Financial asset

“ In the interest of conservatism and as producing certain other desirable results which will be brought out as each asset is examined in detail, cost price, if lower than market, is deemed the desirable basis for the valuation of this group. By way of explanation, it should be said that working capital as used here is the difference between current assets and current liabilities and so represents the portion free to be put to the further pursuit of business. ”

“ Is it for the best financial interest of the company to borrow on short or long time, to create a floating or a funded debt, etc.—these points require consideration and can, of course, be answered only in the light of the conditions prevailing in each case as to the status of the working capital requirements. ”

“ Long-established principles govern the application of the more favorable tax rates to long-term capital gains: (1) There must be first, a 'capital asset,' and second, a 'sale or exchange' of that asset (§ 117 (a) ) ; (2) 'capital asset' is defined as 'property held by the taxpayer,' with certain exceptions not here relevant (§ 117 (a) (1) ) ”

“ Some types of undertakings are more subject to the effects of wasting assets than others. Concerns dealing in investments, insurance of all kinds, brokerage and commission, manufacturers’ agents, banking and financial houses, professional firms, and the like, only a small portion of whose capital is tied up in fixed assets, are comparatively unaffected by the charge for depreciation. ”

“ In case the reserve is more than the value of the asset at the time of discard, it means that more than the cost of the asset has been charged as expense. Accordingly, the excess represents real profit and must be transferred to surplus. ”

“ And the promise to pay interest or rent, or the expectancy of dividends upon stock, the amount of such payments, the past and prospective regularity of the payments, and other elements bearing upon the expectation of the receipt of income affect the value of any income producing property. But these elements are not separately valued in appraising the worth of the asset at any given time. It is the uniform practice to value the asset as an entirety, taking into consideration all the elements that go to give it value in the market. ”

“ With the third method a permanent increase is secured in the capital funds available for use in the business. Financial policy, governed by the needs of the business and its markets, will always dictate the method to be used for extinguishing or contracting a debt. ”

“ Their own importance has vastly grown as their companies' assets have piled up. A man with $400,000,000 or $500,000,000 under his control, with an annual income of $60,000,000 requiring investment, has become a financial giant. ”

“ Organization Expense. The group of expenditures explained in Chapter XXXVIII, as incident to the organization of a corporation, is recorded under the title “Organization Expenses” and is classified for purposes of the balance sheet as an asset. It is a kind of asset, however, which has no [Pg 407] tangible value and most businesses desire to consider it more in the nature of a deferred charge to operations. It is recognized that frequently intangible assets add no strength to the business. ”

“ If the capital liabilities exactly balance the property assets, it is plain that the surplus will exactly balance the net quick assets. If the surplus is smaller than net quick assets, it is usually a sign that capital liabilities have been created to provide working capital. ”

“ The capital is not an ideal, fictitious, arbitrary sum of meney set down in the articles of association, but, in the theory and practical operation of the system, is composed of substantial property, and which gives value and solidity to the stock of the institution. ”

“ The net output thus obtained is obviously for each industry the only fund from which first, wages, salaries, interest on capital, rent, royalties and profits are, or can be, paid, and secondly, taxes, rates, depreciation, advertisement and sales expenses. ”

“ It is therefore obvious, that, when you have ascertained the current cash value of the whole funded debt, and the current cash value of the entire number of shares, you have, by the action of those who above all others can best estimate it, ascertained the true value of the road, all its property, its capital stock, and its franchises ”

“ Exchanges within the Asset and Liability Groups.—All changes in individual assets and liabilities, however, are not always the result of business or economic forces. There may be an even exchange of one asset for another asset, as when delivery equipment is purchased for cash. ”

“ The moneyed capital thus employed is invested for that purpose in securities by way of loan, discount, or otherwise, which are from time to time, according to the rules of the business, reduced again to money and reinvested. ”

“ The time during which an asset continues in use is the customary basis for a classification of its cost as between expenses and fixed assets. Thus, an asset acquired for purposes of business operation which, however, will be used up completely during the current period is charged immediately to some expense account, whereas an asset which will continue in use over several periods is charged to an asset account. Fixed asset purchases are never for purposes of resale. ”

“ Illogical as it may appear in view of the usual English practice, this account is credited with the capital stock and bonds issued to establish the undertaking, and is debited with the fixed assets in which the capital funds have been invested, the intent of the law being that the capital funds raised should be applied to purchase of fixed equipment with which to earn revenue and that all other expenditures should be made from revenue. If the fixed assets exceed at any time the fixed liabilities and capital, it means that the excess has been supplied out of revenue. ”

“ There is one, who furnishes a part of the capital or lends a part of the money by which it is carried on, and another, who carries it on with the addition of his own capital. Out of the surplus which remains after defraying expenses, an interest is paid to the money lender, for the portion of the capital furnished by him, which exactly agrees with the rent paid to the landlord; and the residue of that surplus constitutes the profit of the undertaker or manufacturer and agrees with what is denominated the ordinary profits on the stock of the farmer. ”

“ It has long been recognized, as a general matter, that costs incurred in the acquisition or disposition of a capital asset are to be treated as capital expenditures. The most familiar example of such treatment is the capitalization of brokerage fees for the sale or purchase of securities, as explicitly provided by a longstanding Treasury regulation, Treas.Reg. ”

“ It includes money in the hands of individuals, employed in a similar way, invested in loans, or in securities for the payment of money, either as an investment of a permanent character, or temporarily, with a view to sale or repayment and reinvestment. In this way the moneyed capital in the hands of individuals is distinguished from what is known generally as personal property. ”

“ Interest on Partners’ Loans.—Careful differentiation must be made between interest on partners’ capitals and on partners’ loans. If a loan is secured from outside parties, its interest cost is a business expense, to be taken into account before determining net profits. ”

“ The accumulation of this capital, its management, the keeping of accounts of cost of material and labor and of the finished product, required financial skill and acquaintance in the markets in which this capital could be obtained; for often the sums required were in excess of the quantity possessed by the individual who had invested his all in the buildings and machinery, and must needs borrow of some other capitalist the additional sums required for purchasing material and paying the wages of his workmen. ”

“ Under the operation of a shrinkage in the volume of money this enormous mass of borrowers, at the maturity of their respective debts, though nominally paying no more than the amount borrowed, with interest, are, in reality, in the amount of the principal alone, returning a percentage of value greater than they received—more than in equity they contracted to pay and oftentimes more, in substance, than they profited by the loan. ”

“ Variable capital, v, is the annual wages bill. Surplus, s, is annual rent, interest, and net profit, so that v + s represents net national income. (In this introduction surplus is used interchangeably with rent, interest and net profit.) Constant capital, c, represents at the same time the contribution which materials and capital equipment make to annual output, and the cost of maintaining the stock of physical capital in existence at the beginning of the year. ”

“ The Active Capital is that portion of the wealth of the country which is employed in the production, transportation and distribution of consumable commodities, and is more accurately described as the commercial fund of the country.
The Passive Capital is that portion of the wealth of [Pg 110] the country which is derived from the commercial fund in the form of earnings, profits, savings and income from investments, and is more accurately described as the investment fund of the country. It is represented by bonds, mortgages, and other investment securities. ”

“ Their holdings of investment securities are kept well within the limits set by their aggregate capital, surplus, and savings funds, and their method of handling commercial business, based as it is on accurate knowledge of their customer's operations and upon the lien upon produce heretofore described, prevents their acceptance, through ignorance, of investment securities under commercial disguise. ”

“ If a property earns only its operating expenses, including therein proper depreciation reserves, taxes, and such a percentage on its actual invested capital as could be earned by that capital if invested in good non-taxable bonds or other like security, it is worth no more than its physical property is worth. If it earns more than that, it is due to the franchise, going concern, or other intangible elements of value, and, to determine that value, capitalize the surplus. ”

“ You will see immense sums brought to light which are at present yielding nothing, and which would be gladly exchanged for productive securities bearing annual interest, when once it is felt that the payment of that interest is certain, and that the capital will not be endangered. ”

“ The financial organization is the medium by which the various parts of the industrial and commercial organism are held in harmony. It is by the financial organization that capital is collected and distributed, that the friction of exchanges is reduced to a minimum, and that time is economized, through credit, between production and consumption. The financial system furnishes three indicators—prices, the rate of discount, and the foreign exchanges—through which we may read the operation of economic forces now that their magnitude makes it impossible to inspect them directly. ”

“ Profits realized on sales of fixed assets should be first applied to make good estimated depreciation (if any) in other fixed assets not resulting from the ordinary conduct of the business. If there is no such depreciation, such profits may be distributed as dividends, but should be distinguished from the operating profits.
3. A sufficient surplus should be accumulated (in addition to the provisions required to maintain wasting capital assets) for the purpose of making good losses due to shrinkage in values of fixed assets arising from causes other than the ordinary operations of the company. ”

“ The company mortgages its property for a certain sum, too large for a single person to advance, so it is divided up into even amounts of, say, £100, the money being secured by de- benture bonds, bearing interest at a fixed rate, and being saleable in the stock markets. ”

“ 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. ”

“ A certain amount of capital must be invested in the physical business plant. Furniture and fixtures, delivery equipment, buildings, land, machinery and tools, and so forth, must be purchased before the business can commence operating. It is assets of this type that comprise the class of fixed assets. [Pg 28] There is a corresponding group among the liabilities which are known as Fixed or Long-Term Liabilities. All debts maturing a year or more after the date of the balance sheet are classed as fixed liabilities. ”

“ The treasury stock is excluded because it is a hoard which does not become adjusted to needs of payment in the sense—or at any rate in the degree—that the stocks in merchants' tills and in people's pockets become adjusted. ”

“ The capital of those who live on the interest of their own fortunes, has generally sought and found some fixed investment, such as the public funds, mortgages, or the bonds of public companies, which investment, except under peculiar temptations or necessities, is not changed.
§ 3.⁠Fluctuations in the rate of interest arise from variations either in the demand for loans, or in the supply. The supply is liable to variation, though less so than the demand. ”