assets and undervaluation of the liabilities. The use of the balance sheet as an index of financial condition makes apparent the harm of wrongful content or valuation of the items entering into it. ”

“ Such unissued stocks or bonds manifestly represent an inflation of asset values, offset, it is true, by an equal inflation of capital stock. In the first place, conceding for the sake of argument that the inclusion of unissued stocks among the assets is legitimate, the principle of equilibrium requires that they be valued at par on the balance sheet, a figure which is not cost and which may be very far from market. ”

“ If you gentlemen will examine the table of statistics and the balance sheet, you will understand that the company is in a very difficult predicament. The nation’s currency, which at the time of the great earthquake was greatly inflated, is now being deflated, and this has an enormous influence on this company. ”

“ In the meanwhile, however, we may assume that we now have at least an approximate idea of the national wealth, and a positive idea respecting the national income. These are naturally the fundamental things in any consideration of our national affairs. They are of the nature of a corporation balance sheet and income statement. ”

“ In concerns where both regular and instalment sales take place, a separation of the customers’ balances on the basis of the sales contract gives the necessary information for balance sheet purposes. The accounts of instalment trade debtors normally require a much more liberal valuation reserve than those of regular credit customers. ”

“ As a distinctive banking term, “reserve” is used to indicate the amount of cash and cash items on hand and on deposit which under the law may be counted as a cash reserve fund held against deposits and note issues. This use of “reserve” is limited strictly to financial institutions.
We find also various so-called reserves shown on the commercial balance sheet, both among the liabilities and the assets. As deductions from the assets are the various depreciation reserves and reserves for bad and doubtful accounts and notes receivable. ”

“ Though capital in this form is generally being converted into cash or other forms of working capital, the fact that large sums are invested in material does not always mean that its cash value measures the amount of working capital. On the liability side of the balance sheet there may be items such as short-time loans or accounts payable which must be deducted in order to determine the net working capital. If the stock carried is disproportionate to requirements, it is a sign of poor management. ”