In this instance it happened that these stocks and bonds were all in defunct concerns taken over by this concern and had little, if any, value. As for the "land stations and real estate" and "boat stations," they also were arbitrarily appraised.

The result is that instead of there being a surplus of $5,256,662.78 as indicated, there was a deficit after the inflation in "patents" of $5,005,100.00, in "stock in the treasury" of $5,310,410.00, and in "stocks and bonds in other companies" of $14,128,610.00 had been deducted from the assets. Together these three items aggregated $24,444,120.00. Deducting them from the assets left only $840,099, if what can be considered the actual physical value of the remaining items is accepted as represented. When this is placed side by side with the liabilities, there is a deficit of $19,184,457, instead of a surplus of $5,256,-662.78, a hopeless case of insolvency as the shareholders' stock is practically worthless.

This illustration will serve to enlighten the readers of this book with respect to the possibilities that lie in juggling figures in making up a financial statement where the work is in charge of unscrupulous people.

Such items in a financial statement as "good-will," "patent rights," and "trade-marks" should never be included among the assets. In the first place, they are not tangible assets. There is no way by which a market value may be placed upon them. I do not assert that they have no worth at all, for in some instances they are quite valuable, but what that value is can be determined only when an offer is made for them.

The mere assumption on the part of the directors that they would not sell these assets except at the figures at which they have valued them in their statement, by no means makes them worth that amount. They may never receive such an offer.

Such items should be carried as concealed assets. To use them for the purpose of striking a balance in a corporation 's financial statement must arouse at once the belief in the intelligent investor's mind that their function is to perform the work of inflation, to make a better showing than is justified. What is more, under the cover of such assets, insolvency can be concealed, as the value of these assets may be correspondingly increased as the liabilities grow.

Creditors of a corporation, however, are very seldom deceived by these assets. They do not pay the bills. When the creditors cannot get their money promptly, it is not long before the corporation is thrown into bankruptcy. When this occurs the unsuspecting shareholders who have been going along unsuspiciously in the belief that their corporation was in a strong financial shape, are rudely awakened to the existence of a contrary state of affairs.

A financial wit once described the surplus item in a financial statement as a corporation's ash heap on which were thrown all the undesirable items which it was advisable to keep from too prying eyes. The description, however, is far-fetched. With reputable corporations the surplus stands for exactly what it means, the excess in assets over the liabilities. It is the reverse with corporations of the other type.

For a financial schemer concerned only in defrauding credulous investors, juggling figures so as to get at a healthy surplus is the least difficult part of the work. In the financial statements which dishonest promoters concoct for their ventures, they always manipulate the figures.. Their main concern is in getting people to believe in their figures.

I am reminded of a case which occurred some years ago where a Get-Rich-Quick Wallingford succeeded in deceiving even some very shrewd bankers by including for a large amount among his assets the item "Government and other bonds," thereby establishing for his venture a robust surplus upon which he was able to secure quite a number of loans. This item included one government bond of the denomination of $1,000. The other bonds were not worth the paper on which they were printed.

That a surplus is at times meaningless was demonstrated some years ago by the failure of the Baltimore & Ohio, which had been allowed by the younger generation of the founders of the property to run down. Up to the day of the failure the annual statement carried a surplus in excess of $36,000,000. But there was no surplus. The alleged surplus proved to be an item against which the railroad charged supposed equities and expenditures which were regarded as investments. The management was deceiving itself quite as much as it did the stockholders.