A Model Balance Sheet

What I should regard as an illuminating financial statement conservatively prepared is the following, recently submitted to its shareholders by one of the smaller electrical manufacturing companies:

This financial statement is as complete in essential information for the shareholders as the other and previous statement is lacking in it. In this statement the cost of patents is placed at a nominal sum, so small in fact as to show that their value about represents the actual outlay to secure the patents. The other item, "stocks and bonds," is also so small as to be insignificant. What makes the statement strong and carries the impression that the corporation has taken its stockholders wholly into its confidence, is the care taken to show everything as it actually is.

Stockholders Duty

In England the shareholders take a greater interest in the affairs of their corporations. They do not do as many American shareholders do - leave it mostly to the officers and directors to represent them at their annual meetings through proxies. They come to the meetings in numbers prepared to heckle the chairman thoroughly regarding items in the annual statement about which they have just cause for criticism.

If more heckling were done by the stockholders in this country at their annual meetings, more care would be exercised by the directors of our corporations to have their annual statements comprehensive. There would be less mysticism in connection with the various items. We have the habit of leaving such matters, vital as they are, to others. Each item in a financial statement should be carefully scrutinized, and when there is any doubt in the mind a courteous request to the secretary for more detailed facts should bring the desired information. Any effort at concealment is a ground for suspicion unless a satisfactory explanation is offered.

In late years in the capitalization of industrial corporations, the tendency has been to depart from our more conservative methods of basing the capital on physical assets, with a reasonable margin for future growth. Instead, the earning possibilities of a corporation are capitalized. If a corporation has shown that it can earn $100,000 a year, the capital is placed at $1,000,000, and so on, irrespective of the actual assets. Fundamentally this idea is wrong. It is at the bottom of our evil of stock-watering. It robs securities of book value and places them upon the intangible basis of earning power.

That this is true can be easily shown by substituting a partnership arrangement for the issuing of stock. One would hardly pay $100,000 for a half-interest in a partnership because of the fact that the business was making $20,000 a year, which divided between two partners would reduce the revenue for each to $10,000, or 10 per cent. There are too many contingencies likely to arise that would reduce the revenue to a much smaller sum. Yet it is on this very idea that some of our captains of industry base their capital for their ventures.

The Mystery Of A Balance Sheet. Test Questions

1. Why is it desirable that corporations should make public statements of their operations?

2. Why is there greater publicity among railroad and public utility concerns than among industrial corporations?

3. What is the policy of the United States Steel Corporation in this regard?

4. What precaution should be observed in regard to balance sheets certified to by public accountants?

5. What are some of the most common means used to inflate the assets on a balance sheet?

6. What are the strong points in the model balance sheet submitted in this chapter?

7. What are the duties of stockholders in regard to securing safe management of corporate affairs?

8. What objections from the standpoint of the investor are there to capitalization on the basis of earning power?

9. What disadvantages are there to placing a large sum of money into a partnership?

10. What measures would you propose to secure greater responsibility in the issuance of balance sheets?