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1950 Accounting trends and techniques, 4th annual survey, 1950 edition American Institute of Accountants

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Recommended Citation American Institute of Accountants, "Accounting trends and techniques, 4th annual survey, 1950 edition" (1950). Accounting Trends and Techniques. 41. https://egrove.olemiss.edu/aicpa_att/41

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th ANNUAL CUMULATIVE SURVEY 4of the accounting aspects of 525 corporate annual re­ ports, to which are added excerpts from and comments upon unusual accounting treatments found in six hundred additional reports. The reports analyzed are those with fiscal years ending July 1 , 1949 to June 30, 1950

PREPARED BY THE RESEARCH DEPARTMENT AMERICAN INSTITUTE OF ACCOUNTANTS ACCOUNTING T R E N D S and TECHNIQUES

IN PUBLISHED CORPORATE ANNUAL REPORTS . 1950 EDITION

th ANNUAL CUMULATIVE SURVEY 4of the accounting aspects of 525 corporate annual re­ ports, to which are added excerpts from and comments upon unusual accounting treatments found in six hundred additional reports. The reports analyzed are those with fiscal years ending July 1, 1949 to June 30, 1950

PREPARED BY THE RESEARCH DEPARTMENT AMERICAN INSTITUTE OF ACCOUNTANTS Copyright 1960 American Institute of Accountants

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$ 10 p e r copy introduction

A ccounting Trends and Techniques in Published Corporate Annual Reports—1950 is the fourth in a series of studies carried out by the research department of the American Institute of Accountants as part of a long-term program initiated by the council in 1946 for the analysis of corporate reports.

T he study is based on an analysis of 525 annual reports of corpora­ tions with fiscal years ending between July 1949 and June 1950. Reports of the same 525 companies have been examined for each of the past four years in order that trends in accounting treatments might be disclosed. In our previous study, in order to make the re­ sults available as early as possible, we did not wait to receive about 2 per cent of the selected group of 525 reports. This practice was continued in the current study, with the result that the trends as they are affected by those companies are one year late.

P articular emphasis has been placed on subjects covered in recent Accounting Research Bulletins issued by the committee on accounting procedure of the American Institute of Accountants. In addition to the 525 reports which have been included in the tabulations, approximately 600 additional reports have been reviewed and referred to in many instances.

A list of the 525 companies on whose reports the tabulations have been based is included in the appendix. For the convenience of the reader, examples have been furnished frequently throughout the study by referring to the code numbers of companies appearing in the appendix.

Carman G. Blough, Director of Research American Institute of Accountants table of contents

Section 1: general Page Customary Certified Statements...... 7 Additional Certified Statements...... 10 Certified Statements—Comparative Form Used...... 13 Uncertified Statements...... 14 Consolidation Policy—Domestic Subsidiaries...... 15 Consolidation Policy—Foreign Subsidiaries...... 16 Post-Balance-Sheet Disclosures...... 20 Pension Plans...... 21 Reasons Advanced for Retaining Earnings...... 30 Section 2: balance sheet Title of Certified “Balance Sheet”...... 33 Form of Certified Balance Sheet...... 33 Marketable Securities (Current Assets)—Basis of Valuation...... 34 Inventories—Basis of Pricing...... 35 Inventories—Method of Determining Cost...... 37 Disclosure of Replacement Value of Lifo Inventories...... 40 Inventories—Excess and Slow Moving...... 42 Current Assets—Unusual Items, Treatments, and Presentations...... 43 Cash Surrender Value of Life Insurance...... 46 Prepaid Expenses and Deferred Charges...... 47 Unconsolidated Subsidiaries—Valuation Basis...... 48 Property—Basis of Valuation...... 49 Fully Amortized Emergency Facilities...... 50 Claims for Tax Refunds...... 50 Intangibles...... 51 Non-Current Assets—Unusual Items, Treatments, and Presentations...... 53 Current Liabilities—Interesting and Unusual Items...... 56 Non-Current Liabilities and Deferred Credits—Interesting and Unusual Items...... 60 Reserves Shown Below Current Liabilities...... 61 Inventory Reserves—Where Shown...... 68 Inventory Reserves—Classification...... 69 Contingency and Possible Future Inventory Price Decline Reserves—How Created or Increased...... 72 Contingency and Possible Future Inventory Price Decline Reserves—How Decreased 74 Use of Term “Reserve”...... 77 “Net Equity” Terminology...... 78 Minority Interests in Consolidated Subsidiaries—Where Shown...... 79 Capital Stock...... 80 Treasury Stock...... 81 Disclosure of Contingent Liabilities...... 83 Disclosure of Long-Term Leases in Financial Statements of Lessees...... 84 Section 3: income statement Page Title of Income Statement...... 87 Form of Income Statement...... 88 Volume of Business...... 88 Wages and Salaries (Employment Costs)...... 89 Cost of Past Service Pension Credits...... 89 Allocation of Income Taxes...... 92 Accrual of Vacation Allowances...... 93 Accelerated Depreciation and Plant Replacement Charges...... 94 Foreign Exchange Losses...... 98 Reporting of Earnings per Share in the President’s Letter...... 102 Effect of Accounting Research Bulletin No. 35...... 102 Material Extraordinary Items Shown Separately in the Income Statement...... 103

Section 4: retained income “Retained Income (Earned Surplus)” Terminology...... 105 Terminology for “Surplus” Other Than “Retained Income (Earned Surplus)”...... 106 Retained Income (Earned Surplus) Charges and Credits...... 108 Retained Income (Earned Surplus) Charges (Excluding Dividends)...... 108 Retained Income (Earned Surplus) Credits (Excluding Net Income for the Year) ... 110 “Surplus” Appropriations...... 113 Materiality of Charges and Credits to “Surplus”...... 113 Capital Surplus Charges...... 114 Capital Surplus Credits...... 115 Dividends—Where Charged...... 120 Retained Income (Earned Surplus) Restrictions...... 121

Section 5: accountant’s report Recommended Short-Form Report...... 123 Exceptions Taken to Accounting Treatments...... 124 Opinions Subject to Uncertainties...... 125 Inconsistencies with Prior Year’s Treatments...... 127 Auditing Procedures Omitted...... 130 Auditing Procedures Followed...... 134 Pro-Forma Statements...... 136 Additional Disclosures...... 136 Wording Variations...... 138

A ppendix List of 525 Corporations on Which Tabulations Were Based...... 141 section 1: g e n e ra l

The following table shows the number of com­ Customary certified statements panies presenting various types of statements during the years 1946 through 1949: 1949 1948 1947 1946 The balance sheet, the income statement, and 352 357 357 369 Separate balance sheet, in­ the statements of retained income (earned sur­ come statement and sur­ plus) and capital surplus are the customary certi­ plus statement (11, 12, 35, fied statements. In 1949, fifty-eight companies 86, 136, 197, 265, 274, 309, presented their certified statements in a form 441) 151 143 137 129 Balance sheet, combined different from that of the preceding year. The income and surplus state­ changes effected were: ment (20, 42, 116, 150, 16 Eliminated a capital surplus statement (19, 57, 154, 172, 180, 390, 396, 84, 123, 146, 152, 181, 205, 209, 305, 373, 375 399) 377, 416, 494, 500) 16 17 22 18 Balance sheet and income 13 Added a capital surplus statement (8, 69, 79, 88, statement only—no sepa­ 141, 188, 260, 308, 341, 343, 361, 488, 493) rate surplus statement (10, 15 Changed from separate income and retained in­ 17, 296, 314, 350, 382, 391, come (earned surplus) statements to a combined 475, 499, 519, 524) income and retained income (earned surplus) 3 3 4 5 Balance sheet only (237, statement (92, 143, 148, 153, 171, 174, 180, 183, 370, 386) 207, 230, 330, 384, 388, 431, 501) 1 1 1 1 No certified statements 8 Changed from a combined income and retained presented (The Buckeye income (earned surplus) statement to separate Steel Castings Co.) income and retained income (earned surplus) 2 4 4 3 Balance sheet and retained statements (34, 263, 290, 297, 411, 446, 472, 489) income (earned surplus) 4 Presented a stockholders’ equity statement in statement—income items place of a statement of retained income (earned in retained income (earned surplus) (See section which follows.) surplus) statement (187, 1 Discontinued their earned surplus statement and 492) presented earned surplus changes on the balance 525 525 525 525 sheet (Parker Pen Co.) (Numbers in parentheses refer to companies listed 1 Included a full set of statements including bal­ in Appendix.) ance sheet, statement of profit and loss, and sur­ plus statements rather than a balance sheet only In some cases there seemed to be a tendency to (Billings & Spencer Co.) use the combined income and surplus form when 58 the only changes in retained income (earned sur­ (Numbers in parentheses refer to companies listed plus) were net income and dividends for the year, in Appendix.) and when additional charges or credits did occur, 8 Section 1— General to use the separate retained income (earned sur­ schedule summarizes the equities included by the plus) statement. twelve companies that were listed in the preced­ A separate capital surplus statement was ing column: usually omitted when there had been no changes 6 Equities for both preferred and common share­ in the account during the year. Of the sixteen holders (59, 111, 294, 435, 462, 483) companies eliminating the capital surplus state­ 2 Common shareholders’ equity only (Preferred ment, seven, including two presenting compara­ stock equity was shown on the balance sheet) tive balance sheets, made a parenthetical notation (13, 204) on the balance sheet stating that no change had 4 Common shareholders’ equity only—(No pre­ occurred in the account during the year and three _ ferred stock) (240, 275, 447, 461) other companies furnished comparative balance 12 (Numbers in parentheses refer to companies listed sheets. in Appendix.) Stockholder equity statements More complete information concerning the purpose(s) for which capital stock was issued dur­ Of the following named companies, the first ing the year was often given in this type of state­ four presented statements of stockholders’ equity ment. Colt’s Manufacturing Company, which in place of the more usual retained income was not included in the study, included in its (earned surplus) certified statements for the first report a “Statement of Stockholders’ Ownership” time in 1949, the others having used such state­ showing the common stockholders’ equity. (See ments in years previous to 1949: Exhibit 1, p. 9.) Title of Statements Name of Company “Statement of Stockholders’ Omission of surplus statement Equity” Armstrong Cork Co. Of sixteen companies which in 1949 presented “Shareholders’ Ownership” Union Oil Company of no certified retained income (earned surplus) Calif. statements, fourteen showed the year’s retained “Statement of Changes in Stockholders’ Equity” Granite City Steel Co. income (earned surplus) adjustment(s) on the “Statement of Stockholders’ balance sheet itself. United States Steel Cor­ Equity” Koppers Co., Inc. poration deducted dividends declared from the “Statement of Common net income for the year in its income statement. Stockholders’ Equity” Allied Stores Corp. The remainder was referred to in a parenthetical “Common Stockholders’ In­ note on the balance sheet after “Income rein­ vestment and Changes Federated Department vested in business” as an addition for 1949. Therein” Stores, Inc. S. H. Kress & Company did not explain that the “Stockholders’ Equity” Socony-Vacuum Oil “earnings retained for use in the business” shown Co., Inc. at the foot of its statement of earnings was the “Capital Stocks and Surplus (Schedule A)” The Byrndun Corp. only amount affecting the “accumulated earnings “Statement of Capital Stock retained for use in the business” during the year. and Surplus” International Shoe Co. “Analysis of Capital In­ Scovill Manufacturing Presentation of balance sheet only vested” Co. “Consolidated Statement of Three companies included in their annual re­ Net Worth” Standard Oil Co. (N.J.) port only a balance sheet as a certified statement. “Statement of Stockholders’ Standard Oil Co. Good Humor Corp. and The Ohio Match Com­ Interest” (Ohio) pany presented an analysis of earned surplus for the year on their balance sheet. Net income The above certified statements presented in (after deduction by The Ohio Match Company to detail the various elements comprising the net provide additional reserve) and dividends paid worth of the respective companies. Two com­ or declared were the only items affecting earned panies (Allied Stores Corp., and Federated surplus. Department Stores, Inc.) included only the com­ Peden Iron & Steel Co. did not show a surplus mon shareholders’ equity in this type of state­ analysis but presented a separate certified ment and presented the equity of the preferred schedule of “Statistical Data” which included net shareholders in the balance sheet. The following sales, net income and dividends paid in cash. Exhibit 1: Colt's Manufacturing Company 10 Section 1— General time in 1949, a balance sheet of the parent com­ Additional certified statements pany. The reason stated for the change was “to bring out more clearly the financial position of the parent company.” All certified statements except those considered Subsidiary statements—domestic in the preceding section are included under the Four of the nine companies presenting domestic above heading. subsidiary statements included a balance sheet, 1949 1948 1947 income statement, and retained income (earned 475 483 482 None shown surplus) statement (212, 288, 387, 431). Allied 5 4 7 Parent company statements (See Stores Corp. and International Shoe Co. used a section which follows) balance sheet and a combined income and re­ 9 11 13 Subsidiary statements—domestic tained income (earned surplus) statement. (See section which follows) Two companies presented only a balance sheet 14 14 14 Subsidiary statements—foreign (Nash-Kelvinator Corp. and R. H. Macy & Co., (32, 137, 158, 276, 349, 457, 480, 489, 490 518) Inc.), and Crucible Steel Co. of America included 3 4 7 Reserve statements (53, 325, 475) only a balance sheet of a wholly owned, uncon­ 1 1 1 Supplemental compensation fund solidated subsidiary in its “notes to financial (83) statements.” 5 3 2 Schedules (See section which fol­ The auditors of four companies (Nash-Kelvina­ lows) tor Corp., Fruehauf Trailer Co., Allied Stores 2 1 1 Comparative statements—more Corp., J. C. Penney Co.) presented a separate than two years (118, 281) report for the domestic subsidiary statements. 7 3 1 Statements of source and applica­ All the others, except the auditor of Crucible tion of funds (See section which Steel Co. of America, presented only one report follows) in which was mentioned the examination and the 1 2 1 Summary earnings comparisons (118) opinion relating to the various subsidiary state­ 1 1 1 Retirement system assets (321) ments. In the report for Crucible Steel Co. of 1 1 1 Profit and loss statement of fac­ America, no mention was specifically made of tory retail store (111) the examination or opinion of the subsidiary’s 2 3 Statements of disposition of net balance sheet, although it was considered to be a profit (See section which follows) certified statement since it was included in the 2 1 Statistical material on dividends, “notes to financial statements.” wages, prices, taxes, book value per share, outstanding shares and Subsidiary statements—-foreign dividends per share (236, 428) In 1949 Johnson & Johnson presented six-year 2 Net assets and earnings—geo­ comparative, condensed statements of financial graphical (230, 461) condition and of earnings of its foreign sub­ 1 Pro forma balance sheet and in­ come statement (380) sidiaries. This year, however, the company did 1 Condensed balance sheets and not include foreign subsidiaries in its consolidated combined statements of earnings statements. and earned surplus with separate The National Cash Register Company’s report columns for the film and the for 1949 did not include a separate statement theatre companies, which com­ titled “Net Assets of Foreign Companies and prise the Twentieth Century-Fox Branches.” The same information, however, Film Corporation was furnished as part of a schedule “Details of (Numbers in parentheses refer to companies listed Items Included in Consolidated Statement of in Appendix.) Financial Position.” Parent company statements John Morrell & Co. again presented statements The four companies (American Bank Note Co., of assets and liabilities used in England and Anderson-Clayton & Co., Inc., Cities Service Co., income from operations in England which had Standard Oil Co. (N.J.)) listed in 1948 as includ­ been examined by chartered accountants. They ing parent company statements in their annual were not included in the consolidated statements reports, continued to do so in 1949. of John Morrell & Co. Reynolds Metals Co. introduced for the first All other companies continued their practice of Additional Certified Statements 11 showing separate statements for foreign sub­ Business for the year ended that date, and the supple­ sidiaries. mental schedules appearing on pages 22 and 23 Columbia Pictures Corp., which was not in­ herein...” cluded in the tabulation, furnished its stock­ “In our opinion.. .the statement of Financial Con­ holders with a combined statement of assets and dition, Summary of Income, Summary of Net Income liabilities of subsidiary companies actively operat­ Retained for Use in the Business, and the supple­ ing in foreign countries. mental schedules..." The auditors of St. Joseph Lead Co. gave a The other companies where the supporting separate report on the balance sheet, income and schedules were mentioned in the auditor’s report surplus statements of the company’s foreign were: Bethlehem Steel Corp., Caterpillar Trac­ subsidiary. Coty International Corporation ex­ tor Co., International Paper Co., and U. S. cluded its French and other continental Euro­ Rubber Co. pean subsidiaries but furnished a separate sum­ Numerous companies presented additional mary of their combined financial position and a schedules, not included in the preceding tabula­ statement of their combined profit and loss and tion as certified, supporting balance sheet items. earnings retained in the business unappropriated. These schedules covered a variety of items, but predominantly those of property plant and equip­ Schedules ment, and inventories. The auditors of the five companies included in Most companies implied that these schedules the preceding tabulation expressly included the were included as a part of the certified financial supplemental schedules in either the scope or statements either by parenthetical references in opinion paragraph, or both, of their reports. the balance sheet (such as: “See accompanying The following quotation from the auditor’s re­ statement”) or by the position of such schedules port for the International Harvester Company in their annual reports. is an example: The appendix numbers of fifteen companies “We have examined the Statement of Financial presenting supporting schedules which were tabu­ Condition of International Harvester Company as of lated as certified either by parenthetical reference October 31, 1949, the related Summary of Income and or by position are: 39, 41, 68, 70, 89, 98, 107, 113, Summary of Net Income Retained for Use in the 204, 226, 246, 294, 321, 355, 511. Exhibit 2: United States Gypsum Company Statements of source and application of funds Of the 525 companies tabulated, seven com­ United States Gypsum Company panies included the “statement of source and and SUBSIDIARY COMPANIES application of funds” (sometimes referred to as Statement of Money Provided changes in working capital or a similar title) From Operations and Its Disposition as an additional certified statement. This state­ For the Years Ended December 31, 1949 and 1948 ment was tabulated as certified if it was men­ tioned in either the scope or opinion paragraph of the auditor’s certificate. (See Exhibits 2, p. 11; Money Provided From Operations: 1949 1948 and 3, p. 18.) N et earnings for year...... $22,165,608 $24,596,688 In the auditor’s report for six of these com­ Provision for depletion and depreciation (charged panies (21, 118, 250, 347, 494, 497) the statement against earnings, to provide funds for future replace- ments) ...... 5,109,171 4,919,018 of source and application of funds was mentioned Other...... 95,127 283,034 in either the scope or opinion paragraph or in T o tal,...... $27,369,906 $29,798,740 both, while Armour & Co. included the statement in the “Notes to the Financial Statements.” Armour & Co., Harbison-Walker Refractories Disposition Of Money Provided: Co., and the American Box Board Co. adopted, Dividends paid...... $14,941,740 $10,137,978 for the first time in 1949, the “source and applica­ Additions and improvements to plant and equipment 7,800,031 14,184,492 tion of funds” type of statement. The auditors Retained as additional working capital (cash, securi­ of U. S. Rubber Co. referred to the “Financial ties, receivables and inventories)...... 4,628,135 5,476,270 Review” in their report for the first time in 1949, Total $27,369,906 $29,798,740 although the statement had been included in the “Financial Review” in previous years as well as the current year. 12 Section 1—General The statements of source and application of used were: (1) United States, (2) Other Western funds were not mentioned by the auditors for Hemisphere, (3) Great Britain, (4) Continental Johnson & Johnson and Motor Products Corp. Europe and North Africa, and (5) Other Foreign and were therefore not included in the tabulation, Countries. (See Exhibit 5, p. 25.) although they may have been considered to be The Gillette Safety Razor Company employed certified because of the position they occupied in the same principle in presenting its “State­ the annual reports. ment of Approximate Geographical Distribution of Consolidated Net Assets Included in the Con­ Statements of disposition of net profit solidated Balance Sheet.” The locations sub­ In 1948 the following companies used a “Dis­ divided were: (1) United States and Canada, (2) position of Net Profit” type of statement, shown Other Western Hemisphere, (3) Eastern Hemi­ after the figure for net income for the year or as a sphere—British Empire, and (4) Eastern Hemi­ separate statement: sphere—Other. Twentieth Century-Fox Film Corp. and voting- 1. Granite City Steel Co. controlled subsidiary companies for the first time 2. International Paper Co. in 1949 presented a condensed balance sheet and 3. Wesson Oil & Snowdrift Co. statement of earnings and earned surplus with In 1949 the International Paper Co. and the separate columns for film companies and for Wesson Oil & Snowdrift Co. abandoned this type theatre companies. No reason was given for of statement in favor of a more comprehensive furnishing statements in this manner but the retained income (earned surplus) statement. president’s letter contained a discussion of the The Colgate-Palmolive-Peet Company intro­ status of the government’s suit which, if success­ duced, in 1949, a statement entitled “Transferred ful, would compel the company to divorce the to Earned Surplus,” shown below the “Total Net production and distribution business from the Income for the Year” but separate from the in­ exhibition business. come statement. This new type of statement included net income as shown in the income Pro-forma statements statement and a restoration to surplus of the In addition to its customary annual report to balance remaining in the “Reserve for inventory stockholders, Paramount Pictures Inc. submitted price decline.” Dividends paid were included a separate report containing opening consolidated in the surplus statement. balance sheets for each of the two new companies, Granite City Steel Co. continued to use a Paramount Pictures Corporation and United “disposition of net profit” type of statement in Paramount Theatres, Inc., and, in addition, pro­ 1949, and included therein net income for the forma profit and loss statements for the two fiscal year, an appropriation to provide for inventory years ending January 1, 1949, and December 31, price declines and other contingencies, and divi­ 1949. An auditor’s report accompanied the dends paid. (See Exhibit 4, p. 23.) statements for each of the new companies which The use of the separate statement to show the had been formed to take over the assets and disposition of net income is in accord with Ac­ liabilities of Paramount Pictures Inc. under a counting Research Bulletin No. 35, “Presenta­ plan of reorganization which became effective tion of Income and Earned Surplus,” which sug­ December 30, 1949. gested a separate statement wherein certain Niagara Mohawk Power Corporation presented charges or credits could be shown as an alterna­ statements as of December 31, 1949, which gave tive to including them in the retained income effect to the consolidation plan which was con­ (earned surplus) statement. summated January 5, 1950. After arriving at the figures representing the net income for each Other unusual types of additional of the years 1948 and 1949 which were carried certified statements forward to the earned surplus statement, there The Standard Oil Company (N.J.) presented a were deducted certain estimated adjustments of statement entitled “Net Assets and Earnings— net income resulting from the change, applied Geographically” in which the “net assets which retroactively as if the change had been effective correspond to the net worth shown in the con­ January 1, 1948, to obtain the net income as ad­ solidated statement of financial position” and the justed. consolidated net income for the year were pre­ Another interesting group of pro-forma finan­ sented by geographical location. The locations cial statements, which included a consolidating Certified Statements— Comparative Form Used 13 balance sheet and a consolidating statement of Companies presenting no comparative state­ income, was presented by General Public Utili­ ments in 1949 but which furnished the following ties Corporation. The pro-forma balance sheets in 1948 are tabulated below: included subsidiaries owned at December 31, 1 Income statement (230) 1949, exclusive of one subsidiary under contract 1 Balance sheet (88) to sell, and pro-forma consolidated statements of 1 Combined income and retained income (earned the operations of the same subsidiaries. These surplus) statement (332) statements were not accompanied by an audi­ 3 tor’s report. Ten companies, which had presented one or A pro-forma consolidated balance sheet as of more of their certified statements in comparative December 31, 1949, and a pro-forma consolidated form in previous years, furnished balance sheet income for the year then ended, both covered in a and separate income and retained income (earned separate report by the company’s auditors, were surplus) statements or a combined income and presented by the Equitable Gas Company. retained income (earned surplus) statement in The statements gave effect to transactions con­ comparative form for the first time in 1949. summated on March 29, 1950, as if they had (56, 73, 91, 175, 223, 261, 281, 431, 483, 501) taken place as of January 1, 1949. (Also see The following tabulation shows the compara­ section on Accountant’s Report.) tive statements included in the annual reports of the 525 companies for 1946 through 1949: Certifted statements— 1949 1948 1947 1946 228 248 278 297 No comparative state­ comparative f orm used ments Comparative Statements Furnished: While the auditor’s report usually did not 126 112 89 86 Separate balance sheet, express an opinion as to the previous year’s state­ income statement and re­ tained income (earned sur­ ments, the certified statements were considered plus) statement (15, 98, to be in comparative form when figures for the 107, 226, 227) preceding year were shown in an adjoining vertical 79 70 60 43 Balance sheet, combined column. In this regard, several statements were income and retained in­ noted in which the auditor either expressed an come (earned surplus) opinion on both years or stated in the last sen­ statement (24, 150, 280, tence of the scope paragraph that a similar 349, 374) 64 57 56 62 Balance sheet and income examination had been made for the preceding statement only (58, 78, year. 337, 522, 524) The year 1949 continued the trend of present­ 13 14 17 18 Income statement and re­ ing some type of comparative certified state­ tained income (earned sur­ ments. plus) statement only (16, In 1949 there were 228 companies, as compared 39, 53, 110, 133, 347, 478, with 248 in 1948, which did not present any type 494) 11 18 18 14 Income statement only of comparative certified statements. (129, 131, 297, 373, 382, Companies which did not furnish any compara­ 480) tive statements in 1948 presented the following 4 6 7 5 Balance sheet only (173, in 1949: 206, 386, 492) 9 Balance sheet, income statement, and retained 525 525 525 525 income (earned surplus) statement (12, 50, 189, (Numbers in parentheses refer] to companies listed 235, 260, 323, 346, 397, 460) in Appendix.) 8 Balance sheet and a combined income and re­ tained income (earned surplus) statement (113, The United Shoe Machinery Corporation pre­ 114, 207, 250, 299, 310, 313, 390) sented a comparative balance sheet in which the 5 Balance sheet and income statement only (69, balances of the accounts for the current year 108, 135, 314, 416) were shown in one column, and in an adjacent 1 Income and retained income (earned surplus) column, increases and decreases were shown. statement only (190) The balances for the preceding year were not 23 presented. 14 Section 1—General U. S. Hoffman Machinery Corporation con­ (b) Simplified balance sheets—standard form tinued to use an increase-decrease column with (14, 117, 240, 334, 515) its comparative statements. (c) Charts showing distribution of sales dol­ Warner Bros. Pictures, Inc., revised its con­ lar (104, 198, 272, 281, 312) solidation policy in 1949 and restated the 1948 figures in the 1949 annual report. The follow­ The following five uncertified statements are ing is quoted from its “Notes to Consolidated reproduced as examples of a few interesting types Financial Statements”: used in the 1949 reports to stockholders: “For purposes of comparison, the statement of con­ (1) Explanatory Balance Sheet (Jantzen Knit­ solidated profit and loss for the year ending August 31, ting Mills, Inc.) (See Exhibit 6, p. 28.) 1948, has been restated to conform to the basis adopted Explanatory captions used on this balance for the year ending August 31, 1949. This restate­ sheet furnished a great deal of information about ment did not change the amount of consolidated net each item in simple, nontechnical terms. Bige­ profit for the year ending August 31, 1948.” low-Sanford Carpet Company, Inc., Botany Willys-Overland Motors, Inc., also restated Mills Inc., and A. E. Staley Manufacturing Com­ the 1948 figures in its 1949 annual report. pany also used simplified balance sheets. Elec­ The following is quoted from the “Notes to tric Boat Company presented a very interesting Financial Statements”: simplified balance sheet in graphic form. “These figures have been restated for comparative (2) Simplified Statement of Operations 1949 purposes by including in either the income or surplus (Blaw-Knox Co.) (See Exhibit 7, p. 36.) accounts special charges or credits heretofore reflected This statement presents the income statement in reserves for contingencies and by including in in narrative form with total employment costs capital surplus discount on preferred stock reacquired shown separately. in anticipation of sinking fund requirements, etc.” The Haloid Company also included a simplified income statement titled “1949 and How We Occasionally references were made to the com­ Made Out.” Percentage of sales for each item parative figures presented for the preceding year: was shown in a separate column. Lone Star “The figures as of December 31, 1948, are presented Cement Corporation, Monsanto Chemical Com­ for comparative purposes only.” (Western Auto pany and Hamilton Watch Company are other Supply Co.—below balance sheet and income state­ companies using variations of this form of state­ ment) ment. (3) Statement of What Assets and Liabilities Mean to Each Employee (Diamond Match Co.) Uncertified statements (See Exhibit 8, p. 45.) In this simplified statement of assets and lia­ bilities, the book figures are shown in total and Many companies presented a variety of uncerti­ also in “amount behind each employee.” fied statements in their annual reports. (4) Changes in Working Capital—Receipts The significant changes that occurred in the and Expenditures (Jones & Laughlin Steel Corp.) statements most frequently presented in 1949 (See Exhibit 9, p. 59.) were: This statement shows the changes in working Increased use of: capital in total and per employee. Other state­ (a) Summary earnings comparisons for more ments of changes in working capital are included than two years (107, 128, 224, 353, 476) in the annual reports of Pillsbury Mills, Inc., and (b) Statements of source and application of Crown Zellerbach Corporation. funds and of changes in working capital (5) Sources of Funds for Expansion, Modern­ (140, 212, 283, 457, 516) ization and Replacement of Facilities and for other (c) Comparative balance sheets for more Corporate Purposes (Standard Oil Co. (Ohio)) (See than two years (95, 98, 307, 315, 494) Exhibit 10, p. 64.) Slightly decreased use of: The number of companies presenting state­ (a) Supplementary income statements with ments of source and disposition of funds or employment costs shown as a separate changes in working capital has been gradually item (58, 94, 396, 455, 469) increasing for the past few years. Consolidation Policy—Domestic Subsidiaries 15 Ex-Cell-O Corporation included in this year’s 40 36 37 Some domestic subsidiaries con­ report a statement titled “Here’s What Happened solidated, others excluded (128, in 1949 in Relation to One Share of Ex-Cell-0 164, 227, 280, 465) Stock.” The statement showed pertinent infor­ Policy indicated: mation of the year’s operations on a per share 82 84 79 Subsidiaries consolidated were 100% owned (113, 224, 304, 375, basis. 517) Houdaille-Hershey Corporation again pre­ 7 6 6 Stated percentage of ownership sented a statement of value added to raw mate­ determined inclusion of subsidi­ rials and services by their company and showed aries in consolidation (32, 50, 399, how this value added was used. 461, 509) 4 4 4 No fixed percentage stated for over-all policy but percentage of ownership quoted for individual subsidiaries (66, 209, 353, 419) 8 8 7 Subsidiaries excluded because their operations were not homo­ Consolidation policy — geneous with those of the parent domcstic subsidiaries company (35, 63, 94, 228, 397) 34 35 36 Positive statement that all do­ mestic subsidiaries were consoli­ dated (158, 307, 315, 447, 524) In 1949, only about 38% of the companies 1 1 1 All consolidated except mutual insurance company and three having domestic subsidiaries explained their con­ subsidiaries less than 60% owned solidation policy. (358) Possibly the main reasons for lack of disclosure 2O 2 2 Only domestic sales companies were (1) that most companies did not have to consolidated (124, 156) decide upon any over-all policy, since they had 1 1 1 Voting controlled subsidiaries only one or a limited number of subsidiaries, or consolidated (480) (2) a company’s subsidiaries may all have been 3 3 3 Fixed percentage of homogeneous 100% owned, making it unnecessary to consider companies (222, 357, 525) whether or not a partly-owned subsidiary would 1 1 1 Only 100% owned subsidiaries consolidated except one 100% be excluded or included. owned pipe line with earnings re­ The tabulations below indicate the manner in stricted (441) which the policies of consolidation were revealed. 4 4 3 All consolidated except those not Such information was found in the great majority considered significant (65, 393, of reports only in the title heading of the financial 477, 490) statements. For example, if the statement title 1 Subsidiary excluded in 1947 be­ read “Consolidated Balance Sheet” and no invest­ cause of bankruptcy ment in subsidiaries was separately shown on the 525 525 525 balance sheet, it was assumed that all domestic (Numbers in parentheses refer to companies listed subsidiaries were consolidated with no general in Appendix.) statement of policy being provided. In other From the tabulations above it can be seen that cases the financial statements might include “and there were very few significant changes during Wholly Owned Domestic Subsidiary Companies” the year. Most of the changes that did occur in the title and would be classified as a “positive were the result of the acquisition, creation, sale or statement that all 100% owned subsidiaries were dissolution of subsidiaries. consolidated.” Policy changes or other changes in consolida­ 1949 1948 1947 tion were described in the following excerpts 134 124 127 No domestic subsidiaries indi­ taken from the related auditor’s reports or foot­ cated notes : No statement of policy: (1) “As explained on page three of this report, the 25 30 28 Domestic subsidiaries indicated accompanying financial statements are presented on a on the balance sheet but not con­ basis of consolidation different from that followed in solidated (81, 155, 206, 317, 344) 1948 and prior years. In the condensed comparative 179 186 189 All domestic subsidiaries con­ statements for the years 1944 to 1949, inclusive, there solidated (189, 265, 377, 467, 479) have been certain changes in amounts previously re­ 16 Section 1—General ported to give effect to adjustments between years. ments in that company and in Davisbilt Products “The financial statements of foreign subsidiaries Company. The investment in the new second pre­ have been translated into United States dollars on ferred stock is shown at the cost of the investments generally accepted bases of conversion. The con­ surrendered in exchange therefor, and the sum of solidated total capital of foreign subsidiaries as at $1,400,000 has been provided from earned surplus as a December 31, 1949, exceeded the carrying value of the reserve for the revaluation of the new stock to approx­ company’s investments in such subsidiaries by $8,291,­ imately its par value.” (Liberty Products Corp.— 000.” (Johnson & Johnson—footnote) footnote) “Foreign exchange and trade controls have become so burdensome that the company has thought it The following three excerpts also deal with the advisable to limit the consolidated statements, for the general question of consolidation policy and illus­ first time in 1949, to the domestic affiliated companies. trate the practice of full disclosure where war­ Consequently, only foreign company dividends of ranted : $203,452 actually received in this country have been (1) “Principle of Consolidation: taken into the domestic accounts. All amounts re­ “It is the practice of the corporation to include in ported for years prior to 1949 have been restated in the consolidated statements all subsidiary companies accordance with the revised principle of consolida­ which are wholly owned, or practically so, and which tion.” (Johnson & Johnson—president’s letter) are engaged in the manufacture or wholesale market­ (2) “Financial statements for the year 1949, on a ing of its United States and Canadian products. Sub­ consolidated basis, certified by our auditors . . . are sidiary companies which are not included in the presented in this report. Heretofore, our condensed Corporation’s consolidated statements are listed on annual reports have been presented on the basis of Schedule 1, page 38, which shows also the bases on the Alabama Fuel and Iron Company as a separate which such investments are carried. legal entity. However, it is my opinion and the “Earned Surplus includes $51,006,370 at December opinion of our auditors that consolidated statements 31, 1949, and $44,827,453 at December 31, 1948, for net present the true picture of the financial condition and earned surplus of subsidiaries not consolidated. The operations of the enterprise as a whole, and it is our investments in domestic non-consolidated subsidiaries intention to render all future published statements are adjusted to reflect current income, losses and divi­ on a consolidated basis.” (Alabama Fuel & Iron dends.” (General Motors Corp.—footnote) Co.—president’s letter) (2) “The consolidated financial statements in­ (3) “Assets held for disposal or liquidation include corporate the accounts of the parent company and mortgages received for assets disposed of in prior those of a subsidiary company, the operations of years, other non-current receivables, miscellaneous in­ which are related to those of the parent. There is one vestments and, at December 31, 1949, the investment other subsidiary (wholly owned) that is not included in certain subsidiary companies. These subsidiaries in the consolidation for the reason that its operations are consolidated in the balance sheet at December 31, are unrelated to those of the parent company. The 1948, and in the statements of income for the years investment in this latter company is carried at cost.” 1949 and 1948; however, since they are in process of (Bay Petroleum Corp.—footnote) disposal or liquidation at December 31, 1949, they are (3) “The consolidated financial statements include not consolidated in the balance sheet at that date, but only the accounts of subsidiary companies operating are carried as investments in the amount of the equity in the United States in which the company owned 75% as shown by their balance sheets, less reserve for loss or more of the voting stock. The accounts of sub­ in disposal or liquidation.” (Curtiss-Wright Corp.— sidiary companies operating in foreign territories are footnotes) not included.” (Warner Bros. Pictures, Inc.—foot­ (4) In 1949, the Liberty Products Corpora­ note) tion allowed two of its subsidiaries to merge to­ gether. These subsidiaries were previously con­ solidated by the parent company. The footnote appearing in the 1949 annual report relating to Consolidation policy— this transaction follows: foreign subsidiaries “Under the terms of the merger of The Davisbilt Products Company with Highway Trailer Company effective as of December 27, 1949, Liberty Products Corporation received 75,000 shares of new $1 cumula­ The following tabulation reveals the manner tive convertible second preferred stock, $20 par value in which foreign subsidiaries were consolidated (convertible into 300,000 shares of common stock) of and whether or not a consolidation policy was Highway Trailer Company in exchange for its invest­ stated: Consolidation Policy— Foreign Subsidiaries 17 1949 1948 1947 cluded. For comparative purposes, the statement of 327 331 338 No foreign subsidiaries indicated financial position at October 30, 1948, and the earnings No statement of policy: statement for 1948 have in this report been so re­ 42 43 48 Foreign subsidiaries indicated but classified and restated. The effect of this change on none consolidated (95, 98, 128, the financial position at October 30, 1948, was as fol­ 353, 374) lows: 48 51 54 But all foreign subsidiaries con­ “Excluded from: solidated (189, 263, 320, 476, 479) Working capital (Current Assets 15 13 11 Some but not all foreign subsidi­ less Current Liabilities) $20,152,468 aries consolidated (193, 250, 265, Other Investments 905,765 280, 307) Fixed Assets 14,557,756 Policy indicated: Deferred Charges 343,777 19 18 21 Based on geographical location $35,959,766 (94, 138, 410, 447, 473) Minority Stockholders’ Equity 470,806 21 20 14 Based on percentage ownership $35,488,960 (113, 315, 441, 522) 9 10 11 Based on both geographical loca­ The $35,488,960 excluded was classified as investments tion and percentage ownership and long term receivables. In addition, the undis­ (224, 246, 421, 461, 482) tributed earnings of foreign subsidiaries previously in­ 26 23 18 No foreign subsidiaries consoli­ cluded in earned surplus (earnings employed in the dated (35, 158, 358, 399, 524) business) were transferred to capital and paid in sur­ 16 13 7 All foreign subsidiaries consoli­ plus.” (Armour & Co.—notes to financial statements) dated (41, 65, 109, 192, 497) (2) Armco Steel Corporation eliminated its 2 3 3 Some foreign subsidiaries con­ solidated in income account but only foreign subsidiary from the consolidated not in balance sheet (299, 314) statements with the following explanation ap­ 525 525 525 pearing in the president’s letter: (Numbers in parentheses refer to companies listed “Financial results for 1949 were not comparable in Appendix.) with those of previous years for the reason that the sales, expense and net income of foreign subsidiaries of As can be seen from the above tabulation The Armco International Corporation were excluded there were relatively few changes in 1949. from consolidated income. The sales of Armco Inter­ The changes that did occur during the year national to its subsidiaries and the resulting net in­ were due principally to: (1) the effect of ex­ come together with dividends actually received in change restrictions and unsettled economic con­ dollars from foreign subsidiaries were included. ditions in foreign countries, and (2) the acquisi­ “These changes were made in the interest of a more tion of new foreign subsidiaries or an increase in conservative statement of income in view of the in­ the equity of subsidiaries already held. creasing difficulty of obtaining dollar exchange in most foreign countries for remitting dividends.” Effect of exchange restrictions and unsettled (3) Johnson & Johnson excluded all foreign economic conditions in foreign countries subsidiaries because of foreign exchange and trade controls and discussed the change in the Excerpts from auditors’ reports or presidents’ president’s letter: letters regarding some of the above changes, “Foreign exchange and trade controls have become follow: so burdensome that the company has thought it ad­ (1) “The consolidated financial statements issued visable to limit the consolidated statements, for the by the company in previous fiscal years included the first time in 1949, to the domestic affiliated companies. accounts of the parent company and its domestic and Consequently, only foreign company dividends of foreign subsidiary companies. Due to the uncertain­ $203,452 actually received in this country have been ties prevailing in foreign exchange it was decided to taken into the domestic accounts. All amounts re­ change the treatment of the accounts of foreign sub­ ported for years prior to 1949 have been restated in sidiaries in the consolidated financial statements. As accordance with the revised principle of consolida­ to the statement of financial position, all of the assets tion.” and liabilities of foreign subsidiaries are reclassified in a net amount as investments. As to the earnings state­ (4) Bristol-Myers Company effected a change ment, the income and costs arising from operations of in its consolidation policy of foreign subsidiaries foreign subsidiaries are excluded and only dividends in 1949. In his review of the year, the president received in U. S. dollars from such subsidiaries are in­ made the following comment: Exhibit 3: Harbison-Walker Refractories Company Consolidation Policy— Foreign Subsidiaries 19 “Although the total volume of sales achieved in their equity in subsidiaries already held. Three foreign markets during the past year represented a of the companies did not consolidate their new new peak, increasing restrictions on the transfer of interests but chose to show them in the balance funds, the uncertainty of foreign exchange rates, and sheet as investments. Avon Allied Products, the possibility of devaluation, all indicated that we Inc., during 1949, acquired full ownership in should seriously consider revising our past method of Avon Products of Canada, Ltd., in which a pre­ reporting net income from these sources.” vious interest had been held and chose to con­ The present method of consolidation is ex­ solidate the wholly-owned subsidiary in its plained in the following excerpts from “Notes to 1949 financial statements. Consolidated Financial Statements”: One other interesting aspect of the formation of new foreign subsidiaries was in connection with “The consolidated financial statements include the parent Company and all wholly-owned North Ameri­ the A. B. Farquhar Co. Its newly formed can subsidiaries. Beginning January 1, 1949, the Canadian sales branch (a subsidiary) was incor­ Company discontinued the consolidation of the profits porated eight days after the close of their fiscal and losses of its subsidiaries operating in England, year. This fact was revealed in a footnote with Australia, South Africa and Latin America and the unconsolidated investment, at cost, shown adopted the policy that only dividends received from in the balance sheet. unconsolidated subsidiaries shall be included in re­ ported net income. Also, the assets and liabilities of Other changes foreign branches and licensees are no longer consoli­ dated but carried as investments and valued on the (1) Subsidiaries reinstated basis of the net assets not subject to foreign exchange Remington Rand Inc. reinstated certain of its fluctuation, such as dollar deposits, fixed and capital foreign subsidiaries during the year. The follow­ assets. ing excerpt is from “Notes to Financial State­ “Pursuant to this change in policy, the Company ments” : wrote off all accumulated undistributed earnings “The accounts (excluded from consolidation since previously credited to earned surplus in the following 1941) of wholly-owned subsidiaries in Belgium, Neth­ amounts: erlands and Norway were reinstated in the consoli­ Unconsolidated foreign subsidiaries $ 971,095.75 dated financial statements as of October 1, 1949, and Unconsolidated Western Hemi­ provision has been made for estimated federal income sphere subsidiaries...... — 72,809.65 taxes with respect thereto. The accounts of sub­ 898,286.10 sidiaries in France and Germany continue to be ex­ Unconsolidated foreign branches cluded from consolidation pending determination of and licensees...... 266,813.45 the extent of the recoveries thereon.” $1,165,099.55" (2) Growing importance of foreign subsidiary “Net current assets and deferred charges of North In the president’s letter of PurOlator Products, American subsidiaries stated in foreign currencies Inc., the reason for the change in consolidation were converted into United States dollars at the free rate of exchange prevailing at December 31, 1949. policy in regard to a foreign subsidiary was given Other assets of such companies have been stated at as follows: cost, converted generally at the exchange rates pre­ “Because of the growing importance of the Cana­ vailing at date of acquisition. The devaluation of the dian subsidiary, it was felt that a consolidated report Canadian dollar resulted in an exchange loss of $79,­ should be made this year. Accordingly the financial 948.83 which was charged to earned surplus.” statements presented with this report represent the combined operations of PurOlator Products, Inc., and The auditors referred to the change in con­ its wholly-owned subsidiary PurOlator Products solidation, which they approved, in the last (Canada) Limited.” sentence of their report. The method of consolidation was explained in the “Notes to Financial Statements.” Foreign subsidiaries purchased, new ones formed Collins & Aikman Corp. explained in their or increased equity in subsidiaries already held annual report that the earnings figures given did Four companies (Republic Steel Corp., A. B. not include the earnings of their Canadian sub­ Farquhar Co., Avon Allied Products, Inc., Inter­ sidiary in accordance with their previous prac­ national Business Machines Corp.) purchased or tice, but they contemplated consolidation of formed new foreign subsidiaries or increased their Canadian subsidiary in the ensuing fiscal 20 Section 1— General year and for that reason the earnings of the sub­ modified by agreement dated January 20, 1950, provid­ sidiary for the year ended February 25, 1950 ing for payments as follows: were shown in Canadian dollars after taxes. $130,000.00 in monthly installments during 1950 15.000.00 on January 15, 1951 10.000.00 on February 15, 1951 222,050.00 on March 15, 1951 $377,050.00 Total Post-balance-sheet disclosures The note issued in accordance with provisions of the agreement provides for additional payments should the company realize net profits from operations for any year prior to maturity of the note. Interest is pay­ While the great majority of post-balance-sheet able on this loan at 4% per annum on the 15th day of disclosures appeared in the president’s letter, each month.” principally because it post-dated the company’s fiscal year, the footnotes, the financial statements The footnote went on to state the collateral and even the auditor’s report, at times, contained held by the Reconstruction Finance Corporation such information. in regard to the above loan. (Samson United The discussion which follows will deal in order Corporation—fiscal year ended December 31, with the last three locations as being of greater 1949) interest to the accountant than disclosure in the president’s letter. In financial statements The most common post-balance-sheet disclo­ In footnotes sure was in connection with the declaration and The items which appeared most often in the payment of dividends. Illustrations of paren­ footnotes were in connection with funds borrowed thetic disclosures in the balance sheet follow: or repaid, acquisition or sale of subsidiaries, and (1) “Current Liabilities: declaration, payment or receipt of dividends. Dividends payable (paid in January 1950 These three items constituted approximately and 1949)” 52% of the total number of post-balance-sheet (Air Reduction Co., Inc.—fiscal year ended Decem­ disclosures appearing in the footnotes. The re­ ber 31, 1949) maining 48% was made up of various items ap­ (2) “Liabilities and Capital pearing infrequently in the reports of many cor­ Current: porations. Dividends payable (paid January 3, 1950) ’’ A few examples quoted from the footnotes are (Haloid Co.—fiscal year ended December 31, 1949) presented below: (3) “Current Liabilities: (1) “On December 8, 1949, the company announced Dividend declared on $3 Convertible Pref­ its intention to call for redemption $24,000,000 in erence stock paid January 3, 1950” principal amount of debentures, including $1,000,000 (Chicago Pneumatic Tool Co.—fiscal year ended due May 1, 1950 . . .” (Swift & Co.—fiscal year ended December 31, 1949) October 29, 1949) An interesting post-balance-sheet transaction, (2) “The company since December 31, 1949, has in regard to the purchase of a subsidiary, follows. invested approximately $2,200,000 in another com­ Although this transaction was not reflected in the pany, organized by it and others, which has acquired certain mineral properties. If increased prices are ob­ statements, it was stated in a footnote with a tained on or before April 15, 1951, for gas contracted parenthetical reference to it appearing on the to be sold from these properties, an additional invest­ balance sheet. ment up to $1,000,000 will be required.” (Columbian “Subsequent to June 30, 1949, the entire outstand­ Carbon Company—fiscal year ended December 31, ing capital stock of Wire Specialties Co. (a California 1949) Corporation) was acquired for a maximum considera­ (3) “Pursuant to the provisions of a loan agreement tion of $600,000 plus or minus the difference between dated March 15, 1949, a loan was obtained from the certain assets and liabilities of that company, the Reconstruction Finance Corporation in the amount amount of which is to be determined by independent of $400,000.00. Payments were made on this loan in certified public accountants. This amount has not 1949 reducing the balance to $377,050.00 on Decem­ yet been determined, but it is estimated that the total ber 31, 1949. The original terms of this loan were consideration may approximate $700,000. The stock Pension Plans 21 purchase contract provides, among other things, for equity accrued thereto as Victor’s cumulative deficit to payments on the purchase price aggregating $250,000 September 30, 1949, exceeded its outstanding capital prior to June 30, 1950, and that payments on the bal­ stock and surplus. On October 3, 1949, the corporation ance of the purchase price are required only to the ex­ gave up its entire investment in Victor’s common tent of the amount of a stated percentage of certain stock. sales. Under this provision it is estimated that an “In place of its advances to Victor, amounting to additional payment of $60,000 will be required prior $902,614 after deduction of reserve, the Corporation to June 30, 1950.” (Keystone Steel & Wire Co.—fiscal accepted on October 3, 1949, Victor’s 4% non-cumula­ year ended June 30, 1949) tive income note for $750,000 due October 3, 1959, and 2500 shares of Victor’s newly issued 4% non- One other parenthetical reference in the balance cumulative non-voting preferred stock having a par sheet to a post-balance-sheet transaction dis­ value of $250,000 and an equity of $152,614 in Victor’s closed in a footnote was presented by Marmon- net assets. The Corporation’s advances to Victor at Herrington Company, Inc., whose fiscal year September 30, 1949, were subordinate to Victor’s in­ ended December 31, 1949. debtedness to Reconstruction Finance Corporation “The subsidiary company’s land, buildings, machin­ amounting to $397,500 at that date. The Victor note ery and equipment carried at $335,008.13 at December received on October 3, 1949, is also subordinate to such 31, 1949 (consisting principally of assets fully amor­ indebtedness.” (Notes to financial statements) tized for tax purposes, restored in the accounts in 1945) were sold as of February 28, 1950, for $450,000. No determination can be made at this time as to the Pension plans ultimate effect of this transaction on future opera­ tions.” [See also later section on Past Service Pension In auditor’s report Costs.\ References to post-balance-sheet transactions The annual reports for 1949 revealed that in the auditor’s report were not very common. almost one-half of the 525 companies tabulated A few which were noted follow: either had no pension plan or gave no information (1) “It is also our opinion that the action of the in the president’s letter or in the financial state­ Board of Directors on March 17, 1950, in setting ments on any plan which they may have had. aside from the earnings of the year 1949 a sum of $500,­ Of these same companies, twelve were noted 000 under the Incentive Compensation Plan for which did not disclose any information relative to Officers and Employees is in conformity with the a pension plan in the current year although they provisions contained in the first paragraph of Section had furnished some details in the previous year. 2 of such plan.” Of the remaining 264 companies, 181 merely The above quotation appeared as the last mentioned, by various methods, that a pension paragraph, after the usual opinion paragraph, in plan was in existence and did not reveal sufficient the auditor’s report of Boeing Airplane Com­ information for the reader to determine the type pany whose fiscal year ended December 31, of plan in use or the accounting treatment ac­ 1949. corded it. (2) The W. L. Maxson Corp. (fiscal year The pension plans that were more fully de­ ended September 30, 1949) revealed in detail a scribed in 1949 reports seemed to be of three post balance sheet transaction in their “Notes to types, with considerable variation being noted as Financial Statements,” reference to which was to the accounting treatments followed and the made in the auditor’s report. Excerpts follow: information provided. These three types of plan were : “. . . and the results of their operations for the year then ended, in conformity with generally accepted ac­ ( 1) Trusteed plans —Formal counting principles applied on a basis consistent with (2) Annuity plans that of the preceding period, except for the elimina­ (3) Informal plans tion of Victor Electric Products, Inc. from consolida­ tion in the accompanying financial statements as ex­ In the case of the formal plans the corporations plained in Note 1, which change we approve.’’ (Audi­ made actuarially computed payments to an in­ tor’s report) dependent agency which took over the adminis­ “The Corporation’s investment in common stock of tration of the plan, whereas with the informal Victor Electric Products, Inc., is not reflected in the plans the responsibility for administration re­ accompanying consolidated balance sheet since no mained with the corporations. 22 Section 1—General Even with those plans considered to be more fective as of January 1, 1946, the company adopted a fully described, information was not always suf­ trusteed profit sharing and retirement program for the ficient to allow for a definite classification. With benefit of all eligible employees, including officers, the this in mind, the following material will at­ entire cost of which is borne by the company. The maximum contribution for the entire program in any tempt to point out various accounting methods year is 15% of the compensation of the participants. used to handle such plans. The total unfunded cost in respect of past services Formal plans under the Retirement Plan was approximately $507,­ 000.00 at December 31, 1949, to be funded over the Under the trusteed plan, the usual accounting next six years providing the Plan continues in opera­ treatment was to charge income for the pay­ tion. While the company expects to continue the pro­ ment made to the trustee for either past or future gram indefinitely, the right to modify, amend, or ter­ service benefits. minate such program has been reserved. Upon termi­ The estimated future liability for past service nation, the entire amount theretofore contributed pension costs was frequently stated as supple­ under the program must be applied to the payment of mentary information in either the auditor’s notes benefits to participants and their beneficiaries.” to the financial statements or in the president’s (Western Auto Supply Co.—notes) letter. It was also noted that a few companies On the balance sheet of the American Bank carried reserves to cover such costs, charging pay­ Note Company the following item was shown as ments directly thereto. (Brown & Sharpe Manu­ an asset in the investment section with a contra facturing Co. and Lambert Co.) reserve also shown: In a trusteed plan, the trustee might make payments directly to the beneficiary or purchase “Investments of Appropriations for Employees’ an annuity from an insurance company which Pensions: would then assume the obligation of making the Securities, at cost .... payments to the beneficiary. Cash . . . .” In many instances there was a clause providing The payment made to the trustee of the plan for modification, amendment or termination of was shown as a charge in the income statement. the plan. In general, however, contributions The Atlas Powder Co. showed the following in already made under independently administered its balance sheet: plans were irrevocable. “Reserves Excerpts from the annual reports of two com­ Pensions (December 31, panies which embody the above points are in­ 1949) $2,898,309 cluded here as examples of a trusteed pension Less Amount in Pension plan: Trust 2,592,232 $306,077” (1) “The companies’ 1949 contributions to the Re­ tirement Plan Trust Fund, in accordance with the re­ The accounting treatment given annuity-type quirements certified by the Company’s actuary, plans appeared to be quite similar to that of totalled $555,743 which, by reason of reduction in the trusteed plans, previously discussed, except that number of employees, is substantially less than the the company would deal directly with an in­ total contributed in each of the three preceding years. surance company in the purchase of annuities for In accordance with the practice established in prior its employees. years, $478,937 of the annual contribution has been It was noted, that the predominent treatment charged to the Provisional Reserve for Past Service. was to charge income for the payments made to The balance of 1949 contributions, $76,806, has been the insurance company which in most cases in­ charged to the year’s operations and is substantially less than the normal cost of currently maintaining the cluded past and future service costs. plan. The amount of $478,937 represents one-tenth of The estimated future liability for past service the reserve established as at the effective date of the costs was not stated as frequently in the foot­ plan based on then estimated total past service costs notes or the president’s letter as was done when less related income tax reduction.” (Brown & Sharpe companies used a trusteed type of plan. Re­ Manufacturing Co.—president’s letter) serves for past service costs were rarely used, but when the past service costs were prepaid, the un­ The “Provisional Reserve for Past Service amortized portion was often set up in the balance Under Retirement Plan” was shown in the sheet as a deferred charge periodically amortized balance sheet following current liabilities. by a charge to income. (Electric Boat Co. and (2) “Profit Sharing and Retirement Program: Ef­ Alpha Portland Cement Co.) Exhibit 4: Granite City Steel Company

Granite City Steel Company

statem ent of operations FOR YEAR ENDED DECEMBER 31, 1949

Operating income: Gross sales, less discounts, returns, and allowances.. $46,423,474 Operating expenses: Cost of products sold, including materials, wages and salaries, property taxes, and other manufacturing expenses...... $39,451,530 Provision for depreciation...... 1,078,815 Selling, administrative, and general expenses...... 906,040 Interest on notes payable...... 112,029 41,548,414 Income from operations before income taxes. $ 4,875,060 Other income...... 73,048 Net income before income taxes...... $ 4,948,108 Estimated federal income taxes...... 1,890,000 Net income for the year...... $ 3,058,108

disposition of net income Net income for year, as above...... $ 3,058,108 Retained to provide for inventory price declines and other contingencies...... 100,000 $ 2,958,108 Dividends paid: In cash, $2 per share...... $ 764,976 In common stock of the company...... 431,060 1,196,036 Balance, reinvested in the business during the year... $ 1,762,072 24 Section 1—General While very few companies mentioned in their operation required as the result of the steel strike notes to financial statements or in the president’s settlement agreements: letter their right to modify, amend or terminate the plan, Pacific Mills and The Western Electric Bethlehem Steel Corporation Co. did state in footnotes that they had the right “It is the practice of Bethlehem Steel Corporation to terminate their plans. Likewise no informa­ and its subsidiaries, when an employee becomes en­ tion was given regarding the effect on annuities titled to a pension under the provisions of the Pension previously purchased, should the plan be ter­ Plan referred to on page 7 above, to charge to income minated. and to pay into the Pension Trust Fund established Two typical examples of annuity plans are set pursuant to said Plan (which Fund is not included in forth below by excerpts from footnotes or the the consolidated accounts) an amount, determined president’s letter: on an actuarial basis, which is estimated to be suf­ ficient to provide for the payment to such employee of (1) “The company established, as of April 1, 1946 the amounts he will become entitled to receive monthly (and amended as of April 1, 1948) a retirement an­ as a pension during the remainder of his life. In addi­ nuity plan for the benefit of its salaried employees. tion to such payments, lump sums have from time to The plan is administered by an insurance company time been provided from income and paid into the Pen­ under a group annuity contract. The adjusted liabil­ sion Trust Fund, in order to provide for the payment ity, related to services rendered prior to April 1, 1948, of pensions that might be granted in the then future. is payable in ten annual installments beginning with The aggregate amount in such Fund at December 31, that date. At December 31, 1949, the company’s esti­ 1949, is $30,643,140. Of that amount $10,376,375 is mated remaining liability for services rendered prior available for the payment of pensions which it is to the establishment of the plan was approximately expected will be granted after December 31, 1949. $1,678,000. The company has the right to terminate “As shown by the consolidated income statement, the plan at its discretion.’’ (Pacific Mills—notes to fi­ the amount which was provided from income for pen­ nancial statements) sions in 1949 was $15,462,419. The amount that was (2) “On May 11, 1948, at its regular meeting, the paid into the Pension Trust Fund in 1949 (which rep­ stockholders adopted a Retirement Plan, effective resented the estimated cost of pensions granted in that January 1, 1948, involving the purchase of retirement year and some others granted in prior years) was $5,­ annuities, and in addition other benefits based on prof­ 832,653, of which $370,234 had been charged against its of the company. Under the provisions of the plan earnings in prior years. $10,000,000 (which is included providing for group annuities, in which both eligible among the current liabilities in the foregoing balance hourly-paid and salaried employees are included, the sheet) of such $15,462,419 will be paid into such Fund company is required (so long as the plan is continued) in 1950, in part to provide for pensions which it is ex­ to make payments for the past service benefits of the pected will be granted in 1950 and subsequent years, covered employees until the past service program is and in part to provide for possible increases in pen­ completed over a period of approximately eighteen sions which were granted prior to 1950. years, starting with 1948. Payments on account of such “At their Special Meeting held February 7, 1950, the items are required on or before February 1 each year in stockholders of Bethlehem Steel Corporation approved amounts not less than $50,000.00. The 1949 payment amendments to the Pension Plan which were required for past service benefits amounted to $74,974.03. The by the strike settlement agreements dated October 31, company has reserved the right to modify or discon­ 1949, between certain subsidiaries of the Corporation tinue the plan at any time in the future. The unpaid and the United Steelworkers of America. cost at December 31, 1949, for such past service bene­ “It is estimated that the cost of the pensions that fits is estimated at approximately $1,010,000.00, none it is expected will be granted in 1950 under such Pen­ of which is reflected in the balance sheet of the com­ sion Plan as so amended will be between $17,500,000 pany.” (Master Electric Co.—notes to financial state­ and $20,000,000. Such amounts include the estimated ments) cost ($10,000,000) of the pensions that will be payable to a substantial number of persons who at December Steel company pension plans 31, 1949, were eligible for pensions under such Pension Plan but had not chosen to apply therefor, because During the latter part of 1949 new agreements they were receiving benefits under the Relief Plan of were made by various steel companies with the Bethlehem Steel Corporation and Subsidiary Compa­ steelworkers’ union. These agreements among nies. Since, as stated on page 7 above, such Relief Plan other things provided for certain benefits to be has been terminated, it is expected that pensions will paid for by the employer. be granted to all but a few of such persons in 1950. It is The following excerpts from presidents’ letters also estimated that the cost of the pensions that it is and footnotes provide information concerning expected will be granted in 1951 under such Plan will new plans or amendments to plans already in be between $7,500,000 and $10,000,000. The estimates Exhibit Si Standard Oil Company (New Jersey) 26 Section 1—General made in this paragraph have been made on the as­ January 1, 1950, for retirement pensions to eligible sumption that the old-age benefits payable under the employees covered by this Agreement. No employees Federal Social Security Act as at present in effect will of the Steel Division will be eligible for retirement not be increased prior to January 1, 1952. But, if any prior to the year 1954. Under the terms of the Agree­ increase in such old-age benefits under such Act effec­ ment, the Company is required to pay into a trust tive prior to that date shall be made, such increase will fund or funds in the year of retirement sufficient have the effect of reducing the amounts that are re­ money, on a sound actuarial basis, to provide for quired to be provided for the payment of the pensions pensions of employees who were granted pensions referred to in this paragraph, but will also result in during such year. Actuarial studies necessary to deter­ granting increased pensions to some of those who were mine the cost of this pension plan are in progress pensioned on or before March 1, 1950. and not yet completed. “The Pension Plan as amended provides that it is “As of October 1, 1949, the Company began to strictly a voluntary provision on the part of the em­ make provisions for voluntary pensions to salaried ploying companies, and shall not be deemed to con­ employees, on the basis of a provision of approximately stitute a contract between any one or more of them $70,000 per annum. A definite plan for pensions to and any employee or to be in consideration for, or an in­ such employees has not yet been established.” ducement or condition of, the employment of any em­ ployee. Said Plan also provides that the Board of H. H. Robertson Company Directors of the Corporation has the right to modify “During 1949 the officers of the company approved or terminate the Plan at any time; provided, however, an agreement with the United Steelworkers, C.I.O., that, with an unimportant exception, a pension which to set aside $.10 per hour worked by the men in the had been granted at the time of any modification of or Ambridge plant, for the financing of pension and in­ the termination of the Plan shall not be discontinued surance benefits. This agreement was effective Octo­ or reduced. Each of the above-mentioned strike settle­ ber 1, 1949. Including amounts set aside after October ment agreements, however, provides, in substance, 1, the total expenditures for pensions and insurance that such Plan, in so far as it applies to the employees benefits for plant employees during 1949 were approxi­ to whom such agreement relates, will continue in effect mately $40,000. If the 1949 agreement had been in without modification or change during the term of the effect the whole year, the total expenditures for the existing collective bargaining agreement covering same purpose would have amounted to $131,548. Re­ such employees, which by its terms will expire not cently, subject to the approval of the stockholders, a later than January 1, 1952. 1950 revision of this agreement has been prepared, pro­ “In view of the voluntary nature of such Pension viding for the sharing of the costs of insurance benefits Plan as amended, as stated above, and of the numer­ between the company and employees, and providing ous and doubtful assumptions that it would be neces­ for pensions financed entirely by the company. Pen­ sary to make in ascertaining the probable actuarial sions are on the basis of a minimum (including social cost in respect of so-called past service benefits under security benefits) of $100.00 per month upon retire­ such Plan, the Corporation has not made any defini­ ment after reaching age 65, if the employee has had tive actuarial studies as to such cost. It is probable, at least twenty-five years service. Proportionately however, that, if such studies were made and were of lower pension rates are provided for shorter service, importance, it would be found that said cost would if the employee has worked at least fifteen years. substantially exceed the amount in the Pension Trust “The insurance benefits will cost the company ap- Fund at December 31, 1949.” proximately$30,000peryear. Noactuarial estimate of the cost of the 1950 pension plan has been prepared, Copperweld Steel Company but estimates prepared for similar plans in other com­ “Under the terms of a Supplemental Agreement panies indicate a cost between $.08 and $.13 per pay with the United Steelworkers of America—CIO, ap­ roll hour, based on full funding of current and future plicable to the Wire and Cable Division of the Com­ service and funding past service over a period of pany, the Company agreed to provide a reserve, be­ twenty-five years. At the present level of employment ginning October 1, 1949, on the basis of six cents net this would cost from $90,000 to $145,000 per year.” for each hour’s pay to employees subject to the Agree­ ment, for a pension plan for such employees. The de­ National Steel Corporation tails of the pension plan are to be worked out by study “In addition to pension and retirement plans which and agreement between the Company and the Union. the Corporation and certain of its subsidiaries have It is estimated that the cost of the plan to the Com­ had in effect for some time past, certain consolidated pany, on the basis of a provision of six cents net for subsidiary companies entered into agreements on each hour’s pay, will approximate $100,000 annually. November 9, 1949, with United Steelworkers of Amer­ “Under the terms of an Agreement with the United ica which provided that such companies would estab­ Steelworkers of America—CIO, applicable to the Steel lish, as of January 1, 1950, noncontributory pension Division of the Company, the Company agreed, sub­ plans financed completely by the companies for the ject to shareholders’ approval, to provide, beginning benefit of plant employees of such companies, which Pension Plans 27 agreements also covered certain former plant em­ of employees now eligible who may be expected to ployees who had retired during the years 1948 and retire within the next twelve months have been pro­ 1949, prior to the effective date of the pension plans. vided for in the balance sheet. Except as to the The estimated total cost of pensions under the plans amount included under current liabilities, the pro­ covered by the agreements entered into on November vision is on a basis net of anticipated future tax bene­ 9, 1949, for former eligible employees who retired fits. The amount by which such liabilities exceeded during the years 1948 and 1949, for those eligible for the provision for the six months ended June 30, 1950, pensions but who had not retired at December 31, has been set up as a deferred charge to future opera­ 1949, and for plant employees who it is contemplated tions. will become eligible for pensions during the two-year “Increased Federal old-age benefits, enacted into period from January 1, 1950, to December 31, 1951, has law on August 28, 1950, will, under the terms of the been calculated by an independent actuary as being pension plan, reduce the Corporation’s liabilities for approximately $1,200,000, of which amount $697,000 pensions in a substantial amount, which amount, has been provided for in the accompanying statements however, is presently undetermined pending further and which has been determined as being the approxi­ actuarial study. mate total estimated cost for pensions with respect to “Provision has also been made during the six former eligible plant employees who retired during the months ended June 30, 1950, for the Corporation’s years 1948 and 1949 and for those eligible for pensions share of the cost of a contributory social insurance but who had not retired at December 31, 1949. No program for employees.” actuarial determination has as yet been made as to the estimated average annual or total cost of pensions Hercules Motors Corporation under the terms of the plans with respect to employees “The Corporation has announced that an Em­ who become eligible for pensions during the period ployees’ Pension Plan will become effective January 1, from January 1, 1952, to October 31, 1954, which is 1950, subject to approval by stockholders at a meeting the expiration date of the agreements unless termi­ on May 18, 1950, and also subject to qualification of nated on December 31, 1951, as is optionally provided the Plan under the Internal Revenue Code for federal for in the agreements.” income tax purposes. The Plan provides that no change or amendment will be made therein before The Colorado Fuel and Iron Corporation January 1, 1952, and in no event will it terminate “A pension plan providing retirement and dis­ prior to that date. The corporation expects to continue ability benefits to employees of the Corporation and the Plan after January 1, 1952, but reserves the right certain subsidiaries (except those covered by previous thereafter to reduce or discontinue payments provided agreements) became effective March 1, 1950, and is to to be made by it or to terminate the Plan. Actuarial continue in effect until December 31,1951, and, unless estimates on a level cost basis with past service funded terminated by the Corporation on or after that date, over twenty years indicate that the Plan will result until October 31, 1954. Actuarial computations in a cost of approximately $491,000 for each of the were made of the liabilities thereunder on the basis of years 1950 and 1951, before deducting income tax the continuance of the plan to October 31, 1954, and benefits. These estimates were made on the assump­ certain assumptions as to dates of retirement, con­ tion that federal social security benefits would remain tinuity of employment, future compensation and the at the present levels.” (Fiscal year ended December continuance of present Federal old-age insurance 31, 1949) benefits without increase. Based upon such computa­ tions the maximum liability for the five-year period Republic Steel Corporation to October 31, 1954, has been estimated to aggregate “On November 8, 1949, the Corporation entered a gross amount of approximately $10,000,000, of into an agreement with the United Steelworkers of which $4,300,000 relates to employees who had re­ America which provided, subject to favorable action tired prior to December 31, 1949, or had already at by the stockholders, and among other things, that the that date met the age and service requirements of the Corporation would establish a Pension Plan not later plan. than March 1, 1950. A special meeting of the stock­ “Commencing as of January 1, 1950, provision is holders of the Corporation has been called for Febru­ being made for such liability by a method which is ary 21, 1950, to consider and take action upon the designed to spread the entire cost, less anticipated in­ Proposed Pension Plan and Proposed Trust Agree­ come tax benefits, over the five-year period ending on ment, to be dated as of March 1, 1950. The present December 31, 1954. For the six months ended June intention is that the Corporation will pay into the 30, 1950, the provision amounted to $1,012,549 be­ Trust Fund, commencing March 1, 1950, not less in fore income taxes. Unpaid amounts in respect of any one year than is necessary to fund one-fifth (1/5) employees who have been granted pensions, the of each pension payable to employees eligible for a pen­ actuarial liability in respect of employees who have sion on March 1, 1950, who retire, and to fully fund applied for pensions, and a preliminary estimate, other pensions as they become payable. If the pro­ pending further experience under the plan, in respect posed Pension Plan is approved by the stockholders, Exhibit 6: Jantsen Knitting Mills Pension Plans 29 the estimated maximum average annual cost, as de­ There seemed to be three types of accounting termined by an independent actuary, for employees presentation for the informal type of pension plan: who are eligible to retire on March 1, 1950, and employees who thereafter become eligible to re­ 1. Where the pension reserve was shown but tire up to October 31, 1954, will be $9,100,000.00. In no cash or securities segregated on the the event the Corporation should exercise its option balance sheet. to terminate the proposed pension plan on December 31, 1951, the estimated maximum average annual cost 2. Where the cash and securities had been set would be $13,700,000.00 for each of the two years in­ aside and the pension reserve was also asmuch as the total cost of funding the pensions for shown on the balance sheet in an equal employees who will be eligible to retire on March 1, amount. 1950, would be spread over a two-year period rather 3. Where no funds or pension reserves had than a five-year period. It is contemplated that the been created, or the funds and reserves so Proposed Pension Plan and Proposed Trust Agree­ created had been omitted from the balance ment, upon its approval by the stockholders of the sheet. Corporation, will be adopted by all subsidiaries of the Corporation except certain relatively minor compan­ The following three quotations furnish an ies. The existing Pension Plan for Eligible Salaried example of each of the above groups: Employees, dated as of December 15,1943, as amended, and heretofore approved by the stockholders, will Group 1 (Wheeling Steel Corp.—president’s be continued in full force and effect without, how­ letter) ever, any duplication of benefits provided by the Cor­ poration. With the information now available it is “The Pension Plan of the Corporation, effective impossible with any reasonable degree of accuracy to November 16, 1946, resulted in payments of pensions make an estimate of what the aggregate cost of past during 1949 of $406,211 and at December 31, 1949, 729 service benefits would be for all employees as of March former employees were receiving benefits under the 1, 1950; however, on an actuarial basis, using certain Plan. Because of the adoption of the new Pension assumptions, the indicated cost would be very sub­ Plan, effective March 1, 1950, this Plan was termi­ stantial.” nated and discontinued for all employees retiring after that date. Such termination and discontinuance, how­ Republic Steel Corp., while not showing a re­ ever, did not effect the payment of pensions to any serve for pensions, showed among other assets, former employee who was receiving a pension under “Cash ($3,300,000.00) and U. S. Government the Plan. If payments are continued over the life securities ($3,510,201.45) held for use in connec­ expectancies of the persons presently receiving pen­ tion with pension plan for eligible salaried em­ sions, the aggregate payments in the future will ap­ ployees—$6,810,201 .45.” proximate $4,700,000.” In 1948, the Pratt & Lambert, Inc., adopted a “ . . . The new Pension Plan of the Corporation, ap­ plicable to all of its employees, including officers, be­ pension plan for their employees, effective came effective March 1, 1950, after approval by the January 1, 1948. In the same year a reserve for stockholders in a special meeting held February 8, the estimated cost of past service benefits was set 1950, and, therefore, the Corporation is bound to up by a charge to earned surplus. Yearly pay­ continue it in force until 1951 for employees repre­ ments to the insurers, equal to approximately sented by the Union, but after that time the Corpora­ one-tenth of the amount originally set up out of tion will be as free to act with reference to pensions as earned surplus, are charged directly to the re­ it was before the Strike Settlement Agreement was serve. signed ...” “The Corporation is not obligated to, and it is not presently contemplated that it will make provision to, Informal plans fund or insure the new Pension Plan. However, during the years 1948 and 1949 provisions were made, through The informal type of pension plan appeared to charges to earnings, for a pension reserve in the possess the following characteristics: amount of $1,136,767 and $1,122,598, respectively, 1. No legal or formal obligation for pension and it now appears that if similar provisions are made in 1950 and 1951 such amounts will be sufficient payments recognized by the corporation. to meet the pension costs in those years. Such provi­ 2. Plan administered entirely or partially by sions in 1948 and 1949 were $766,390 and $716,387, the corporation, as contrasted with the respectively, in excess of payments made during those “trusteed” and “annuity” type plan, the years. administration of which was vested in a “The new Pension Plan provides that the Board third party. of Directors shall have the right to modify, change or 30 Section 1—General terminate the Plan at any time, but any such modifi­ proposes to establish over a period of years a Pension cation, change or termination will not affect pensions Fund from current earnings as in the judgment of the theretofore granted under the new Plan.” Board might appear to be appropriate from time to time and to set aside funds for that purpose. This Fund Other companies using this type of informal is designated on the books of the Company as ‘Pen­ pension plan are Sunshine Biscuits, Inc., U. S. sion Fund,’ and may not be returned to the general Rubber Co. and Deere & Company. funds of the Company unless the Pension Plan is ter­ minated, modified or amended. In 1949 there is in­ Group 2 (The American Sugar Refining Com­ cluded in cost of goods sold and other expenses an pany—president’s letter) amount of $6,244,268 set aside by the Board of Direc­ “It was pointed out in last year’s annual report that tors for the Pension Fund. This amount was based on the Pension Fund and Reserve of $6,927,300 approxi­ studies made by independent actuaries and repre­ mated our estimate of the amount then required, net sents their recommendation of the amount which of tax deductions, to provide pensions for those would be required to cover the cost of current service then on the pension roll plus the accrual up to that benefits to December 31, 1949, and in addition a pay­ time toward the future cost of pensions for all persons ment into the fund towards the cost of past service then employed. In the light of further study and benefits. Amounts of pensions paid each year will be subsequent developments, it has seemed desirable to charged to the Fund and will then be deductible for add another $1,000,000 to the Pension Fund and Re­ federal income tax purposes but the amount charged serve, and this has been done by a transfer of this to profit and loss for the current year is not presently amount from Earned Surplus. deductible. ‘‘We have also revised our accounting procedure for “In our opinion, with the foregoing explanation, the pension costs so that beginning in 1949 we will pro­ accompanying balance sheet and related statements vide each year an addition to our Pension Fund and Reserve sufficient to maintain it at a level represent­ of income and earned surplus present fairly the ...” ing our best estimate of our pension costs accrued to Additional information was given in a footnote date. to the balance sheet as follows: “Accordingly, in addition to the provision of $1,000,­ 000 mentioned above, we added to our Reserve in “Assets do not include Pension Fund assets in the 1949 the total sum of $603,341. Of this amount $170,­ amount of $10,168,586 represented by cash and United 569 was provided by the income from Pension Fund States Government securities set aside by the Board investments. The balance of $432,772 was charged to of Directors and in the custody of the Pension com­ operations. Actual payments made for pensions during mittee for the purpose of paying pensions to retired the year, amounting to $373,465, were charged directly employees pursuant to the Employee Pension Plan to our Pension Fund Reserve and not to operations as approved by the stockholders on December 28, 1948.” in preceding years. (Had we followed the same ac­ counting method as in preceding years, our charge Other to operations would have been $59,307 less.) The International Nickel Co. of Canada, Ltd., “The net result of these adjustments was to increase used a partially trusteed and informal plan, our Pension Fund Reserve by $1,229,876.” showing only the “Retirement System” assets Further information was added in a footnote to held by the company and a “Retirement Sys­ the balance sheet as follows: tem Reserve,” in an equal amount, on their “The pension fund and reserve have been estab­ balance sheet. Additional amounts were held lished as a matter of convenience in administering the by the trustee, which were irrevocable. Company’s pension plan, but the Company reserves Benefits paid to retired members appeared to the right to make the fund and the reserve available be paid by both the trustee and the company. for other corporate purposes at any time.” Other companies using this type of an informal pension plan are—Tide Water Associated Oil Co. Reasons advanced and Babcock & Wilcox Co. Air Reduction Co., for retaining earnings Inc., also used this type of plan, but valued their securities at approximate market value. Group 3 (Ingersoll-Rand Company—audi­ In a release issued on October 14, 1948, the tor’s report) Committee on Accounting Procedure reaffirmed “Under the Pension Plan, approved by the stock­ the position which it expressed in Accounting Re­ holders on December 28, 1948, the Board of Directors search Bulletin No. 33, December, 1947, that Reasons Advanced for Retaining Earnings 31 “Accounting and financial reporting for general presents a very real problem to all industry. With the greatly increased costs of all replacement and construc­ use will best serve their purposes by adhering tion work, the amount of depreciation which the Cor­ to the generally accepted concept of depreciation poration is permitted to charge off under the income on cost.” This release further stated: tax laws, while sufficient to write off the original cost “Stockholders, employees, and the general public of buildings and equipment over their useful life, is should be informed that a business must be able to quite inadequate to replace those facilities, so that it retain out of profits amounts sufficient to replace is necessary to get new money to supplement the de­ productive facilities at current prices if it is to stay in preciation set aside. business. The committee therefore gives its full sup­ “The market for industrial common stocks during port to the use of supplementary financial schedules, the years of the Corporation’s greatest expenditures explanations or footnotes by which management may was in a period of recession and it was not feasible to explain the need for retention of earnings.” sell equity securities. Therefore your Corporation, in order to safeguard the shareholders’ investment, has In the annual reports for 1949, it was noted had to obtain needed funds from two main sources: that a considerable number of companies which first, by the retention in the business of a goodly pro­ had advanced reasons for retaining earnings in portion of the earnings and secondly, by borrowing previous years did not continue their policy in conservatively. ’’ 1949. Since explanations were not given for dis­ continuing the former policy, it would seem that Lehigh Portland Cement Company the reasons for the retention of earnings were no “During the past five years we have expended ap­ proximately $19 million for the rehabilitation and longer as compelling as they previously had been. improvement of our plants. It is recognized that under Of the 525 reports tabulated in 1949, only present conditions prices for machinery and equipment about 21% gave reasons for retaining earnings, are two to three times higher than the cost of similar in comparison with approximately 33⅓% in units placed in service prior to 1940. Provision for 1948. depreciation of plant assets has been recorded in our The most frequent explanations given for re­ accounts in accordance with the generally accepted taining earnings were: accounting principle of allocating to each year’s opera­ tions a proper proportion of the original cost of these (1) For plant expansion, modernization or im­ facilities based on their expected useful life. provement requirements “The accompanying chart indicates that the (2) Working capital needs amounts spent on plants during the five years men­ (3) High cost of plant replacements tioned exceeded by more than $10 million the aggre­ gate depreciation provided during that period. Be­ An additional fourteen companies, as compared cause the accumulation of depreciation on the physi­ with eighty companies in 1948, commented upon cal assets removed has not been enough to pay for the inadequacy of depreciation charges but did replacements and improvements, we have of neces­ not, in all cases, specifically relate this factor sity been forced to rely more and more on retained to the need for retaining earnings. Discussion earnings to finance our plant-betterment program.” of the subject was generally found in the presi­ dent’s letter and rarely in the auditor’s report or Thompson Products, Inc. notes to the financial statements. “It is also necessary, in appraising operating re­ sults for the year, to recognize the situation created by Excerpts from the presidents’ letters of selected the inadequacy of amounts provided in our costs for companies are given below as examples of dis­ depreciation in relation to the prevailing high cost of cussions on the inadequacy of depreciation new machinery and equipment. During periods of charges and its direct relation to the need for re­ more stable prices, the annual provisions for deprecia­ taining earnings: tion, computed on the basis of original costs, should provide funds for the replacement of worn-out or ob­ The Mead Corporation solete facilities. As we have commented in our last “While the program of postwar improvements may two annual reports, this is not true under prevailing be said to have been substantially concluded in 1949, conditions. Since income tax regulations do not recog­ continued expenditures will be necessary, not only to nize any deduction for additional amounts from earn­ maintain the plants of the Corporation in proper oper­ ings to meet this problem, we have not changed our es­ ating condition, but also to make improvements neces­ tablished depreciation practice. We have, however, sary to keep it competitive from a cost and quality taken this matter into consideration in arriving at our standpoint. The provision of funds for these purposes dividend and financial policies.” section 2: balance sheet

1 1 1 “Assets, Liabilities and Capital Investment” (A. Title of certified “balance sheet” E. Staley Mfg. Co.) 1 1 1 1 No heading used (Curtis Publishing Co.) The trend away from the use of the heading 525 525 525 525 “balance sheet” continued in 1949, with thirteen (Numbers in parentheses refer to companies listed companies adopting other terminology. Six com­ in Appendix.) panies changed to the title “statement of fi­ nancial position” or “financial position” (3, 240, 423, 431, 461, 469), six adopted the term “state­ ment of financial condition” (143, 259, 281, 294, 312, 346) and The International Nickel Co. Form of certified balance sheet of Canada, Ltd., used the heading “statement of assets and liabilities.” 1949 1948 1947 1946 As in previous years, changes in the title of the 455 468 485 506 “Balance Sheet” (35, 87, balance sheet were frequently made in conjunc­ 92, 128, 206, 246, 354, 417, tion with changes in form. 494, 504) Using the titles “financial position,” “state­ 39 32 23 9 ‘‘Statement of Financial ment of financial position” and “statement of Position” or ‘‘Financial financial condition,” the traditional presentation Position” (113, 144, 288, 397, 499) of assets on the left-hand side and liabilities and 24 18 10 6 “Statement of Financial capital accounts on the right-hand side was re­ Condition” (57, 143, 294, placed by statements which did not show such 346, 511) balancing amounts. 3 2 1 1 “Statement of Assets and These statements began by deducting current Liabilities” (61, 95, 273) liabilities from current assets to arrive at a 1 1 1 “Statement of Assets, Lia­ working capital or net current assets figure, with bilities and Net Worth” the remaining assets and liabilities being re­ 1 1 1 . . . ‘‘Statement of Ownership” spectively added and deducted before reaching a (Westinghouse Electric net assets amount. The composition of the net Corp.) assets in terms of the stockholders’ equity, ... 1 “Statement of What The Company Owned and represented by capital stock, capital surplus and What It Owed” retained income (earned surplus) completed the 1 1 1 1 “Investment” (Johns- statement. (See Exhibit 11, p. 70.) In 1949, Manville Corp.) forty-seven companies were using this type of 34 Section 2—Balance Sheet certified presentation, an aggregate increase of 130 110 109 145 Cost—market value not stated (83, 93, 244, 411, ten for the year. 508) 1949 1948 1947 Cost—market value 477 484 490 Assets equal liabilities plus capi­ stated— tal stock and surplus—current 57 50 63 89 above cost (102, 109, items first (80, 162, 180, 224, 227, 136, 167, 489) 271, 281, 305, 306, 320) 16 27 27 17 below cost (39, 213, 402, 1 1 4 Same as above, except non-cur­ 405, 443) rent items first (Allied Chemical 39 37 31 18 Cost which approximates & Dye Corp.) market (40, 81, 158, 168, 39 32 24 Current assets minus current lia­ 304) bilities, plus other assets, minus other liabilities equals net equity 17 18 17 17 Lower of cost or market (capital stock and surplus) (118, (86, 113, 194, 230, 482) 144, 244, 372, 524) 8 8 8 4 Redemption value (241, 3 3 4 Same as above but bonds or long­ 321, 327, 517) term notes included as investors’ 6 8 7 Cost, not over market equity (31, 58, 216) (290, 468, 502) 2 2 Same as above but net equity 4 2 2 Cost which equals market stated first (18, 98) (1, 279, 339, 524) 3 3 3 Total assets minus total liabilities 4 6 4 3 Market (23, 52) equal capital stock and surplus 3 6 7 7 Cost, less reserve (65, 360, (57, 371, 514) 513) 525 525 525 2 3 2 Par (129, 268) (Numbers in parentheses refer to companies listed 2 2 1 At or below cost (173, 273) in Appendix.) 2 1 2 6 Face value (6, 38) American Asphalt Roof Corporation and 1 1 1 At or below cost—market Briggs Manufacturing Co. continued their prac­ stated above cost (315) 1 1 1 Approximate market or tice of beginning their statements with their redemption value (380) stockholders’ equity. The statement used by 1 1 1 1 1934 written down values American Asphalt Roof Corporation is shown (36) in Exhibit 12, p. 82. 1 1 1 1 Lower of cost or principal amount (479) 1 1 Cost—market stated to be Marketable securities (current slightly lower 1 1 Cost or market plus ac­ assets)—basis of valuation crued interest (Numbers in parentheses refer to companies listed in Appendix.) Few actual changes in the basis of valuing Of the companies showing additional market­ marketable securities were noted on the 1949 able securities (mainly U. S. Government) reports; the majority of changes registered in the twenty companies stated their basis to be cost following tabulation were due to a net increase (18, 93, 184, 299, 481, 520), with nine making of thirty reports carrying such securities and some reference to their market value (40, 294, a reduction in the number of cases where such 451, 469, 524). Seven companies gave no valua­ holdings were carried above their market value tion basis, although Newport News Shipbuilding because of a general increase in market values. and Dry Dock Co. disclosed a market value above In most cases, marketable securities consisted carrying value (79, 107, 215, 332, 386, 466). of U. S. Government obligations. (When shown The majority of instances where securities separately, tax notes were excluded from the were shown at cost without disclosure of market tabulation.) value pertained to U. S. Government securities. 1949 1948 1947 1946 In a few instances, however, such items as ‘‘other 185 215 215 155 No marketable securities marketable securities” or “short-term market­ shown able securities” were shown separately, without 71 64 61 78 No basis of valuation any parenthetical disclosure of their market stated (35, 66, 346, 358, value. 415) Where cost was the basis used, accrued interest Inventories—Basis of Pricing 35 was often added thereto. (24, 96, 123, 140, 154, sified products or processes may result in varying 174, 263, 269, 317, 467) bases. Thus a number of the classifications in the Of the seventy-one companies failing to dis­ table below relate to only a portion of a company’s close the specific basis of security valuation, inventory. eighteen either disclosed actual market value or 1949 1948 1947 1946 made parenthetical reference to the relationship 444 446 437 428 Lower of cost or market between carrying value and market. (52, 119, (44, 94, 100, 123, 136, 162, 220, 250, 256, 313, 354, 390, 437,466) 191, 222, 280, 494) The International Nickel Company of Canada, 114 112 113 111 Cost (42, 107, 150, 158, Ltd., continued to carry as a current asset 192, 245, 333, 337, 475, “government and other marketable securities 496) 34 43 44 46 At or below cost—market maturing after 1950,” and National Biscuit not mentioned (20, 74, Company made the following current asset 186, 315, 480) presentation: 18 17 17 13 Less than market—cost “Government securities: not mentioned (50, 165, (Approximately equal to amounts at 294, 393, 518) market quotations) 16 20 19 23 Market (141, 223, 247) 11 11 11 11 At or below cost—not in United States...... excess of market (153, 224, Other...... 378, 380, 452) Note: $1,800,000 principal amount de­ 10 12 15 15 Basis not stated (7, 47, posited as collateral for notes payable by 207, 360, 361) Canadian subsidiary; $741,500 deposited to 9 11 10 14 Less than the lower of cost comply with workmen’s compensation re­ or market (3, 92, 119, 185, quirements, etc.” 399) A few examples of captions used by various 6 6 6 7 Contract price or sales companies to describe their marketable securities price (32, 39, 164) are listed below: 2 4 4 2 No inventories or inven­ tories negligible (178, 486) “Short term marketable securities at cost and 3 3 3 3 Cost or less—not exceed­ accrued interest” (Chrysler Corp.) ing replacement cost (396, “Other bonds and short term notes at approximate 461) market value” (Air Reduction Co., Inc.) 2 2 2 2 Cost—not over estimated “Marketable securities, at amortized cost (approx­ realizable amount (98, imating market)” (Socony-Vacuum Oil Co., Inc.) 483) “Marketable securities, at cost which is below 8 8 8 14 Miscellaneous (156, 360, market” (Union Oil Co. of California and Universal 376) Leaf Tobacco Co., Inc.) 677 695 689 689 “Marketable securities, at lower of cost or market (Numbers in parentheses refer to companies listed quotations” (California Packing Corp.) in Appendix.) Several statements contained footnote dis­ closure of elements of cost either included or excluded from the inventory valuation: Inventories—basis of pricing “It is the consistent accounting practice of the Company to include general and administrative ex­ penses of aircraft operations in overhead charges to work in process because the Company is of the opinion Little change was noted in the basis of in­ that the amount of such expenses which do not clearly ventory pricing in 1949, with “at the lower of relate to production is relatively immaterial. Ap­ cost or market” continuing as the generally proximately $1,420,000 of general and administrative accepted terminology. expenses is included in the inventory at December 31, Attention is directed to the fact that com­ 1949.” (Glenn L. Martin Co.) panies frequently have two or more bases for “The inventories are stated at average cost or mar­ inventory pricing; e.g., goods in process and ket, whichever the lower. Cost at December 31,1949, finished goods may be at the lower of cost does not include any interest on plant investment as it or market while supplies may be at cost, or diver­ did in prior years but the effect of the change on the Exhibit Blaw-Knox 7: Company Inventories—Method of Determining Cost 37 income of the year is not significant.” (A.P.W. closure policy (265, 277, 357, 371, 373, 404, 457, Products Co., Inc.) 517). “Inventories are priced at average unit cost or less, 1949 1948 1947 1946 after the elimination of all significant amounts of 313 295 284 289 Not indicated inter-company profits, and are not in excess of market. 105 110 107 100 Average cost (78, 155, 288, Such cost, consistent with the policy previously 351, 358, 438) adopted, does not include depreciation of fixed 91 91 86 79 Last-in first-out (31, 94, assets.. ."(Celanese Corp. of America) 158, 228, 399) “Merchandise inventories, at the lower of cost or 91 87 92 102 First-in first-out (37, 95, market, less discounts.” (Florsheim Shoe Co.) 181, 206, 224, 241, 353) 25 26 24 23 Standard cost (51, 191, “In accordance with the company’s practice estab­ 196, 422, 449, 481) lished in 1939, the appropriation representing the in­ 6 6 5 Retail method (236, 292, crease of $361,518 between the amounts of overhead 305) included in the inventories at the end and beginning 7 6 3 12 Lifo—retail method (63, of the year has been deducted from income for the 131, 204, 231, 321) year.” (Wagner Electric Corp.—auditor’s report) 6 6 4 Fifo—retail method (92, An unusual description of inventory pricing 139, 431, 437) was the “coal, coke and by-products and mine 10 10 9 . . . Specific invoice costs 7 6 6 6 Base stock (22, 97, 156, supplies—at cost or useful value” of The Crow’s 360) Nest Pass Coal Co., Ltd. 6 8 7 “Actual” costs (287, 398, Archer-Daniels-Midland Co. classified its in­ 402) ventory for balance sheet presentation as follows: 3 5 3 “Estimated” costs (226, “Inventories: 234, 342) At lower of cost (last-in, first-out principle) or 2 4 4 2 Inventories negligible market: (178, 486) Linseed oil, soybean oil, sperm and crude fish 1 Relative value method oil 1 1 1 1 Market prices of ingre­ At lower of cost (first-in, first-out principle) or dients plus manufacturing market: costs (412) Flaxseed, soybeans, and other raw materials 673 662 635 614 Sundry oils (Numbers in parentheses refer to companies listed Packaging materials in Appendix.) Manufacturing supplies At market: Several companies presented complete foot­ Flour, wheat, and other grains including adjust­ note descriptions of their method of inventory ment of open contracts to market valuation. Some of these descriptions are quoted At market or less: below: Feed and meal including adjustment of open “Inventory of metals in process and on hand in­ contracts to market” cludes metals sold under firm contracts but not de­ livered at the end of the year. These undelivered sales are valued at sales contract prices. In accord­ ance with the Company’s established practice unsold Inventories—method metals are carried at the average of prices prevailing of determining cost at the time of production or purchase, or at market price at the end of the year, whichever is lower. In the case of metals in process there has been deducted from the inventory value the estimated cost of further No significant changes occurred in the 1949 reduction processes. Inventories of purchased ores, methods of valuing inventories. Changes in the supplies, fuel and timber are carried at or below cost. use of Lifo were limited to modification of There are no commitments for purchases of materials existing procedures rather than complete changes at prices which may have a material effect on future in costing methods. earnings.” (United States Smelting, Refining and Eleven companies disclosed their costing Mining Co.) methods for the first time in 1949 (42, 63, 222, “The inventories are priced at cost or market, 235, 236, 242, 252, 299, 366, 413, 416), while eight whichever the lower. In determining cost the indi­ companies failed to continue their previous dis­ vidual items are priced at standard cost and the 38 Section 2—Balance Sheet aggregate of such costs is adjusted at the end of the and acceptance by the Bureau of Internal Revenue.” year to actual cost. Under the procedure followed, (First National Stores Inc.—footnotes) effect is given to the first-in, first-out method of de­ “Inventories are stated at cost, generally on the termining cost.” (Hamilton Watch Co.) principle of last-in, first-out, less reserves for shrinkage. “Crude oil and petroleum products: Inventories of supplies, rolls, moulds, spares, etc., and “Inventories of crude oil and petroleum products of fabricated parts which, in the past, were priced are valued at cost under the last-in, first-out method generally at average cost, were priced at December 31, applied on a monthly basis, such cost being adjusted 1949, on the principle of last-in, first-out, using Decem­ to exclude abnormalities and to not exceed estimated ber 31, 1941, quantities and prices as a basis therefor, current realization. to conform to the basis used since that date with re­ “Materials and supplies: spect to the principal inventories of raw materials and “Inventories of materials and supplies are valued at finished and semi-finished products. It is estimated cost or less, not exceeding market. that the change had the effect of reducing inventories “In 1949 certain tubular goods and construction at December 31, 1949, and net income for 1949 by materials formerly carried in inventory account were approximately $3,500,000. The prices used were not transferred to property account as work in progress; in excess of replacement market at December 31, 1949. for comparative purposes, a similar transfer has been Reserve for general contingencies, inventories, etc., reflected in the December 31, 1948, statement of con­ carried in the liability section of the balance sheet in­ solidated financial position.” (Union Oil Co. of Cali­ cludes $900,000 for possible loss in liquidation of in­ fornia—footnotes) ventories. Inventories reported in the Consolidated “Inventories of crude oil are included at accumu­ Balance Sheet of the Corporation at December 31, lated average price per barrel based upon cost of oil 1949, in the amount of $44,056,400 comprised (a) fin­ purchased and posted price of oil produced; quanti­ ished and semi-finished products $16,551,943 (b) raw ties at refineries are priced at market at date of trans­ materials $23,606,901 and (c) supplies, rolls; moulds, fer to refineries. Refined products are priced at spares, etc., $9,167,518, less reserves for inter-company approximate cost to refineries, and materials and sup­ profit and inventory shrinkage in the amount of plies are priced at or below cost. The amounts in­ $5,269,962.” (National Steel Corp.—footnote) cluded for inventories, in the aggregate, did not exceed The inventory costing of General Refractories market.” (Ohio Oil Co.—footnotes) Company was described in the auditor’s report “The vegetable oils and their by-products included (with a balance-sheet reference thereto) as in the inventories were valued on the last-in, first-out follows: basis at cost established originally at August 31, 1941, “The inventories of brick finished and in process, and for all of the oils in the inventory at August 31, amounting to $1,571,440.61 at December 31, 1949, and 1949, cost was below market value as at that date. $1,491,848.78 at December 31, 1948, are valued at The other finished goods and other raw materials were estimated cost calculated by the management on the valued at the lower of cost (computed on the first-in, basis of cost for 1932 with production estimated at first-out basis) or market. Inventories of supplies seventy per cent of plant capacity. This procedure, were valued at cost or less.” (Wesson Oil & Snow­ which has been consistently followed since January 1, drift Co., Inc.—footnotes) 1933, results in the inventories being valued at less “Merchandise in retail stores was valued at approxi­ than current cost or market. Raw materials and mate average cost (on the basis of first in, first out) supplies are stated at cost or market, whichever the which did not exceed market; other merchandise, lower, cost being computed generally on the first-in, materials and supplies (aggregating $14,229,970 at first-out method.” April 1, 1950, and $12,004,830 at April 2, 1949) were valued at cost on the basis of last in, first out, or at market where lower in the case of individual items. Industrial breakdown of companies “Partial replacement has been made of inventories using some Lifo costing which were involuntarily liquidated in prior years and, References as permitted by the Internal Revenue Code, the com­ No. of No. to companies pany has elected to value the items replaced at their reports mention­ listed in original inventory prices. The excess cost of replacing Industry examined ing Lifo Appendix a portion of the inventories which were involuntarily Airplane 16 liquidated, less estimated refunds of $290,000 of fed­ Automobile 11 eral taxes resulting therefrom, has been charged to Auto Parts 14 . . . profit and loss. Beverages 6 1 359 “The use of the last-in, first-out method and the Building application of the involuntary liquidation and replace­ Materials 20 6 34, 59, 158, ment provisions of the tax law are subject to review 233, 280, 399 Inventories— Method of Determining Cost 39 Chemicals 16 4 25, 66, 294, part of its established policy of hedging these inven­ 346 tories to the extent practicable, to minimize the market Food 22 6 80, 94, 96, risk due to price fluctuations. The financial state­ 113, 307, 522 ments reflect the hedged position by taking into Grain 6 account all elements in the hedge (inventories on hand Machinery 33 4 118, 258, 363, and long and short commitments) at market, so that 515 the market gains and losses substantially compensate Meat Packing 12 7 58, 291, 330, or offset one another, subject to the completeness of 349, 413, 473 the hedge and certain other relatively minor elements. 518 This procedure has been applied in a manner which Metals 16 9 31, 39, 50, does not result in taking unrealized profit into account. 127, 151, 220 “Inventories other than those specified above, on 287, 420, 435 which there were no satisfactory hedging facilities, Paper 13 4 274, 290, 335, have been stated on the basis of cost (first-in, first-out 511 and average bases) or market, whichever lower. In Petroleum 26 17 65, 129, 153, accordance with previously established policy, the 246, 378, 396, excess of inventories of unhedged commodities so 407, 425, 444, stated over their valuation at prices of May 31, 1946, 458, 459, 460, is reflected in a reserve for inventory valuation. The 461, 462, 468, reserve has as its purpose the reflection of the current 477, 483 costs of these commodities in cost of products sold. Printing 7 As a result of smaller quantities at May 31, 1950, and Retail 31 9 13, 63, 131, decreases in prices during the year ended that date, 204, 206, 231, the reserve was reduced by $125,000 with a corre­ 241, 321, 329 sponding reduction in cost of products sold during the Rubber 5 1 228 year. Shipbuilding 4 “This reserve is not effective for income tax pur­ Shoes 7 2 275, 337 poses, and taxable income is determined without ad­ Steel 22 5 86, 283, 362, justment of the reserve. If the reserve adjustment for 419, 499 the year ended May 31, 1950, were taxable, the provi­ Textiles 13 7 44, 81, 87, 116, 186, 344, sion for federal taxes on income would have been 390 $47,500 greater. If the reserve remaining at May 31, Tobacco 8 1 146 1950, were reduced by federal income taxes at the Transportation current rate, the amount would be $294,500 instead of Equipment 8 1 225 $475,000.” (Pillsbury Mills, Inc.) Wholesale 8 “The company continues to hedge its flour and soy­ Miscellaneous bean product unfilled orders and inventories of raw unclassified materials and finished goods whenever adequate hedg­ companies 201 14 31, 54, 61, ing facilities exist, as a means of minimizing the risk of 133, 171, 195, adverse price fluctuations. All factors relating to 201, 248, 252, items customarily hedged are reflected in the financial 279, 281, 400, position at fair market value, including market ad­ ______443, 510 justments for open transactions. 525 98 “Items for which no hedging facilities exist, such as Note: Numbers in italics indicate companies giving formula feeds, ingredients, package foods, home appli­ replacement value of Lifo inventory. ances, etc., are valued at the lower of cost or market. In addition, for certain of these items, valuation allow­ Hedging to minimize risks ances determined by specific formula are established in Pillsbury Mills, Inc., and General Mills, Inc., order to minimize the effect of fluctuating prices on earnings. The effect of these allowances is to revalue explained their hedging operations in their notes what are deemed to represent normal quantities of to financial statements: these inventories on a basis that is believed to reflect “Wheat, other milling grain, flour and millfeed, the normal costs thereof. soybeans, and merchandising grain inventories have “Containers, supplies, mechanical inventories, etc., been stated on the basis of market prices of grain are valued at cost. For containers, a valuation allow­ May 31, 1950, including adjustment to market of open ance is established which has the effect of reducing the contracts for purchases and sales. The company value to what is considered to be normal cost. enters into commitments for the purchase and sales of “Total inventory valuation allowances as of May these and other related commodities as an essential 31, 1950, amounted to $4,554,547. The decrease in 40 Section 2—Balance Sheet these allowances during the year of $586,534 is re­ vision at November 30, 1949 would be reduced from flected in earnings as an offset to inventory losses sus­ $16,283,790 to $10,095,950. tained because of price level declines as they applied to “The normal base stock method is designed to elimi­ base or normal quantities of certain non-hedged nate from earnings most of the inventory price in­ items.” (General Mills, Inc.) creases or declines. As prices declined during the year for the first time since 1943, earnings include a transfer Base stock from the provision accumulated in prior years. How­ ever, since the decline also resulted in a reduction in In 1949 seven companies disclosed their use 1949 federal income taxes, such credit to earnings has of the normal base stock inventory method. A been reduced by $676,500, an amount approximately few excerpts from the notes to financial state­ equivalent to the tax reduction, and this has been car­ ments of several companies follow: ried directly to ‘accumulated retained earnings.’” “(1) The Corporation employs the normal base (Endicott Johnson Corp.) stock method of inventory under which the inven­ “The Company’s practice in respect to inventory tories are stated on the basis of cost or market, which­ valuations is as follows: Normal working stocks of ever is lower, and a provision is made to reduce the copper at fabricating plants and (in respect to the established normal inventories to the following fixed Company’s own production) normal working stocks of prices: copper in transit to and in process at refineries are Fixed prices* valued at a fixed price which price is below market “Hide value in (a) raw hides and quotations. Copper in excess of normal working hides in process; (b) own upper stocks is carried at the lower of cost or market and leather; (c) own sole leather; (d) gold and silver at market quotations or less. In upper leather in footwear; and (e) general, all other inventories are carried at the lower of sole leather in footwear...... 7 cents per lb. cost or market. No intercompany profits of sub­ Purchased upper leather...... 13 cents per ft. stantial amount are included in inventories. ’’ (Phelps Crude rubber (a) unprocessed; (b) Dodge Corp.) in rubber footwear; and (c) in “The Companies use the normal base stock inven­ soles and heels in leather footwear 5 cents per lb. tory method with respect to corn, finished and in * Fixed prices to which inventories are adjusted are process goods manufactured from corn. This was substantially below current market levels. effected by establishing normal stock requirements at fixed prices, based upon the lowest monthly cost of “In addition to the above materials the provision in­ corn which has prevailed since the inception of the cludes that portion of inventory valuation attributable method. Corn, finished and in process goods manu­ to the following items on the normal quantities to the factured from corn are priced at cost on the basis of extent such items exceed costs prevailing in 1939: first in-first out less a reserve to reduce the established Labor and overhead costs normal base stock inventory quantities to the fixed Certain miscellaneous raw materials and supplies base price. Milo, finished and in process goods Purchased shoes, slippers and hosiery in retail stores manufactured from milo are priced at cost on the “The inclusion of purchased shoes, slippers and basis of first in-first out. Materials and supplies are hosiery in retail stores represents an extension of the priced at the lower of cost or market.” (Corn Prod­ method as of November 30, 1948, and involved an ucts Refining Co.) addition to the provision of $698,235. At the same “As heretofore, a fixed quantity of tinplate is carried time, the quantities of the normal base stock were at an amount which is substantially lower than the adjusted to reflect current conditions, and other refine­ present market price; the remainder of the inventory ments were made in the application of the method. is valued at the lower of cost or market, generally on a As a result of these changes, the provision as of No­ first-in, first-out basis.” (American Can Co.) vember 30, 1948, was decreased by $306,263 which was credited directly to ‘accumulated retained earnings.' However, these changes in the application of the method did not materially affect earnings for the year. Disclosure of replacement value “The normal base stock method is not recognized by the Treasury Department for federal income tax pur­ of Lifo inventories poses. When the method was adopted in 1936, tax rates were sufficiently low as not to have any sub­ stantial effect on the application of the method, and Of the ninety-eight companies valuing all or the effect of taxes was not taken into account in the part of their inventories under the Lifo method, computations. Since that time, however, tax rates seventeen disclosed either the actual replace­ have increased materially. If effect were given to fed­ ment value of such inventories or the difference eral income taxes at the current rate of 38%, the pro­ between the Lifo value and the value under other Disclosure of Replacement Value of Lifo Inventories 41 valuation methods which might have been used. of crude oil and refined products (at Lifo and Two companies made such disclosure by Fifo) was “approximately $540,000 less than parenthetical comments on the balance sheet: market.” “Inventories stated at cost (principally standard In the retail field, three companies (13, 63, costs periodically adjusted) or market, whichever is 131) disclosed the difference between their lower, except for certain items of resale merchandise Lifo valuation and value under the retail in­ and tubular products aggregating $14,034,191.17, ventory method, Associated Dry Goods Corpora­ which are stated on ‘last-in, first-out’ basis and had a tion showing the difference in a footnote covering current replacement cost of approximately $6,000,000 its claim for refund of federal and state taxes, in excess of the stated value.” (National Supply Co.) as follows: “Inventories—at cost determined principally on the “Present Treasury Regulations do not provide for ‘last-in, first-out’ basis of valuation (approximate re­ retroactive application of the Lifo method. Accord­ placement cost, $2,527,329 in 1949 and $2,515,573 in ingly, it is possible that none of the $2,789,000 (tax 1948—see Note 1)”: refund claim) carried as an asset will be realized, but “Note 1—In accordance with the ‘last-in, first-out’ that would be offset to the extent of approximately principle, the excess of replacement cost over carrying $2,148,000 by restatement of the inventories on the value may be realized, if at all, only in the event of basis formerly used.” liquidation of inventories, in which event the amount realized might depend upon market conditions and be The remaining disclosures of replacement subject to income tax at that time.” (Falstaff Brew­ value were made in the presidents’ letters. (233, ing Corp.) 279, 291, 359, 435) It was noted also that six companies, while Five companies (32, 54, 59, 81, 290) disclosed not disclosing actual inventory replacement the replacement value of Lifo inventories in value, made some reference to the difference footnotes, two of which are quoted: between it and the Lifo value in the presidents’ “The above total includes approximately $4,540,000 reports to stockholders: with respect to commodities valued on Lifo basis; if such commodities were priced at current replacement “By use of the last-in, first-out method, our inven­ costs, the comparable valuation would be approxi­ tories are carried on an extremely conservative basis.” mately $7,915,000, a difference of $3,375,000.” (International Shoe Co.) (Armstrong Cork Co.) “There is a considerable difference between the cur­ “The inventories of certain oils are priced on the rent market value of the inventories and the value at basis of the last-in, first-out principle which was first which they are carried, and this constitutes a sub­ adopted as of December 31, 1941. Under this princi­ stantial reserve against future declines in product ple base quantities were established and thereafter prices.” (John Morrell & Co.) such quantities have been priced at the prices which “The aggregate value of mill inventories with re­ prevailed when the Lifo principle was adopted, with­ spect to cotton, therefore, is substantially below Gov­ out recognition of subsequent increases in replacement ernment loan of present market price of raw cotton.” cost except as to quantities in excess of the afore­ (Ely & Walker Dry Goods Co.) mentioned base quantities. This method has obvi­ “Inventory is carried well below market prices as a ously eliminated from inventory valuation and from result of the use of ‘last-in-first-out’ method of in­ reported profits the effect of increasing replacement ventory valuation.” (Artloom Carpet Co., Inc.) cost during the period of price increases which has prevailed since 1941. It is estimated that at June 30, “At December 31, 1949, the inventory value of the 1949, the inventory valuation of these oils on hand on inventories that were valued by the use of the last-in, the Lifo principle reflected in the balance sheet was first-out method was substantially less than the re­ less than the current replacement cost by approxi­ placement cost of such inventories at that date.” mately $8,000,000. Such difference, when and if (Bethlehem Steel Corp.—footnotes) realized, will be subject to taxes on income at the rates “At the close of the year, inventory book values prevailing at the time of realization.” (Archer- were somewhat below market values.” (Atlas Pow­ Daniels-Midland Co.) der Co.) The American Metal Co., Ltd., and The Pittsburgh Plate Glass Company presented Derby Oil Co. carry only a portion of their in­ the following balance sheet footnote: ventories at Lifo values. The former company “Inventories are stated generally at the lower of disclosed the market value of its total unsold average cost (excluding certain fixed expenses) or metal inventory (carried at Lifo and average market and are after deducting allowances of $2,271,­ cost) while the latter stated that its inventory 991 in 1949 and $4,682,001 in 1948 to reduce inven- 42 Section 2—Balance Sheet tones of flax, linseed oil, and bristle to a last-in first-out tion of such excess quantities.” (United Stove Co.— basis of computing costs. On an average basis, such footnotes) inventories amounted to $5,872,060 and $9,251,510 at (2) “Materials and supplies include items which December 31, 1949, and 1948, respectively.” will not be utilized within one year but which are in­ The 1949 report of Holly Sugar Corp., which cluded in current assets in conformity with the com­ was not included in the study of the 525 com­ pany’s established practice.” (Mid-Continent Air­ panies tabulated furnishes the following in­ lines, Inc.—footnotes) formation in respect of Lifo inventories under (3) “The inventories of work in process, finished parts and equipment include approximately $1,600,000 the last-in first-out (Lifo) method : in respect of parts and equipment, etc., which are slow “Under the ‘last-in first-out’ (Lifo) method of sugar moving but are believed to be conservatively valued inventory valuation, established as of April 1, 1942, and salable.” (R. G. LeTourneau, Inc.—footnotes) the sugar inventory is valued at approximately $4,­ 800,000 less than under the more generally used ‘first- As non-current assets in first-out’ (Fifo) method. For the years since the (1) “Inventory in excess of one year’s expected adoption of Lifo, net income has totaled approxi­ requirements, at estimated realizable value.” (Auto­ mately $3,000,000 less than the net income would have car Co.) been if Fifo had been used. During the eight years’ (2) “ Raw materials and purchased parts—Note B use of Lifo, Federal Income Taxes have been approxi­ Less : Reserve for possible inventory losses” mately $1,800,000 less than if Fifo had been used. “Note B: Pending disposition of completed trac­ The difference in the value of the sugar inventory tors, manufacturing in the Tractor Division has been under the Lifo and Fifo methods this year is less than temporarily suspended. Because of market condi­ such difference in the previous fiscal year. This is due tions all tractor inventory has been provided with a principally to lower unit costs in the fiscal year just reserve for loss. Only finished tractors have been closed and to liquidation during the year of a portion considered as a current asset.” (Federal Machine and of the low cost inventory.” (President’s letter) Welder Co.) “The inventory of sugar at March 31, 1950, is valued (3) One balance sheet showed the following: at cost, using the last-in, first-out (Lifo) method of sugar inventory valuation adopted as of April 1, 1942, “Inventories (see accompanying notes) plus Federal excise taxes, prepaid freight, and han­ Portion of Inventories Estimated to be not dling charges. Such valuation is approximately $4,­ Realizable Within One Year (non-cur­ 800,000 less than it would have been had the sugar in­ rent above) ventory been valued at current cost (not in excess of Less Valuation Reserve (applicable market) under the more generally used first-in, first- principally to Raw Materials and out (Fifo) method. Net income (after deduction for Purchased Parts)” income taxes) for the year ended March 31, 1950 The “accompanying notes” referred to above would have been approximately $1,200,000 less had are as follows: the Fifo method of sugar inventory valuation been used.” (Notes) “Inventories “Physical inventories were taken as at September 30, 1949. The principles, procedures and methods used in determination of the valuation of inventories at the beginning and close of the current fiscal year were consistent in all respects. The basis of valuation Inventories—excess and segregation as to current and non-current classifi­ and slow moving cation are as follows: ‘ ‘ Current Inventories— “The current classification includes only the portion available for and deemed usable in production for Several illustrations of slow moving or in­ sales requirements of airplanes and service parts dur­ ventory in excess of one year’s requirements ing the fiscal year ending September 30, 1950, on the basis of estimated sales volume. The basis of pricing shown in certain 1949 reports are: was the lower of actual, standard or replacement cost As current assets with reduction, where necessary, to allow for a reason­ (1) “The inventories contain quantities of certain able margin of profit on present selling prices. purchased parts and materials which are in excess of “Non-Current Inventories— estimated current production requirements of the “The portion of inventories considered to be in ex­ company. An allowance of $75,000.00 has been pro­ cess of requirements for the coming fiscal year is com­ vided for losses which may be incurred in the liquida­ posed principally of materials, fabricated parts and Current Assets— Unusual Items, Treatments, and Presentations 43 manufacturing supplies, and consists of three general Cuba and South America. The Atlantic Refining classes: Company and The Electric Storage Battery “(a) Quantities which were estimated will be used Company showed “United States currency” in production of successors to present airplane and “foreign currencies” while International models during the fiscal year ending September 30, Telephone and Telegraph Corporation separated 1951. The basis of valuation was the same as for its cash in to “in United States” and “in foreign current inventories. countries.” “(b) Quantities pertaining to present airplane mod­ The Bon Ami Company presented “cash, els but in excess of requirements in paragraph (a). receivables and inventories less current liabili­ An adjusted valuation reserve of $349,596.48 re­ mains to reduce this portion of the inventory to an ties” subject to foreign exchange restrictions as a amount estimated to be realizable from use in separate current item again in 1949 while Sharpe manufacture of future airplane models. Since the & Dohme, Incorporated, showed “current assets estimated realization was predicated upon use in the of foreign subsidiaries and branches” in one period beyond presently planned production, the current amount, with the applicable liabilities adequacy of the reserve is subject to numerous similarly treated. factors in the future. In the event of sale, without any use in production of this portion of the inven­ Special deposits tory, it is estimated that the amount realizable would result in a loss of approximately $150,000.00 Certain companies showed cash deposits as in addition to the reserve provided. separate current assets: “(c) Inventories pertaining solely to discontinued “Margin deposits on commodity futures contracts” models were valued only to the extent of normal (Central Soya Company, Inc.) service parts requirements and a conservative esti­ “Post-office and other deposits” (Hearst Consoli­ mate of realization from sale. dated Publications, Inc.) “The net effect of revaluation of surplus quantities “Deposits with postmasters and postage stamps on on the basis of estimated future use, the recoveries hand” (McCall Corp.) through use or disposal and the loss from obsolescence has been a credit which is shown in the Statement of “Life insurance proceeds on deposit with insurer” Profit and Loss under Other Income as Net Adjust­ (A. O. Smith Corp.) ments of Valuation of Surplus Inventory in the amount of $136,889.68. This amount is based on Cash advances such records as were available and on estimates. The As in 1948, Wesson Oil and Snowdrift Co., accounting records and procedures do not permit an Inc., treated advances for purchases of raw exact determination of the amount or segregation of materials and Pillsbury Mills, Inc., showed ad­ the component items.” (Piper Aircraft Corp.—foot­ vances on grain purchases as separate current notes) assets, while Central Soya Company, Inc., carried its advances on homes under construc­ tion for employees in the same manner. (See Current assets—unusual items, subsequent section for advances on construction treated as a non-current asset.) treatm ents, and presentations Bayuk Cigars Inc. reported separately: “Advances for tobacco grown for Company’s ac­ Because of their interest to the reader, we have count (including $1,503,116 (1949) and $2,700,000 included below several examples which have (1948) to subsidiary not consolidated).” appeared in prior years’ studies. Special funds Cash Amounts designated for payment of specific Although cash was generally shown as one corporate liabilities were shown separately by item in the current assets section of the balance several companies: sheet, several instances were noted where foreign “Cash in special bank account for liquidation of currency items were shown separately. sundry liabilities—contra” (District Theatres Corp.) Lone Star Cement Corporation continued its “Cash deposited for payment of dividends (see separation of cash on hand and on deposit in contra)” (International Silver Co.) (See Booth Fish­ banks into that in the United States and that in eries Corp., Robertshaw-Fulton Controls Co. and 44 Section 2—Balance Sheet Reliance Engineering Co. for presentations with cash 463.02 of accounts hypothecated,” following with deducted from the current liability.) a footnote description: "Cash on deposit with sinking fund trustees for re­ "The Corporation has entered into a contract with a demption of debentures” (American Tobacco Co.) banking institution to assign to them accounts re­ "Preferred stock sinking fund” (Dictaphone Corp). ceivable, with recourse, against which the institution An alternative treatment was shown by A. G. agrees to advance immediately eighty per cent of the Spalding & Bros. Inc. as "Cash (including deposit net balance due on the accounts, and the remainder with trustee for payment of debenture interest— when the accounts have been paid in full.” 1949, $75,820; 1948, $77,890).” Hearst Consoli­ dated Publications, Inc., separated cash as be­ Cash held for consignor tween "general funds” and "other funds” without "Cash in Bank for Account of Merchandise Con­ disclosure of the purpose of the "other funds.” signors Less Amount due to Consignors for Merchan­ The Glenn L. Martin Co. showed "Cash dise Sold” (Byrndun Corp.) (includes $1,888,253 restricted as to use).” International Paper Co. carried U. S. Govern­ Accounts receivable ment obligations as a special fund: Installment receivables "Special Fund—U. S. Governent obligations: Installment accounts receivable were normally For restoration of 1949 decrease in U. S. inven­ shown separately from regular trade accounts, tories with varying treatment of unearned profit. For working capital of new dissolving pulp mill” Allied Stores Corporation, The Trailmobile Co. and The May Department Stores Company Payroll withholdings and deductions showed customers’ accounts receivable less allow­ The Baldwin Locomotive Works and Grum­ ances for deferred carrying charges. Federated man Aircraft Engineering Corporation separated Department Stores made the following presenta­ cash representing employee payroll deductions tion in a statement accompanying its balance and savings bond subscriptions from general sheet: corporate cash, with contra current liabilities. "Due from customers: (Pacific Mills and The Glenn L. Martin Com­ Regular instalment accounts pany showed similar current liabilities without Deduct accounts sold to banks (less Com­ segregation of cash.) pany’s equity therein of $1,022,033 at Hooker Electrochemical Company separated January 28, 1950) "employees’ U. S. Savings Bond fund” but com­ Revolving budget accounts bined the liability with taxes withheld. Thirty-day charge accounts (See subsequent section for treatment of Other accounts receivable such cash as a non-current asset.) Less provision for possible future losses and de­ ferred service charges” Cash in transit The Brunswick-Balke-Collender Company de­ S. S. Kresge Company again mentioned that ducted a reserve for losses and unearned interest cash in transit was included in its cash balance. from notes and accounts receivable. Cash hypothecated Long-term receivables A large number of companies included re­ Anderson, Clayton & Co. again indicated in ceivables (often installment receivables) which notes to the financial statement that cash, cotton were not expected to be collected within twelve documents in process of collection and cotton months in current assets: had been hypothecated as security for indebted­ "Receivables (including approximately $1,100,000 ness on notes payable and performance contracts. at January 1, 1950, due in more than one year) less The Trailmobile Company included cash in reserves for doubtful accounts, income taxes on in­ escrow with general cash as follows : stallment sale profits, and unearned carrying charges "Cash ($172,921.26 at December 31, 1949, and of $1,687,200 and $885,775 at respective dates.” $53,298.11 at December 31, 1948, held in escrow as (Goldblatt Bros., Inc.) collateral to notes payable to banks—Note 2)” "Instalment accounts, a portion of which is due O’Sullivan Rubber Corporation deducted from after one year.” (R. H. Macy & Co., Inc.) its accounts receivable "cash received on $495,­ "Notes and Accounts Receivable—customers (in- » Exhibit 8:The Diamond Match Company 46 Section 2—Balance Sheet cluding balances of $158,056.13 maturing after one “Other current notes and accounts receivable and year.” (National Supply Co.) advances” (Glidden Co.) “Contracts receivable on equipment installations “Properties to be offered for sale within one year (of which $199,000 [1949] and $175,000 [1948] is re­ under the company’s real estate program, covered by ceivable after one year from balance sheet date).” purchase commitments—at cost less depreciation” (Iron Fireman Mfg. Co.) (Safeway Stores, Inc.) “Installments receivable (Note A)” “Cotton Documents in process of collection “Note A: Installments receivable, of which $7,­ Market differences due from brokers and in out­ 541,155 are due subsequent to 1950, are secured by standing contracts—net chattel mortgages, conditional sales agreements or Crop loans and accrued interest (less reserves...) ” leases.” (Mack Trucks, Inc.) (Anderson, Clayton & Co.) “Advances to, and amounts due from joint ven­ “Federal crop and soil conservation benefits accrued tures (a portion of which will be collected after a (estimated)” (Godchaux Sugars, Inc.) year).” (Arundel Corp.) “Instalment notes, including amounts due after one year (1949, $4,870,295; 1948, $3,695,007).” (Bruns­ wick-Balke-Collender Co.) Cash surrender value Receivables from employees and subsidiaries o f life insurance Where such items were considered to be current assets, the predominant practice was to show a parenthetical reference to their inclusion in other Predominant practice continued to be the balance sheet items. showing of the cash surrender value of life “Sundry accounts and notes receivable (officers and insurance below the current assets section of the employees, $20,083, 1950; $11,630,1949)” (Godchaux balance sheet, in accordance with Accounting Sugars, Inc.) Research Bulletin No. 30, “Current Assets and “Accounts (including $34,087.20 due from subsidi­ Current Liabilities—Working Capital” (August aries)” (Keystone Steel & Wire Co.) 1947). “Trade accounts (including $256,272 from Fruehauf 1949 1948 1947 1946 Trailer Company of Canada Limited and $97,209 435 434 427 424 No such item shown from Fruehauf Trailer Sales, Inc.)” (Fruehauf Trailer 6 9 13 19 Shown as current asset Co.) (10, 174, 278, 279, 282, “Accounts and notes receivable—(including $1,655,­ 333) 000 for controlled retail store companies)” (General 84 82 85 82 Shown below current Tire & Rubber Co.) assets 18—As a separate item (115, 138, 209, 244, Cost-plus-fixed-fee contracts 452) 26—As an investment Eight illustrations were found of amounts (109, 123, 335, 337, reimbursable under cost-plus-fixed-fee contracts 469) being shown on the balance sheet as separate 39—As an other asset items apart from either accounts receivable or (74, 229, 233, 277, inventories. (82, 89, 90,148, 181, 326, 369, 418) 490) 1—As a deferred Other current receivable items charge (293) 525 525 525 525 “Reimbursable expenditures for rehabilitation and (Numbers in parentheses refer to companies listed improvement of plant facilities, insurance and other in Appendix.) claims and deposits; duty drawback, etc.” (Reynolds Metals Co.) Four companies (141,155, 183, 503) eliminated “Due from trustees of former subsidiaries” (Feder­ the item from their 1949 balance sheet and one ated Dept. Stores) company (H. K. Porter Co., Inc.) changed its “Unbilled shipments of sales orders at estimated presentation from current to non-current. A selling prices” (Lukens Steel Co.) change in presentation occurred when four com­ “Maine timberlands (amount realized from sale in panies reclassified the item from investments to 1950)” (Southern Advance Bag & Paper Co., Inc.) other assets. (91, 250, 323, 326) Prepaid Expenses and Deferred Charges 47 31 25 24 23 Miscellaneous titles 6—Unexpired insur­ Prepaid expenses ance, etc. (74, 323, and deferred charges 382) 5—Deferred charges to (future) operations (100, 180, 239) 4—Costs chargeable to Approximately thirty per cent of the 525 future operations tabulated reports carried some item of prepaid (89, 223, 524) 3—Charges applicable expense as a current asset, twenty-six of the to future operations items appearing for the first time in 1949. This /periods (86, 263, continues the trend started in 1947 by Accounting 273) Research Bulletin No. 30, “Current Assets and 2—Costs allocable to Current Liabilities.” future periods (113, 118) 1949 1948 1947 1946 11—Other (see below) All or part shown in cur­ 360 387 420 506 rent assets: 8 9 9 13 No such items separately 94 81 58 3 Described as “prepaid”— shown no deferred classification 525 525 525 525 shown (12, 13, 115, 221, 265, 337, 393, 434, 437, (Numbers in parentheses refer to companies listed 469) in Appendix.) 2 1 1 Described as “prepaid and Among the substitute titles and variations for deferred” (31, 427) “prepaid expenses” and “deferred charges” 2 2 3 O ‘‘Prepaid and deferred’’ were: split between current and non-current (9, 465) “Prepaid royalty, unamortized discount and ex­ 44 40 32 “Prepaid” in current— pense, taxes, insurance, and other costs allocable to “deferred” in non-cur­ future operations” (Jones & Laughlin Steel Corp.) rent (6, 109, 129, 226, 277, 397, 495) “Other prepayments” (Chicago and Southern Air 1 1 1 “Deferred” split between Lines, Inc.) current and non-current “Supplies, insurance, etc.” (Barker Bros. Corp.) (207) “Insurance premiums and other expenses paid but 8 1 ‘‘Prepaid’’ current—mis­ applicable to future years” (Westinghouse Electric cellaneous title non-cur­ Corp.) rent (59, 161, 294, 307) “Insurance deposits, prepaid expenses, etc.” (Walter 1 1 “Charges applicable to fu­ Kidde & Co., Inc.) ture operations” (304) 5 2 1 “Unexpired insurance “Deferred debit items” (Pepsi-Cola Co.) premiums and other de­ “Insurance, taxes, etc., applicable to future periods” ferred charges” (75, 240, (American Locomotive Co.) 281) “Expenses paid in advance” (Lambert Co.) 157 129 96 6 “Prepaid expenses applicable to future periods” All shown in non-current (Armco Steel Corp.) section: 113 121 134 157 Headed “deferred” with In its notes to the financial statements General some individual items de­ Mills, Inc., gave the following explanation of the scribed as “prepaid” (81, items included in its caption “Sundry costs 158, 164, 192, 205, 270, chargeable to future periods” : 274, 477, 482, 518) 86 86 91 114 Title included words “pre­ “This caption includes unexpired insurance pre­ paid” and “deferred” (26, miums, advances for traveling, supplies, advertising and 165, 246, 354, 374, 376, other prepaid costs expected to benefit operations over 401, 497) the next few years. The company considers auto­ 84 90 98 133 Described as “deferred” motive equipment to be a cost of this nature because (35, 162, 229, 301, 492) of the relatively short life of such equipment; accord­ 46 65 73 79 Described as “prepaid” ingly, amounts of $1,828,469 and $1,857,840 included (352, 494, 508, 516) in the figures at May 31, 1950, and 1949 represent the 48 Section 2—Balance Sheet depreciated cost of automotive equipment at the 12 12 11 At cost less reserve (86, 97, 144, respective dates.” 153, 156) 9 8 9 At nominal value (111, 428, 513) Of those reports carrying prepaid expense or 1 1 1 Estimated realizable value (456) deferred charges as non-current items, twelve 1 1 1 As valued at a specific date— reports placed the item immediately following subsequent additions at cost the current asset section. Borg-Warner Corpora­ (380) tion showed two statement captions, e.g., “pre­ 3 3 3 At par value of capital stock (13, paid expense” immediately following current 257) assets and “deferred charges” farther down on 2 1 1 At book values (281, 519) the statement. 4 3 3 As revalued in a specific year A few illustrations of unusual items reported (294, 497) 1 1 2 At net assets in a specific year, as “deferred charges” are: less undistributed earnings and “Dead season sugar expenses since termination of reserves (100) 1949 crop” (United Fruit Co.) 2 1 1 Independent appraisal for sub­ “Deferred general and administrative expenses sidiaries written off during the applicable to U. S. Government contracts and sub­ war (314, 447) 1 1 1 At values determined by board of contracts in process” (W. L. Maxson Corp.) directors in 1940 (35) “Improvements to leased properties (recoverable) 1 Investment in stock written off; and miscellaneous deferred charges” (J. J. Newberry advances carried at actual Co.) amounts advanced less reserve “Costs Applicable to Future Periods (Deferred (328) charges) Less Deferred Credits ($95,349 in 1949 and (Numbers in parentheses refer to companies listed $141,840 in 1948)” (Copperweld Steel Co.) in Appendix.) “Depletion applicable to pulpwood in inventory” (International Paper Co.) There are included under the caption “at net “Payment for past service under retirement plan— equity (or related thereto)” certain items which portion unamortized” (American Sumatra Tobacco were not valued strictly on a current net equity Corp.) basis but for which the stated valuations re­ “Retirement annuity plan” (General Baking Co.) ferred to either “net equity” or “net assets” (Written off as deductions are allowed for Federal (24, 50, 58, 168, 200, 224, 268, 307, 349, 355, income tax) 399, 411, 451, 489, 514). Illustrations of modi­ “Unapplied portion of advances to landlords toward fication of the “net equity” basis are: construction costs to be offset against future addi­ “ . . .less reserve for certain profits carried in sus­ tional percentage rentals” (City Stores Co.) pense” (John Morrell & Co.) “...deduct earnings outside the Western Hemi­ sphere not remitted to the United States” (National Unconsolidated subsidiaries Cash Register Co.) — “ .. .less reserve. . . ” (Armour and Co.) valuation basis “ .. .less reserve for loss in disposal or liquidation” (Curtiss-Wright Corp.) “.. .at book value of net tangible assets at dates of Cost continued to be the most general basis acquisition” (Pittsburgh Plate Glass Co.—foreign of valuation for unconsolidated subsidiaries on subsidiaries) the 1949 reports of parent companies. During 1949 both Armstrong Cork Co. and 1949 1948 1947 Nash-Kelvinator Corp. eliminated reserves pre­ 327 329 329 No investments shown viously deducted from their investments in 95 94 92 At cost (64, 83, 95, 128, 149, 212, subsidiary companies, while Bridgeport Brass 280, 508) Co. created a reserve. Panhandle Producing & 42 43 45 No basis of valuation indicated (66, 80, 94, 272, 444, 446, 490, Refining Co. made this footnote comment: 525) “As of December 31, 1949, Panhandle Producing and 25 25 28 At net equity (or related thereto) Refining Company reduced its investment in James (222, 231, 299, 387, 397) Stewart & Co. to $1.00 since ‘the loss by Stewart dur­ 22 19 18 At cost or less—at or below cost ing the year exceeded the remaining cost of $122,803 of (39, 287, 362, 374, 458, 482) Stewart stock owned by the Company.. ” Property—Basis of Valuation 49 In 1949 Bristol-Meyers Company wrote off 1949, were subordinate to Victor’s indebtedness to against earned surplus all accumulated un­ Reconstruction Finance Corporation amounting to distributed earnings of foreign subsidiaries pre­ $397,500 at that date. The Victor note received on viously consolidated and valued its investments October 3, 1949, is also subordinate to such indebted­ at the net value of assets not subject to foreign ness.” exchange fluctuation (dollar deposits, fixed and The elimination of Victor Electric Products, capital assets). Inc., from consolidation was mentioned and Warner Bros. Pictures, Inc., made the following approved in the auditor’s opinion. complete disclosure of its valuation basis: Advances to subsidiary “The amount of $2,056,946 shown in the attached consolidated balance sheet for investments in and ad­ Where the investment in subsidiaries included vances to subsidiaries operating in foreign territories both capital stock holdings and cash advances, represents the adjusted cost of such investments and the predominant presentation was to combine advances (adjusted for operating deficits and for de­ both in a single amount. valuation of foreign currencies in September 1949) less a reserve of $1,187,438. The adjustment for the devaluation of foreign currencies amounted to $1,018,­ 769 and has been reflected in the accounts as at August Property—basis of valuation 31, 1949, by the application of this amount against the reserve provided in prior years...” Mohawk Carpet Mills, Inc., continued to carry Although the majority practice was to show its subsidiary investments at cost, which due to fixed assets at cost, sixty-six companies gave no 1949 losses was greater than the net equity, indication of the basis of their property values since “in the opinion of Management the reduc­ in their 1949 reports. tion in equity represents only a temporary im­ 1949 pairment in values.” 66 No basis given (8, 16, 17, 115, 301) American Radiator & Standard Sanitary Cor­ 323 Cost (35, 80, 123, 136, 227, 228, 229, 290, 307, poration, by action of its board of directors, re­ 508) instated the investment in its Italian subsidiary 19 Less than cost (72, 78, 306, 392, 494) in 1949 by restoration of a 100% reserve to paid- Based on appraisals in surplus. The company continued to carry 31 Year stated; subsequent additions at cost its investments in German and Austrian sub­ (98, 275, 397, 411, 473) sidiaries at no value. 3 At “going concern value”—year of appraisal The W. L. Maxson Corp. had previously con­ not stated (220, 348, 517) solidated its wholly-owned subsidiary, Victor 7 Book value; subsequent additions at cost (129, Electric Products, Inc., but as of September 513, 516) 13 Revalued—no appraisal indicated (39, 153, 316, 30, 1949, it carried “advances to Victor Electric 380, 524) Products, Inc., (less reserve of $111,229) (Note 2)” 5 Acquisition values; subsequent additions at explained as follows: cost (88, 217, 518) ‘‘Note 2: The Corporation’s investment in common Multiple bases stock of Victor Electric Products, Inc., is not reflected 56 Some property at cost; some at one or more in the accompanying consolidated balance sheet since of the above bases (14, 150, 273, 280, 393) no equity accrued thereto as Victor’s cumulative defi­ 2 Some property at cost; some at par value of cit to September 30, 1949, exceeded its outstanding securities issued therefor (50, 410) capital stock and capital surplus. On October 3, 1949, 525 the Corporation gave up its entire investment in Vic­ (Numbers in parentheses refer to companies listed tor’s common stock. in Appendix.) “In place of its advances to Victor, amounting to $902,614 after deduction of reserve, the Corporation Falstaff Brewing Corporation, Link-Belt Com­ accepted on October 3, 1949, Victor’s 4% non-cumula­ pany and The Federal Machine & Welder Com­ tive income note for $750,000 due October 3, 1959, and pany eliminated a description of the basis of 2,500 shares of Victor’s newly issued 4% non-cumula­ their property valuation, although such de­ tive preferred stock having a par value of $250,000 scription was made on prior years’ reports. and an equity of $152,614 in Victor’s net assets. The Listed here are some illustrations of bases Corporation’s advances to Victor at September 30, other than cost: 50 Section 2—Balance Sheet “Land at cost less write-down of $7,251.86” (Geo. E. Typical of the disclosures made is the following Keith Co.) footnote of The Sperry Corporation: “Property, Plant and Equipment, at cost (for assets “Plant and equipment at December 31, 1949, in­ acquired at organization, September 1, 1919, cost was cludes facilities acquired for war purposes aggregating determined by independent appraisal)” (Arundel $8,174,488 at cost, which have been fully amortized Corp.) under the provisions of the Internal Revenue Code. “Land, as appraised in 1934 If depreciated at rates based upon their estimated use­ “Land, buildings, machinery and equipment, at ful lives, the undepreciated balance of such facilities 60% of appraisal in 1927 and subsequent additions at would amount to $4,485,066 at December 31, 1949.” cost” (Industrial Brownhoist Corp.) “Capital Assets “... at values determined by the Board of Directors as of January 31, 1932, with subsequent additions at cost” (Sinclair Oil Corp.) Claims for tax refunds “The amount at which buildings are stated in the accompanying consolidated balance sheet includes $344,214.33 which represents the excess of cost of the capital stocks (acquired from non-affiliated persons), The tabulation of tax refund claims indicated of three wholly-owned subsidiary companies over the a slight increase in the number of claims out­ underlying book amounts shown by such subsidiaries’ standing over those at the previous year end. books. On evidence satisfactory to the management, Approximately one quarter of the tabulated such excess is deemed to be a portion of the cost of the reports carried some form of refund claim, with buildings of such subsidiaries. Depreciation has been an additional nine per cent mentioning claims computed on such increased amount and charged to filed under Section 721 or 722 of the IRC but operations.” (District Theatres Corp.—footnote) not recorded on the books. (See also Miller Manufacturing Co. and Paramount 1949 1948 Pictures, Inc.) In current assets: The Studebaker Corporation, in addition to 26 18 Carry-back claims (67, 122, 160, 188, the normal depreciation reserve, showed a “re­ 209, 226, 266, 320, 341, 369) 17 16 Prior years’ federal taxes (and interest serve for loss on demolition, disposal and change thereon) (27, 133, 334, 419, 496) in use of property and facilities, and carrying 9 11 Tax refunds (181, 184, 228, 350) charges on property held for sale.’’ 2 2 Replacement of basic Lifo inventories (54, 330) 2 2 Recoverable federal and Canadian taxes on income (198, 210) .. 2 Prior years’ excess profits taxes Fully amortized emergency 2 2 Canadian excess profits taxes (380, 430) 6 2 Refund claims for federal income and facilities excess profits taxes and renegotiation rebate (175, 190, 234) 1 1 Resulting from adoption of Lifo (204) Ten companies discontinued disclosure and 1 1 State tax claim (202) three companies (83, 226, 327) added disclosure 66 57 of fully amortized emergency facilities on their Below current assets: 1949 reports, leaving a total of fifty-seven such 20 28 Post-war refund—foreign excess profits disclosures in the 525 reports tabulated. tax (20, 26, 193, 239, 519) The Federal Machine and Welder Company 15 16 Prior years’ taxes on income (233, 255, reinstated its emergency facilities with the 326, 401, 515) 16 13 Carry-back claims (15, 22, 31, 38, 48, following explanatory footnote in its 1949 report: 102, 280, 373, 421, 517) “Emergency facilities acquired during the years 15 14 Replacement of basic Lifo inventories 1941, 1942 and 1943, which had been fully amortized, (35, 96, 307, 335, 337) and carried at no net value, in the amount of $1,125,­ 12 11 Federal income tax refund—no explana­ 072.24, have been reinstated at cost less estimated de­ tion (52, 156, 256, 269, 479) preciation to date, creating a capital surplus in the 6 6 Resulting from adoption of Lifo method amount of $870,967.51.” (63, 231, 241) Intangibles 51 3 3 Recoverable state income or franchise January 31, 1941. By application of the Lifo taxes (261, 367) method, federal taxes on income for the year ended 1 1 Inventory restatements in prior years January 31, 1950, and prior years have been reduced by under Treasury rulings (413) $6,570,000. Of this amount, $5,990,000 represents 1 1 Excess profits refund claim (61) overpayments claimed for the six years ended January 1 1 Claims for refunds—federal and Cana­ 31, 1947. The balance of the reduction of $580,000 dian income taxes (485) has been reflected in the reduced provision for federal 90 94 taxes for the three years ended January 31, 1950. To (Numbers in parentheses refer to Companies listed date, regulations of the Treasury Department have in Appendix.) not been modified to permit the Company to use the Lifo basis for tax purposes. Should the Company be Twenty-six companies showed claims for denied the right to use the Lifo method, the claimed federal income tax carry-back refunds as a overpayments of $5,990,000 and the reduction of result of 1949 operating losses—eighteen as $580,000 in provisions for the three years ended Janu­ current and eight as non-current assets. (Current ary 31, 1950, will not be realized.” 1, 67, 97, 142, 160, 165, 187, 188, 203, 209, 254, 305, 320, 341, 404, 429, 451, 500; non-current 38, 48, 102, 328, 373, 421, 490, 517) The balance of the claims were carry-overs from 1948 reports, Intangibles six of which (two current and four non-current) did not change in amount. United Merchants and Manufacturers, Inc., Method of valuation showed no refund claim on its balance sheet [See Accounting Research Bulletin No. 24, Ac­ but indicated that its provision for taxes was counting for Intangible Assets.”] net of estimated refunds under carry-back The statistics below indicate the frequency provisions of the Internal Revenue Code. Mack with which various types of intangible assets were Trucks, Inc., deducted from its “estimated mentioned, as well as the number of each type recovery of Federal income taxes through carry­ valued at a nominal value, in excess of a nominal back” the fourth installment of 1948 taxes, value, or shown in fixed assets with no amount showing the balance as a current asset. indicated. Six companies showed refund claims in both In current and non-current assets (105, 131, 184, At Valued Fixed 329, 380, 430). The Safety Car Heating and Nom­ in Ex­ Assets— Lighting Company, Inc., and Paramount Pic­ inal cess of Amount tures, Inc., split Canadian excess profits refunds, 1949 Valua­ Nom­ Not with the former company giving the following Type Total tion inal Shown supplemental information in the president’s Patents 192 117 75 . . report: Goodwill 150 121 27 1 Goodwill arising “Post-war refunds of Canadian excess profits tax from consolida­ collectable in 1950 are included in accounts receivable tion 8 ... 8 and the balance collectable in 1951 is carried as a non- Trademarks, current asset. As these payments have been author­ trade names ized by the Canadian Government, the reserve of and brands 99 74 25 . . . $71,140.08 has been carried to surplus.” Patterns, draw­ Of the six retail companies showing refunds ings, dies, lasts due to adoption of the Lifo inventory method, and jigs 62 25 20 17 five carried the item as a separate non-current Lease holds 45 2 21 22 balance sheet item (63, 231, 241, 321, 329) Licenses 23 5 18 . . • while Federated Department Stores, Inc., carried Water rights 12 2 10 “Intangibles” such refund as a current item. Typical of the (Type not speci­ explanatory footnotes is the following from the fied in reports) 12 7 3 2 report of The May Department Stores Company: Processes 9 5 4 . . . “As explained in the report for the year ended Copyrights 8 6 2 January 31, 1948, the Company adopted the Lifo Formulae 7 5 2 . . . method of valuing its inventories retroactively to Franchises 5 3 1 1 52 Section 2—Balance Sheet Value in excess of nominal— Goodwill The Curtis Publishing Co. where shown on balance sheet Pathé Industries, Inc. Water Rights Heart Consolidated Publica­ Of 208 various intangible items shown on the tions, Inc. balance sheets at values in excess of nominal, United States Potash Com­ approximately one third were shown either pany Goodwill and Trade­ Quaker Oats Co. separately or combined with other intangibles in marks Macfadden Publications, a separate group. “Leaseholds” and “patterns, Inc. drawings, dies, lasts and jigs” were the only types Patents, Goodwill, American Tobacco Co. of intangibles which, when shown at values in Trademarks excess of nominal, were generally included in the Patents, Goodwill, Allied Chemical and Dye fixed asset group. Trademarks and Corp. Processes Patents and Trade­ Diamond T. Motor Car Co. Value in excess of nominal—basis of valuation marks Briggs & Stratton Corp. Approximately 40% of the companies showing Patents and Goodwill Atlas Powder Co. Chicago Railway Equipment intangibles at values in excess of nominal did not Co. disclose the basis for such values. A total of Goodwill, Trademarks ninety-seven intangible items were indicated to and Formulae The Coca-Cola Co. be valued at cost. Patterns and Drawings Blaw-Knox Co. The American Smelting and Refining Company “Intangibles” (Type presented a schedule showing “tangible property” not specified in re­ and “intangible property.” The “intangible port) National Lead Co. property” consisted of “goodwill, patents, li­ censes, etc.,” and was explained in the following A few companies showing goodwill resulting manner: from consolidation on their 1949 balance sheets were: “Intangible Property—Segregated and valued as of General Motors Corp. December 31, 1934, in accordance with authority and Bath Iron Works Corp. direction of the stockholders at a special meeting held Cities Service Co. on May 21, 1935.” Loew’s Inc. American Wringer Co., Inc. Crown Zellerbach Corporation disclosed in a General American Transportation Corp. note that the investment in properties, which in­ cluded “intangibles, consisting mainly of water power leases and licenses” represented amounts Clear statement of amortization policy “based largely upon appraisals in 1925 or prior, Examples of a clear statement of amortization plus subsequent additions at cost, less deductions policy follow: for certain intangibles since written off and for “Goodwill is the backbone of an established busi­ depletion, amortization and reserves for deprecia­ ness. It is the high regard which people hold for prod­ tion.” The income statement showed charges ucts bearing our name. Because it is intangible and for amortization without indicating what part, if cannot be measured, goodwill is generally carried at any, applied to intangibles. the nominal value of $1.00. However, in 1946, the The Quaker Oats Company explained in a price paid for the Lustre-Creme business included note in its June 30, 1949, report: $3,750,000 for the goodwill of this product. This “Property, plant and equipment and trade marks, goodwill is being absorbed in expense over a ten-year trade rights and good will are stated at cost, including period starting in 1947.” (Colgate-Palmolive-Peet the par value of any capital stock issued as considera­ Co.—uncertified statement entitled “The Balance tion therefor. The allocation of the cost of businesses Sheet Plainly Stated”) acquired as entireties as between tangible assets and Bendix Home Appliances, Inc., disclosed a trade-marks, trade rights and good will was deter­ revision in 1949 in the rate of amortization of mined by the management as of the dates of acquisi­ tools and dies in accordance with the Treasury tions.” Department’s determination which resulted as a Examples of companies retaining intangibles reduced charge to income for the year. Its on the balance sheet at fixed amounts are as fol­ amortization policy in respect of patents was lows : explained in a footnote: Non-Current Assets— Unusual Items, Treatments, and Presentations 53 “The patents acquired through the purchase of the 1949 changes stock of H. J. Rand Washing Machine Corporation are being amortized over a ten-year period commencing There were few changes in intangibles during July 1, 1949...” the year 1949. “Excess in Consolidation: Sixteen companies (see page 108) reported a Excess of cost of investments in reduction in intangibles by charges to retained subsidiaries over the book value income (earned surplus). American Safety of their net assets at date of Razor Corp. wrote off a portion of its “goodwill, acquisition $400,607.10 patents and trade marks” by charging to “capital Less: Amortization (over ten- surplus” an amount equal to the total in that year period) 176,934.84 account and charging the balance to “earned $223,672.26” surplus.” (Diana Stores Corp.—balance sheet) The president’s letter in the report of Bucyrus- “The excess of the costs over the underlying book Erie Company made the following comment in amounts at dates of acquisition of the investments in respect of a partial write-off of “goodwill”: (1) securities of three wholly-owned subsidiary com­ “The book value of Goodwill, consisting of Engi­ panies, the net assets of which were acquired by the neering Development, Trade-Marks and Patents, was Corporation through liquidation in 1947, and (2) reduced from $3,419,255 to $2,338,511 at the year securities of partially-owned companies, amounted to end by a charge of $1,080,744 to Additional Paid-In $84,724.23 and $157,911.66 respectively, which amounts Capital, and now approximates the cash value ap­ were allocated to goodwill by the management and proved by the Government for use in determining the are being amortized over five years.” (District Company’s invested capital.” Theatres Corp.—notes to financial statements) Gillette Safety Razor Company explained its Pathe Industries, Inc., in 1949, changed its write-off of intangibles in a note: method of presenting “story rights and scenarios.” “Goodwill, Trademarks and Patents, amounting to In 1948, these intangibles were included in the $23,955,970 and including all intangibles appearing inventory section of the balance sheet. In 1949, on the Company’s consolidated balance sheet at they were shown in “idle plant and related assets” December 31, 1948, plus all further intangibles appli­ just below “fixed assets,” in the non-current sec­ cable to subsidiaries not consolidated at that date, tion of the balance sheet. A write-down of these have been written down at December 31, 1949, to the intangibles was also made in 1949 with the amount nominal figure of $3.00. Of the total of $23,955,970 being charged to the “deficit” account (earned an amount of $15,955,970, arising in the main from surplus). The valuation basis was, therefore, the acquisition of the Auto-Strop Company and its said to be at less than cost. No policy of future subsidiaries in 1930, has been written down to $3 by amortization, if any, was stated. charges of $15,302,922 against available Capital Sur­ Pathe Industries, Inc., made a clear statement plus and the balance of $653,045 against Earned Sur­ of policy in regard to “exchange franchises re­ plus, and the goodwill of $8,000,000 arising out of the acquired,” in notes to financial statements, as fol­ acquisition of The Toni Company has been eliminated lows: by a charge to Earned Surplus.” “The cost of exchange franchises reacquired repre­ W. L. Maxson Corp. reduced the book value of sents amounts expended in prior years to reacquire “jigs, tools, dies and patterns” to $1 by additional franchises conferring upon the holders thereof exclu­ amortization charged to income. sive rights to distribute in territories defined in the franchise agreements certain motion pictures released for distribution by Pathé Industries, Inc., and its sub­ Non-current assets—unusual items, sidiaries. The franchise agreements were originally treatments, and presentations made during a period when a market for the motion pictures produced by the companies was being de­ veloped and, at the time of their reacquisition, these franchises carried with them elements of goodwill Listed here are examples of balance-sheet which had been built up by the franchise holders dur­ items in the reports tabulated which were noted ing the period of their ownership. The cost of reac­ as being interesting or unusual: quiring the exchange franchises is being amortized by charges to expense at the rate of 10% of such cost per Foreign assets annum, the amount charged to expense during 1949 “Net assets of branches in countries where foreign being $158,636.31.” exchange controls were in effect” (Time, Inc.) 54 Section 2—Balance Sheet “Other assets of foreign subsidiaries and branches” bond payable as follows in the fixed asset section: (Sharp & Dohme, Inc.) “Used for manufacturing purposes: “Amount Due from Foreign Government” (Na­ Land, buildings, machinery and equipment, less tional Paper and Type Co.) accumulated depreciation of $3,122,087.22 Deduct: mortgage bond payable (non- “Receivables from Canadian housing corporations” current portion)—secured by mortgage on (Marathon Corp.) land and buildings situated at #64 “Net Current Assets in Foreign Countries William Street, Newburgh, New York “(Withdrawals subject to prevailing restrictions in (interest rate, 6% per annum) foreign exchange)” (Brunswick-Balke-Collender Co.) Balance “Miscellaneous investments, including stock and ‘‘Other real property: notes of wholly owned agency companies abroad less Land, dwellings and other buildings, less accum­ $3,938,800 notes and accounts payable to such com­ ulated depreciation of $27,382.31” panies” (United States Lines Co.) Metal and Thermit Corporation showed “Mis­ “Receivables from customers in countries with cur­ cellaneous assets acquired in liquidation of rency restrictions, less reserve of $105,000” (Parker American Rutile Corporation,” a subsidiary Pen Co.) liquidated during 1949, as a separate item in the “Additional amount at which investment in capital plant and equipment section of its balance stock of Malay States Tin Limited is included in the sheet. The president’s letter stated that most of accounts of Pacific Tin Consolidated Corporation, in the former subsidiary’s assets were being dis­ excess of cost plus undistributed earnings accumulated posed of. prior to date of revaluation: McGraw-Hill Publishing Company valued its “Credited to capital surplus for appreciation as of fixed assets at “cost, after charging off all ex­ November 21, 1939, penditures for alterations and financing.” Mid- “Less—Charged to capital surplus for amortization Continent Airlines, Inc., separated its “flying to December 31, 1949” units—aircraft and auxiliary equipment” be­ (Pacific Tin Consolidated Co.) tween those pledged to secure chattel mortgage notes payable and those unpledged. Plant and equipment “Property, plant and equipment (at cost), (includ­ Funds ing $375,000 estimated cost to complete and equip facilities in process of construction) (Note 2)” “Cash in Special Deposit Accounts, per non-current “Note 2—Estimated liability to complete and equip contra (Federal taxes and savings bonds)” (United facilities in process of construction is based on con­ Aircraft Corp.) (See also Carpenter Steel Co., Roberts tracts with construction companies, on purchase com­ & Mander Corp., General Electric Co., G. R. Kinney mitments and on estimates by the company’s engi­ Co., Inc.) neering and purchasing departments. ’ ’ (Central Soya “Plant Improvement and Replacement Fund” Co., Inc.) ($375,000 was shown as a current liability as (Libbey-Owens-Ford Glass Co.) (See also National “Estimated liability to complete and equip facilities in Sugar Refining Co., Marchant Calculating Machine process of constructions.”) Co., Cutler-Hammer, Inc., International Paper Co., Hearst Consolidated Publications, Inc., pre­ Ohio Oil Co.) “Deposits with First Mortgage Trustees” sented similar asset and liability items. These “Note 3: First Mortgage Bonds, 6%, due January were as follows: 1, 1956, in the amount of $1,000,000, have been “Property, plant and equipment to be received authorized and issued but not sold. Under Article under purchase and construction contracts” Two, Section 3, of the First Mortgage Indenture, these bonds may be delivered to the Company from time to “Plant and equipment purchase and construction time in an amount not exceeding 75% of the cash cost contracts payable— of acquisitions, betterments and improvements. In Amounts due within one year” 1949 the Company deposited with the Trustees under American Wringer Co., Inc., carried a “real the First Mortgage Indenture $20,200.00 received estate purchase contract” immediately following from the sale of certain assets. These deposits are re­ its fixed assets, with a contra non-current li­ fundable under the provisions of the Indenture.” ability. (American Writing Paper Corp.) The Eastern Malleable Iron Company de­ “Compensation Insurance Fund (per contra): ducted the non-current portion of its mortgage “Cash and United States savings bonds at redemp­ Non-Current Assets— Unusual Items, Treatments, and Presentations 55 tion value, less in 1949 advance of $30,000 owing to “Note F. Includes securities issued by wholly and general cash.” (Hamischfeger Corp.) (See also partly owned subsidiary companies—$691,927.” General Cable Corp., Frank G. Shattuck Co., Colonial (Loew’s Inc.) Stores, Inc.) “Other Securities and Investments (Note 1-C) “Retirement Reserve Fund” (Stix, Baer and Fuller “Note 1-C. Other securities and investments are Co.) carried at cost or less with the exception of a Canadian investment, revaluation of which in prior years re­ “Pension Trust Contributions—advances for Em­ sulted in $4,364,113 addition to Surplus. Included at ployees” (E. Kahn’s Sons Co.) December 31, 1949, are 1,371 shares of the Company’s “Investments of appropriation for Employees’ Common Stock ($5 par value) carried at $63,457, and Pensions: at December 31, 1948, 156 shares ($20 par value) at Securities, at cost $27,506.” Cash” “Investment in General Motors Corporation 10,­ (American Bank Note Co.) 000,000 Shares Common Stock (Note 1-D)” “Pension trust fund (Note A) “Note 1-D. General Motors Corporation common Cash stock, in accordance with a practice followed since Stocks, bonds and mortgages” 1925, has been revalued annually to an amount which (Note A stated that a portion of the fund was invested closely corresponds to the equity indicated by the in the Company’s stock.) (Craddock-Terry Shoe consolidated balance sheet of General Motors Cor­ Corp.) poration at December 31 of the preceding year. The “Government Securities Deposited to Guarantee net additions to Surplus as a result of all such revalu­ Fulfillment of Sales Contracts” (American Bank Note ations amounted to $285,878,242 at December 31, Co.) 1949, and $233,878,242 at December 31, 1948.” (E. I. du Pont de Nemours & Co.) Funds not appearing on the balance sheet “Investments and Advances—Note 2: were disclosed in a footnote by E. I. du Pont de Investments in Canadian and British related Nemours & Co. as follows: companies—less reserve $45,000 “The Company held funds aggregating $5,843,403 Investments in Domestic related companies—less at December 31, 1949, and $5,917,702 at December 31, reserve $62,000 1948, restricted to performance under U. S. Govern­ Sundry investments—at cost” ment contracts. These funds, and the corresponding “Note 2: Investments in the capital stocks of accountability therefor, are not reflected in the con­ foreign and domestic related companies are stated at solidated balance sheet.” the lower of cost or the approximate book value of the Monsanto Chemical Co. and General Electric Company’s equity therein. Book values have been Company carried similar funds as non-current determined from audited and unaudited financial statements at latest available dates and, with respect assets with a contra non-current liability of the to foreign investments, have been computed at ex­ same amount for the advances on government change rates in effect at December 31, 1949. Changes contracts. occurring during the year 1949 in the book value of in­ vestments against which a reserve has been provided Investments are reflected in the income account; the excess of cost “Investment in Capital Stock of Plantation Pipe over book value at December 31, 1948, has been Line Company (not a subsidiary)—at cost” (Standard charged to surplus.” (P. R. Mallory & Co., Inc.) Oil Co. (Kentucky)) “Listed securities—at net carrying value (compris­ In a supplementary financial information ing at December 31, 1949, 1,508,729 shares of Standard schedule of investments and long-term receiv­ Oil Company (New Jersey) and other securities, the ables, Pittsburgh Steel Co. stated that its in­ total having a quoted market value of $123,007,000) vestment in The National Supply Company “Investments held for operating purposes—at cost, (117,500 shares common stock—$3,172,500) was less reserve” (Standard Oil Co. (Indiana)) carried at: “Investments and Other Assets: “.. .fair value to the company as determined by Partly Owned Subsidiary and Affiliated Corpo­ board of directors upon acquisition in 1938. The rations : closing sale of The National Supply Company common Securities stock on December 31, 1949, was $16,125 per share. Advances At that price, the indicated value for the shares held is Investments in and Advances to Allied Corpora­ $1,894,687.” tions Other Investments (Note F)” Arden Farms Co. disclosed in its president’s 56 Section 2-—Balance Sheet letter that it carried in its “investments” account A. O. Smith Corporation showed research and (a non-current item) $2,000,000 U. S. Treasury development expense as a current liability less a Certificates of Indebtedness, due January, 1950. like amount of “segregated cash in banks.” It was also disclosed that these securities had since been exchanged for a like amount due Taxes January 1, 1951. Federal income taxes were generally shown as a separate current liability, with U. S. Treasury Miscellaneous notes, if held, deducted therefrom. Taxes other “Fixed fees retained by U. S. Government under than federal income taxes were shown separately terms of cost-plus-fixed-fee contracts” (Glenn L. on many balance sheets. Martin Co.) The following listing of accrued liabilities of the “Distributions withheld from foreign stockholders Master Electric Company illustrates a complete (contra)” (Kennecott Copper Corp.) tax presentation : “Advance payment on account of possible federal “Accrued liabilities: income tax assessment” (Glidden Co.) Salaries, wages and other compensation “Working and Trading Assets at Cost: Taxes—state, county and city Inventories of Sulphur above Ground Social security taxes Inventories of Materials and Supplies” Federal income taxes (Texas Gulf Sulphur Co.) (No inventories included Less: U.S. Treasury Saving Notes, Series C in current assets) and D, at current redemption value” “Advances to Trustees of the Master Electric Profit Sharing Trust” (Master Electric Co.) Pan American Petroleum & Transport Com­ “Installment sales contracts on customers’ dies— pany showed the following grouping of tax li­ maturing after October 31, 1950” (Harvill Corp.— abilities : October 31, 1949) “Liabilities Payable Within One Year: “Notes and Other Credit Instruments and Accounts “Taxes payable—including federal taxes on income Receivable Not Realizable within One Year (less re­ (less $2,400,000 U. S. Treasury savings notes), taxes serve, 1949, $8,733; 1948, $988,377)” (Baldwin Loco­ withheld and state and federal taxes on petroleum motive Works) products collected from customers.” “Equipment and repair parts for resale or use—at Thompson Products, Inc., included “maxi­ cost or less” (National Cylinder Gas Co.) mum refunds on contracts subject to profit “Printing and other equipment for resale—at cost limitations—estimated” with its federal and less allowance of $600,000 for loss on sale Canadian tax accrual, and deducted its Treasury Less allowance for depreciation” (Time, Inc.) Savings Notes from the combined accrual. Prior year taxes were frequently set out separately: Current liabilities—interesting “Current year federal taxes on income—estimated Prior year federal taxes on income and unusual items State and foreign taxes on income Other taxes” (Scovill Mfg. Co.) Offsetting items “Federal Taxes on Profits Three companies (Booth Fisheries Corp., Prior year Robertshaw-Fulton Controls Co., and Reliance Current year” Electric & Engineering Co.) deducted cash on (Consolidated Paper Co.) deposit for dividend payment from the current “Federal Income Taxes—1949 liability. Reserve for Contingencies The Colorado Milling & Elevator Co. carried Excess Profits Taxes withheld from payment in the dividend liability and the fund as current prior years” liability and current asset, respectively. (Park & Tilford, Inc.) Hazel-Atlas Glass Co. showed the following Celanese Corp. of America showed an item note on its balance sheet: of “Federal taxes on income, net (Note 2)” with no amount extended. Note 2 explained the “Funds for dividend of $651,613.50 payable January 3, 1950, were held by dividend disbursing agent on item as follows: December 31, 1949.” “The net accrued liability for Federal taxes on in­ Current Liabilities—Interesting and Unusual Items 57 come is stated after the deduction of refund claims Corp., Hercules Powder Co., Hooker Electrochemical aggregating $2,484,753 and after applying U. S. Co., Monsanto Chemical Co., and Jacob Ruppert) Treasury Savings Notes, Series D and Series C, to the Liability for returnable samples (Hamilton Watch extent of $14,632,734 and $25,976,816, respectively Co.) at December 31, 1949, and 1948.” Pepsi-Cola Co. treated container deposits as a The National Cash Register Company dis­ non-current liability, but qualified the total of its continued its practice of showing “Deferred current liabilities with the parenthetic note taxes on installment income” as a separate item, “exclusive of customers’ deposits on bottles and its 1949 report having only one tax caption, cases, shown below.” (See also Falstaff Brewing “Accrued taxes (estimated).” Corp. and The Harshaw Chemical Company for Wording of federal income tax current liability additional non-current presentations.) 1949 1948 Product warranties 99 113 “Accrued” 13 13 “Accrued.. .estimated” The following items were shown as current 3 1 “Accrual for” liabilities: 105 116 “Provision” “Reserves for cooperative advertising and service 8 8 “Provision.. .estimated” warranties” (Bendix Home Appliances, Inc.) 1 1 “Provision for taxes accrued” “Provision for returns and allowances” (Standard 127 115 No qualifying words—just “Federal Stoker Co., Inc.) taxes” “Provision for product warranty, commitments, 84 76 “Estimated” etc.” (Packard Motor Car Co.) 6 6 ‘‘Estimated liability’’ Nash-Kelvinator Corp. changed the position 55 66 “Reserve” of its “Five-Year Warranty on Refrigerators” 1 1 “Liability for...” from a non-current to current liability in 1949. 20 9 No provision shown (See subsequent section on “Reserve for 2 “Amounts provided for estimated fed­ eral income taxes” Warranties.”) 1 Included in “Accrued liabilities” per footnote Sinking fund provision 525 525 The Cuneo Press, Inc., shows “Current portion Employee benefits of long-term debt and sinking fund requirement of preferred stock,” with a deduction from the The following current liabilities were related total of capital stock and surplus, explained by to employee services and benefit plans: the following footnotes: “Special Incentive Compensation Fund” (Bethle­ hem Steel Corp.) “... On or before May 1 in each year, the company “Reserve for Employees’ Death Benefits” is required to set aside a sinking fund ($42,600 for “Reserve for Vacation Pay” (Consolidated Paper 1950), based on net income for the preceding year, for Co.) the purchase or redemption of preferred shares at not “Estimated cost of past service benefits under pen­ more than $106.50 per share.” sion plan, payable during year 1950” (Pratt & Lam­ “Current liabilities do not include provision for sink­ bert, Inc.) ing fund of $275,000 payable on December 31, 1950, “Pensions” (Jacob Ruppert) with respect to the sinking fund debentures maturing “Accrued Incentive Compensation” (United Air­ January 1, 1951.” craft Corp.) B. F. Avery & Sons Company showed “Sinking “Accrued vacation pay” (Glenn L. Martin Co., American Viscose Corp.) (See Camden Forge Co., fund deposits due within one year.” W. F. Hall Printing Co. and National Steel Corp. for The D. Emil Klein Co., Inc., showed a similar, mention of accrued vacation pay as being included in but unfunded, liability as follows : accrued salaries and wages, etc.) Current Liabilities: “Liability on Contract to Purchase Treasury Stock, Container deposits Due March 1, 1950” The following customers’ deposits were in­ Deferred Liabilities: cluded in current liabilities: “Liability on Contract to Purchase Treasury Stock, Deposits for returnable containers (General Cable Due January 10, 1951” 58 Section 2—Balance Sheet Capital Stock, Surplus and Surplus Reserve: Details of Pathe Industries “Notes payable to “Total banks and others” (part shown as non-current Less: Contract to Purchase 24,880 Shares of liability) were given in the footnotes: Treasury Stock” “Notes Payable to Banks and Others: “The notes payable consist chiefly of notes issued Miscellaneous current liabilities in accordance with the following bank loan and credit “Replacement cost of pattern discards” (McCall agreements, the maturity of which has been extended Corp.) since the close of the year to the dates shown below: “Provision for repairs to tugs and other floating Amount Due Amount Due equipment” (Pacific American Fisheries, Inc.) July 15, 1950 January 15, 1951 “Accounts Payable: Payables loan agree­ Trade ment, as amended $1,600,000.00 $ ...... Directors, officers, and principal holders of equity 1947 Credit agree­ securities other than affiliates ment, as amended 489,521.55 3,105,973.36 Employees” General loan agree­ (Anderson-Clayton & Co.) (No further explana­ ment, as amended ...... 3,225,000.00 tion shown.) $2,089,521.55 $6,330,973.36 “Purchase Money Obligation—instalments due “The foregoing bank loans are secured by liens on within one year” (Stahl-Meyer, Inc.) all finished and unfinished photoplays which are now “Estimated additional payment for beets (applica­ owned or will be produced by Pathé Industries, Inc., ble to 1949-crop sugar sold to February 28, 1950” and its subsidiary companies, except those included (Great Western Sugar Co.—fiscal year February 28, in all program years preceding the 1944/45 program 1950) year and on all revenue therefrom; by the assignment “Accounts receivable—credit balances” (Belding of rights relating to motion picture costs advanced to Heminway Co., Inc.) certain producers and all revenue therefrom; by a “Special Deposits on Uncompleted Contracts and lien on all the issued and outstanding stock of all but Accounts Receivable Credit Balances” (A. B. Farqu­ one of the domestic subsidiaries of Pathé Industries, har Co.) Inc., and certain of the assets of such companies; “Advances received on sales contracts and custo­ and by a lien on other miscellaneous assets of Pathé Industries, Inc. mers’ credit balances” (Lukens Steel Co.) “The loan and credit agreements provide that no “Dividends Unclaimed” (American Smelting & Re­ dividends, except stock dividends, shall be paid on the fining Co.) common stock of Pathé Industries, Inc., during the “Drafts in transit” (U. S. Smelting, Refining and term of the loans, restrict the companies as to the Mining Co.) assumption of further indebtedness, as to the payment “Liability under foreign letter of credit” (Canada of dividends by the subsidiary companies to Pathé Dry Ginger Ale, Inc.) Industries, Inc., as to the placing of further liens upon “Sludge Disposal Costs” (National Cylinder Gas the assets of the parent company and its subsidiaries, Co.) and as to the maintenance of their financial condition “Advance payments received on contracts” (Kop­ as of October 4, 1947.” pers Co., Inc.) “Contract advances, less related contract costs” Current liabilities not accrued (Electric Boat Co.) The Sperry Corporation balance-sheet caption “Progress payments and advances received on U. S. “Total Current Liabilities” carries the following Government Contracts and Subcontracts footnote reference in respect of a current liability Less: Applied as a deduction from inventories” of undetermined amount which was not accrued (W. L. Maxson Corp.) at December 31, 1949: “Amounts payable to the United States arising from “In September, 1947, the Company purchased the price revisions in process or anticipated with respect to Common stock of certain corporations for $7,600,000. deliveries under price redetermination contracts” Under the purchase agreement, as amended, addi­ (Boeing Airplane Co.) tional sums may be payable by the Company as the “Sundry liabilities (including admission, with­ purchase price of such stock, depending on the con­ holding, and other taxes) for which monies are on solidated net earnings, as defined in the agreement, of deposit in special bank account—contra” (District these acquired companies over the period of five Theatres Corp.) years from July 1, 1947. If, during this five year “Reserves for Current Liabilities” (Buckeye Steel period, such earnings from July 1, 1947, to the end of Castings Co.) any calendar year or to June 30, 1952, exceed $5,- Exhibit 9: Jones Laughlin Steel Corporation 60 Section 2—Balance Sheet 000,000, an amount equal to such excess will be paid “Provision for non-current liabilities” (American by the Company as additional purchase price of the Metal Co., Ltd.) stock until a total of $2,000,000 has been paid. Simi­ “Purchase obligations” (American Stores Co.) larly, if such earnings exceed $7,000,000, an amount equal to one-half of such excess will also be paid by the “Equipment obligations: Company as additional purchase price of the stock. Due within one year” “A supplement to the agreement, dated July 20, Due after one year” 1949, provides for certain deferments of payment of (Greyhound Corp.) and subsequent revisions of the sum accruing pending “Royalties Accrued—payment deferred” (Struthers realization of sales through collections. In view of Wells Corp.) this it is impractical to compute accurately the “Discount on reacquired securities” (Hearst Con­ amount accruing at December 31, 1949, under these solidated Publications, Inc.) provisions, but at this time it is estimated to be “Premium coupon redemption and self-insurance” approximately $275,000. The amount of such pay­ (Colgate-Palmolive-Peet Co.) ments for capital stock when finally determined, “Amount payable for commitment of Canadian sub­ representing additional payments for intangible sidiary, due from 1952 to 1957” (Bridgeport Brass Co.) assets, will be charged against earned surplus.” (1950 payment included in current liabilities.) “Premium on 3% Sinking Fund Debentures, less Expenses” (Continental Can Co.) “Deferred Credits” (Colorado Fuel and Iron Corp., Non-current liabilities and American-LaFrance-Foamite Corp.) deferred credits—-interesting and “Billings to Customers in Excess of Costs of Un­ completed Erection Contracts” (H. H. Robertson unusual items Co.) “Deferred finance income” (Iron Fireman Mfg. Co.) Employee stock-purchase plans “Deferred rental income—leased machines” (Ex- “Employees’ Payments on Stock Subscriptions” Cell-0 Corp.) (M. H. Fishman Co., Inc.) “Deferred income—television service fees” (Emer­ “Employee Stock Plan Credits: son Radio & Phonograph Corp.) Accrued earnings credits applicable to employee “Deferred income—storage and handling charges” stock options (Beatrice Foods Co.) Less stock held by trustee for issuance” (Libbey- “Unearned Income (Marmon-Herrington Co., Inc.) Owens-Ford Glass Co.) “Unearned transportation revenue” (Chicago and Workmen’s compensation insurance claims Southern Air Lines, Inc.) “Accident Compensation Payable After One Year” “Deferred income (revenue on account of unfinished (Bethlehem Steel Corp.) voyages, etc.)” (United Fruit Co.) “Liability, as self-insurer for workmen’s compensa­ “Advance billings of future issues (less related pro­ tion, payable after end of ensuing year” (Camden duction and shipping costs—1949, $598,378; $706,­ Forge Co.) 452)” (Macfadden Publications, Inc.) “Workmen’s Compensation Claims (fund contra) “Deferred income” (Dictaphone Corp.) (No further “Payable over extended period of years (payment explanation given.) on claims of current and prior years amounted to “Excess of billings on shipbuilding contracts over $35,000 in 1949; estimated payments in 1950— expenditures and estimated profits recorded thereon” $34,000.)” (Pennsylvania Coal and Coke Corp.) (Newport News Shipbuilding & Dry Dock Co.) “Accident compensation and pensions payable “Deferred Income on Installment Sales” (Charles (exclusive of $1,174,982 in 1949 and $854,295 in 1948 E. Hines Co., Super-Cold Corp., City Stores Co.) payable within one year included with ‘accrued “Received in partial payments on Government fixed- salaries, wages and other compensation’)” (Jones & price contracts (Note 5)” Laughlin Steel Corp.) “Note 5—The amounts shown in the accompanying balance sheets as deferred income arise from the fact Miscellaneous that general and administrative expenses are included in the basis on which partial payments are received “Advance on account of Agreement for Sale of from the Government on fixed-price contracts, whereas Canadian Property” (American Bank Note Co.) such expenses are charged off by the Company as they “Contingent compensation of executives for past are incurred. These amounts of deferred income are years—deferred” (Gimbel Brothers, Inc.) taken into income in ensuing periods as deliveries are Reserves Shown Below Current Liabilities 61 145 144 142 143 Insurance reserves (1, 17, made under the contracts.” (Lockheed Aircraft 35, 86, 182, 189, 223, 392, Corp.) 483, 492) ‘‘Unearned Handling Charges—Associate Store 5 4 10 50 War and post-war reserves Owners’ collateral contracts” (38, 214, 374, 499) “Note 7: On installment receivables held as collat­ 38 38 46 46 General, “other,” “sun­ eral to accounts of Associate Store Owners, the com­ dry,” “miscellaneous” (15, pany takes handling charges into income as such ac­ 95, 106, 144, 223, 444) counts become due.” (Western Auto Supply Co.) 63 83 87 51 Reserves involving plant and equipment “Deferred Credits to Income—Note 3” 24—Increased plant re- “Note 3—This amount represents dividends, royal­ placement costs ties and other items due from foreign subsidiary and (See discussion affiliated companies at approximate transfer rates at which follows) December 31, 1949, which has not been included in 4—Depreciation (185, income and is shown as a deferred credit pending re­ 242, 489) lease by exchange authorities.” (Corn Products Re­ 3—Repairs and main­ fining Co.) tenance (57, 123, 240) 32—Other (39, 110, 121, 290, 375) Reserves shown below 30 32 31 26 Taxes (4, 49, 155, 204, 215, current liabilities 274, 294, 362, 406, 458) 17 19 21 22 Warranties or guarantees (18, 105, 174, 322, 350, 382, 374) (Inventory reserves are discussed separately 27 31 33 20 Foreign operations (126, in the next two sections following this one.) 205, 238, 239, 290, 474, As in previous years, the tabulation of “re­ 518) serves” includes all items below the current 74 70 68 Reserves for employee liabilities section of the balance sheet in which benefits (23, 41, 59, 74, 123, 158, 224, 238, 307, the word “reserve” was used, as well as all earned 405, 469) surplus appropriations shown in the net equity 45 51 49 Miscellaneous titles (See section. discussion which follows) Although Accounting Research Bulletin No. 626 694 730 630 34, “Recommendation of the Committee on (Numbers in parentheses refer to companies listed Terminology—Use of Term ‘Reserve’ ” (October in Appendix.) 1948), recommended that the use of the term “reserve” be limited to indicating “that an Contingency reserves undivided portion of the assets is being held or A substantial reduction in the number of retained for general or specific purposes,” little reserves for contingencies took place during change in terminology in the section immediately 1949, with forty-one companies eliminating such below “current liabilities” was noted in the 1949 reserves from their statements. reports. The majority of companies continued Thirty companies effected the reserve elimina­ the use of the term “reserve.” (See separate tion by credits to retained income (earned sur­ section on “Use of Term ‘Reserve’ ” in connection plus). (1, 3, 7, 10, 36, 40, 74, 81, 82, 85, 106, with accounts receivable and depreciation.) 135, 158, 161, 162, 165, 168, 175, 256, 264, 297, The tabluation below covers developments in 334, 335, 358, 363, 395, 402, 405, 423, 521) the most widely used reserve categories. Changes The Coca-Cola Company presented the follow­ in the 1949 presentations are discussed in sub­ ing footnote to explain the elimination of its sequent paragraphs. contingency reserve: 1949 1948 1947 1946 “Reserves. In order to show the specific purposes 182 222 243 272 “Contingency Reserves” for which the reserves provided in prior years are to shown separately, or words be used, such reserves have been reclassified into two “and other contingencies” accounts: reserve for unremitted foreign profits and added to other specific re­ reserve for employees’ retirement plan. Deductions serves (113, 141, 265, 306, during the year from the reserves were: $2,095,725.81 317, 376, 433, 435, 468, from the reserve for unremitted foreign profits to 482) cover foreign exchange losses applicable to prior 62 Section 2—Balance Sheet years; and $552,661.23 from the reserve for em­ Trend toward decrease in use of ployees’ retirement plan, the amount funded during the year.” general contingency reserves General American Transportation Corp. also In reviewing financial statements it is fre­ reclassified its contingency reserve to “reserve quently impossible to determine whether the for income tax contingencies.” “reserve for contingencies” has been provided Two companies, American Maize-Products for specific contingent liabilities (including antici­ Company and Montgomery Ward & Co., Inc., pated future inventory price declines) or repre­ transferred their December 31, 1948, contingency sents a means of insuring the retention in the reserve balances to specific current liabilities business of sufficient surplus to absorb any un­ in 1949, the former to “estimated liability for forseen extraordinary losses which otherwise federal income taxes and related contingencies” might reduce earnings. and the latter to “accrued expenses and insur­ A trend toward the discontinuance of general ance reserve.” Addressograph-Multigraph Cor­ contingency reserves is indicated by the con­ portation substituted “reserve for other li­ tinued reduction in the number of these reserves abilities (income taxes and commissions)” for appearing in the four-year tabulation, and in the the “reserve for possible additional federal previously mentioned breakdowns of contingency income and excess profits taxes and contin­ reserves into their specific components. gencies” shown on its 1948 statement. In addition to the complete elimination of con­ Giddings & Lewis Machine Tool Co. explained tingency reserves, the following changes were its elimination of the reserve for inventory noted in the 1949 presentations: price decline and other contingencies in the From: “Reserve for Contingencies’’ following footnote: To: “Reserve for Foreign Investments’’ “Of the $200,000 reserve for inventory price decline “Reserve for Contingencies (Surplus Re­ and other contingencies in the consolidated balance serve)” sheet at December 31, 1948, $100,000 provided by (Firestone Tire & Rubber Co.) the wholly owned subsidiary prior to acquisition was applied in 1949 to reduce (from $191,762 to $91,762) From: “Reserves for contingencies and deferred the account ‘cost of capital stock of subsidiary in liabilities” excess of its book value at date of acquisition’ which To: “Reserves for severance compensation— is added in consolidation to the fixed assets of the South American Subsidiaries” subsidiary, and is being depreciated over a period of “Reserves for general contingencies” ten years from July 1, 1948, data of acquisition.” (Lone Star Cement Corp.) From: “Reserves for Possible Market Decline in Three companies eliminated contingency re­ Inventories, Contingencies, Insurance, serves by credits to 1949 income. Credits to etc.” (in reserve section above net equity) income by Hayes Mfg. Corp. and The Cleveland To: “Reserves for Contingencies, Insurance, Builders Supply Co. represented the reserve etc.” balances after application of specific items for “Reserve for Possible Market Decline In which the reserves were created, and appeared Inventories” (in net equity section) prior to the determination of net income for the (Allied Mills, Inc.) year. The Glenn L. Martin Company credited From: ‘‘Reserves for Contingencies’’ the reserve balance as of December 31, 1948, To: “Reserve for contingencies (appropriated to the 1949 statement of income as one of several earned surplus)” “special adjustments” between the captions (Willys-Overland Motors, Inc.) “net income for the year before special adjust­ From: “Reserve for contingencies” ments” and “balance transferred to earned To: “Reserve for contingencies (surplus re­ surplus.” serve)” Only one new contingency reserve appeared (Goodyear Tire & Rubber Co.) in 1949, that of the A. S. Campbell Co., Inc., described in the following balance sheet footnote: Of the thirty contingency reserves eliminated “In connection with a claim made against the by transfer to earned surplus, seven companies company a machine purchased in 1949 for $16,050 (74, 158, 297, 335, 395, 402, 405) stated (usually has been attached. Although the amount of the in the president’s report) that the specific con­ claim has not been determined, a reserve of $10,000 tingencies for which the reserves were provided has been provided.’’ (From income) had ceased to exist. Eighteen companies gave no Reserves Shown below Current Liabilities 63 reason for the transfer, and four companies in­ “The Statement of Earned Surplus reflects the dicated that there were no known contingencies decision, made in the light of currently recommended accounting practice, to transfer to earned surplus the requiring retention of the reserves. reserve for contingencies in the amount of $1,696,800. “In 1946 the Company provided out of earnings a The elimination of the reserve does not mean that reserve for possible inventory price declines in the inventory risks are at an end, for, as the section on amount of $1,500,000, and there has been accumulated Raw Materials and Inventories indicates, vegetable out of earings over a period of years a general reserve oil prices are still unstable.” for contingencies which amounted to $775,691. If and when inventory losses or extraordinary losses Insurance reserves should occur in the future, they will be charged to income account or to earnings retained for use in the Two new reserves for self-insurance appeared business, as may be appropriate in the light of gener­ in 1949, that of Diana Stores Corp. (charged to ally accepted accounting principles. Under the income) and that of Rexall Drug, Inc., (source circumstances the Board of Directors has decided to of reserve not disclosed). The reserve of Diana close out the two said reserves by transferring the Stores Corp. was explained by the following total balance of $2,275,691 to earnings retained for footnote: use in the business.” (American Stores Co.) “As of December 1, 1948, the Company’s sub­ “The reserve for inventory price declines and con­ sidiaries became self-insurers for stores fire losses to tingencies, amounting to $2,000,000 was transferred the extent of the first $15,000.00 at each location. to the surplus account because the management does As an initial provision for future losses an amount of not know of any items chargeable thereto.” (Harni­ $10,000.00 has been charged to profit and loss during schfeger Corp.) the year.” “During the war years the Board of Directors set aside out of net profits a total of $2,000,000, as a Six companies transferred their insurance reserve to provide for certain contingencies. In reserves from their 1948 balance sheet position view of the fact that no charges against this reserve below the current liability section—Montgomery have been made or are contemplated, the reserve Ward & Co., Inc., and The May Department was transferred to earned surplus as at June 30, 1949, Stores Company to current liabilities, Ralston by action of the Board of Directors.” (McKesson & Purina Company to “earnings retained for use in Robins, Inc.) the business (appropriated for self-insurance)” and three companies (197, 275, 423) to un­ Of particular interest is the comment made by appropriated retained income (earned surplus). the president of the Adams-Millis Corporation, In restoring its “reserve for self-insured risks” implying that stockholders’ misconception of the to capital (profit retained and employed in the term “surplus” was responsible for the creation business is dated from April 1, 1936), The Lehigh of a general contingency reserve: Portland Cement Company made the following “A glance at the statement of financial position comments: will show that your Company’s capital, together with the accumulated portion of earnings retained through­ “Attention is directed to the fact that the amount of out the years, are invested in plants and equipment, $1,000,000 which was provided prior to April 1, 1936, inventories, accounts receivable, and other necessary as a reserve for self-insured risks has been trans­ working assets. It is obvious that the business could ferred in 1949 to the ‘amount in excess of par value’ not operate on the present scale with only the original of common stock. Under present-day accounting capital. It is therefore necessary to retain for the practice, it is recognized that a reserve of this type requirements of the business a certain portion of the may not be used to relieve future profits of charges earnings from year to year. In recognition of this that would otherwise be made against them and that fact, such retained earnings are so described in the all such general-purpose contingency reserves, which accompanying financial statements, in lieu of the term are in effect appropriations of retained profits, should ‘surplus’ which did not indicate its true nature. preferably be reflected as part of stockholders’ equity.” Consistent with this principle, the amount heretofore The reserve had been invested in govern­ reserved for general contingencies is now included in ment securities which had been included in the the amount representing earnings retained for require­ caption “Investments and other assets shown as a ments of the business.” non-current asset.” With reference to the elimination of its reserve After restoration of the reserve to capital in for contingencies, The Best Foods, Inc., stated 1949, government securities on deposit under in its president’s letter: workmen’s compensation laws (which had been Exhibit 10 : The Standard Oil Company (an Ohio Corporation)

DISTRIBUTION OF SOHIO’S INCOME— SOURCES OF FUNDS FOR EXPANSION AND REPLACEMENT 1949 1948 Total Income . . $256,891,000 $249,048,000 The income was distributed as follows: Materials, merchandise, operating and other expenses including the cost of finding crude o il...... $175,259,000 $158,818,000 *Wages, salaries and employee benefits...... 41,324,000 38,912,000 Depreciation and depletion (see table below)...... 12,326,000 12,482,000 Interest paid for borrowed m oney...... 1,315,000 1,081,000 Income and other taxes...... 10,525,000 13,972,000 Dividends paid to stockholders...... 8,074,000 6,635,000 Invested in the business (see table below)...... 8,068,000 17,148,000 T o t a l ...... $249,048,000

SOURCES OF FUNDS FOR EXPANSION, MODERNIZATION AND REPLACEMENT OF FACILITIES AND FOR OTHER CORPORATE PURPOSES

Funds Provided Invested in the business (portion of net income remaining after paym ent of d iv id e n d s ) ...... $ 8,068,000 $ 17,148,000 Charges against income which were not current cash payments: Depreciation and depletion (wear and exhaustion of operating fa c ilitie s)...... 12,326,000 12,482,000 O t h e r ...... 2,837,000 1,322,000 R eceived from assets sold and m isc e lla n e o u s...... 4,408,000 9,114,000 Total provided from operations ...... $ 27,639,000 $ 40,066,000 M oney borrow ed by the C o m p a n y ...... - 0 - 20,000,000 Total funds provided ...... $ 27,639,000 $ 60,066,000

Funds Used Capital expenditures (for oil wells, pipelines, refineries, service stations, e t c . ) ...... $ 35,312,000 $ 27,772,000 M iscellaneous investm ents and other u s e s ...... 1,145,000 1,978,000 Total funds u se d ...... $ 36,457,000 $ 29,750,000 Increase or (decrease) in working c a p ita l ...... $ (8,818,000) $ 30,316,000 Funds used in 1949 exceeded funds provided by $8,818,000. This amount came from working capital which had been increased in 1948 mainly as a result of $20 million of borrowings. Such borrowings were obtained on a long-term basis to be used in connection with the current three-year expansion program expected to cost approximately $100 million. Working capital at 1949 year-end was $58,322,000 as compared with $67,140,000 at the end of 1948.* * Excluded are amounts of about $1,720,000for 1949 and $1,535,000 for 1948 paid to employees in connection with capital expenditures and for operations and services performed by the Company for others. Reserves Shown below Current Liabilities 65 included as a part of the investment of insurance ing the appropriation at the foot of its profit reserve) were retained in the investment caption and loss statement before determination of net and the balance returned to working capital. profit for the year. Dwight Manufacturing Company showed an War and post-war reserves appropriation of profits in a combined profit and loss and earned surplus statement, after Five companies continue to carry reserves the determination of profit for the year and be­ mentioning war or post-war transactions: fore the opening earned surplus. The B. F. Good­ “Reserve for Post-War Adjustments” (principally rich Company deducted a “special reserve for Federal taxes) (Sprague Electric Co.) increased replacement cost of facilities” from “For War Loss Claim” (Otis Elevator Co.) “income before special reserves” at the foot of the “For postwar adjustments and other contingencies” income account. (principally Federal taxes) (American Shipbuilding Allied Chemical & Dye Corporation increased Co.) its reserve by a transfer of $10,000,000 from its “For post-war contingencies” (Gaylord Container “Reserve for investments and securities,” this Corp.) amount no longer being required since the market “For expenditures arising out of war” (U. S. Steel value of its securities exceeded their carrying Corp.) value. There was no significant change in the balances Sunshine Biscuits, Inc., decreased its appropria­ of the first three reserves. Gaylord Container tion for extraordinary depreciation with no Corp. charged its reserve with “excess of cost disclosure as to the disposition of the reduction. over proceeds from disposal of unused equipment Other plant and equipment reserves acquired in anticipation of post-war require­ Five companies (156, 219, 232, 249, 374) ments,” and transferred the reserve balance to the restored reserves for plant expansion or replace­ stockholders’ equity section of its balance sheet. ment of facilities at current costs to retained U. S. Steel Corp. credited 1949 income with a income (earned surplus), Com Products Re­ portion of its reserve representing an amount fining Company first making an appropriation equal to the “higher costs (net of tax reduction) of 1949 income to the reserve before restoration of replacing inventories depleted during the war.” of the entire reserve balance. Sunshine Biscuits, Inc., and United Drill and High cost of plant replacement reserves Tool Corp. retained similar plant replacement Twenty-four companies continued to carry reserves but carried them as surplus appropria­ reserves or surplus appropriations relating to tions in the net equity section in 1949 for the increased cost of fixed asset replacements, twelve first time. shown as reserves immediately after the current Monsanto Chemical Co. deducted its deprecia­ liabilities section of the balance sheet (11, 105, tion reserve from the fixed assets in 1949, whereas 158, 180, 185, 238, 274, 309, 340, 430, 473, 525) the reserve had been previously carried on the and eleven as surplus appropriations in the net liability side of the balance sheet. equity section (18, 34, 59, 96, 186, 197, 267, Libbey-Owens-Ford Glass Co. restored its 292, 354, 469, 489). Pittsburgh Plate Glass Co. reserve for property replacement and/or ex­ carried an appropriation for replacement cost of cessive cost of new facilities to earned surplus facilities under the caption “Appropriations and charged earned surplus for accelerated de­ (from income or retained earnings)” located just preciation retroactive to January 1, 1947. The above the capital and retained earnings section auditor’s report described and approved the of its balance sheet. transaction. Of the twenty-four reserves, nine were in­ The stockholders report of United Aircraft creased during 1949, the majority being round- Corporation contained the following comments amount appropriations of retained income (earned on the company’s “reserve for development surplus). (11, 59, 473, 489, 525) facility expenditures, plant relocation, etc.”: Crane Company and Pittsburgh Plate Glass “The Corporation in 1949, as in 1948, utilized the Company computed 1949 depreciation on the Reserve for Plant Relocation to absorb a portion of estimated replacement cost of their depreciable the costs of moving the Chance Vought operations fixed assets, and appropriated the excess over to Dallas, Texas. The charge to the Reserve in 1949 normal depreciation, the former company show­ amounted to $1,400,000 representing the approximate 66 Section 2—Balance Sheet difference between moving costs of $2,335,188 in­ Revenue Code, which disallowance has been protested curred during the year and the reduction in Federal by the Corporation; the Section 722 claims are now income taxes resulting from such expenses. There before the Excess Profits Tax Council. Manage­ will be no further charges to the Reserve of this nature ment has been advised that its refund claims exceed in view of the completion of the move. As previously in amount the deficiency asserted in the Agent’s mentioned, it is presently the intention to use the report, but no amount has been set up in the accounts Reserve for Development Facility Expenditures of for such refund claims under Sections 721 and 722. $4,500,000 at December 31, 1949, to absorb a portion It is not the present intention of the management of the depreciation charges arising from the turbine to pay these additional taxes until final decision re­ development facilities program.” garding Sections 721 and 722 (as protested by the The Colorado Milling & Elevator Co. trans­ Corporation) has been rendered.” (Eastern Stainless ferred its reserve for deferred maintenance to Steel Corp.) income, showing it on the statement of income The report of Tide Water Associated Oil as a reduction of income deductions. Company stated that its reserve for “additional federal taxes and other contingencies” contained Reserves for taxes a prior year’s tax provision less tax refundable as a result of the replacement of basic Lifo Thirty companies carried reserves for taxes on inventories. their 1949 statements below the current liability Three companies continued to carry reserves section. Of these reserves eight mentioned prior for deferred taxes on installment sale collections. years taxes in their titles (4, 155, 188, 254, 274, (City Stores Co., W. T. Grant Co., Spiegel, Inc.) 358, 362, 458) and seventeen mentioned the The treatment is explained in a footnote to the word contingency. (164, 215, 220, 230, 241, 246, profit and loss statement of Spiegel, Inc.: 257, 294, 299, 328, 406, 407, 411,432, 477, 478) “In accordance with past practice, the foregoing Some illustrative titles follow: statement of profit and loss was prepared on the “Reserve for taxes” (Columbian Carbon Co.) accrual basis, whereas for federal income tax purposes “Reserve for prior years Federal Income Taxes” the income arising from installment sales is reported (Eastern Stainless Steel Co.) on the cash collection basis. The federal income tax provision for the year 1949 was $1,255,000 on the “Reserves for Foreign Income Tax Contingencies” accrual basis as compared with $245,000 payable on (Gillette Safety Razor Co.) the cash collection basis. The latter amount is in­ “Reserve for contingencies including possible addi­ cluded under current liabilities while the deferred tional income taxes for prior years” (Pure Oil Co.) portion of $1,010,000 is included under reserves.” “Special Tax Reserve (representing estimate for Federal income taxes which may arise from non­ The May Department Stores Company, pre­ deductibility of depreciation on certain plant facilities viously carrying such a reserve, reclassified the fully amortized for tax purposes but subject to de­ item to current liabilities in 1949. preciation on the books of account.” (Ampco Metal, Contrasting treatments of possible tax li­ Inc.) ability are illustrated by the following footnotes: “Reserve for deferred Federal taxes on installment “The Company and its subsidiaries have made full rates and other tax contingencies” (W. T. Grant Co.) provision as of July 31, 1949, for all known liabilities Fourteen companies (123, 188, 220, 241, 257, in respect of U. S. and local foreign taxes. In addi­ 294, 299, 328, 406, 432, 452, 458, 477, 478) tion, there is included in Reserve for Contingencies presented footnote comments regarding the tax (Consolidated) a reserve for theoretical tax liability which would have been incurred by the Company reserves, the majority of which represent pro­ had it received in dividends during the year the dis­ visions for possible additional assessments on tributable earned surplus of all subsidiaries. Such unaudited returns or proposed deficiencies under reserve has been provided from, and is adjusted protest. The following footnote is typical: annually through Earned Surplus (Consolidated). “This reserve has been provided for additional As of July 31, 1949, this reserve for theoretical tax taxes and interest in respect of deficiencies for the liability amounted to $3,926,542.65 as compared with years 1943 to 1945, inclusive (including carry-back of $3,946,171.82 as of July 31, 1948, a decrease of $19,­ 1947 operating loss), asserted by the Bureau of In­ 629.17 during the current year. However, no such ternal Revenue as indicated in a Revenue Agent’s tax liability has been incurred; it may never be in­ report for those years. Such report disallowed, in curred, depending on the needs of the particular full, claims for refund filed by the Corporation for subsidiary; and the amount, if ever incurred, is pres­ relief under Sections 721 and 722 of the Internal ently indeterminable, being dependent upon income Reserves Shown below Current Liabilities 67 tax rates in effect at the actual time of transfer." 1949 due to the elimination of foreign subsidiaries (Anderson, Clayton & Co., Inc.) from the consolidated statements. “No provision has been made for income taxes Only one new reserve item appeared in 1949 which may be payable on distribution of profits of in this category, that of Chicago and Southern certain wholly owned subsidiary companies operating Air Lines, Inc., established by a charge to income in foreign countries whose profits are included in the entitled “reserve provision for foreign opera­ consolidated statements of income and surplus.” tions.” The Coca-Cola Company and The (Standard Oil Co. of California) Firestone Tire Rubber Company reclassified Reserve for warranties portions of their contingency reserves as re­ serves for foreign operations. (See prior section Curtiss-Wright Corp. and Wright Aeronautical on contingency reserves.) Corp. restored their reserves for warranties to retained income (earned surplus) during the year Employee benefit reserves 1949. Seventeen companies continued reserves for Notwithstanding the number of new pension product warranties on their 1949 balance sheets, plans under consideration, only two new pension all shown following current liabilities except that reserves were noted on the 1949 statements. of American Asphalt Roof Corp. which carried McGraw-Hill Publishing Company transferred “income reserved to repair or replace products $1,200,000 of its earned surplus to its reserve sold under a guarantee” in the net equity section. section immediately following deferred liabilities, (18, 68, 72, 95, 105, 174, 278, 280, 294, 322, 350, to continue payments to employees pensioned 374, 382, 428, 446, 451, 464). prior to the end of 1949 and to cover the unpaid Of the seventeen reserves, four remained un­ past-service liability under its funded pension changed from their round-amount December plan. Although details of Copperweld Steel Com­ 31, 1948, balance, indicating that these reserves pany’s new pension plans were not completed might possibly be considered surplus appropria­ at December 31, 1949, the plans were effective tions with current expenses being charged against as of October 1, 1949, and the company estab­ operations (278, 322, 382, 464). The remaining lished a reserve by charging income with the thirteen reserves showed evidence of activity. estimated cost of the plans for the last quarter of The A. O. Smith Corp. furnished an analysis of 1949. all changes in reserves for the year in its notes The Coca-Cola Co., The American Agricul­ to the financial statements. tural Chemical Co., and Lone Star Cement Treatment of liabilities for product warranties reclassified their reserves for contingencies in was divided on the 1949 reports between non- order to show the specific purposes for which current reserves, as herein described, and the reserves were provided. In 1949, The Coca- current liabilities. Of the eleven automobile and Cola Company showed “reserve for employees’ truck manufacturers included in the 525 tabu­ retirement plan,” The American Agricultural lated reports, four companies carried the item Chemical Co. carried “reserve for retirement as a current liability (224, 353, 377, 517), while payments” and Lone Star Cement Corp. pre­ Diamond T. Motor Car Co. showed it as a sented “reserves for severance compensation— non-current reserve. A similar tabulation of South American subsidiaries.” These reserves fourteen automobile parts manufacturers dis­ appeared as non-current items above the net closed four companies with non-current reserves worth section. (95, 350, 446, 464) and Bendix Aviation Corp. R. J. Reynolds Tobacco Co. transferred its showing a current liability. reserve for retirement and group insurance to earnings retained. Foreign operations Miscellaneous reserves Six reserves covering phases of foreign opera­ tions were eliminated by charges in connection Some illustrative titles of reserves classified as with devaluation of Canadian and British cur­ miscellaneous follow: rencies. (37, 151, 193, 323, 382, 431) “Research and development” (A. O. Smith Corp.; The reserves for “taxes on undistributed in­ National Cylinder Gas Co.) come of foreign subsidiaries” and “loss from de­ “Unemployment taxes” (Kingan & Co.) valuation of foreign currencies” previously car­ “Special” (Liggett & Meyers Tobacco Co.) ried by Johnson & Johnson were not shown in “Redemption of Trading Stamps” (City Stores Co.) 68 Section 2—Balance Sheet “Unrealized profit in customers’ balances on inventory losses.’’ Allis-Chalmers Manufacturing layaway merchandise sales” (Diana Stores Corp.) Company used the following retained income “Probable future expenditures or losses (Reserves— (earned surplus) terminology: including inventory contingencies at December 31, 1949, and 1948, $14,699,179; 1947, $12,009,179)” “Appropriated for inventory and other contin­ (Westinghouse Electric Corp.) gencies (no change during year—formerly included in “Doubtful accounts and general contingencies” Reserves).” (Art Metal Construction Co.) For the names of the remaining companies “Workmens’ Compensation Awards” (Eastern changing their reserve to the net worth section Malleable Iron Co.) refer to the following numbers in the Appendix: “Operating reserves” (71, 83, 105, 151, 154, 155, 78, 151, 206, 221, 240, 269, 292, 295, 347,469, 489. 206, 362, 419) Among the companies retaining a “reserve for possible future decline in inventory values” During 1949 the Pepsi-Cola Company ap­ above the net equity section was the Buffalo Bolt propriated $1,525,000 of its earned surplus as a Company, which provided the following de­ “reserve for excess of equity in net assets of a scription in the president’s report: Cuban subsidiary over estimated net proceeds “The appropriated net income of $300,000 and from sale, in 1950, of investment in such sub­ $360,000 in the respective years 1947 and 1948 was sidiary.” part of a reserve standing at $800,000 as of December 31, 1949, for possible future decline in inventory values. In future years this reserve will be reversed and shown as an addition to net income in amounts Inventory reserves—where shown reasonably reflecting the loss in inventory value due to deflationary influences.” In addition to the four companies previously Although the majority of companies continued showing reserves for replacement of basic Lifo to show their inventory reserves (mainly re­ inventories, E. J. Brach & Sons treated the serves for future inventory price declines) below portion of its reserve which represented esti­ the current liability section of the balance sheet mated replacements during 1950 as a current in their 1949 reports, thirteen companies changed liability instead of showing it as a non-current the location to the net equity section, clearly item as in prior years. earmarking the reserves as appropriations of A semi-current treatment was found in the retained income (earned surplus). reports of Libby, McNeill & Libby, Oscar Mayer 1949 1948 1947 & Co., Inc., and Wilson & Co., Inc. These state­ 390 368 360 None shown ments showed a short-extended sub-total of 61 99 114 Shown on liability side of the “total current liabilities” to which was added balance sheet above net equity section (22, 39, 47, 170, 173, 274, the Lifo replacement reserves and the combined 276, 370, 414, 420, 498) total extended as “total current liabilities and 45 44 34 Deducted from assets—purpose inventory replacement reserve.” indicated (see analysis which Titles of the reserves deducted from inventories follows) on the asset side of the balance sheet included: 12 12 19 Deduced from assets—purpose 16 Obsolescence (64, 71, 90, 107, 151, 189, 194, 268, not indicated (4, 29, 74, 346, 364) 339, 341, 363, 372, 398, 476, 514, 520) 23 15 9 Shown in net worth section (14, 8 To reduce to Lifo or normal stock basis (61, 156, 78, 139, 154, 206, 240, 269, 272, 158, 223, 258, 397, 399, 442) 295, 354, 469) 6 Inventory price decline (26, 203, 305, 337, 464, 6 4 4 Shown in current liabilities (all 515) relating to replacement of basic 4 Unrealized inter-company profit (222, 286, 362, Lifo inventories) (54, 58, 96, 363, 497) 473, 518) 2 Unrealized losses on market valuations (113, (Numbers in parentheses refer to companies listed 171) in Appendix.) 2 Amortization of released production (314, 384) In changing the balance sheet location of the 1 To reduce inventories to lower of cost or market reserve to the net worth section, American Op­ (326) tical Co. also changed its title from “general 2 For possible loss on liquidation (369, 500) inventory reserve” to “appropriation for possible 1 Inventory contingencies (109) Inventory Reserves— Classification 69 1 Valuation reserve for containers and supplies 17 18 10 Obsolescence (71, 90, 107, 151, (141) 194, 363, 520) 1 Increased cost to replace opening inventories 12 12 19 No indication of purpose of re­ (11) serve deducted on the asset side 1 Estimated expenses of shipment from Cuba (4, 29, 230, 333, 506) _ (164) 11 12 13 Replacement of inventories 45 (mainly Lifo) (11, 58, 96, 307, (Numbers in parentheses refer to companies listed 349) 7 7 6 To reduce inventories to Lifo in Appendix.) basis (61, 158, 258, 399, 442) In addition to the obsolescence reserves in­ 4 5 5 Normal stock method (97, 197, cluded above, J. I. Case Co. and Deere & Com­ 360, 420) pany carried obsolescence reserves on the li­ 3 2 1 For unrealized losses based on ability side above the net equity section, the market valuations (113, 171, 326) former company combining the reserve with a 2 1 1 Amortization of released produc­ price decline reserve created by a charge to re­ tion (314, 384) 1 Valuation reserve for containers tained income (earned surplus) in 1949 and stat­ and supplies (141) ing on its balance sheet that the reserve had pre­ 1 1 1 To reduce inventories from cost viously been deducted from inventories. to lower of cost or market (514) Ingersoll-Rand Company retained its obsoles­ 1 1 1 Surplus reserve based on inven­ cence reserve as a deduction from inventory but tory overhead (505) transferred a portion of the reserve to a position 4 5 4 Unrealized inter-company profits below current liabilities with the following (and discount) (222, 286, 362, parenthetical reference: 497) 1 1 1 Estimated expense of shipping “This reserve was included in the $4,500,000 from Cuba (164) inventory reserve shown in 1948 as a deduction from 1 1 1 Metal stock reserve—used to inventories.” absorb price fluctuations occur­ ring during processing period (39) 1 1 Loss indicated on completed pro­ duction not released Inventory reserves—-classification (Numbers in parentheses refer to companies listed in Appendix.) The majority of inventory reserves appearing The following list illustrates the variety of on the 1949 reports continued to represent pro­ titles used which were considered to represent visions against future inventory price declines, provisions for future inventory price declines: and, although a few changes in position were Deducted from assets noted, they were usually shown above the net “Inventory contingencies” (Burlington Mills Corp.) equity section of the balance sheet. “Possible losses on revaluation” (Federal Machine Since there was generally little information & Welder Co.) relative to the purpose of the reserves, other than might be inferred from the title used, Shown between current liabilities separate tabulations were made of those reserves and net equity section specifically mentioning inventory price decline “Inventory price adjustment” (Universal-Cyclops and those whose title implied this purpose. Steel Co.) 1949 1948 1947 “Inventories” (Bigelow-Sanford Carpet Co., Inc.) 390 368 360 No reserves shown “Inventory losses” (Curtis Publishing Co.) 47 51 50 Reserves with varying titles not “General inventory reserve” (National Lead Co.) providing specifically for future “Inventory and other contingencies” (Yale & inventory price declines, but, in Towne Mfg. Co.) most cases, probably intended “Possible loss in liquidation” (National Steel Co.) for that purpose (26, 34, 109, 120, 193, 272, 274, 276, 354) “Shrinkage and Markdowns” (City Stores Co.) 43 57 69 Reserves providing specifically “Unusual market conditions” (Ely & Walker Dry for possible future inventory Goods Co.) price decline (12, 28, 94, 180, 206, “Surplus reserve based on inventory overhead 238, 269, 295, 347, 464) increase” (Wagner Electric Corp.) Exhibit 11: Eastman Kodak Company

EASTMAN KODAK COMPANY AND SUBSIDIARY COMPANIES IN THE UNITED STATES STATEMENT OF FINANCIAL CONDITION—DECEMBER 25, 1949

NET ASSETS IN WHICH CAPITAL AND RETAINED EARNINGS WERE INVESTED SOURCES FROM WHICH NET ASSETS WERE OBTAINED

DECEMBER 2 5 , DECEMBER 2.6, DECEMBER 2 5 , DECEMBER 2 6 , Current Assets: 1949 I948* Capital: 1949 I948* C ash...... $ 22,594,027 $ 25,004,652 Six Per Cent Cumulative Preferred Stock: United States Government securities, Authorized 100,000 shares, $100 par value at cost (Market value: $42 ,7 2 2 ,9 9 8 )...... 42,698,170 42,565,448 Issued 61,657 shares...... $ 6,165,700 $ 6,165,700 Receivables (less reserves for doubtful accounts: $1,173,583) 37,511,344 43,084,401 Common Stock: Authorized 20,000,000 shares, $10 par value Inventories of raw materials, work in process, finished goods Issued 13,060,214 shares and supplies, at cost or market, whichever is lower...... 85,776,011 94,661,526 Less: In treasury 61,145 shares Prepaid insurance, taxes and other charges applicable to future 2,166,942 2,295,672 Outstanding 12,999,069 shares. 129,990,690 operations...... To be issued January 21, 1950 649,811 shares Total current assets. $190,746,494 $207,611,699 13,648,880 shares . 136,488,800 Less—Current Liabilities: Total capital stock ...... $142,654,500 $136,156,390 Retained earnings transferred to capital...... 38,064,450 18,570,120 Payables...... $ 37,268,797 $ 38,258,120 Total capital...... $180,718,950 $154,726,510 Provision for federal, state and other taxes (less $25,000,000 U. S. Treasury N o te s)...... 17,336,632 46,952,364 Retained Earnings Used in the Business: Cash dividends payable to stockholders January 3, 1950. 6,590,549 6,282,518 Reserved for general contingencies...... $ 12,670,987 Reserved for intercompany profit in inventories of subsidiary Total current liabilities...... $ 61,195,978 $ 91,493,002 companies and branches not consolidated...... 4,400,000 Reserved for workmen’s compensation and other insurance . . . 1,878,653 Working capital $129,550,516 $116,118,697 Retained and used for general business purposes...... 137,781,880 131,396,719 Total earnings retained and used in the business...... $137,781,880 $150,346,359 Properties: Total capital and retained earnings invested in Buildings, machinery, and equipment, at cost. . . $323,113,310 $300,495,756 the business...... $318,500,830 $305,072,869 Less: Reserves for depreciation and amortization. 148,764,140 138,251,671 *Adjusted to include only the accounts of the Eastman Kodak Company and subsidiary companies operating in the United States. N et balance of depreciable assets...... $174,349,170 $162,244,085 AUDITORS' REPORT 5,758,676 5,228,834 To the Stockholders of Eastman Kodak Company: Land, at c o st...... In our opinion, the accompanying statement of financial condition and related statement of earnings, to­ $180,107,846 $167,472,919 gether with the supplementary financial information, fairly present the position of Eastman Kodak Company and its Net properties...... consolidated subsidiaries at December 25, 1949, and the results of their operations for the year then ended, in con­ formity with generally accepted accounting principles. These principles were applied on a basis consistent with Other Assets: that of the preceding year except that the accounts of wholly owned subsidiary companies and branches operating Investments in and advances to subsidiary companies and in Canada, Mexico, Cuba, Panama, and South America, heretofore included in the consolidated financial state­ branches not consolidated...... $ 7,132,261 $ 19,952,389 ments, have been eliminated from the 1949 consolidated financial statements, which change has our approval. The 1,710,207 1,528,864 foregoing change has been reflected in the accompanying 1948 financial statements for purposes of comparison. Sundry investments and deposits...... As auditors elected at the annual meeting of stockholders held on April 26, 1949, our examination of the Total other assets...... $ 8,842,468 $ 21,481,253 consolidated financial statements was made in accordance with generally accepted auditing standards and accord­ ingly included such tests of the accounting records and such other auditing procedures as we considered neces­ Total net assets...... $318,500,830 $305,072,869 sary in the circumstances. New York, N. Y., March 7, 1950 P rice, W aterhouse & Co. 72 Section 2—Balance Sheet “Fluctuation in prices of metals and other con­ Northrup Aircraft, Inc., presented the follow­ tingencies” (International Silver Co.) ing footnote covering a possible future loss on the “Metal price fluctuations” (U. S. Smelting, Re­ uncompleted portion of a government contract: fining & Mining Co.) “Provision has been made in the balance sheet and “Inventory contingencies” (Westinghouse Electric the profit and loss statement for loss of $4,400,000.00 Corp.) anticipated in the performance of a contract with the “Contingencies (with description in footnotes or U. S. Government on which approximately $8,- president’s report earmarking the reserve for inventory 000,000.00 has been expended to July 31, 1949. price decline)” (American Wringer Co., Inc.) The amount of the provision is necessarily based on estimates of future events and it is possible that an Shown as retained income additional provision of substantial amount may be (earned surplus) appropriations required in the ensuing fiscal year, in which year “Inventories” (National Biscuit Co.) completion of the contract is expected. The amount “Inventory losses” (American Optical Co.) of refund of federal income taxes which may result “Inventory adjustment reserve” (General Cigar from carrying back a portion of this loss is uncertain Co.) and no provision is made therefor.” “Contingencies” (International Harvester Co.) “Adjustments in materials and supplies” (United Fruit Co.) “Possible inventory adjustments and other con­ Contingency and possible future tingencies” (Industrial Brownhoist Corp.) inventory price decline reserves— “Future inventory losses and necessary price how created or increased adjustments” (Quaker Oats Co.) “Appropriated for contingencies on account of unusual market conditions and other contingencies” Following prior years’ practice, these two (Rice-Stix, Inc.) types of reserves are tabulated together since in many cases they are combined into one account 1949 changes (such as “reserve for inventory price decline and Twenty-nine companies eliminated reserves other contingencies”) or the statements indicate for inventory price declines from their 1949 that possible decline in inventory values is the reports, twenty-eight by credits to retained chief contingency covered by the reserve. income (earned surplus), and one without dis­ The 1949 reports disclosed only half the num­ closure of the account credited (1, 40, 45, 93, ber of charges increasing this type of reserves as 95, 123, 155, 162, 229, 358). No new reserves for were shown in a similar tabulation for 1948. future inventory price declines were noted in 1949 1948 1947 1946 1949. 4 9 27 52 Charge against income Boeing Airplane Company provided a reserve prior to the determination for obsolescence against its inventory of parts of “net income for the and materials, and United Stove Company year” (11,167, 362, 396) charged income with an “allowance for possible 28 53 36 Charge after the deter­ mination of net income but loss on excess quantities.” prior to the determination Suspension of the manufacture of certain of a net balance carried to products caused The Federal Machine & Welder retained income (earned Company to carry a portion of its inventory as a surplus) (164, 226, 370, non-current asset from which was deducted a 391) “reserve for possible inventory losses.” In or 1 5 Charge made at the end of addition, a “reserve for loss on unbooked claims” the income account but was carried following current liabilities as ex­ with wording of items or plained by the following footnote: sub-totals either omitted or so vague that it was not “Due to the suspending of manufacture of tractors clear whether the provi­ the Company has inventory and work in process in sion was considered to be a creditors’ plants which, on the basis of claims filed, charge before net income approximates $1,200,000. As a reserve for possible or an appropriation after loss through final cancellation and disposition of this net income was deter­ inventory the sum of $400,000.00 has been provided.” mined (238) Contingency and Possible Future Inventory Price Decline Reserves—How Created or Increased 73 9 26 15 11 Charge made to retained stated that all inventory price losses that took income (earned surplus) (115, 131, 170, 319, 333) place during the year were charged to direct 7 9 4 15 Charge made to other re­ operations, leaving its contingency reserve intact; serve or liability account The Coca-Cola Company eliminated its con­ (22, 246, 475, 492) tingency reserve by division into specific-purpose 24 23 26 14 Increase in contingency or reserves; Marshall Field & Company did not inventory reserve appar­ increase its reserve but took into 1949 income ent but no indication of $900,000 representing the decrease in its reserve retained income (earned surplus) charge or appro­ for possible future decline in market value of priation of net income (12, inventories. 129, 144, 274, 354, 428, Thus, while the charges against income de­ 516) creased in 1949, it is apparent that the decrease 1 3 ...... Charge made in statement was due to varying circumstances and, that had of disposition of net in­ the need for increased reserves been deemed come (240) necessary, there might have been a number of 1 ...... Exploration costs capital­ ized with corresponding additional provisions from current earnings. credit to contingency re­ In the four instances noted in 1949 where serve reserves were increased by a charge in the in­ 2 ...... Charge made in combined come statement prior to determination of net in­ income and retained in­ come for the year, all resulted in increases in come (earned surplus) contingency reserves except the charge made by (117, 505) The Curtis Publishing Co. for its reserve for 1 ...... By consolidating a sub­ sidiary with reserve (404) inventory losses. None of the auditors took 53 104 125 128 exception in the opinion to the charge. (Numbers in parentheses refer to companies listed in Con­ Appendix.) tingency Net Company Provision Income National Steel Company disclosed charges Allied Chemical & Dye against income as a provision for contingencies Corporation $1,500,000 $37,150,977 for the first time in 1949. Of the six companies National Steel Corp. 2,000,000 39,311,269 which discontinued or did not disclose such Phillips Petroleum Company 740,238 44,514,371 charges to income in 1949, two indicated by in­ Inventory come statement footnote (Texas Gulf Sulphur Provision Company) and by comment in the president’s re­ Curtis Publishing Co. $ 270,000 $ 5,185,943 port (Lone Star Cement Corporation) that pro­ An amount “accrued for contingencies” by visions against 1949 income were not deemed Camden Forge Company appeared in the state­ necessary; American Wringer Company, Inc. ment of profit and loss and earned surplus prior “Note 5—Reserve for Contingencies “Changes in the reserve for contingencies during 1949 are summarized as follows: Balance, December 31, 1948 $10,475,066 Additions: Provisions for contingencies charged to 1949 Income Account in the amount of $740,238 and provision of $76,759 charged to other accounts $ 816,997 Transferred from Accounts Payable 500,000 1,316,997 $11,792,063 “Deductions: Payments for which the reserve was established $ 515,222 Loss from investments in Colombia 831,177 Prior year’s accruals—not now required—credited to current year’s income 1,347,049 Provisions for war contingencies—transferred to surplus 1,500,000 4,193,448 “Balance, December 31, 1949 $7,598,615” (Phillips Petroleum Co.—footnote.) 74 Section 2—Balance Sheet to the determination of “net income transferred 6) 13 Credits appearing in the income statement after the to earned surplus,” yet no contingency reserve designation of net income appeared on the statement of financial condition, for the year resulting in a the provision apparently being carried in one of balance carried to surplus the liability accounts. (326, 436) Allied Chemical & Dye Corporation stated in a Credits made at the end of footnote that its provision was not included in the income statement but with wording of items or deductions for purpose of arriving at the amount subtotals either omitted or of federal income taxes for the year. so vague that it is not clear A charge against current year’s income was whether the credit is be­ only one method used by Phillips Petroleum Com­ fore or after net income pany in increasing its contingency reserve. A Credits to other reserve balance-sheet footnote (see preceding page) dis­ accounts (17, 31, 101, 136, closed the reserve transactions. 205) Credits to income state­ The four companies increasing their contin­ ment described or shown gency reserves by appropriations of income after as offsetting specific ex­ the determination of net income for the year penses included therein were all continuing their previous practice. (223, 325, 397) (164, 226, 370, 391) 19 17 Decrease in contingency or The Ohio Match Company did not include an inventory reserve but no indication of where cred­ income statement in its annual report, but the ited (27, 39, 41, 53, 149, increase in earned surplus as shown on its balance 168, 200, 211, 265, 417, sheet was termed “net income for the year ending 514) December 31, 1949 (after deduction of $650,000.00 To “other accrued liabili­ covering appropriation to provide additional ties” reserve).” To current liability (for additional prior year taxes) (347) Cancellation of reserve by board of directors Contingency and possible future Adjustments made to opening surplus balance inventory price decline reserves— Credits to capital surplus how decreased (36, 497) 121 97 84 90 (Numbers in parentheses refer to companies listed Credits to retained income (earned surplus) in Appendix.) continued to account for the majority of de­ creases in contingency and inventory price decline Contingency reserves—decreases reserves, with thirty companies completely elimi­ As detailed in the preceding section entitled nating contingency reserves from their 1949 state­ “Contingency Reserves,” thirty companies elimi­ ments. (See preceding section on Reserves.) nated contingency reserves from their 1949 1949 1948 1947 1946 statements by credits to retained income (earned 69 41 32 20 Credits to retained income surplus). (earned surplus) (36, 95, American Republics Corp. (also restored a por­ 100, 165, 234, 376, 469, tion to earned surplus) and United States Rubber 479, 511) Company restored reserves to capital surplus by 13 16 20 30 Credits to cash, inventory, or other asset or liability reason of prior year’s corporate reorganizations, accounts with direct with United States Rubber Company presenting charges to reserves (151, the following footnote explanation: 205, 246, 380, 396, 475) 7 2 5 5 Credits in the income “The Company provided reserves during the years statement appearing be­ 1930 to 1937, as well as corporate and financial adjust­ fore the determination of ments as of June 30, 1938, for various contingencies in­ net income for the year cluding losses on obsolete inventories and on disposal (270, 286, 442) of machinery upon closing of obsolete plants. The Contingency and Possible Future Inventory Price Decline Reserves How Decreased 75 balance of these reserves, $1,583,091, being no longer The Firestone Tire & Rubber Company— required and having been provided prior to July 1, To “reserve for foreign investments” 1938, has been credited to capital surplus.” The following list illustrates the types of trans­ American Woolen Company, Inc., transferred actions charged direct to “contingency” or an amount equal to the inventory loss for the “general” reserves: year from its contingency reserve to unappro­ priated earned surplus. “Replacement of inventories involuntarily liqui­ Five companies reduced contingency reserves dated in prior years” (Gulf Oil Corp.) by credits to 1949 income, four of the five stating “Federal income and excess profits taxes and in­ that the contingencies for which the reserves terest thereon” (Paramount Pictures, Inc., Cuban- had been provided no longer existed. American Sugar Co.) Income Net “Adjustments due to devaluation of foreign cur­ Company Credit Income rencies” (United States Rubber Co., Firestone Tire & Cleveland Builders Supply Rubber Co., International Nickel Co. of Canada, Ltd.) Company $ 54,845 $ 423,573 “Exploration costs” (Texas Gulf Sulphur Co., Interchemical Corporation 150,000 2,335,572 Standard Oil Co. of California) Hayes Manufacturing Corp. 28,888 1,111,706 “Accounts receivable written off as uncollectible” Phillips Petroleum Company 1,347,049 44,514,371 (Texas Gulf Sulphur Co.) Geo. E. Keith Company 155,000 10,144 Two companies eliminated their contingency No explanation was given for the reduction in reserves by a credit on the income statement the reserve of Geo. E. Keith Company, which pro­ after the determination of net income for the vided for “inventory losses, extraordinary items year. These companies were the Glenn L. Martin and machinery return charges.” A separate Company and The Scranton Lace Company. (See reserve “for inventory” remained unchanged tables at bottom of page.) from December 31, 1948. The Electric Storage Battery Company re­ Five instances were noted of reductions in or stored a portion of a contingency reserve to earned eliminations of contingency reserves by transfer surplus, adding it to net income before the open­ to other reserve or liability accounts: ing earned surplus balance on its combined state­ The American Agricultural Chemical Company— ment of income and earned surplus. The follow­ To “reserve for retirement payments” ing explanation is given in the president’s report: American Maize Products Company— “. . . Declines in the market price of lead caused us To “estimated liability for federal income taxes to sustain losses resulting from selling lead contained and related contingencies” (current liability) in finished batteries at prices which were less than Brockway Motor Company, Inc.— cost. Also it was necessary, at the close of the year, To “allowance for doubtful notes and accounts” to make a moderate write-down in the value of lead in The Coco-Cola Company— inventories to the basis of cost or market, whichever To “reserve for unremitted foreign profits” and the lower. The combination of these realized lead “reserve for employees retirement plan” losses and year-end revaluations had the effect of re-

The Glenn L. Martin Company “Net Income For The Year Before Special Adjustments...... $5,131,500 ‘‘ Special Adjustments: Charge—Excess of renegotiation refund applicable to the year 1945 over reserve provided therefor...... $2,809,339 Credits: Reversal of reserve for contingencies no longer required...... $275,212 Federal and State income tax adjustments applicable to prior years—net (Federal $194,884; State $42,140)...... 237,024 512,236 Remainder—special adjustments—net...... 2,297,103 “Balance Transferred to Earned Surplus...... $2,834,397” The Scranton Lace Company “Net Earnings for Year...... $315,152 Transfer from Reserve for Contingencies 60,000 Balance...... $375,152” 76 Section 2—Balance Sheet ducing net income for the year by $2,400,000—the Of the twenty-nine reserves for possible future equivalent of $2.64 per share. As previously stated, inventory price declines restored to retained in­ reserves were set aside from earnings of prior years to come (earned surplus) in 1949, twenty-seven had provide for this situation, which is met by transferring been shown on the balance sheet immediately fol­ $2,400,000 from reserves for contingencies to surplus. lowing the current liabilities section. That of The combined additions to surplus from earnings and Timken Roller Bearing Co. had previously been all reserves amount to $4,415,517.74 for the year 1949, shown on the balance sheet as an “allowance for or $4.86 per share.” (Electric Storage Battery Co.) adjustments and obsolescence” and deducted Doehler-Jarvis Corporation restored a portion from the inventory account. That of the Cham­ of its contingency reserve to surplus in their pion Paper and Fibre Company had been re­ statement of operations and earned surplus by ported in the net worth section as “appropriated adding it after the determination of net income for possible losses from revaluation of inven­ but before the opening earned surplus balance. tories.” In a footnote to the company’s “Brief Summary Four companies partially reduced their inven­ of Operations” the amount was indicated to be tory price decline reserves by credits to retained equal to “.. .losses from metal price declines and income (earned surplus), with Continental Steel abnormal costs of rearranging production facili­ Corp. stating that the reduction was equivalent ties amounting to approximately $2,550,000, less to the 1949 income adjustments to bring inven­ applicable reduction of Federal taxes on income tories in line with current market prices less re­ of $1,000,000...” lated reduction in federal income tax. (28, 32, 73, 154) Reserves for possible future inventory Sunshine Biscuits, Inc., transferred the “ap­ price declines—decreases propriation for inventory decline” to the net equity section of its balance sheet and reflected a Twenty-nine companies restored inventory reduction in the appropriated amount in the price decline reserves to retained income (earned closing balance. surplus) in 1949 (1, 40, 45, 67, 93, 95, 100, 105, Five companies showed reduction in inventory 123, 132, 137, 155, 157, 162, 165, 229, 251, 264, price decline reserves as credits to 1949 income, 297, 317, 341, 358, 374, 376, 428,479, 500, 510, 511). all resulting from declines in commodity price In commenting on the transfers, The Autocar levels. Co. and Copperweld Steel Co. stated that the Income Net anticipated inventory losses were charged against Company Credit Income 1949 income. Borg-Warner Corp., Otis Eleva­ Stewart-Warner Corp. $ 250,000 $ 2,163,106 tor Co. and Wesson Oil & Snowdrift Co., Inc., (net of tax stated they no longer anticipated substantial effect) inventory losses, the last company making the The Sherwin-Williams Co. 1,852,000 7,645,411 following explanation in the president’s report: General Mills, Inc. 586,534 13,251,218 “It was not necessary to use any of the reserve for Pillsbury Mills, Inc. 125,000 1,524,915 possible future inventory losses provided out of 1948 Marshall Field & Com­ earnings. Since we are now probably close to a normal pany 900,000 8,657,779 price level for vegetable oils we are transferring this $7,200,000 reserve to earned surplus. Our ‘lifo’ oil The first four of the above reserves were car­ inventory at August 31, 1949, is priced below current ried as valuation reserves deducted from the re­ market value.” lated assets on the balance sheet, the first two reducing certain inventories to a Lifo basis. An opposite view was taken by the president General Mills, Inc., and Pillsbury Mills, Inc., re­ of Raybestos-Manhattan, Inc.: duced their reserves as an offset to inventory “No changes occurred in these two reserves (con­ losses sustained because of price level declines as tingencies and possible decline in inventory values) they applied to base or normal quantities of during 1948 and 1949 and they amounted to $4,579,502 certain non-hedged items. at December 31, 1949. Marshall Field & Company explained its re­ “Due to the economic conditions which exist and serve reduction (carried below its current liabili­ the instability of price levels, it has been deemed ad­ ties) by the following comment in its share­ visable to continue these reserves which were provided in prior years. Any unused portion of these reserves holder’s report: can be credited to the Surplus account.” “Because prices declined in 1949, we reduced our re­ Use of Term “Reserve” 77 serve against decline in market value of inventories by 1 Less estimated amounts which may not $900,000, crediting this amount to current earnings. be collectible This procedure reversed that followed in 1948, a year 182 131 during which prices advanced. We are following the policy of adjusting this reserve at each year-end, the (Numbers in parentheses refer to companies listed in amount of the adjustment depending on the magni­ Appendix.) tude of price changes during the year, and the size “Reserve" for depreciation of our inventories. Our inventory reserve at Decem­ ber 31, 1949, was $7,200,000, or 17.3% of total inven­ 1949 1948 78 63 Allowance for depreciation (and amorti­ tory and commitments.” zation) (67, 78, 226, 291, 354) 61 34 Accumulated depreciation (and amorti­ zation) (80, 128, 233, 263, 483) 54 52 Depreciation (140, 350, 359, 374) 11 5 Provision (59, 79, 296, 492) 6 5 Accrued depreciation (56, 256, 400, 501) Use of term “reserve” 5 1 Depreciation to date (45, 264, 342) 5 2 Portion allocated to operations to date as depreciation (77, 107, 281) 5 Stated at balance of original cost allo­ Over 50% of the 1949 reports tabulated used cable to future operations (118) other terminology for the word “reserve” in con­ 3 4 Estimated depreciation and depletion nection with either accounts receivable or de­ (133, 280) predation, as recommended in Accounting Re­ 3 2 Depreciation provided (355, 487) search Bulletin No. 34, “Use of Term ‘Reserve’ ” 3 2 Wear and exhaustion (Oct. 1948). In both instances the wording 2 1 Reduced by the estimated cost of wear “allowance for” was most widely used. and tear (depreciation) (18) Substitute terminology appeared most fre­ 236 171 quently in connection with depreciation, due to (Numbers in parentheses refer to companies listed in the practice of many companies of showing ac­ Appendix.) counts receivable as one net figure on the balance Caterpillar Tractor Co. showed one amount sheet without disclosure of any applicable reduc­ for accounts receivable “stated on basis of tions. realizable values,” and a separate amount for depreciable property entitled “Buildings, ma­ “ R e se rv e" for doubtful accounts chinery and equipment—balance of original cost 1949 1948 allocable to future operations.” The latter 109 70 Allowance for doubtful accounts (possi­ amount was supported by a separate schedule ble losses) (losses on collection) (78, 224, showing original cost, and the “portion of original 233, 244, 441) cost allocated to operations to date.” 31 25 Provision for doubtful accounts (bad debts) (uncollectibles) (possible losses) Johnson & Johnson adopted similar substitute (accounts which may prove uncollect­ terminology for depreciation reserve in its “less ible) (26, 106, 128, 337, 411) portion of cost charged to operations of current 16 13 Estimated uncollectible accounts and prior years.” (amounts) (98, 209, 399, 462) The United States Finishing Company and 11 8 Estimated doubtful accounts (balances) City Products Corporation reverted to “reserve (301, 461, 525) for doubtful notes and accounts” and “reserve 7 8 Estimated losses on/in collection (371, for claims and allowances,” respectively, after 397, 421) using substitute terminology in 1948 reports. 3 1 Deduction for estimated doubtful re­ ceivables (89, 109, 140) Surplus “reserves" 2 1 Net of allowances (226) 1 1 Accounts receivable, considered collect­ Fourteen companies changed the titles of their ible surplus reserves in connection with a change in 1 1 Estimated bad debts (499) position from beneath current liabilities to in­ 1 Stated on basis of realizable values (118) clusion in the net equity section. (14, 34, 78, 1 Less amount not recoverable—estimated 131, 151, 206, 269, 292, 293, 327, 412, 469, 488, • • • 1 Less estimated claims and allowances 489) 78 Section 2—Balance Sheet General Cigar Co., Inc., adopted the term subheadings used in the net equity section. These “appropriated” when it changed its reserves to subheadings differed from the center captions in the net worth section but continued to include in that they were smaller and appeared at the left the appropriation the insurance “reserve.” margin rather than being centered over the net Endicott Johnson Corporation changed from equity section. “reserved for” to “appropriated for” in connec­ Sub-Heading(s) of tion with its surplus reserves. Equity Section (1) (2) (3) (4) (5) Total Koppers Company, Inc., and Borg-Warner Capital Stock and Sur­ Corporation continued to show their surplus re­ plus 4 1 82 10 25 122 serves above the net equity section but adopted Same as above with “provisions” in place of “reserves” in the titles. additional indented The majority of companies showing reserves as sub-headings cover­ non-current items above the net worth sections ing: continued the use of the word “reserve” in the Capital Stock 1 23 3 3 30 titles. (Also, see section on Surplus Appropria­ Surplus • . . 24 4 6 34 tions.) Both . . . 21 1 7 29 Capital Stock; Sur­ plus (two separate captions) 2 10 26 5 5 48 Stockholders’ (Share­ “Net equity” terminology holders’, Investors’) Equity (Interest) 3 27 9 1 40 Stockholders’ Invest­ While there was not as much variation in the ment (Ownership) 4 16 7 27 titles used for the net equity sections on the bal­ No sub-headings 1 20 13 9 2 45 ance sheets of the 525 companies as there was in Sub-heading for “Cap­ ital Stock”; surplus the retained income (earned surplus) titles, the items (one or more) tabulation disclosed that headings using the words not covered by sub­ “capital stock’’ and “surplus’’ were the most popu­ heading 13 23 9 1 46 lar on balance sheets using the conventional form Capital and Surplus . . . 12 12 where assets equal liabilities plus net worth. Capital 6 5 2 13 In reviewing current practice in the use of center Net Worth 1 3 4 captions on the “liability” side of the balance Capital Shares and sheet, it was found that the majority of companies Surplus 2 2 used “liabilities” centered at the top of the credit Miscellaneous • • • 6 10 1 9 26 side of the balance sheet with no corresponding 15 50 286 63 64 478 center caption over the net equity section. Use Included in the captions listed as “miscellane­ of such center captions was classified as follows: ous” in the above tabulation are: (1) No center captions on the “liability” side of the balance sheet (15). Investment of Stockholders Represented by (2) Center caption “Liabilities” with an Capital Contributed additional heading “Capital” centered over the Paid-in Capital net equity section (50). Equity of Common Stockholders (3) Center caption “Liabilities” without any Capital Invested additional heading centered over the net equity Capital Stock section (286). Shareholders’ Ownership (4) Center caption “Liabilities and Capital” Capitalization (including variations of the word “capital”) with Listed below are the various titles used for the no net equity center caption (63). net equity sections by the forty-two companies (5) Center caption “Liabilities, Capital Stock presenting balance sheets where current assets and Surplus” with no net equity center cap­ minus current liabilities, plus other assets, minus tion (64). other liabilities equal net equity: While the above breakdown refers to center cap­ 6 Represented by tions on the credit side of the conventional form 6 Stockholders' (Investors) Equity of balance sheet, a further study was made of the 1 Stockholders’ Equity Represented by Minority Interests in Consolidated Subsidiaries— Where Shown 79 2 Shareholders’ Ownership Represented by A brief description of the presentations em­ 1 Above Stockholders’ Investment Repre­ ployed by the five companies which included the sented by minority interests in consolidated subsidiaries in i Stockholders’ Interest their net equity sections follows: 1 Stockholders’ Interest Represented by 2 Ownership Evidenced by (1) American Wringer Company, In c. 2 Ownership Minority interest in capital stock and in sur­ 1 Ownership Equities plus shown separately and added to the com­ 4 Sources From Which (Stockholders) Capital pany’s capital stock and surplus respectively. Was Obtained The total surplus of $3,913,305.52 carried a refer­ 2 Source of Net Assets ence to Note A which read as follows: 4 Sources From Which (The Above) Net “Note A: The amount of $2,461,359.83 included in Assets Were Obtained (derived) surplus of $3,913,305.52 is restricted from dividend 1 Capital Stock Outstanding; Surplus payment in accordance with Trust Indenture dated 2 Excess of Assets Over Liabilities May 1, 1946.” 1 Net Worth No amounts applicable to minority interests 1 Capital and Accumulated Earnings Re­ were shown separately in the income statement. tained for Use in the Business This treatment was consistent with that of the 1 Derived From preceding year. (2) American Metal Company, L td . 1 Investment: “Minority interests in subsidiaries” was shown Represented by as the first item in their “capital” section im­ 1 Funds Entrusted to the Management by the mediately above the company’s capital stock. Stockholders The minority interest in income for the current 1 Total Common Stockholders’ Interest: year was not disclosed as had been the practice in Consisting of previous years. A footnote stated that 1948 42 figures were restated to conform to classifications American Maize-Products Company, Armour adopted for 1949. and Company and General Aniline & Film Cor­ (3) Crown Zellerbach Corporation poration included bonds or long-term notes in Minority interests in subsidiaries were shown their equity sections. as the first item in the “capital” section: American Asphalt Roof Corporation and Briggs “M inority Interests: Manufacturing Company, which are not included “Capital stocks of subsidiaries in the hands of the in the above tabulations, presented balance sheets public and proportionate interest in surplus, showing “stockholders’ investment” first, fol­ principally Pacific Mills, Limited.” lowed with “used in the business as follows” by In the consolidated income statement, “mi­ American Asphalt Roof Company and “This nority stockholders’ equity in earnings, principally investment was used as follows” by Briggs Manu­ Pacific Mills, Limited” was deducted as the last facturing Company. item. This treatment was consistent with that of the preceding year. A surplus restriction applicable to the parent company’s surplus was Minority interests in consolidated also disclosed. (4) Standard Oil Company (Indiana) .subsidiaries—where shown “Minority stockholders of subsidiaries” was presented as the first item in the “stockholders’ ownership” section. In the income statement, Of the sixty-four companies in this year’s study as in the previous year, the last item shown was a showing on their balance sheets the minority deduction for “minority stockholders’ interest in interests in their consolidated subsidiaries, all net earnings of subsidiaries.” A surplus restric­ but five companies placed them immediately tion applicable to the parent company’s portion of above the net worth section. (For names of a the “earnings retained and invested in the busi­ few companies showing minority interests above ness” was reported. the net worth section refer to the following num­ (5) Armour and Company bers listed in Appendix: 9 , 10, 23, 68, 75, 80, 120, The “minority stockholders’ equity in subsidi­ 152, 165, 192, 271, 314, 323, 333, 358.) ary consolidated” was shown in the “investors’ 80 Section 2—Balance Sheet equities” in 1949 following the inclusion of ary 31, 1950, and 1949 is comprised of the liquidation Winslow Bros. & Smith Co. in the consolidation value of the prior preferred stock, $2,847,600, the stated value of the Class A and B stocks, $842,500, for the first time beginning November 1, 1948. and surplus as set forth in the accompanying state­ The “portion of net earnings of subsidiary com­ ment. The excess of the minimum liquidation value pany applicable to minority interest” was in­ of the Class A stock over the stated value thereof does cluded in “costs” in the consolidated earnings not constitute a restriction on earned surplus.” statement. (Godchaux Sugars, Inc.) “Capital Stock and Surplus: “Cumulative 4½% preferred stock, $100 par value; Capital stock convertible prior to 1957 at one share of common for each $23.70 par value of preferred; authorized 300,000 shares; outstanding 94,773 shares. “Management stock, $10 par value; convertible There have been only slight changes during the share for share into common stock after fifth January 1 past three years in the disclosures made on the following date of sale; in disposition, holders are re­ balance sheet in connection with capital stock quired to offer this stock to the company at book issues. In 1949, 335 companies showed the value; authorized 100,000 shares; issued 39,150 number of shares authorized and outstanding and shares, less 2,500 shares held in Treasury; outstanding the par or stated value for each class of stock; 36,650 shares. nine companies gave all information except the “Common stock, $10 par value; authorized 5,000,­ number of shares authorized; and two others 000 shares of which there are reserved 399,887 shares failed only to show the number of shares author­ for conversion of preferred stock, 100,000 shares for ized for their preferred stocks. There were 159 conversion of management stock, and 2,817 shares for sale to an officer; outstanding 2,032,896 ⅔shares. companies which showed neither par nor stated “Capital account—generally (not in respect of any value for their common stocks (these were designated class of stock)—arising from capitalization generally no-par stocks) and thirty-five others of surplus in 1947. failed to give the information for their preferred “Capital surplus—per accompanying statement. stocks. However, the par or stated value could “Earned surplus—(the amount available for cash be obtained by a simple calculation. Three com­ dividends and management stock is limited to $1,000,­ panies (124, 235, 347) showed their preferred 000 until additional net earnings exceed $2,295,319)— stocks at liquidation values. Three companies per accompanying statement.” (United Air Lines, (167, 208, 439) gave the number of shares author­ Inc.) ized and outstanding for each class of stock but extended their combined total. Two balance sheet disclosures of possible Two unusually complete balance sheet presen­ future transactions in capital stock appeared as tations of capital stock and surplus are quoted be­ follows: low: “Preferred stock, 4% cumulative, par value $100 per share, redeemable at $2 to $1 per share premium. “Equity of Stockholders (see note): “In accordance with preferred stock retirement pro­ “Prior preference stock ($4.50 cumulative) without visions, open market orders are outstanding on par value—stated value, $5 a share; callable at $105 a November 14 for the purchase of 4,480 shares at share and accrued dividends (dividends paid to De­ par— cember 31, 1949). Authorized and issued 30,500 “Authorized and outstanding 58,500 shares, whereof 2,024 in treasury, leaving 28,476 shares at September 30, 1949 $5,850,000 shares outstanding 1950 and 1949—at liquidation “Par value of shares held pending re­ value of $100 a share. tirement 2,000” “Class A stock without par value—stated value, (Walgreen Co.) $5 a share. Authorized, 200,000 shares; issued and outstanding 1950 and 1949, 85,250 shares (minimum “Common stock, par value $10 per share, authorized liquidation value, $50 a share)—equity ($58.00 a 600,000 shares, issued or to be issued in respect of note share, 1950; $55.58, 1949). and preferred stock of the predecessor company, 274,­ “Class B stock without par value—stated value, $5 601 shares.” (American-La France-Foamite Corp.) a share. Authorized 200,000 shares; issued 85,250 shares, whereof 2,000 shares in treasury, leaving 83,250 Geo. A. Hormel & Company changed in 1949 shares outstanding 1950 and 1949—equity ($58.00 a from a no-par to a $15 par value common stock, share, 1950; $55.58, 1949).” and stated that its outstanding shares included “Note:—The total equity of stockholders at Janu­ 160 shares represented by unexchanged scrip. Treasury Stock 81 “Treasury common deducted from total of common Treasury stock stock, capital and earned surplus, 'below cost.’ ” (Harbison-Walker Refractories Co.) Approximately 47% of the tabulated reports Deducted from total of capital stock and showed treasury stock, with disclosure fairly earned surplus— evenly divided between deduction from issued “Less 892 shares of preferred and 2,447 shares of stock of the same class and deduction from the common stock held in treasury and reserved for em­ total of capital stock and surplus. This repre­ ployees, at cost less reserve.” (Quaker Oats Co.) sents no significant change over the prior year. “Common stock held in treasury—9,057 shares at 1949 reduced amount carried on books” (First National 101 Deducted from total of capital stock and sur­ Stores, Inc.) plus “824 Treasury Shares (Nominal Value)” (Billings & 10 Basis not stated (180, 193, 522) Spencer Co.) 80 At cost (64, 115, 265, 411, 504) “Capital Stock: 7 At par or stated value (187, 191) Authorized—6,000,000 shares, par value $5 each 2 Below cost—cost less reserve (250, 410) Outstanding—4,879,499.8 shares of which 56,­ 2 At reduced amount (206) 041.3 shares were held in treasury and carried 126 Deducted from issued stock of same class at no value (Note 2)” 69 At par or stated value—aggregate dollar (Note 2 refers to a stock purchase option of 50,000 amount of treasury stock not ex­ shares held by its president.) (Continental Oil tended (93, 128, 244, 417, 476) Co.) 33 At par or stated value—aggregate amount extended (23, 305, 353, 397) Alternative treatments of treasury stock held 9 At cost (no par or stated value) (172, for retirement are illustrated: 263) “Capital stock (as of September 30, 1949): 6 Par or stated value not shown—aggre­ Cumulative preferred stock, without par value: gate amount not extended (87, 482) Authorized 238,200 shares issuable in series 5 Par or stated value not shown—aggre­ $4.50 Series A, convertible on or before De­ gate amount shown (17, 98) cember 31, 1953; issued 155,145 shares; 2 Carried at no value (153, 480) outstanding, less 10,900 shares held for re­ 1 Preferred stock at liquidation value— retirement, 132,445 shares” common at remaining equity (235) (Willys-Overland Motors, Inc.) 1 Donated shares—aggregate amount not shown (517) “Capital stock: Preferred, 4 per cent cumulative, $100 par value, 12 Deducted from earned surplus callable at $105 per share: 6 At cost (217, 471, 510) Authorized and issued 16,000 shares 3 At par (20) Less, retired in accordance 1 At book value (519) with sinking fund provi­ 1 At stated value (62) sions 1,276 shares 1 Basis not stated (473) 14 Shown as an asset Issued (including 64 shares held 8 Reason stated (222, 224) in treasury) 14,724 shares” 6 Reason not stated (15, 230) (The treasury stock was deducted, at par, from 4 Deducted from total of capital and earned sur­ earned surplus, described as “64 shares preferred stock plus (189, 233) held in treasury and available to meet sinking fund re­ 1 Deducted from total of preferred and common quirements.”) (Dictaphone Corp.) stock (71) Of the fourteen companies carrying treasury 1 Deducted from total of capital stock and capital surplus (444) stock as a non-current asset, eight stated reasons 3 Parenthetical reference on the balance sheet to for such presentation as follows: treasury stock with some indication of charge “Corporate purposes, including employee bonus and to earned surplus (478, 515) incentive compensation plans.” (General Motors (Numbers in parentheses refer to companies listed Corp., General Electric Co., Willys-Overland Motors, in Appendix.) Inc.) Some of the less frequently used methods of “Sale to employees” (J. I. Case Co., Ely & Walker presentation are described here: Dry Goods Co.) Exhibit American 12: Asphalt Roof Corporation Disclosure of Contingent Liabilities 83 “Held by subsidiary company” (California Packing Some of the various types of items are de­ Corp., International Nickel Co. of Canada, Ltd., scribed below: United Shoe Machinery Corp.) In its notes to the financial statements, The In connection with its stock acquired for dis­ Sperry Corporation disclosed that in connection tribution under its employee incentive plan, with the purchase of common stock of certain Willys-Overland Motors, Inc., included the corporations, additional sums may be payable as following footnote: the purchase price of such stock depending on the “There were no “incentive earnings” or incentive consolidated net earnings of the acquired com­ compensation for the fiscal year but these shares were panies over the period of five years from July 1, acquired for this purpose and are presently held for 1947. (See section on Current Liabilities for any future distributions to officers and key executives, complete note.) as may be determined by a committee. ..” “The companies have purchase commitments for additions to plant and equipment aggregating approxi­ S. H. Kress & Company continued to show its mately $2,900,000, of which approximately $1,600,000 6% cumulative special preferred stock at no is reimbursable under firm sale and lease back com­ value since all the 1,000,000 authorized shares mitments.” (Cuneo Press, Inc.—notes to financial have been reacquired for its treasury. statements) “No provision has been made for the company’s liability to its attorneys for legal fees for special serv­ Disclosure of contingent liabilities ices rendered prior to December 31, 1949 as the amount thereof has not been determined.” (Pathé Industries Inc.—notes to financial statements) Contingent liabilities were mentioned by 203 “The companies were contingently liable at August companies, with the footnotes as the chief source 31, 1949 in respect of the following: of disclosure. For additional income and excess 112 Lawsuits profits taxes, if any, and for 25 Anti-trust (15, 58, 64, 65, 162, 165, 185, pending litigation including an­ 438, 483, 492) ti-trust suits amount 7 Patent infringement (12, 148, 224) indeterminable 70 Other (319, 354, 503, 517) As guarantor of bank loans of 43 Purchase commitments (93, 156, 226, 283, 305, another company $547,000 371, 481) As guarantor or obligors of leases 41 Taxes of other companies, approximate 21 Additional assessments (193, 233, 294, annual rentals 110,000” 408, 465) 4 On transfer of subsidiary dividends (109, (Warner Bros. Pictures, Inc.—notes to financial state­ 192) ments) 16 Other (231, 327, 433, 457) “The subsidiary, W. T. Grant Realty Corporation, 35 Guaranties is contingently liable on mortgages, aggregating 15 Subsidiary indebtedness (52, 204, 417, $139,813 at January 31, 1950, created by it covering 441, 499) two store properties subsequently sold subject thereto 8 Bank loans (343, 509, 514) and now under lease to W. T. Grant Company. There 12 Other (55, 97, 211, 223, 447) are no other contingent liabilities except those incident 29 Commercial paper (174, 212,246, 252, 320) to the normal course of the companies’ business.” 17 Subsidiary indebtedness (58, 94, 129, 461, 474) (W. T. Grant Co.—balance sheet) “Income taxes have been settled through 1944. 10 Renegotiation (168, 245, 326, 367, 517) Returns for the years 1945, 1946 and 1947 have been 11 Pensions (153, 258, 306, 312, 363) examined and no material adjustments are contem­ 2 Installment sales agreements (514, 524) plated other than as relating to the company’s possible 1 Subsidy refund (413) income tax liability of up to $2,500,000 in connection 1 Disputed items (260) with a distribution made by a consolidated foreign 1 Mutual fire insurance policy assessments (514) subsidiary upon its outstanding capital stock. The 1 Claims (458) company intends to contest an adverse ruling issued by 13 Miscellaneous the Bureau of Internal Revenue and has made no pro­ 307 vision for any part of such tax. If assessed, the tax (Numbers in parentheses refer to companies listed will be charged against earned surplus.” (American in Appendix.) Metal Co., Ltd.—notes to financial statements) 84 Section 2—Balance Sheet These excerpts from 1949 reports are examples Disclosure of long-term leases in of long-term lease disclosures by corporations: financial statements of lessees “As of December 31, 1949, the Companies had 45 leases expiring subsequent to December 31, 1952, the annual rentals of which in 1953 amount to $161,606. The aggregate rentals of these leases, subsequent to In accordance with recommendations con­ December 31, 1952, amounts to $555,306.” (American tained in Accounting Research Bulletin No. 38, Optical Co.—footnote) eighty reports disclosed information in respect of “At December 31, 1949, the company and/or its significant long-term leases. subsidiaries were lessees on 45 leases with stipulated Bulletin No. 38 stated, “The committee be­ rentals aggregating approximately $2,175,000, expiring lieves that material amounts of fixed rentals and at various dates over the next 19 years, about $300,000 other liabilities maturing in future years under being payable in each of the next two years. One long-term leases and possible related contingen­ lease contains a purchase option at $50,000. cies are material facts affecting judgments based “Of the above leases, 26 expire after 1952 and have on the financial statements of a corporation...” an aggregate rental of approximately $1,863,000, as In the absence of a more specific definition of compared with 17 leases at December 31, 1948, expir­ “long-term,” many companies appeared to have ing after 1951 with an aggregate rental of $1,973,000.” adopted the requirement of the Securities and (Autocar Co.—footnotes) Exchange Commission Regulation S-X, Note 5 to “The aggregate minimum amount of rentals, exclu­ sive of taxes and other expenses, for the year ending Rule 12-16, and disclosed only leases maturing December 31, 1950 on all real property now leased to three years after the balance sheet date. the company and its subsidiaries for terms expiring It was noted that thirty-four companies dis­ after December 31, 1952 will approximate $8,638,880 closed deferred rentals or leasehold improvements (including an estimated amount of $151,500 for cer­ on their statements without further description of tain leases under which no minimum annual rentals are the leases involved. Only one of these companies specified). Such rentals are stipulated in 732 leases of had a fiscal closing prior to the release of Bulletin which 165 leases provide for some increase in annual No. 38. (4, 75, 110, 172, 218, 299, 319, 339, 347, rental after 1950. The leases for the most part pro­ 352, 399, 478, 489, 519) vide for payment by the lessee of taxes, repairs and in­ Disclosure Made In surance. The amount of rentals and expenses paid for Presi­ Finan­ the year 1949 on properties covered by the aforemen­ dent’s cial tioned leases aggregated approximately $9,403,664 for Re­ Foot­ State­ rentals, $2,503,705 for taxes and $1,228,442 for repairs port notes ments and insurance.” (S. S. Kresge Co.—footnote) 445 No leases disclosed “The Company had seventy-one leases in effect at Lease disclosed January 31, 1950 having terms of more than three 14 6 1 No details shown (197, years after that date. The leases provide for aggre­ 205, 244, 274, 490) gate m inim um annual rentals of approximately $2,­ 6 2 Annual rental mentioned 260,000 plus, in certain instances, real estate taxes (34, 55, 63, 384, 487) (such amounts being included in taxes) and other ex­ 2 3 Term of lease mentioned penses, and in respect of some of the minor leases, ad­ (67, 87, 204, 470, 485) ditional amounts based on percentages of sales. Of 34 1* Annual rental and term of these seventy-one leases, seven of the principal ones lease mentioned (13, 162, providing for aggregate annual rentals of $1,222,620 227, 231, 292, 337, 469) pertain to three major stores; these leases expire in 4 Same as above with other 1953, 1972 and 1996. Those expiring in 1953 contain obligations assumed (taxes, renewal options which may be exercised by the Com­ repairs, etc.) (270, 294) pany extending the term to 1978.” (May Department 3 Annual rental, term of lease Stores Co.—footnotes) and option to purchase men­ “A major portion of the land and buildings used by tioned (174, 419) the Company is leased from the United States Govern­ 1 3 Overall description of several ment under a five year agreement expiring December leases disclosed with no in­ 31, 1950. The rental is based on sales and for the dividual terms disclosed (21, year 1949 was $786,878, and for the year 1950 cannot 151, 416, 447) be less than $629,503 nor more than $786,878. Nego­ * Auditor’s report tiations are in progress for the continued occupancy of (Numbers in parentheses refer to companies listed the leased premises.” (Republic Aviation Corp.— in Appendix.) footnotes) Disclosure of Long-Term Leases in Financial Statements of Lessees 85 “The aggregate annual minimum amount of rentals years intervals for the remaining twenty years. In upon all real property now leased to the companies for addition the company has agreed to pay property ex­ terms expiring more than three years after August 31, penses such as real estate taxes, assessments, insurance 1949, is approximately $4,106,000 covered by one premiums and repair and maintenance costs.” hundred eighty-nine leases. One hundred fifty-five (Marathon Corp.—footnotes) of these leases with minimum annual rentals of $2,­ “Pursuant to an agreement entered into in 1947, a 983,000 expire prior to August 31, 1967 and thirty- consolidated subsidary sold during the year its new four leases with minimum annual rentals of $1,123,000 office building and garage to an insurance company for expire subsequent to August 31, 1967.” (Warner Bros. $11,745,000 and leased back the buildings for 30 years Pictures, Inc.—footnote) at a specified yearly rental. The agreement contains The following disclosures were made concerning provisions for extending the lease at specified reduced sale-and-lease transactions: rentals and grants options to repurchase the property “The company leases the majority of its warehouses in 1969 and in certain subsequent years for specified and store locations. At December 31,1949, there were sums. Prior to 1949 the offices of this consolidated sub­ in effect 154 leases running for periods of more than sidiary were located in rented space which it was three years, including those referred to in the following obliged to vacate.” (Socony-Vacuum Oil Co., Inc.— paragraph; such leases provide for minimum annual footnotes) net rentals aggregating $989,187, of which approxi­ Safeway Stores, Inc., and subsidiaries handle mately 73% relates to leases expiring within ten years their leases through a wholly-owned non-consoli­ and the balance to leases expiring in from ten to dated subsidiary whose activities are confined to twenty-five years. “During the year ended December 31, 1949, the the ownership and financing of store and other company sold to institutional investors for $2,505,282, equipment leased to Safeway Stores, Inc., and its nine store buildings and one warehouse building which, U. S. subsidiaries. A footnote stated: with one exception, it erected in 1948 and 1949. Such “At December 31, 1949 the parent company and all properties were leased back to the company by the its subsidiaries occupied under lease a total of 2648 purchasers for initial periods of fifteen to twenty-five stores, warehouses, plants, etc. Of these leases, 1967 years at annual net rentals aggregating $184,722.” contain options to cancel which, if exercised, might (Colonial Stores Inc.—footnotes) necessitate the purchase of 956 properties. The “The newly erected store buildings of Macy’s-Flat­ minimum rentals under these leases, some of which bush and Macy’s-White Plains, as well as the newly contain percentage of sale clauses, and exclusive of any erected warehouse of L. Bamberger & Co., located in taxes, insurance and maintenance payable by the Bloomfield, New Jersey, were sold during the year to lessee amount for the year 1950 to approximately various insurance companies while continued use of $7,351,000 in the United States and $390,400 (Cana­ the properties was secured under long-term leases. dian Dollars) in Canada; these aggregate amounts de­ These foregoing transactions provided, in part, the crease annually to 1999 as leases expire.” funds necessary to finance our capital expenditure pro­ gram without having to increase our long-term debt or Bond Stores, Incorporated, disclosed the re­ outstanding capital stock.” (R. H. Macy & Co., quirements of other than inter-company leases: Inc.—president’s letter) “At July 30, 1949 the Corporation had 70 leases “As at December 31, 1949, the aggregate minimum having terms of more than three years from that date. annual rental upon real property leases, other than The rentals under these leases for the year ending inter-company leases, expiring after December 31, July 29, 1950 amount to a minimum of $3,370,000 1952 amounted to approximately $1,847,670.00. Cer­ plus, in certain instances, real estate taxes and in­ tain of these lease agreements provide for additional creased amounts based on percentages of sales. rentals based on sales or for payment of certain ex­ Leases which require the payment of annual rentals in penses, such as real estate taxes and maintenance excess of $100,000 each expire from 1964 to 1982 and costs.” most of them have renewal privileges. Real estate Inter-company leases, pertaining to properties taxes under the lease agreements are included with owned by wholly-owned consolidated subsidiaries, other taxes in the accompanying Statement of Earn­ were mentioned in a separate footnote with dis­ ings.” (R. H. Macy & Co., Inc.—footnotes) closure of the terms of applicable mortgages. “In 1949 the company constructed and sold a con­ verting plant in Wausau, Wisconsin to an insurance The footnote concluded with: company and immediately leased it back for a period “The Corporation is not liable under any of such of twenty-five years with renewal options covering a mortgages, being in each case a lessee of the property, maximum of twenty-five additional years. The an­ or a substantial part thereof, under a long-term lease; nual rental amounts to $118,714 for each of the first such leases are assigned as security under the mort­ five years, decreasing approximately $14,000 at five gages, respectively. section 3: income statement

114 127 154 164 Profit and loss (statement or account) or statement Title of income statement (summary) of profit and loss (60, 109, 136, 139, 151, 158, 228, 375, 380, 385, 411, 464, 506, 516) The titles “income statement” or “statement of 27 31 36 51 Profit and loss (statement income” were used most frequently in 1949 state­ or account) or statement ments although there was only a slight increase in (summary) of profit and the aggregate number of companies using such loss and retained earnings (including variations in titles. earned surplus termi­ The trend towards the use of other terminology nology) (20, 71, 82, 132, for “profit and loss statement” continued, with a 186, 217, 270, 276, 279, total of twenty-two companies adopting other 282) titles. The titles substituted were generally 59 39 22 6 Earnings (statement) or those containing the words “earnings” or “in­ statement (summary) of (net) earnings (58, 59, 95, come,” with Motor Wheel Corporation changing 113, 212, 280, 290, 335, to “statement of operations.” 395, 524) Twenty-four companies initiated the use of the 4 2 Earnings (statement) or titles “earnings statement” or “statement of statement (summary) of earnings” in their 1949 reports. (3, 10, 26, 34, (net) earnings and re­ 59, 106, 143, 146, 182, 197, 206, 222, 281, 290, 292, tained earnings (including variations in earned sur­ 327, 337, 365, 387, 414, 416, 423, 453, 489) plus terminology) (3, 143, The various titles used during the last four 144, 159) years and the number of companies using each 16 16 7 4 Statement of operations are: (and earned surplus) (18, 1949 1948 1947 1946 22, 121, 240, 241, 320, 500, 182 182 185 173 Income (statement or ac­ 508, 514) count) or (statement or 5 7 7 6 No income statement pre­ summary) of (net) income sented (187, 237, 370, 386, (accounts) (15, 67, 162, 492) 189, 218, 239, 246, 340, 4 7 8 4 (Condensed statement or 407, 408, 417, 428, 479, statement) of income and 486, 495) profit and loss (248, 334, 98 96 89 75 Income (statement or ac­ 344, 409) count) or statement (sum­ 4 4 4 Results of operations (and mary) of income and re­ profits retained in the busi­ tained earnings (including ness) (107, 118, 223, 278) variations in earned sur­ 4 4 3 Statement of income and plus terminology) (83, 150, expenses (and summary of 156, 163, 230, 271, 299, earnings retained and in­ 307, 390, 399, 418, 430, vested in the business) (56, 437, 451, 525) 378, 384, 459) 88 Section 3—Income Statement 2 2 1 ... Statement of profit (and form was considered to be the separate grouping of earned surplus) (4, 304) all income items, followed by a separate grouping 1 1 1 ... Income and expense ac­ count (167) of all costs and expenses, the total of the latter 1 1 1 ... Summary of profit (99) being deducted from the total of the former with­ 1 1 1 ... Income, costs and changes out the use of any other subtotals or intermediate in earned surplus (456) balances prior to net income for the year. 1 1 3 . . . Condensed statement of There were a number of income statements gross profit and net earn­ which incorporated certain features of the single- ings (133) step form yet varied in different ways. For ex­ 1 1 ...... Income and unappropri­ ample, the single-step form might be followed ated retained earnings except for the separate addition or deduction of (earned surplus) (354) certain non-recurring items, the income tax pro­ 1 ...... Statement of income, earned surplus and capital vision, or the minority stockholders' interest. surplus (79) 1949 1948 1947 3 3 42 Unclassified variations 326 335 357 Multiple-step form (83, 115, 123, 525 525 525 525 162, 175, 229, 261, 363, 395, 481) (Numbers in parentheses refer to companies listed in 105 95 81 Single-step form (161, 224, 239, Appendix.) 307, 332, 347, 417, 479, 494, 508) 46 45 42 Single-step form with exception Income statement titles used by some com­ of income-tax provision (or credit) deducted (or added) sepa­ panies not included in the above tabulation are: rately (131, 172, 180, 283, 350, “Results of Operations and Summary of Net In­ 377, 401, 434) come Retained in the Business” (Maremont Automo­ 10 11 16 Single-step form with exception tive Products, Inc.) of income-tax provision and other “Consolidated Statement of Operations and Sur­ item(s) deduced (or added) sepa­ plus” (Marshall-Wells Co.) rately at end of statement (107, “Comparative Consolidated Statements of Income, 111, 113, 126, 317, 480) Expenses and Surplus” (Benson and Hedges) 8 8 7 Single-step form with exception “Statements of Consolidated Profit and Loss” of items other than income-tax (UrS. Plywood Corp.) provision shown at end of state­ “Comparative Statement of Earnings” (General ment (93, 346, 349, 355, 447, 522) Foods Corp). 25 24 14 Abbreviated—beginning after “Statement of Profits and Income” (Goebel Brew­ “gross profit” item—not classified ing Co.) (19, 33, 45, 136, 176, 220, 420) “Condensed Consolidated Statement of Operating 5 7 8 No income statement (187, 237, Income and Expenses and of Earned Surplus” (Best & 370, 386, 492) Co., Inc.) 525 525 525 “Consolidated Statement of Earnings” (G . C. Mur­ (Numbers in parentheses refer to companies listed phy Co.) in Appendix.) “Summaries of Consolidated Net Income” (St. An example of the multiple-step form is the Joseph Lead Co.) International Minerals and Chemical Corpora­ “Statement of Consolidated Operations” (Stix, tion consolidated statement of income for the Baer and Fuller Co.) three years ended June 30, 1950. (See Exhibit “Statement of Consolidated Income” (National 14, p. 95.) Gypsum Co.) Lehn & Fink Products Corporation presented its comparative statement of consolidated income for the years 1949 and 1950 in the single-step Form of income statement form. (See Exhibit 15, p. 97.)

Although the multiple-step form continues to Volume of business be the popular form of the income statement, there appears to be a gradual tendency to limit the number of steps used in arriving at the net The method used in reporting the sales figure income figure. has varied only slightly during the last three For purposes of this analysis, the single-step years, with the majority of the companies con- Wages and Salaries (Employment Costs) 89 tinuing to show net sales as the opening figure on of their certified income statements to one show­ the income statement. ing wages and salaries as a separate item under 1949 1948 1947 the heading “costs.” Inland Steel Company dis­ 355 351 354 Sales or revenues reported—net continued showing parenthetically in the income (68, 106, 221, 255, 299, 353, 355, statement the amount of wages and salaries in­ 490, 493, 495, 520) cluded in “cost of goods sold, selling, general and 27 29 29 Sales or revenues reported—gross administrative expenses” but continued to show (65, 74, 117, 271, 366) this information in an uncertified statement 82 78 77 Sales or revenues reported—net or gross not indicated (113, 223, titled “comparison of employees’ earnings with 245, 281, 339, 430) cost of living.” 10 13 12 Sales or revenues reported—both 1949 1948 1947 1946 gross and net (156, 211, 469, 503) 307 302 320 391 Employment costs not 46 47 46 Sales or revenues not reported shown (6, 25, 100, 129, (20, 45, 220, 244, 488, 489) 193, 209, 271, 321, 420, 5 7 7 No separate income statement 437) 525 525 525 193 198 184 122 Shown as supplementary information by means of (Numbers in parentheses refer to companies listed in uncertified statements, pie Appendix.) charts or graphs or men­ tioned either in the presi­ The Cuban-American Sugar Company reported dent’s letter or the finan­ ‘‘refined sugar sales and raw sugar and molasses cial review (35, 94, 106, produced.” For classification purposes it is in­ 113, 128, 222, 263, 269, cluded above as “sales or revenues reported—net 270, 280, 281, 334, 396, or gross not indicated.” 431, 481) City Stores Company showed “net sales— 25 24 19 10 Shown as a separate cost in the certified income including leased departments.” statement (57, 86, 93, 104, Barber Oil Corporation described its sales 118, 332, 347, 453, 456, figure as: 514) “Total volume of business done by Barber Oil 1 2 Shown 2 parenthetically in Corporation and its subsidiaries as represented by the certified income state­ their combined net sales and earnings, exclusive of ment intercompany sales and transactions.” 525 525 525 525 A note explained: (Numbers in parentheses refer to companies listed “The consolidated net income includes $53,487.09 in Appendix.) net income resulting from operations of subsidiaries in Armco Steel Corporation’s statement of consoli­ foreign countries. This amount is after deducting the dated income presented employment costs sepa­ loss arising from sterling devaluation.” rately, as illustrated in Exhibit 16, p. 100. Companies other than those tabulated which showed employment costs in the certified income statement were: Wages and salaries American Steel Foundries (employment costs) The Cleveland Graphite Bronze Co. Colt’s Manufacturing Company The Duplan Corporation Although many companies continued to dis­ Maremont Automotive Products, Inc. cuss employee relationships, the number furnish­ ing specific information about employment costs either in the president’s letter or in the operating Cost of past service pension credits data declined slightly in 1949. The supplemen­ tary information of total wages and salaries was generally disclosed in charts or uncertified state­ Of the seventy-two companies disclosing costs ments. (See Exhibits 7, p. 36; 9, p. 59). of past service pensions for the year 1949, all but Hercules Powder Company and Harbison- fourteen companies provided for the cost out of Walker Refractories Company changed the form the current year’s income. Exhibit 13: United Fruit C o m pany Stockholders Equity) Cost of Past Service Pension Credits 91 1949 1948 1947 ployees’ retirement cost applicable to past services.” 33 28 22 Not separately shown but indi­ cated in the footnotes or presi­ R. H. Macy & Co., Inc., reported a change in dent’s letter to be included in the basis of deducting contributions for past costs and expenses (180, 197, 209, services from earnings in the notes to financial 223, 428) statements: 13 12 11 Combined with current pension costs, total thereof shown as a “The Retirement System of the Corporation in­ separate amount in the income cludes a Pension Plan under which contributions for statement (26, 78, 150, 306, 307) past services are allowable for federal income tax pur­ 7 8 8 Shown separately as an operating poses for a period of not less than ten years. Previous expense (194, 225, 351) contributions have been deducted from earnings since 3 1 2 Remaining cost provided for in the inception of the Retirement System, February 1, full by provision in income state­ 1944, on the basis of the ten year period. This basis ment (412) has now been revised by the Corporation so that sub­ 1 Shown as last item in income sequent contributions will be completed over a period statement after tax provision but of ten years from February 1, 1949. As a result, the before “net profit” past service cost for the year ended July 30, 1949 2 1 1 Included in income statement as amounted to $538,000 as compared with $701,000 for pensions are paid (165, 261) the preceding year. It is estimated that contribu­ 13 13 11 Charged to pension reserve (23, tions to be made in respect of past services, to be 52, 123, 136, 325) deducted from income in future years, are $3,800,000 1 2 1 Transfer from contingency re­ subject, however, to termination or amendment of the serve to income statement in re­ spect of past service cost or direct Plan at the option of the Corporation.” charge to contingency reserve West Virginia Pulp and Paper Company noted: (299) 1 9 Charged to retained income “At the request of the Securities and Exchange (earned surplus) Commission the company’s annual report to that 1 Payment charged after “income Commission on Form 10-K for the year ended October fo‘r year” in combined income and 31, 1948 has been amended so as to charge the amount surplus statement, less one-tenth of $4,976,079 to income for that year instead of to in­ charged to income come reinvested or employed in the business.” 1 One-tenth of total cost of past service pensions charged to sur­ Extracts from footnotes with reference to past plus, remainder set up as a de­ service pension costs in connection with present ferred asset or proposed pension plans follow: 72 68 66 “Cities Service Company and most of its subsidi­ (Numbers in parentheses refer to companies listed in aries have adopted retirement plans, effective January Appendix.) 1, 1949, providing for monthly payments for life for eligible employees upon reaching retirement age. The The Lambert Company charged income with: cost of current service benefits is shared by the em­ “Contributions to Employees Retirement Plan ployees and the companies, but the cost of past service Current service of participants and expenses benefits is borne by the companies alone. The plans Service of participants prior to 1944" may be terminated by the companies at any time without further payment. It is contemplated that To the excess of income over deductions was the cost of past service benefits will be paid over a added as the last credit before arriving at “net twenty-year period; the amount thereof (approxi­ income for the year” an item described as “trans­ mately $1,400,000) applicable to 1949 has been ferred from reserve in respect of above-stated charged to income. That figure does not include past prior service contributions to Employees’ Retire­ service costs applicable to an electric utility whose ment Plan and pensions paid to employees re­ plan calls for such payments (approximately $193,000 tired outside Plan, less attributable reductions in per annum) to commence with 1950.” (Cities Service income taxes.” Co.) American Car and Foundry Company made “Payments of $867,534 under the employees’ re­ the following explanation in a footnote: tirement plans applicable to past service costs have been charged against earnings of each year. It is “The Reserve for Employees’ Welfare Plan has, estimated that, as of January 31, 1950, the aggregate during the year, been charged with the net amount amount which may ultimately be paid in respect of (after tax benefits) of $161,191.51 on account of em­ past service costs, if the plans continue, will approxi- 92 Section 3—Income Statement mate $3,990,000; no provision therefor has been made The following tabulation discloses that both in the accounts.” (May Department Stores Co.) of the foregoing methods have continued to be “Reserve for employes' pension plan used: “On January 27, 1950, the Board of Directors authorized the liberalization of employes’ benefits 1949 1948 1947 under the Company’s Group Life Insurance and Pen­ Charges to Reserve, Net of Tax sion Plans. Included therein is an amendment to the Effect: present Pension Plan under which pensions based 2 2 5 Item charged in the income state­ upon the first ten years or less of service prior to July 1, ment and a portion of the reserve, 1937, will be increased from 0.5% to 1.5% of the em­ equal in amount to the excess of such item over the related tax re­ ploye’s salary on June 30, 1937, for each of such years. duction transferred to the income The cost of the increased pension benefits is to be statement as a credit (299, 485) borne solely by the Company and will be spread over a 2 3 4 Provision for income taxes shown twenty-year period through annual payments which as if charge were not deductible will average about $1,210,800 (including carrying for tax purposes, the total charges). If this amendment is ratified by the stock­ amount of tax estimated to be holders at their annual meeting to be held on April 25, legally due for the year or the tax 1950, a reserve (estimated at $11,500,000 after adjust­ effect of the special charge being ment for carrying charges and future Federal income indicated in a footnote (23, 325) taxes) will be set up on the books of the Company by 1 2 Amount equal to the tax reduc­ a charge to deferred expenses which will be amortized tion charged separately in the in­ against income in equal amounts annually over a come statement twenty-year period.” (Texas Co.) Credits to Reserve, Net of Tax Effect: 1 1 Tax effect of credit to reserve stated in footnote Charges to Surplus, Net of Tax Allocation of income taxes Effect: 4 4 10 Provision for income taxes shown as if charges were not deductible for tax purposes but amount of In 1949 there was a continued decline in the tax legally due not indicated number of tax allocations or disclosures of tax either in the income statement or in footnotes (In 1949 two reports allocations. This may be due, in part, to the showed tax effect in wording of noticeable decrease in post-war and contingency surplus charges.) (10, 491) reserves and in the number of charges and credits 3 2 4 Separate charge included in the to retained income (earned surplus). income statement equal to the Accounting Research Bulletin No. 23, “Ac­ tax reduction (209) counting for Income Taxes” (December 1944) 1 1 2 Provision for taxes shown in in­ come statement as if charge were stated, among other things, that “. . . facts with not deductible for tax purposes respect to taxes must be clearly set forth . . .” but total amount of tax esti­ and recommended allocation of income taxes in mated to be legally due for the situations where there are material differences year indicated in footnote (45) between taxable income and the income shown in the income statement. In Accounting Series Credits to Surplus, Net of Tax Release No. 53, the Securities and Exchange Effect: 1 6 5 Provision for taxes shown in in­ Commission favored one of two alternative come statement as if surplus methods of presenting the tax effect of items credit were not taxable, and charged to surplus and to a deferred-charge ac­ amount of tax legally due not count. The SEC rejected the showing of the indicated either in the income tax provision as if the item were not deductible statement or in footnotes (484) 2 3 Provision for taxes shown in in­ for tax purposes and favored showing the tax come statement as if surplus provision at the actual amount legally due and credit were not taxable, but total including a charge in the income statement for a amount of tax estimated to be portion of the extraordinary item equal in amount legally due for the year indicated to the tax reduction resulting therefrom. in footnote Accrual of Vacation Allowances 93 1 Amount equal to tax reduction 1 1 “Deferred adjustments for fed­ credited separately in the income eral taxes” (asset) adjusted for statement after tax provision deductibility for tax purposes of stated at amount legally payable prior year past service payment (also in 1948 for losses and ex­ 1 Net adjustment due to replace­ penses charged to reserve) and ment in prior year of Lifo inven­ non-deductibility for tax pur­ tories involuntarily liquidated poses of depreciation on fully during the war amortized facilities (420) 1 Tax effect of capital surplus 1 1 1 Excess cost of replacing inven­ credit deducted separately from tories on a Lifo basis involun­ income statement provision tarily liquidated over estimated tax refund shown after tax pro­ Other Allocations: vision and before net income 9 10 10 Extraordinary or non-operating (206) costs or profits net of related tax effect shown in the income state­ 1 Recovery (in part) of war loss, ment before “net income,” usu­ less related provision for federal ally following the provision for income taxes (113) federal income taxes, the latter 1 Portion of past service pension being shown as if the extraordi­ costs, less federal income tax re­ nary items were not deductible for duction shown after tax provision tax purposes (200, 246, 363) and before net income (220) 1 1 Reduction in current income (Numbers in parentheses refer to companies listed taxes, resulting from payments in Appendix.) for past service annuities previ­ ously charged to surplus reserves, treated as a general expense in the income statement and added Accrual of vacation allowances to surplus 1 Foreign subsidiaries reinstated. Portion of recovery equivalent to tax effect thereof credited to in­ Six reports were noted in 1949 which disclosed come—not clear where remaining a change in policy in respect of vacation pay­ credit was entered rolls. These companies now accrue vacation 4 3 Mention of difference between allowances during the period in which the em­ taxable and reported income (224, ployees qualify for vacations rather than in the 360) period in which vacations are granted, the 2 1 Difference in federal income taxes charges for the increased liability being equally between Lifo and Fifo methods deferred (33, 118) divided between income and retained income 1 Portion of loss on subsidiary (earned surplus). bankruptcy equal to tax effect on The National Supply Company made a charge 1948 return transferred to income to income for “adjustment of vacation accruals and credited to investment ac­ to tax basis—less allowance for tax benefit” count without further comment. 1 Prior year adjustments less re­ National Biscuit Company did not show a lated taxes shown after net in­ come separate deduction in its income statement but 1 1 ... Excess of inventory reduction made the following explanation in the president's upon replacement of basic Lifo letter: inventories over tax refund shown before federal income tax pro­ “Prior to 1949 National Biscuit Company in­ vision (113) cluded wages paid to employees during vacations as 1 Extraordinary write-off of de­ an expense in the year the vacations were granted. velopment expenditures charged Due to changes in Company practice and in labor off net of prior year tax provi­ agreements, these vacation payments now accrue sions—after earnings from opera­ during the period in which employees qualify for vaca­ tions tions. Therefore, 1949 results reflect the cost of 1 1 Tax effect of repairs and standby vacation payments made in 1949, as well as those expense charged but not spent that have been earned but will not be paid until 1950. credited to tax provision (corre­ Net profit for 1949 was reduced approximately $2,000,­ sponding debit apparently to re­ 000 (equivalent to 32 cents per share of common serve) (45) stock) because of the accrual of the estimated amount 94 Section 3—Income Statement of the 1950 vacations less the related federal income 1949 1948 1947 tax effect.” 487 480 481 No increased charge shown 25 21 17 Charge made prior to net income W. F. Hall Printing Company showed a de­ (see summary which follows) duction in its statement of income for "pay­ 9 10 5 Charge made directly to retained ments for vacations earned in previous year, income (earned surplus) (11, 59, adjustments of prior years’ income taxes, etc. 156, 197, 239, 469, 473, 489, 525) (net)” without further comment. 4 14 22 Charge made as an appropriation Allegheny Ludlum Steel Corporation charged of net income (158, 186, 238, 399) earned surplus with "vacation allowances con­ 525 525 525 sidered earned by employees prior to 1949, less (Numbers in parentheses refer to companies listed estimated applicable income taxes.” A note in Appendix.) with respect to the vacation allowances stated: "The corporation, in years prior to 1949, included Charge made prior to net income the cost of vacation allowances in its accounts in the year in which they were paid. Because of recent Last year the auditors of American Asphalt legal interpretations of labor contracts, this policy Roof Corp. took exception to the charge made in was changed effective January 1, 1949, and such the income statement for an additional provision vacation costs are now considered accrued during for estimated wear and exhaustion of facilities the period in which employees qualify for a vacation. computed on the basis of present replacement cost. Pursuant to this new policy, the allowances earned This practice was discontinued in 1949. Two prior to 1949 but payable in 1949 of $1,342,642, less other companies, which reported increased charges income taxes of $535,000, have been charged to earned in their 1948 reports, did not disclose additional surplus. The effect of the new policy on the income charges in 1949. (Scovill Manufacturing Co., for the year is not significant.” Struthers Wells Corp.) In the above instance the auditors commented The remaining eighteen companies which last in their report upon the change in accounting for year reported charges against the current year’s vacation allowances and expressed approval of operations for accelerated depreciation continued the change. that policy. None of the auditors concerned The Billings & Spencer Company and Clark expressed disapproval. Although the formulae Equipment Company also charged earned sur­ used in computing such additional charges varied plus for the adjustment resulting from the change considerably, the plans may be summarized as to the accrual basis in accounting for vacation follows: pay. 8 Write-off of abnormal costs of newly acquired The United Piece Dye Works, which was not facilities during the early years where economic included in the above six companies, charged usefulness is greatest. (30, 128, 185, 224, 275, earnings retained for use in the business with 419, 437, 468) “vacation salaries of prior year less federal in­ 4 Stated percentage of cost of new facilities written off in the first and the succeeding year, adjusted come taxes applicable thereto” but did not indi­ ratably for operating variances and generally cate whether or not this charge was due to a providing that no increased charges will be made change in the method of accounting. when operations drop to certain levels. (11, 44, 4.99, 501) 2 Provision for depreciation of all or a certain por­ tion of fixed assets based on activity. (87, 225) 2 Higher rate of depreciation on new facilities dur­ ing the first three years. (281, 479) Accelerated depreciation and 1 Provision for special depreciation—$35,000. plant replacement charges (same amount provided each year since 1946) (Artloom Carpet Co.) 1 No explanation in 1949 statement—see discussion __ which follows. (National Steel Corp.) Only thirty-nine companies included in this 18 year’s study reported either increased charges for accelerated depreciation or appropriations of re­ Although the method used by National Steel tained income (earned surplus) for increased costs Corp. in computing accelerated depreciation was of plant replacements. not explained in the 1949 financial statements, in Exhibit 14: International Minerals & Chemical Corporation

CONSOLIDATED STATEMENT OF INCOM E

FOR THE THREE YEARS ENDED JUNE 30, 1 9 50

Years Ended June 30 1950 1949 1948 NET SALES...... $53,394,760 $50,123,269

OPERATING COSTS AND EXPENSES: Cost of goods sold...... $41,904,546 $38,757,418 $37,158,689 Depreciation and depletion...... 2,907,755 2,523,752 2,176,800 Amortization of patents and processes...... 9 3 ,2 4 4 93,244 93,244 Selling and administrative expenses...... 5,200,862 4,140,743 3,598,793 $50,104,347 $45,515,157 $43,027,526 NET OPERATING IN C O M E...... $ 8,295,833 $ 7,879,603 $ 7,095,743

OTHER INCOME: Dividends received from affiliated companies.. $ 10,830 $ 13,285 $ 21,635 Interest earned...... 21,168 25,378 38,291 Miscellaneous...... ______7 ,0 4 4 29,186 29,451 $ _ 3 9 ,0 4 2 $ 67,849 $ 89,377 $ 8,334,875 $ 7,947,452 $ 7,185,120

INCOME DEDUCTIONS: Interest expense...... $ 4 3 3 ,2 1 5 $ 451,435 $ 350,281 Premium on long-term debt retired...... 93,811 $ 43 3 , 2 1 5 $ 451,435 $ 444,092

NET INCOME BEFORE PROVISION FOR INCOME TAXES...... $ 7,901,660 $ 7,496,017 $ 6,741,023

PROVISION FOR INCOME TAXES: Federal income taxes...... $ 2,050,000 $ 1,965,000 $ 1,640,000 Other income taxes...... ___ 75,000 110,000 85,000 $ 2,125,000 $ 2,075,000 $ 1,725,000 $ 5 ,7 7 6 ,6 6 0 $ 5,421,017 $ 5,016,028

ROBERT P. RESCH, Vice President and Treasurer 96 Section 3—Income Statement 1948 the accountant’s report contained the fol­ Corp. and H. H. Robertson Co. deducted de­ lowing: preciation on certain Canadian properties used on a multiple-shift basis at rates in excess of nor­ ". . .The method adopted in 1948 takes into con­ mal, as permitted under Canadian income tax sideration, among other things, the high rate of opera­ laws. United Aircraft Corp. and National Lead tions and the desirability of charging off a portion of Co. computed depreciation at accelerated rates on the abnormally high costs during the early life of the specific properties. First National Stores Inc., assets...” charged current operations with accelerated de­ In his report on the company’s operations for preciation at 7½ % per annum. Libbey-Owens- the year 1949, the chairman of the board dis­ Ford Glass Co. and Lukens Steel Co. applied cussed depreciation and depletion, in part, as their increased charges retroactively to 1947. follows: The following excerpts from 1949 reports pro­ “The 1949 charge for depreciation and depletion in­ vide information about the amended deprecia­ cluded regular depreciation of $13,171,857 and acceler­ tion policies adopted during the year: ated depreciation of $11,850,000, or a total of $25,021,­ (1) First National Stores, Inc. 857. In annual reports over the past several years, I “As stated in the accompanying letter of the presi­ have called attention to the greatly increased cost of dent to the stockholders, the company adopted during replacement and new construction. Previously, we the fiscal year ending April 1, 1950 the policy of pro­ expressed the hope that costs might be lower, as more viding accelerated depreciation at the rate of 7½ % nearly normal conditions became established in the per annum during the first two years of use on com­ country. We are now thoroughly convinced that pleted additions to warehouses, store fixtures, ma­ there will be no substantial reduction in costs and, in chinery and equipment. The provision charged to fact, believe that over the next 10 years, the cost of operations during the current year, which was based material and labor will be higher than today. This on additions completed during the two years ending makes necessary a new appraisal of the cost of re­ April 1, 1950, amounted to $1,064,724. The previous placement and of the amount per year which should be practice of charging operations with additional de­ charged off as depreciation. preciation in anticipation of future obsolescence of “We now have capacity for production of 4,500,000 store buildings has been continued and the provision of tons of ingots per year. A most conservative esti­ $318,010 has also been classified this year as acceler­ mate shows that to replace all of our properties as they ated depreciation. The total of $1,382,734 has not exist today would cost $1,000,000,000, or about $220 been deducted in computing the provision for federal per ingot ton. Other steel companies estimate the income taxes. The accelerated depreciation is in cost per ton at from $250 to $300 and we, ourselves, addition to the normal depreciation on such facilities consider our figure low, rather than high. but the total depreciation over their expected lives “Replacement is a continuing, year-by-year neces­ will not exceed the cost of the facilities.” (Footnote) sity because facilities wear out or become obsolete, and we know from experience that there is not a single (2) Kimberly-Clark Corporation piece of equipment in our plants today that will not Note 8 with reference to the provision for have to be replaced within a maximum of 35 years. depreciation states: By charging accelerated depreciation in the past several years, we have accumulated over $25,000,000 “Provisions for depreciation, depletion, and ordinary against this replacement cost which would reduce the obsolescence amounted to $5,570,689 in 1949 and total amount required to $975,000,000, or $27,500,000 $3,307,633 in 1948. As permitted by the Canadian per year over a 35-year period. I cannot over­ Department of National Revenue there is included in emphasize the fact that there can be only one way to the above amount for 1949, $1,008,993 of depreciation get the money for replacement and that is by charging in excess of normal.” (Footnote) amounts for depreciation which give recognition to (3) Libbey-Owens-Ford Glass Company the reality of replacement costs.” “In 1947 and 1948 the Company made provisions of “Finally, I must point out that the above discus­ $2,000,000.00 and $3,000,000.00 respectively, for sion is limited strictly to the problem of providing property replacement and/or excessive cost of new money to replace our present property and that no facilities by a charge to costs and expenses in 1947 and part of such provision will be available for construc­ an appropriation of net profit in 1948. During the tion to increase capacity. Money required to increase year the Company continued its study of the de­ capacity must either come out of earnings or be pro­ preciation and obsolescence problem and adopted the vided by the public in loans or equity capital.” policy which has our approval and is effective retro­ actively to January 1, 1947, of providing for acceler­ In 1949, seven additional companies revised ated depreciation and obsolescence (not treated as their former depreciation policy. Kimberly-Clark deductible for federal income tax purposes) on prop- Exhibit 15: Lehn & Fink Products Corporation 98 Section 3—Income Statement erty additions constructed after January 1, 1946. amount is a special accrual of $59,612 applying to The reserve of $5,000,000.00 for property replacement Canadian assets. This additional depreciation is the and/or excessive cost of new facilities has been re­ result of increased rates, as compared with prior turned to earned surplus, and provisions of $2,291,­ years, which rates are permitted by changes in the 114.14 and $2,075,756.39 for accelerated depreciation Canadian income tax statutes effective in 1949.” and obsolescence for 1947 and 1948, respectively, (Footnote) have been charged to earned surplus, and the provi­ sion of $2,392,209.19 for 1949, has been charged to (7) United Aircraft Corporation costs and expenses for the year. As so revised, the “The facilities in Stratford, Connecticut, previously net profits for 1947 and 1948 and the net profit for occupied by Chance Vought, and approximately 80% 1949 were $2,291,114.14, $2,075,756.39 and $2,392,­ government-owned, are surplus to the Corporation’s 209.19, respectively, less than the amounts the net needs. . .The Corporation has accelerated the de­ profits would have been if no change had been made in preciation of its proportion of the facilities by charges the method followed in providing for depreciation and to operations in 1949 of $637,187 and the value in the obsolescence prior to 1947; and for the years 1947 accounts is now nominal in amount.” (President’s and 1948, the revised net profits amount to $10,881,­ letter) 961.42 and $15,131,582.14 respectively. In other re­ spects, the principles of accounting maintained by the Company during the year were consistent with those of the preceding year.” (Opinion) Foreign exchange losses (4) Lukens Steel Company “During the fiscal year 1949, the company adopted The devaluation of the British pound sterling a policy, effective retroactively to the beginning of its by 30% on September 19, 1949, followed shortly fiscal year 1947, of providing for accelerated deprecia­ tion on property additions completed in the fiscal thereafter by devaluation in many other coun­ year 1946 and subsequent fiscal years, subject to the tries, resulted in extraordinary foreign exchange limitation that no acceleration of depreciation is to losses for many companies. be made in any year in which the company’s rate of To meet the urgent requests for advice on cer­ operations is seventy per cent or lower. Pursuant to tain problems arising from the currency devalua­ this policy, which has the approval of the company’s tions, the research department of the American auditors, provision has been made for accelerated Institute of Accountants issued a statement depreciation in the amount of $652,771 of which $313,­ “Accounting Problems Arising from Devaluation 833, applicable to the year 1949, has been charged of Foreign Currencies” (November, 1949). This against current income and $338,938, applicable to the memorandum stated: fiscal years 1947 (amount not significant) and 1948, has been reflected in the accompanying financial state­ “While the possibility of losses from currency devalu­ ments as a deduction from income for the fiscal year ation may ordinarily be considered to be a risk inherent 1948. The financial statements previously submitted in the conduct of business in foreign countries, the for 1948 have been restated accordingly. world-wide scope and unprecedented magnitude of the “The amount of accelerated depreciation has not recent devaluations of foreign currencies are such that been deducted in computing the provision for Federal they cannot be considered recurrent hazards of business. taxes on income.” (Footnote) Accordingly, the losses resulting from such devaluation would appear to be of such a nature that, if they are (5) National Lead Company so material in amount that their inclusion in the income “During 1949, the company adopted the diminish­ statement would impair the significance of net income ing balance method of computing depreciation on the to an extent that misleading inferences might be drawn manufacturing facilities of its Titanium Division, in therefrom, they might appropriately be charged to lieu of the straight-line method theretofore employed. retained income (surplus) under the provisions of As a result of this change, depreciation charges for Bulletin No. 32.” 1949 are approximately $2,571,000 higher, and con­ solidated net income for 1949 is approximately $2,571,­ Bulletin No. 32 states: 000 lower, than would have been the case if the com­ “... it is the opinion of the committee that there pany had continued the use of the straight-line should be a general presumption that all items of method.” (Footnote) profit and loss recognized during the period are to be (6) H. H. Robertson Company used in determining the figure reported as net income. “Included in costs and expenses in the statement of The only possible exception to this presumption in any consolidated income are charges for depreciation on case would be with respect to items which in the aggre­ property, plant, and equipment aggregating $407,716 gate are materially significant in relation to the com­ for 1949, and $302,104 for 1948. Included in the 1949 pany’s net income and are clearly not identifiable Foreign Exchange Losses 99 with or do not result from the usual or typical opera­ at the end of the year...” The total write­ tions of the period.” down amounted to $1,685,839, of which $860,000 was charged to income and $825,839 to surplus. As the result of the extraordinary foreign ex­ The total write-down represented unrealized change losses incurred, sixteen companies re­ foreign exchange losses, resulting from fluctua­ ported charges to retained income (earned sur­ tions in exchange rates during the year of $599,­ plus) as follows: 001 and a write-down of $1,086,838 explained in Loss arising from conversion of Canadian net assets the president’s letter: to dollars (Drackett Co.) “All amounts for Cuban currency are stated at par Loss arising from conversion of foreign net assets to of one Cuban peso equals one U. S. dollar. Amounts dollars (Gruen Watch Co.) for net current and working assets in South American currencies are in general converted at current ex­ Net foreign exchange adjustments for unrealized change rates prevailing at the balance sheet date, ex­ losses in addition to charges made to income (Lone cept for the following special provisions for 1948 and Star Cement Corp.) 1949. South American current rates of exchange have Unrealized exchange loss on conversion of net assets been subject to local government controls of varying of British subsidiaries resulting from devaluation of degrees in each of the countries in which the subsidi­ British pound (John Morrell & Co.) aries of our Corporation operate, and in recent years Adjustment of unrealized Canadian exchange losses there have been delays in obtaining remittances in (Rexall Drug, Inc.) U. S. dollars. While it was hoped that these would be Exchange adjustment from conversion of net cur­ only temporary, such delays and the then instability rent assets of the Canadian subsidiary into U. S. of foreign exchange rates made it seem prudent at the dollars (F. W. Woolworth Co.) end of 1948 to make special provision of $1,321,066 Unrealized exchange loss arising from devaluation of against the possibility of decline in South American ex­ foreign currencies (Wilson & Co., Inc.) change rates which provision was absorbed by the Adjustment arising from devaluation of Canadian declines which occurred in 1949. In October 1949 dollar (Union Carbide and Carbon Corp.) there was devaluation of the Argentine peso, but there are still delays in obtaining remittances and possi­ Exchange loss arising from devaluation of the Cana­ bility of still further decline in South American ex­ dian dollar (Bristol-Myers Co.) change rates. Accordingly, in the balance sheet and Unrealized exchange loss arising from devaluation of in the foregoing summary the amounts stated for net Canadian dollar (Iron Fireman Mfg. Co.) current and working assets located in South America Adjustment resulting from conversion into equiva­ at December 31, 1949 have been reduced by an lent U. S. dollars at September 30, 1949 of foreign net amount of $1,086,838 against possibility of a decline working capital, deferred assets and certain reserves in the current exchange rates prevailing at that date. (International Paper Co.) “Fixed assets in Argentina and Uruguay acquired Exchange adjustments arising from expressing prior to 1935 are converted at the then par of exchange; Canadian subsidiary company’s net assets in U. S. A. all other fixed assets in South American currencies are dollars (S. S. Kresge Co.) converted at rates prevailing at date of acquisition.” Decline in conversion value of funds and invest­ ments in Canada (Safeway Stores, Inc.) American Metal Company, Limited showed in Provision to reduce net current assets of foreign its income statement a profit on foreign currency subsidiary companies to rates of exchange prevailing obligations in contrast to eighteen companies at December 31, 1949 (American Bank Note Co.) which included losses on foreign exchange in their Exchange loss on translation of net assets of foreign income statements. (See later section on “ma­ subsidiaries, resulting from devaluation of British and terial extraordinary items shown separately in Canadian currencies, less amount charged to reserve the income statement.”) (American Safety Razor Corp.) The Firestone Tire & Rubber Company and Adjustment for devaluation of Canadian currency H. H. Robertson Company, included in the (Avon Allied Products, Inc.) eighteen companies referred to in the preceding paragraph, charged a portion of their losses to In addition to the charge to retained income reserves provided in prior years. (earned surplus) shown above, Lone Star Cement Pratt & Lambert, Inc., charged its reserve for Corporation included a “provision for other contingencies and The B. F. Goodrich Company foreign exchange losses” in order “. . .to reduce charged its reserve for foreign losses with losses the foreign earnings for the year (before provision caused by currency devaluations. for depreciation and depletion) to the basis of General Motors Corporation commented in a exchange rates to which assets were written down footnote: Exhibit 16: Armco Steel Corporation Foreign Exchange Losses 101 “In accordance with the Corporation’s practice, mented in the president’s letter on the devalua­ profits of foreign operations not remitted to the United tion of foreign currencies: States from certain foreign countries where exchange restrictions exist are excluded from consolidated net “It is difficult to determine the precise effect of the income. The dollar equivalent of such profits is in­ foreign currency devaluations that took place in the cluded only when remitted. The net amount of unre­ latter part of 1949, precipitated by the devaluation of mitted profits of consolidated foreign operations so ex­ the English pound on September 18. In some coun­ cluded from consolidated net income to date is reported tries these devaluations already have been partly com­ in the balance sheet as ‘Reserves—Unremitted foreign pensated by price increases. Complete financial in­ profits.’ formation is not yet available, but based on the latest “In the event that changes in foreign exchange rates data our Company’s equity in the net assets of its result in a reduction in the value, as measured in foreign operations is still well in excess of its corre­ dollars, of the net working capital of any foreign sub­ sponding investments and advances. Likewise, our sidiary or branch, the reduction becomes a charge Company’s equity in the earnings of its foreign opera­ against consolidated net income if it exceeds reserves tions exceeds the amount included in its 1949 income. previously provided. A revaluation of the net work­ Foreign income is included in our Statement of Con­ ing capital of consolidated operations in foreign coun­ solidated Income only to the extent actually received tries was made coincidental with the devaluation of in dollars.’’ foreign currencies in September 1949. The reduction in value, in terms of dollars, represented principally an An insert to the report of United Merchants adjustment of the dollar amount of local currency prof­ and Manufacturers Inc. stated: its which had previously been excluded from con­ “The devaluation of the Argentine Peso announced solidated income because of exchange restrictions. October 3rd, which had the effect of reducing the value “The reserve for unremitted foreign profits at of our net assets in that country by approximately December 31, 1949, was $64,439,383 compared with $2,000,000, has not been reflected in this Report. $63,809,307 at December 31, 1948. The reserve was “Such extraordinary devaluations are usually ad­ increased during the year by $26,561,857 representing justed through surplus account.’’ the unremitted profits for 1949 of foreign operations whose accounts are consolidated. However, the re­ International Harvester Company disclosed: serve was reduced during the year by $15,507,657 representing the remittance to the United States of “Losses arising from conversion of foreign currencies, profits previously reserved, and by $10,424,124 repre­ due principally to devaluation of certain foreign cur­ senting the adjustment resulting from currency de­ rencies, in September, 1949, and aggregating approxi­ valuation, as explained in the preceding paragraph. mately $7,257,000, have been deducted in determining “Investments in foreign subsidiaries not consoli­ the amounts of the Company’s equity.. .in the sub­ dated are carried generally at cost adjusted to include sidiaries’ net assets at the close of their 1949 fiscal profits since acquisition, other than unremitted profits years and in their 1949 net income.” in certain countries having exchange restrictions. Loew’s Incorporated stated in its notes to The Corporation’s investment in Vauxhall Motors financial statements: Limited was reduced by $2,043,363 during the year, principally by a charge against consolidated income “Due to increased exchange restrictions in four reflecting the devaluation of foreign currencies in foreign countries, no unrealized income has been in­ September 1949. The Corporation’s equity in the cluded; such excluded income less loss on devaluation undivided surplus of foreign subsidiaries not consoli­ of net current assets therein has been deferred.” dated which has been excluded from consolidated in­ The auditors included the following paragraph come and earned surplus because of exchange restric­ tions amounted to $15,770,950 at December 31, 1949, in their report without any further reference to it compared with $17,669,687 at December 31, 1948. in their opinion paragraph: “A portion of the cash as reported above for con­ “The accounts of foreign subsidiaries were examined solidated foreign operations in certain countries where or tested by Independent Public Accountants in the exchange restrictions exist is in excess of current respective foreign countries as of August 31, 1949, in operating needs. Such cash, which arose principally accordance with program which we prepared. We from profits unremitted because of exchange restric­ have reviewed their reports relating to such examina­ tions, amounted to $15,219,461 at December 31, 1949, tions, have had no exceptions to take to the adequacy and to $26,839,063 at December 31, 1948. It is the and sufficiency of the examinations and tests made by practice of the Corporation to exclude these amounts such other accounts, have accepted such work in the from the cash account in the consolidated balance same manner as if it had been done by us and have sheet and to carry them in miscellaneous assets.’’ accepted them as a proper basis for consolidating the accounts of foreign subsidiaries with the accounts of Socony-Vacuum Oil Company, Inc., com­ the domestic companies as of August 31, 1949. Cur- 102 Section 3—Income Statement rent asset and current liability accounts of foreign subsidiaries and other current accounts in foreign moneys have been included (1) as to countries which Effect of Accounting Research devalued their currencies, at devalued rates estab­ Bulletin No. 35 lished in September 1949, or at rates of sales of futures, except film inventories which are carried at cost and (2) as to other countries at prevailing exchange rates, at rates lower than nominally quoted or at rates of Bulletin No. 35, “Presentation of Income and current remittances." Earned Surplus,” recommended that items ex­ cluded from the determination of net income under Bulletins Nos. 28, 31, 32, and 33 be dis­ played in the surplus statement rather than in the income statement after the amount desig­ Reporting of earnings per share nated as net income. It did not intend to pre­ in the president's letter clude or discourage the use of the combined state­ ment of income and earned surplus provided the figure of net income is followed immediately by In certain instances where appropriations of the surplus balance at the beginning of the retained income or reversals thereof were shown period. It did not preclude use of a separate in the income statement after “net income for the statement of disposition of net income. year,” earnings per share were incorrectly stated. The 1949 reports showed a marked reduction Current practice is illustrated below. in the number of appropriations deducted at the Appropriations for contingencies, plant re­ foot of the income statement although there was placement costs, and possible inventory losses, a considerable increase in the number of appro­ together with charges for material or extraordi­ priations made through “retained income” nary costs were the principal items tabulated. (earned surplus). Six instances of extraordinary or non-recurring Of the four previous bulletins which were re­ credits or restorations of surplus reserves were ferred to in Accounting Research Bulletin No. 35, also noted. Bulletin No. 33, “Depreciation and High Cost,” The tabulation discloses a noticeable reduction dealt with increased charges for plant replace­ in the number of appropriations or reversals ment, Bulletin No. 28 dealt with “general con­ shown as the last deduction or credit in the in­ tingency” provisions, Bulletin No. 32 dealt with come statement. There are included five in­ “extraordinary items which would impair the stances where the appropriation was made after significance of net income,” and Bulletin No. 31 net income and before the opening surplus bal­ dealt with “inventory reserves.” ance in a combined income and retained income The following schedule contrasts the number (earned surplus) statement, with references to of items shown as charges or credits after net in­ such appropriations in the president’s letters come in 1949 and 1948 with the related charges indicating that they were made from surplus. or credits shown in the retained income (earned 1949 1948 1947 surplus) statement: 511 474 452 No appropriations shown 1949 1948 Appropriations shown: Items shown after “net income": 4 19 45 Earnings per share based on bal­ 4 25 Future inventory price declines ance after appropriation 4 14 Plant replacement 3 14 10 Earnings per share quoted on 8 9 Contingencies both “net income” and balance remaining after appropriation 1 Research and development 2 9 8 Earnings per share based on 2 Possible foreign losses amount of net income 4 5 Extraordinary or prior year adjustments 3 5 1 Earnings per share not quoted, 1 Exchange adjustment but net income reported by the Related charges or credits to surplus: president 39 24 Future inventory price declines 3 3 No earnings figure quoted by the 15 12 Plant replacement president 43 41 Contingencies 2 1 6 Earnings per share not quoted, but amount after appropriation A majority of the companies considered to be mentioned by the president violating Bulletin No. 35 presented combined in­ 525 525 525 come and surplus statements in which the charges Material Extraordinary Items Shown Separately in the Income Statement 103 9 Transfer of excess reserves or provisions: or credits were shown deducted or added to the 4 Prior year tax reserves (270, 430, 487, net income figure but prior to the opening earned 497) surplus balance. 2 Allowances to reduce inventory prices to Buffalo Bolt Company showed an appropria­ amounts equivalent to a Lifo basis tion for plant replacement after net income in the (Inventory Valuation Reserves—Sher­ income statement but carried net income forward win-Williams Co., Hercules Motors Corp.) to the surplus account and showed the appropria­ 1 Modification costs on delivered commer­ tion again in that statement. cial airplanes (Glenn L. Martin Co.) One company was noted which presented a 1 Provisions no longer required for repairs separate statement of “Disposition of Net In­ and stand-by expenses applicable to come” wherein it showed appropriations de­ plant sold by company (American Win­ dow Glass Co.) ducted from net income for the year, and cash 1 Loss on a production (Radio-Keith- dividends paid during the year, carrying the bal­ Orpheum Corp.) ance to earned surplus (Pittsburgh Plate Glass 7 Office and plant moving and rearrangement ex­ Company). Two other companies presented simi­ penses (Jones & Laughlin Steel Corp., United lar treatments. Corn Products Refining Com­ Aircraft Corp.) pany presented a separate statement, “Trans­ 7 Provisions for loss on investments and advances ferred to Earned Surplus,” in which an appro­ to subsidiaries, or provisions to set up reserves against investments in foreign subsidiaries or priation was deducted from net income and the foreign operations (126, 360, 442, 471) balance transferred to earned surplus. Divi­ 6 Employees participation in profits—bonus and dends declared were included in the surplus state­ profit sharing plans (General Motors Corp., ment. Dwight Manufacturing Company, in its General Mills, Inc.) income statement, arrived at a “Profit for the 6 Undistributed net profits of foreign subsidiaries year” from which appropriations and dividends (National Cash Register Co., Paramount Pic­ were deducted, resulting in a “Balance added to tures Inc.) earned surplus.” 6 Loss on inventory disposal and project aban­ donment (Dow Chemical Co., General Box Co.) 4 Strike expenses (Eastern Stainless Steel Corp., Youngstown Sheet and Tube Co.) Material extraordinary items 3 Transfers from reserves to offset special costs incurred during the year: shown separately To offset past service pension costs and pen­ in the income statement sions paid to employees retired outside of plan. (Lambert Co.) Additional costs aris­ ing out of the war—to replace inventories depleted during the war. (U. S. Steel (Excluding charges, appropriations, and credits Corp.) Special credit—reserve returned to income account to absorb part of cost of in connection with contingency, future inventory standardization of products. (Walworth price decline, and plant replacement reserves, and Co.) items, in most cases, not in excess of 5% of net 3 Loss on operations and liquidation of divisions income.) (Atlas Powder Co., Northrop Aircraft, Inc.) There are listed below the most frequently used 2 Excess cost of inventory replacements (Rath types of material charges and credits and the Packing Co., Swift & Co.) number of times each was noted as appearing in 2 Provisions to reduce inventories to Lifo basis the income statement prior to the determination (Crane Co.) of net income for the year. 2 Income from termination of contracts (Com­ 1949 merical Solvents Corp.) 36 Profit or loss on disposal of assets (plant, real 2 Flood loss (Montgomery Ward & Co., Inc.) estate, securities, etc.) (23, 93, 109, 131, 182, 2 Settlement of litigation (Twentieth Century- 192, 221, 229, 335, 506) Fox Film Corp.) 19 Gain or loss on foreign exchange (22, 32, 72, 84, 2 Adjustment of prior years doubtful accounts 136, 217, 343, 439, 479, 522) and discounts (Ely & Walker Dry Goods Co.) 13 Prior year adjustments (Taxes, details for some (Numbers in parentheses refer to companies listed in were not specified, etc.) (163, 164, 177, 181, 418) Appendix.) 12 Write down of inventories, patterns, develop­ Many other types of material charges or credits ment expense, idle plant, service and experi­ appeared infrequently in the income statements mental expenses (39, 46, 97, 171, 500) prior to the determination of net income: 104 Section 3—Income Statement “Probable future expenditures applicable to current provisions for the current and prior years’ federal operations.” (Westinghouse Electric Corp.) income taxes and showed the net amount as the “Provision for loss on exploratory activities in last credit on the income statement, while the foreign countries.” (Sinclair Oil Corp.) remaining five companies used them as the last “Appropriation of net income for possible further credit items. (27, 203, 320, 341, 429) loss on foreign investments.” (American Tobacco Camden Forge Company showed “accrued for Co.) contingencies” as the last deduction before deter­ “Income from settlement of insurance claim.” mination of “net income transferred to earned (Copperweld Steel Corp.) surplus” on a combined “statement of profit and “Special provisions against decline in exchange loss and earned surplus.” rates.” (Lone Star Cement Corp.) Earnings for the year 1949 were stated, in the “Inactive mill property expenses, net including de­ president’s letter, to be the amount transferred to preciation.” (American Writing Paper Corp.) earned surplus ($196,426.79). The earnings per “Estimated taxes recoverable on further replace­ share (on common stock after payment of divi­ ment of inventories in 1950.” (Archer-Daniels-Mid- dends to preferred shareholders) was also based land Co.) upon the net amount transferred to earned sur­ “To give effect to normal stock method.” (Endi­ plus after deducting the accrual for contingencies. cott Johnson Corp.) For purposes of this study this accrual for con­ “Recoveries of amounts due from foreign subsidi­ tingencies has been considered an income deduc­ aries or advances to affiliated companies charged off in prior years; and refunds (received or claimable) of tion since no reserve for contingencies was shown prior years’ costs and expenses.” (Reynolds Metals on the balance sheet. Co.) Where there is a question as to whether the “Patent Amortization” (American Woolen Co.) special adjustments should be considered as in­ “Retirement Plan Credits” (Wright Aeronautical come deductions or as earned surplus adjustments, Corp.) they are here considered as income deductions. “Provision for estimated refund of profits to United In the statement of income of The Glenn L. States government under Vinson-Trammell Act on Martin Company (see table below) the earnings uncompleted contracts.” (Grumman Aircraft Engi­ per share of stock and total earnings for the year neering Corp.) 1949 ($5,131,500) were stated or based upon the “Adjustment of vacation accruals to tax basis (net amount before deducting the “special adjust­ of tax).” (National Supply Co.) ments,” although the following quotation from “Non-Operating Property expense.” (Continental the president’s letter refers to the balance after Motors Corp.) deduction of the special adjustments as the “net “Write off of questionable assets by President’s income transferred to earned surplus”: order.” (Harvill Corp.) “Net Worth—Net income transferred to earned surplus, in the amount of $2,834,397, was smaller Eight companies were noted which showed on than total earnings for 1949, primarily because the their income statement credits for estimated re­ renegotiation refund for 1945, as determined last funds of prior years’ federal income taxes arising year, was $2.8 million larger than the provision which from carry-back of operating losses and on their had been set aside in prior years for this purpose. balance sheets a receivable for the same amount. Earned surplus has nevertheless been restored, after The Cudahy Packing Co. included the credit in other adjustments, to above $6.1 million which, to­ “costs and expenses,” Brown & Sharpe Manufac­ gether with capital stock and capital surplus, brings turing Co. showed it as an income item, Crown the total net worth of the Company to more than Central Petroleum Corp. deducted from it the $19.6 million, or above $17 per share of stock.” “Net Income For The Year Before Special Adjustments $5,131,500 Special Adjustments: Charge—Excess of renegotiation refund applicable to the year 1945 over reserve provided therefor $2,809,339 Credits: Reversal of reserve for contingencies no longer required $275,212 Federal and State income tax applicable to prior years—net (Federal $194,884; State $42,140) 237,024 512,236 Remainder—special adjustments—net 2,297,103 Balance Transferred to Earned Surplus 2,834,397” (Glenn L. Martin Co.—statement of income)______51 22 10 (Net or accumulated) earnings retained (for use) in the business uRetained income (earned (95, 128, 152, 216, 281, 288, 329, surplus)" terminology 353, 465, 489) 18 11 7 (Net, balance of, or accumulated) income retained (for use) in the business (81, 89, 258, 272, 337, 377, 483) The trend toward using other terminology for 1 Earnings retained for require­ “earned surplus” was given great impetus in ments of the business (423) October, 1949 by the issuance of Accounting Re­ 10 5 3 Earnings retained and invested in search Bulletin No. 39, “Discontinuance of the the business (87, 194, 312, 392, Use of the Term ‘Surplus,' ” In this bulletin, 459) the subcommitte on terminology recommended 7 4 1 Earnings retained and used (in among other things, that “The term earned sur­ use) in the business (269, 408, plus be replaced by terms which will indicate 421) 1 2 1 Income retained and invested in source, such as retained income, retained earnings, the business (349) accumulated earnings, or earnings retained for use 1 3 1 Profits retained in the business in the business.” (278) In their 1949 reports, seventy-six companies 1 1 Profit retained and employed in discontinued the use of the term “earned sur­ the business (304) plus,” with fifty-four substituting a term using 2 2 1 Earnings retained and employed the word “retained” as a part of the title. (For in the business (31, 355) names of several companies which substituted 1 1 1 Profits retained in the business variations of “earnings retained in the business” less amounts transferred to cap­ or other titles using the word “retained” for ital stock account (456) 1 1 1 Other capital and income retained “earned surplus” refer to the following numbers in the business (283) listed in Appendix: 3, 8, 19, 40, 56, 95, 106, 123, 1 1 1 Earnings accumulated since in­ 143, 151, 174, 198, 209, 263, 281, 290, 327, 365, ception, retained and invested for 399, 408, 416, 469, 481, 489.) the conduct of the business (117) 1 Income accumulated and re­ 1949 1948 1947 tained in the enterprise 335 406 446 Earned surplus (deficit) (1, 36, 4 3 1 Earnings reinvested (280, 447) 67, 161, 219, 224, 246, 347, 420) 8 5 1 Earnings reinvested in the busi­ 19 24 23 Surplus or deficit (15, 50, 86, 127, ness (59, 240, 479) 384, 403, 516) 2 2 2 Income reinvested in the business 1 1 1 Further surplus (11) (434, 499) 2 3 3 Operating surplus or surplus from 1 Income reinvested or employed in operations (340, 426) the business (511) 1 Retained profits (477) 1 1 1 Earnings reinvested and employed 12 Accumulated retained earnings or earnings retained (3, 197, 292, 4 2 1 Earnings(461). reinvested or retained in 351, 354, 365) the business (289, 294) 106 Section 4—Retained Income 3 3 2 Income invested in the business (98, 259) R. H. Macy & Co. commented in a footnote: 1 1 1 Earnings invested in plant facili­ “Earnings reinvested in the business of $23,940,993 ties and working capital (34) are after deducting $11,621,786 of such earnings trans­ 2 2 Accumulated earnings invested in ferred to capital in connection with the declaration of the business (107, 488) stock dividends in prior years.” 3 1 1 Earnings invested (for use) in the business (213, 214, 400) Marathon Corporation and Endicott Johnson 6 6 6 Accumulated earnings (297, 397, Corporation commented in their presidents’ 437) letters upon the change in terminology of their 2 Earnings accumulated since a retained income (earned surplus) accounts: specific date (291, 438) “For the first time we are omitting the term ‘Sur­ 15 7 3 (Accumulated) earnings employed plus’ from our financial statements. The commonly in the business (58, 121, 371, 441, accepted meaning of ‘Surplus’ outside of accounting 501) and financial circles is ‘that which remains when use or 2 1 1 (Net) income em ployed in the need is satisfied; excess; more than sufficient.’ As business (462, 520) an accounting term ‘Surplus’ has an entirely different 1 1 2 Profit employed in the business meaning and this difference leads to confusion in the (118) minds of many people. We are pleased to see the 2 Unappropriated earnings em­ accounting profession is recognizing the desirability of ployed in the business (206, 221) clarification.” (Marathon Corp.) 2 2 1 Earnings used in the business (241, 436) “In accordance with the trend in accounting prac­ 1 1 1 Undivided profits (167) tice and on the advice of our accountants, the term 525 525 525 ‘earned surplus’ in our statements has been changed to (Numbers in parentheses refer to companies listed in ‘accumulated retained earnings. ’ ’’ (Endicott Johnson Appendix.) Corp.) Sixty-one companies included in the above tabulation (fifty-four using the term “earned sur­ Terminology for “surplus” other plus”) indicated that their earnings had been accumulated since a specific date. (35, 67, 72, than “retained income 129, 226, 229, 390, 452, 495) (earned surplus)” Eleven companies used the term “earned sur­ plus” but added an explanatory phrase. Some examples are: The trend to use new terminology to replace “surplus” as used in “capital surplus” and “paid- “Earned surplus (net income retained for use in the in surplus” continued in 1949 although it was not business)” (General Motors Corp.) as pronounced as was the use of substitute titles “Earned surplus—representing earnings reinvested for “earned surplus.” There was a net decrease in the business, after deducting all dividends” (U. S. of thirty-nine in the number of companies using Gypsum Co.) the titles “capital surplus,” “paid-in surplus” or “Earned surplus (earnings retained in the business)” ‘‘capital surplus—paid-in.’’ (Standard Oil Co. (Ky.)) The new terms most favored continued to be: “Earned Surplus—past earnings retained for use in “Additional paid-in capital” (8, 106, 146, 259, 290, the business” (Mohawk Carpet Mills, Inc.) 300, 351, 431, 448) United Fruit Company, Stokely-Van Camp, “Capital in excess of par value” (139, 177, 209, 294) Inc., and Geo. A. Hormel & Company showed that amounts had been transferred from retained It is evident that a large number of companies income (earned surplus) to capital stock account included in the study are endeavoring to replace by adding an explanatory phrase to the title. the term “surplus” with terminology indicating Gulf Oil Corporation continued its use of the source from which the proprietary capital was “earnings employed in the business (earned sur­ derived. Because of the current interest in such plus),” and Allied Stores Corp. again placed terminology the following tabulation is furnished “earned surplus” in parentheses after its title in detail, without combining title variations: “Earnings retained for use in the business since 1949 1948 1947 1946 June 1, 1935.” 146 145 141 129 None shown Terminology for “Surplus” Other than “Retained Income (Earned Surplus)” 107 226 255 274 301 Capital surplus (107, 109, 1 1 1 Surplus available except 151, 158, 205, 224, 275, for dividends on common 306, 458) stock (352) 57 65 71 82 Paid in surplus (35, 48, 1 ...... Capital resulting from a 63, 201, 231, 320, 375) reduction of the amount 4 6 5 4 Capital surplus—paid in assigned to common shares (183, 188, 219, 261) (249) 19 11 2 . . . Additional paid-in capital 1 ...... Sundry capital credits (90, 152, 259, 290, 300, (418) 353, 448) 1 1 ... Excess of amounts con­ 2 1 2 5 Capital in excess of stated tributed for common stock amount (240, 324) over par value (505) 10 6 1 Capital in excess of par 1 ...... Investment in excess of value (of stock issued) (95, stated value of common 139, 204, 294, 459, 462) stock (222) 3 ...... Amount paid in for (or 1 ...... Other capital contributed assigned to outstanding) upon issuance of shares shares in excess of par (or (400) stated) value (capital) (59, 1 ...... Other contributed capital 198, 325) (9) 6 5 5 3 Surplus arising from re­ 1 ...... Earnings segregated by valuation of property (ap­ stock dividends and gains praisal or appreciation sur­ on distribution of capital plus) (36, 60, 185) stocks acquired (281) 1 1 1 2 Capital paid for common stock in excess of par value 1 ...... Excess of net proceeds re­ (214) ceived from sale of shares 3 2 4 2 Combined with capital of capital stock formerly stock (57, 337, 434) held in treasury over cost 2 1 1 1 Capital paid-in, in addi­ thereof (295) tion to capital stock (267), 3 ...... Capital contributed (for in excess of par values of common stock) in excess capital stock (465) of stated value (of capital 1111 Initial and capital surplus stock) (438) (310) 2 2 1 Amount received in excess 3 3 3 1 (Capital) surplus arising of par value of capital from retirement of stock stock (246, 441) (15, 270, 430) 1 1 1 Stockholders’ investment 1111 Initial surplus (12) in excess of par value of 1111 Surplus arising from ac­ common stock (213) quisition of certain wholly- 2 2 1 Premium on sale of com­ owned subsidiaries (195) mon shares (or capital 1 1 1 ... Other capital (and income stock) (36, 483) retained in the business) 1 1 1 Surplus arising from trans­ (283) fer of nickel properties in 1 1 2 ... Excess of net capital in­ Finland (273) vested by stockholders 1 1 ... Amount received (net) for over par value of out­ capital stock in excess of standing capital stock par value (paid-in surplus (paid-in surplus) (42) (155) 1 ...... Credit arising from retire­ 1 1 Capital in excess of stated ment of preferred stock value of common stock (available for dividends (377) on, or retirements of pre­ 1 1 1 Excess of assets of con­ ferred stock) (483) solidated companies ac­ 1 ...... Premium paid for pre­ quired over cost (461) ferred and common stock 1 1 Amount paid in by stock­ in excess of par value (412) holders in excess of par 1 ...... Other (principally amount value (485) paid in in excess of par 1 1 .. Further amounts paid in value) (501) by stockholders (435) 108 Section 4—Retained Income 1 Capital contributed (des­ ignated as represented by A few companies continued using the terms common stock with par “capital surplus” and “paid-in surplus” but value) (449) added a further explanation on the balance sheet. 1 1 Additional amounts re­ Several examples are: ceived for shares issued in excess of fixed amount and “Capital Surplus created through retirement of discounts on repurchase of Preferred Stock” (American Asphalt Roof Corp.) preferred stock (13) “Capital Surplus (Arising from issuance of 25,000 5 2 Additional capital (311, Shares of Common Stock during 1949 at $30,375 Per 408, 416, 507) from issued Share)” (Doehlar-Jarvis Corp.) shares (paid-in capital) “Paid-in Surplus (Excess over par value of Com­ (299) mon Stock sold in 1949)” (Liggett & Myers Tobacco 2 3 4 Paid-in and (other) cap­ Co.) ital surplus (67, 343) “Capital surplus (additional paid-in capital)” 4 2 2 Capital contributed (by stockholders) in excess of (Standard Oil Co. (Kentucky)) par value of securities Twentieth Century-Fox Film Corporation (117, 174, 399, 472) shows the following on its balance sheet: 1 1 1 Other capital (excess of stated capital over net as­ “Paid-in surplus: sets in 1939 plus subse­ Unappropriated quent additions) (89) Appropriated for preferred stock retirements” 2 2 1 Amount paid the company for capital stock in excess of par value (30, 514) 2 2 2 Surplus—capital — arising Retained income (earned surplus) from reduction of capital (45, 515) charges and credits 1 1 1 Capital (paid-in) surplus (68) 4 2 2 Capital paid-in (by stock­ No charges or credits to retained income holders) in excess of cap­ (earned surplus) other than for dividends and net ital stock (121, 212, 323, income for the year were reported by 297 out of 488) the 525 reports tabulated in 1949. This is 1 1 1 Capital (principally paid- slightly more than the 263 companies which in) in excess of amounts shown for capital stock showed no charges or credits in 1948 and repre­ above (524) sents approximately fifty-seven per cent of the 2 2 1 Surplus from conversion of companies tabulated. preferred stock (53, 274) 1 1 1 Excess of amounts re­ ceived over stated capital (278) Retained income (earned surplus) 2 2 4 Amount in excess of par charges (excluding dividends) value (304, 461) 1 1 1 Surplus paid in by stock­ holders (in excess of par value of capital stocks, The following tabulation of charges to “re­ less financing expenses) tained income (earned surplus)” for the year 1949 (395) reveals a large decrease in the total number of 1 1 1 Capital—donated and items: paid in (383) 1949 1948 1947 1946 1 Reduction in stated value of capital stock in prior 391 358 340 None shown year (capital surplus) 27 40 60 65 Prior years’ adjustments (401) 36 42 60 62 Capital stock transac­ 3 Unclassified titles used in tions prior year 36 60 39 27 To reserves 545 543 547 533 16 17 31 32 Write-off of intangibles (Numbers in parentheses refer to companies listed in • • . . • • 3 8 Bond discount—write-off Appendix.) 1 3 4 7 Recapitalization expenses Retained Income (Earned Surplus) Charges (Excluding Dividends) 109 3 9 9 6 Consolidation and merger 1 Premium paid on redemption of preferred shares adjustments of the company in excess of paid-in surplus appli­ Unusual losses cable thereto (Cuneo Press, Inc.) 8 7 2 3 9 Premium on purchase of treasury stock charged 34 41 40 17 Miscellaneous in total to earnings retained (includes excess of 552 577 588 227 cost over stated value) (56, 160, 164, 448, 477) 1 Excess of stated value of common stock held in Prior year and miscellaneous adjustments treasury over proceeds of the sale less the dis­ count allowed to underwriters (Bethlehem Steel There was little change in the number of ad­ Corp.) justments resulting from examinations of prior 2 Cost of treasury stock purchased during the year years’ federal income tax returns. Several com­ (Time, Inc., Union Oil Co. of Calif.) panies adjusted their prior years’ provisions for 7 Amount transferred to capital stock to increase depreciation and bad debts and one company par or stated value (54, 124, 128, 170, 466, 488, adjusted its property, plant and equipment bases 511) to agree with those determined for federal income 1 Charges in connection with the issuance of pre­ tax purposes. ferred stock (net of proceeds received in excess of The devaluation of certain foreign currencies the par value thereof, $8,401) (Sutherland Paper caused a large increase in exchange adjustments Co.) 1 Premium on 5% preferred stock retired—excess of charged to retained income (earned surplus). premiums paid on redemption over net premium Reserve adjustments received (Safeway Stores, Inc.) 1 Transfer to common stock sufficient to bring There was a marked decrease in 1949 as com­ previous stated value up to new par value after pared with 1948 in charges for the purpose of issuance of two shares of $10 par value common increasing reserves. This reduction might indi­ for each share of no par common (Caterpillar cate a return to more normal business conditions. Tractor Co.) 1 Transfer to common stock incident to reclassifica­ A listing of the charges included in each of the tion of common stock from no par value to par above classifications follows: value of $15 per share and issuance of 11/10 Prior years adjustments shares for each share then outstanding (Geo. A. 17 Taxes (48, 49, 88, 112, 135, 322, 340, 373, 517) Hormel & Co.) 1 Additional Massachusetts excise tax (Moxie Co.) 1 Dividends rescinded by foreign subsidiary (Jant­ To reserves zen Knitting Mills Inc.) 1 Appropriation for contingencies less amount 1 Adjustment of bad debt provisions and write-off applicable to minority interest (City Stores Co.) of bad debts of prior years to agree with basis re­ 1 Unrealized loss on investments (R. R. Mallory & quired in connection with redetermination thereof Co., Inc.) for federal income tax purposes (Cuneo Press, 1 Income tax contingencies less reserve for con­ Inc.) tingencies previously accumulated (General 4 Not specified (Goldblatt Bros., Inc., Amalga­ American Transportation Corp.) mated Sugar Co., Regal Shoe Co., Beech Aircraft 5 Contingencies (115, 319) at foot of income state­ Corp.) ment after determination of “net income” (164, 1 Excess of replacement cost over basic Lifo cost of 226, 391) inventories “involuntarily liquidated” in 1947 (less refundable federal tax) (Tide Water Associ­ 5 Future inventory losses (117, 170, 333, 469) and ated Oil Co.) other contingencies (240) 1 Adjustments for prior years’ depreciation and 1 Appropriation as sinking fund for preferred stock other items, resulting from examination of tax re­ (United Artists Theatre Circuit, Inc.) turns by Bureau of Internal Revenue (Burlington 9 Replacement of fixed assets at higher than orig­ Mills Corp.) inal costs and contingencies (11, 59, 108, 197, 239, 1 Net adjustment of property, plant and equipment 306, 469, 473, 525) and reserves for depreciation and reserve for 3 Appropriation to statutory reserves by South doubtful accounts, as of December 1, 1948, to American subsidiaries (32, 315, 490) bases agreed for federal income-tax purposes 2 Pensions (American Sugar Refining Co., McGraw- (Struthers Wells Corp.) Hill Publishing Co., Inc.) 1 Research and development (A. O. Smith Corp.) Capital stock transactions 1 Creation of reserve for workmen’s compensation 11 Premium on stock retirement charged in total to contingencies (Eastern Malleable Iron Co.) earnings retained (24, 44, 205, 211, 374, 442, 518) 2 Provision for loss on disposal or liquidation of 1 Expense of stock issued charged in total to earn­ certain assets (Curtiss-Wright Corp., Pepsi-Cola ings retained (Sharp & Dohme, Inc.) Co.) 110 Section 4—Retained Income 1 Unrealized foreign earnings of prior years trans­ duction in federal income taxes ($1,704,000) ferred to reserve (Gillette Safety Razor Co.) applicable thereto (Cities Service Co.) 1 Additional provision for loss on advances to other 1 Idle studio expenses (Pathé Industries, Inc.) producers (Path6 Industries, Inc.) 1 Write-down of story rights and scenarios (Pathé 1 Appropriated to reserve for crop hazards and Industries, Inc.) other contingencies (Consolidated Cigar Corp.) 1 Segregation of earnings of European subsidiaries 1 Appropriated during year for abnormal construc­ at December 30, 1939 not realized in U. S. dollars tion and increased replacement costs (United (United Fruit Co.) Fruit Co.) 1 Extraordinary expenses in connection with legal proceedings terminated during the year, net of Write-off of intangibles recoveries (Lerner Stores Corp.) 4 Difference between cost of investment and book 1 Other charges (Creamery Package Mfg. Co.) value of investment at time of acquisition (52, 1 Interest and dividends paid on old gold certificate 198, 417, 493) (Griess-Pfleger Tanning Co.) 1 Write-off of cost of intangible assets (goodwill, 1 Elimination of undistributed net earnings of un­ going concern value, etc.) acquired in the acquisi­ consolidated subsidiaries, foreign branches and tion of the capital stock of Freyn Engineering licensees previously included in earned surplus Company (Koppers Company, Inc.) (Bristol-Myers Co.) 1 Write-off of goodwill arising in connection with 1 Adjustment of fixed asset valuations to cost less acquisition of the H. Belfield Company (Minne­ reserves for depreciation as computed by The apolis-Honeywell Regulator Co.) American Appraisal Company (Vanadium-Alloys 4 Write-off of goodwill purchased or acquired dur­ Steel Co.) ing the year (23, 78, 94, 211) 1 Investments (Liberty Products Corp.) 6 Write-off of intangibles (37, 55, 121, 230, 373, 433) 1 Wisconsin privilege dividend tax paid for stock­ Recapitalization expenses holders (Nash-Kelvinator Corp.) 1 Recapitalization and refinancing expenses 1 Vacation salaries of prior year less federal income (Drackett Co.) taxes applicable thereto (United Piece Dye Works) Consolidation and merger adjustments 1 Adjustments pertaining to exchange of stock re­ lated to merger consummated October 22, 1945 (Colorado Fuel and Iron Corp.) Retained income (earned surplus) 1 Deficits at December 31, 1948, of subsidiaries not credits (excluding net income then consolidated (National Cylinder Gas Co.) 1 Adjustments arising from the purchase of mi­ for the year) nority interests in stock of subsidiary companies (United Merchants & Mfrs., Inc.) The 525 companies included in this year’s study Unusual losses disclosed a reduction in the number of items 1 Loss on sale of subsidiary company applicable to earnings subsequent to specific date (U. S. Finish­ credited to retained income (earned surplus). ing Co.) 6 Loss on sale of assets (135, 266, 502) less estimated Transfers from reserves tax reduction or portion equal to tax reductions (6, 45, 209) As in the three preceeding years, approximately 1 Loss on sale of capital stock of The Linn Manu­ half of the credits to retained income (earned sur­ facturing Corporation (American-La France- plus) consisted of transfers from various reserves. Foamite Corp.) The elimination of contingency reserves con­ Miscellaneous tinued to account for the majority of the credits. 1 Depletion of Mines (Phelps Dodge Corp.) In 1949 there was a noticeable increase in the 1 Charges in connection with retirement plans number of transfers from reserves provided in (Standard Oil Co. of Calif.) prior years for future inventory price declines. 16 Exchange adjustments (See pp. 74 for a discussion of decreases in reserves 1 Adjustment in value of investments—net (West­ provided for future inventory price declines and inghouse Electric Corp.) contingencies.) 3 Adjustment resulting from cash to accrual method of accounting for vacation pay (Billings & Prior year adjustments Spencer Co., Clark Equipment Co.) less estimated income taxes (Allegheny Ludlum Steel Corp.) The reduction in the items included in this 1 Call premiums, less discounts, and other costs on classification was principally due to a reduction in debentures retired during 1949, less estimated re­ credits arising from tax adjustments. Retained Income (Earned Surplus) Credits (Excluding Net Income for the Year) 111 1946 retained earnings to include appropriations for 1949 1948 1947 employees’ recreational and welfare facilities, for 377 355 372 . . . None shown replacement costs of plant and equipment, for 101 96 98 92 From reserves future payments under retirement plan and for 40 73 53 69 Prior year adjustments self-insurance) (Endicott-Johnson Corp.) 3 16 17 18 Unusual gains 1 Elimination of reserve against investments in 6 17 8 17 Consolidation and merger foreign subsidiaries due to increase in underlying adjustments net assets during the year (Armstrong Cork Co.) 7 5 7 5 Adjustment of investment 1 Cancellation of allowance (provided from earned in subsidiaries surplus in prior years) for loss on investments in 7 5 4 4 Capital stock transactions affiliated companies (Reynolds Metals Co.) 1 Investments and securities (Allied Chemical & 25 25 20 21 Miscellaneous Dye Corp.) 566 592 579 226 5 Marketable securities (6, 37, 254, 478, 482) 1 Percentage depletion (Alabama Fuel & Iron Co.) The details of the items included in the above 3 Depreciation (51, 135, 373) classifications in 1949 follow: 1 Adjustment of specific reserves for bottles and cases (net) (Jacob Ruppert) From reserves 2 Doubtful notes and accounts receivable (48, 187) 37 Contingencies (including variations of this title) 1 Fire loss replacement (Ralston Purina Co.) (1, 3, 7, 10, 23, 36, 40, 46, 60, 61, 74, 81, 82, 85, 1 Portion of reserve for post-war refunds no longer 135, 158, 161, 168, 175, 219, 256, 297, 334, 335, required (Safety Car Heating and Lighting Co., 349, 363, 376, 395, 396, 402, 405, 423, 450, 490, Inc.) 517, 521) at foot of income statement after de­ 3 Reserve for replacement of facilities at current termination of “net earnings for the year” (436) cost (or similar titles) (156, 306, 374) 22 Future inventory price declines and other con­ 1 Adjustment of accumulated depreciation on fixed tingencies (including variations of this title) (28, assets for prior years based on a new life-term 40, 67, 73, 93, 132, 137, 145, 154, 155, 157, 165, basis established by the Treasury Department 229, 251, 264, 341, 358, 469, 500, 510) shown on (Less—Additional federal income taxes thereon) combined statement of income and retained in­ (Liberty Products Corp.) come (earned surplus) after “net income” but be­ 1 Appropriations rescinded by action of the board fore opening surplus balance (180, 193) of directors (Champion Paper and Fibre Co.) 1 Contingency reserve for doubtful accounts not (Balance Sheet, dated March 31, 1949, showed presently required, transferred to earnings re­ the earned surplus appropriated: tained (Bayuk Cigars Inc.) For possible extraordinary losses from aban­ 1 Future inventory losses (Lukens Steel Co.) donment of property 1 Adjustments of metal inventory reserves (Ameri­ For possible losses from revaluation of inven­ can Metal Co., Ltd.) tories 1 Reserve of $2,750,000 for inventory price declines For increased cost of property replacement) and other contingencies accumulated during prior 1 Inventory adjustments and obsolescence provided years, not used, now transferred net of minority in prior years credited to earnings invested in the interest (Crown Zellerbach Corp.) business (Timken Roller Bearing Co.) 1 Future losses on inventories and commitments 1 Reversal of reserve provided in prior years for (Bristol-Myers Co.) possible future extraordinary losses on accounts 1 Price decline and other inventory contingencies receivable and inventories (Ruberoid Co.) (Borg-Warner Corp.) 1 Future decline in inventory commodity price 1 Reserves previously established from earned sur­ (Otis Elevator Co.) plus no longer required (Anderson, Clayton & 1 Inventory losses (Buckeye Steel Castings Co.) Co.) 1 Restoration to unappropriated earnings retained 1 Restoration of portion of reserve for intra-plant in the business of amount previously provided for inequities not required (Colorado Fuel and Iron investment in Rustom-Bucyrus, Ltd. (Bucyrus- Corp.) Erie Co.) 1 Plant expansion (Gleaner Harvester Corp.) 1 Replacement of plant and equipment (Hamilton Watch Co.) Prior year adjustments 2 Service guaranty (168, 521) 18 Taxes—prior years’ provisions or reserves exces­ 1 Not named (R. J. Reynolds Tobacco Co.) sive (20, 33, 102, 129, 150, 152, 167, 197, 212, 251, 1 Self-insurance reserve— no longer required (Inter­ 310, 312, 349, 373, 379, 403, 427, 518) national Shoe Co.) 8 Refunds or claims for refund of prior years’ taxes 1 Restoration of appropriations of prior years (37, 157, 183, 264, 446, 473) (722 claim—109, 414) (shown in statement of appropriated accumulated 2 Adjustment of depreciation to tax basis (132, 341) 112 Section 4—Retained Income 2 Adjustments (net) to property accounts resulting 1 Recovery of cost of shares of treasury stock sold from Internal Revenue Agent’s examination (P. (Time, Inc.) R. Mallory & Co., Inc.) (less applicable federal income tax thereon) (Griess-Pfleger Tanning Co.) 1 Cost of treasury stock (restored to unissued 1 Adjustment of prepaid taxes and insurance (prior status) charged off (Archer-Daniels-Midland Co.) year) and miscellaneous (Griess-Pfleger Tanning 1 Cancellation of amounts capitalized in connection Co.) with 1948 stock dividend applicable to scrip 1 Restoration of capital expenditures previously certificates which expired (Liberty Products written off (Craddock-Terry Shoe Corp.) Corp.) 1 Excess provision for doubtful accounts (Fair­ 1 Excess of stated value over cost of preferred stock banks Co.) purchased (Electric Boat Co.) 1 Adjustment of losses on sales of ore lands—prior 1 Cost of 35,200 shares of capital stock reacquired years (Alabama Fuel & Iron Co.) prior to January 1, 1949, previously treated as a 1 Net surplus credit arising from examination of reduction of earned surplus, now shown on the income tax returns (Raybestos-Manhattan, Inc.) balance sheet under the caption, “Treasury Stock” 1 Reduction in depreciation provision for prior (McGraw-Hill Publishing Co., Inc.) years and adjustment of prior year estimated in­ surance claims (E. J. Brach & Sons) Miscellaneous 2 Portion of expenditures in prior years required to 4 Not specified (152, 303, 450, 503) be capitalized for federal income-tax purposes Unusual gains less applicable federal income tax (147, 484) 1 Profit on sale of investment in a public utility 4 Sundry items (123, 135, 243, 514) subsidiary (excluding its undistributed surplus) 1 Renegotiation rebates (Billings & Spencer Co.) (Cities Service Co.) 1 Realized investment appreciation transferred 1 Profit on sale of fixed assets (Koppers Co., Inc.) from capital surplus (Armour and Co.) 1 Profit on sale of investments (Koppers Co., Inc.) 3 Transfer from appreciation surplus (36, 56, 60) 1 Reduction of obligation on purchase of subsidiary Consolidation and merger adjustments (Buffalo Bolt Co.) 3 Surplus of subsidiary upon consolidation (55, 58, 1 Approximate federal income taxes at current 409) rates applicable to provision for the year to give 1 Adjustment of provision for minority interests in effect to normal base stock method of inventory subsidiary company (Bay Petroleum Corp.) (Endicott Johnson Corp.) 1 Share of undistributed earnings of companies con­ 2 Discount on reacquired mortgage bonds (1, 476) solidated for the first time (Paramount Pictures 1 Increase in carrying amount of inventory of used Inc.) trailers (trade-ins and repossessions) at January 1, 1 Earned surplus of subsidiary merged less portion 1949, from $1 each to appraised value, reduced applicable to shares of subsidiaries’ stock pur­ for estimated disposal costs less federal income chased prior to merger and other treasury shares, taxes thereon of $600,000 applicable to prior all of which were retired (McGraw Electric Co.) years (Fruehauf Trailer Co.) 1 Adjustment of purchase price of tanker under Adjustment of investment in subsidiaries provisions of Merchant Ship Sales Act of 1946 1 Revaluation of investments in affiliates for differ­ (Barber Oil Corp.) ences between the equity in the net earnings or 2 Increase in market value of marketable securities losses and the dividends paid (General Electric (116, 482) Co.) 1 Restricted earnings from pipeline operations 1 Transfer of portion of net earnings of Canadian (Standard Oil Co. (N. J.)) subsidiary for year 1946 (Raybestos-Manhattan, 1 Increase in inventory valuation of refined prod­ Inc.) ucts as the result of a change from fixed costs to 1 Additional valuation assigned to investment in a the lower of cost or market, less provision for subsidiary (Pathé Industries, Inc.) estimated additional federal and state taxes 1 Adjustment of acquisition surplus of Canadian thereon (Mid-Continent Petroleum Corp.) subsidiary (H. H. Robertson Co.) 1 Restoration of appropriations for conversion of 1 Excess of book value over cost of shares of capital preferred stock (Argo Oil Corp.) stock of subsidiary purchased (Allegheny Ludlum 1 Cancellations of dividends but not paid on pre­ Steel Corp.) ferred stock which reverted to the company 2 Valuation assigned to investment in subsidiary (Autocar Co.) formerly carried at no value (374, 417) 1 Unexpired subscriptions (McGraw-Hill Publish­ Capital stock transactions ing Co., Inc.) 2 Excess of par value over cost of cumulative pre­ 1 Recovery on investments previously charged off ferred stock retired (158, 228) (Glidden Co.) “Surplus” Appropriations 113 For inventory and other contingencies” "Surplus” appropriations (Yale & Towne Mfg. Co.) (14) “Surplus Reserve : Possible Market Decline in Inventories” (Allied Mills, Inc.) In the annual reports of the 525 companies (15) “Earnings invested in the business including included in the 1949 study, fifty-eight instances income ($3,111,646.04) of constituent companies ac­ were noted where companies showed reserves or quired in consolidation at June 16, 1937: appropriations of “surplus” in their net worth Reserved for compensation insurance section of the balance sheet. A few examples of Reserved for post-war contingencies some of these various reserves or appropriations For general purposes” (Gaylord Container are listed below. (See Exhibit 13, p. 90.) Corp.) (1) “Appropriated for contingencies” (California In addition to “surplus” reserves or appropria­ Packing Co., City Stores Co., Master Electric Co., tions shown in net equity section, there were Wagner Electric Corp.) several cases where reserves relating to inven­ (2) “Surplus reserved for contingencies” (City tories, contingencies and plant replacements were Products Corp.) presented above the net equity section as non- (3) “Reserve for contingencies” (Dictaphone current items specifically designated as surplus Corp., Sharp & Dohme Inc.) reserves. A few of such treatments are listed be­ (4) “Appropriated as reserve for contingencies” low: (Air Reduction Co., Inc.) (1) “Appropriation for fluctuation in price of (5) “Earned surplus—since January 1, 1938: metals and for other contingencies” (International Appropriated as a reserve for general con­ Silver Co.) tingencies (2) ‘‘Surplus Reserves: Unappropriated” (Mohawk Rubber Co.) For Contingencies (6) “Appropriated for: For Possible Inventory Price Declines Inventory adjustment For Losses on Unusual Property Disposals” Insurance reserve” (General Cigar Co., Inc. (Borden Co.) (7) “Income appropriated for possible adjust­ (3) “Reserve for contingencies (appropriated ments of merchandise values” (S. S. Kresge Co.) earned surplus)” (Willys-Overland Motors, Inc.) (8) “Earned surplus, including $700,000.00 appro­ priated in recognition of increased cost of replacement of machinery and equipment” (E. J. Brach & Sons) (9) “Contingent Reserves (earned) and Undivided Materiality of charges and credits Profits to December 31, 1940” (Curtis Publishing Co.) to “surplus" (10) “Earnings retained in business less amounts transferred to capital stock account: Appropriated: Self-insurance The items included in this tabulation represent Abnormal construction and increased all charges and credits to retained income (earned replacement costs surplus) other than dividends, entries relating to Adjustments in materials and supplies surplus reserves and charges and credits affecting Earnings of European subsidiaries at capital. The percentages shown below indicate December 30, 1939 not realized in the relation of the net retained income (earned U. S. dollars Not specifically appropriated” (United surplus) charges and credits to the average net in­ Fruit Co.) come for the current and the preceding year. (11) “Appropriated for exploration and acquisi­ 1949 tion of oil reserves” (Panhandle Producing & Refining 365 None Co.) 74 Under 5% (12) “Reserves 26 5—10% For Inventories 10 10—15% For Contingencies” 5 15—20% (Bigelow-Sanford Carpet Co., Inc.) 8 20—25% (13) ‘‘Surplus reserves: 37 Over 25% For foreign contingencies 525 114 Section 4—Retained Income Premium on shares of preferred stock pur­ Capital surplus charges chased for retirement in each year under sink­ ing fund provisions (Marathon Corp.) Cost in excess of par value of treasury stock The number of charges to capital surplus de­ retired (Paramount Pictures Inc.) creased in 1949, continuing the trend indicated in Paid-in surplus applicable to preferred shares the tabulation for the previous three years. of the company redeemed (Cuneo Press, Inc.) Less activity in the purchase and sale of stock Premium on preferred stock retired less accounted for the greater part of the decrease. amount charged to retained income (Safeway 1949 1948 1947 1946 Stores, Inc.) 17 27 46 51 Resulting from purchase Par value of treasury stock issued in exchange and sale of stock for old shares (Brockway Motor Co., Inc.) 5 12 5 18 Transfers to capital stock 3 3 11 15 Write-off of intangibles Transfers to capital stock 1 3 8 6 Transfers to earned sur­ Transfers to capital stock (54, 478, 488) plus Amount transferred to common stock in con­ 2 1 3 3 Appropriations nection with increase in par value of shares of 7 5 6 5 Consolidation, merger and Common Stock (Chrysler Corp.) recapitalization entries Par value of stock dividend shares credited to 10 9 7 3 Miscellaneous capital (Cuneo Press, Inc.) 45 60 86 101 Write-off of intangibles The details of the above summary are listed Write-down of goodwill (Bucyrus-Erie Co.) below: Appropriated for the reduction of Goodwill, Resulting from purchase and sale of stock Patents and Trademarks (American Safety Razor Loss on sale of treasury shares of the corpora­ Corp.) tion’s capital stock (Eastern Stainless Steel Write-off of goodwill, trademarks and patents Corp.) of the company and its subsidiaries other than Expenses in connection with offering of preferred The Toni Company, less amount charged to stock to employees (American Cyanamid Co.) earned surplus (Gillette Safety Razor Co.) Expenses in connection with the issuance of Transfers to earned surplus preferred stock (National Cylinder Gas Co.) Excess of cost over par value of common stock Transfer of portion of amortization of appraisal purchased for treasury (Federated Department appreciation applicable to capital surplus (Ameri­ Stores, Inc.) can Republics Corp.) Common stock reacquired (American Writing Appropriations Paper Corp.) Appropriation for preferred stock retirements Common stock reacquired for treasury, less (Twentieth Century-Fox Film Corp.) excess of market over par value of treasury shares Provision for retirement of preferred shares issued to employees’ profit-sharing plan (Burling­ pursuant to articles of incorporation, less amounts ton Mills Corp.) restored to surplus (Interchemical Corp.) Excess of market value over $12.50 per share on shares of common stock reacquired (Colgate- Consolidation, merger and recapitalization entries Palmolive-Peet Co.) Transfer to earnings employed in the business Excess of cost over the par value of preferred due to consolidation of a subsidiary (Armour and stock purchased (Macfadden Publications, Inc., Co.) United Artists Theatre Circuit, Inc.) Adjustments in connection with merger: Net premium on shares of preferred capital Earned surplus (deficit) of subsidiaries as of stock purchased for retirement (Copperweld date of merger Steel Co.) Excess of par value of new preferred stock- Excess of cost over stated value of preferred issuable over par value of preferred and stock retired by sinking fund (Goldblatt Bros., common stocks of a subsidiary exchange­ Inc.) able therefor Premium paid on shares of preferred stock pur­ Less capital surplus of subsidiary as of date chased and retired (Johnson & Johnson) of merger (Foremost Dairies, Inc.) Capital Surplus Credits 115 16 18 17 26 Conversion of capital Adjustment of acquisition surplus of Canadian stock into another issue of subsidiary (H. H. Robertson Co.) same company Adjustments resulting principally from acquisi­ 3 4 13 Exchange of capital stock tion of additional capital stock in majority- 5 for that of other company owned subsidiaries (Coca-Cola Co.) 45 40 27 26 Treasury stock—purchase Adjustments resulting from changes in owner­ and retirement (and issu­ ship of various companies consolidated (Standard ance in 1946) Oil Company (N. J.)) 10 8 13 Treasury stock—sale and Net adjustment incident to liquidation of distribution 11 5 12 20 Stock options and war­ subsidiary company (Monsanto Chemical Co.) rants Costs and expenses incidental to liquidation of 3 6 6 11 Restoration or realization subsidiary (Universal Match Corp.) of assets previously writ­ Miscellaneous ten off Adjustment of prior years’ post-war refund of 6 7 7 9 Merger and consolidation foreign excess profits taxes (Gillette Safety Razor adjustments Co.) 5 10 6 7 Transferred from reserves Capital adjustments (Republic Steel Corp.) 4 5 8 6 Negative goodwill Loss on sale of subsidiary company (United 16 20 8 5 Stock dividends States Finishing Co.) 1 2 5 Change in equity in un­ Exchange of old gold certificate for cash and consolidated subsidiary common stock (Griess-Pfleger Tanning Co.) 1 6 3 3 Transfers from earned sur­ Transfer of realized investment appreciation plus (Armour and Co.) 6 18 18 8 Miscellaneous Cancellation of note receivable held as part 151 200 179 218 payment for common stock surrendered upon Details of the above summary are listed below: resignation of an executive (Associated Dry Goods Corp.) Premium on issuance of capital stock Amortization of appreciation (Universal Match Excess of consideration received over par value Corp.) of common stock issued under corporate simplifi­ Appreciation (resulting from appraisal of land) cation plan (Federated Department Stores, Inc.) applicable to property sold during 1949 (Autocar Excess of valuation assigned to stock issued in Co.) acquisition of a subsidiary over par value thereof Plant acquisition and other adjustments relat­ (Ex-Cell-O Corp.) ing to a gas utility (including restoration to Excess of book value of oil properties acquired depreciation reserve) charged to surplus in ac­ over par value of common stock issued therefor cordance with orders issued by the Public Service (Bay Petroleum Corp.) Commission of the State of New York (Cities Value assigned to assets acquired in excess of Service Co.) the par value of common stock issued therefor Miscellaneous (Federated Department Stores, (Piper Aircraft Corp.) Inc.) Excess of value of equipment acquired over par value of common stock issued therefor (Foremost Dairies, Inc.) Excess of proceeds over par value on sale of Capital surplus credits capital stock of foreign subsidiary company (Bur­ lington Mills Corp.) Excess of proceeds over cost of stock sold dur­ The decrease in the number of capital surplus ing the year (H. H. Robertson Co.) credits was very noticeable in 1949. This was Excess of market value at dates of delivery over due principally to a reduction from fifty-three to par value of common stock sold to employees twenty-three in the number of instances where (Dow Chemical Co.) capital stock was issued at a premium. Excess of sales price over par value of common 1949 1948 1947 1946 stock sold to holders of common stock (Dow 23 53 48 79 Premium on issuance of Chemical Co.) capital stock. Credits resulting from transactions under em­ 116 Section 4—Retained Income ployee stock plan (Libbey-Owens-Ford Glass Excess of stated value of preferred stock over Co.) par value of common stock into which converted Amount received in excess of par value from (Avco Mfg. Corp.) sale of common stock to employees, less expenses Preferred stock purchased and converted into (Westinghouse Electric Corp.) common stock (American Hide and Leather Co.) Excess of issue price over par value for shares Surplus arising from issuance of common stock sold to underwriters, less expenses of company on conversion of convertible notes (Paramount (Koppers Co., Inc.) Pictures Inc.) Excess of value assigned to common stock Excess of par value of preferred stock over par issued during year over stated value (J. I. Case value of common stock issued therefor through Co.) conversion (Foremost Dairies, Inc.) upon con­ Excess of market value over par value of com­ version thereof (Sampson United Corp.) mon stock sold to officers and employees (excess Excess of par value of shares of preferred stock of market over selling price charged to expense converted over par value of shares of Common as compensation) (Mid-Continent Airlines, Inc.) Stock issued upon conversion (American Cyana­ Sales proceeds of shares in excess of par value mid Co.) per shares (American Box Board Co.) Excess of par value of preferred stock, con­ Excess over par value of common stock sold verted during the year, over paid-in value of (Liggett & Myers Tobacco Co.) common stock issued therefor (Atlas Powder Co.) Excess of net consideration for shares of capital Excess of par value of Class “A” stock over par stock issued during the year over the assigned value of common stock issued during the year in value thereof (Union Bag & Paper Corp.) conversion thereof (Miller Mfg. Co.) Excess of proceeds over par value of common stock issued under subscription agreements (Gen­ Exchange of capital stock eral American Transportation Corp.) for that of other company Arising from issuance of common stock (Doeh­ Stock issued in exchange for investment in a lar-Jarvis Corp.) subsidiary company (Standard Oil Co. (N.J.)) Excess of market value over par value of com­ Surplus arising in connection with the issuance mon stock issued for the net assets of a company of common stock in exchange for securities of (Minneapolis-Honeywell Regulator Co.) predecessor corporation (Studebaker Corp.) Premium on common stock issued (Jantzen Excess of book value of shares of subsidiary Knitting Mills Inc.) companies acquired over par value of capital Excess of market value of company stock issued stock issued in exchange therefor (Bausch & to employees as compensation (Lear, Inc.) Lomb Optical Co.) Excess of consideration received over par value Excess of par value of capital stock of sub­ of common stock issued in the acquisition of a sidiary over par value of common stock issued in subsidiary company (May Department Stores) exchange therefor (McGraw Electric Co.) Excess of issue price over par value for shares Conversion of capital stock into issued to acquire the capital stock of a subsidiary another issue of same company company (Koppers Co., Inc.) Excess of stated value of preference stock with­ out par value over the par value of common stock Treasury stock—purchase and retirement into which it was converted (Monsanto Chemical Credit arising through retirement of preferred Co.) stock (Twentieth Century-Fox Film Corp.) Excess of par value of preferred stock converted Excess of par value over cost of preferred stock to common stock (Burlington Mills Corp.) over retired (69, 100, 462, 493) stated value of the common stock (Kimberly- Excess of par value over cost of preferred stock Clark Corp.) acquired during the year (Associated Dry Goods Surplus arising from conversion of preferred Corp.) stock into common stock (140, 162, 220) less Discount on preferred shares purchased and amount paid for fractional shares (352) retired pursuant to articles of incorporation (In­ Excess of conversion price over par value of terchemical Corp.) common stock issued on conversion of second Discount on repurchase of preferred stock dur­ preferred stock (Dow Chemical Co.) ing year (Allied Stores Corp.) Capital Surplus Credits 117 Redemption of preferred stock (Jacob Rup­ stock purchased (General Shoe Corp.) repur­ pert) chased (Gimbel Brothers, Inc.) Surplus arising from purchase and cancellation Excess of stated value over cost of capital stock of preferred stock (Crown Zellerbach Corp.) purchased for retirement during the year (Pull­ Discount on preferred stock purchased (93) man Inc.) and retired (78, 115) for retirement (210) Difference between par value of preferred stock redeemed or purchased for redemption and cost Excess of par value over cost of (preference) thereof (Thompson Products, Inc.) stock acquired for treasury (109, 419) Excess of par value of preferred stock acquired Discount on purchase of preferred stock during year over cost thereof (212, 491) (Anchor Hocking Glass Corp.) Arising from the retirement of preferred stock Excess of par value over cost of preferred (Stahl-Meyer, Inc.) shares purchased for retirement (Barker Bros. Credits from reversion to the company of pre­ Corp.) ferred stock no longer required to be held for Excess of par value over cost of shares of pre­ dividends on prior issues of common stock (Auto­ ferred stock held in treasury which were retired car Co.) (Alan Wood Steel Co.) Excess of stated value over cost of preferred Excess of par value over cost of preferred stock capital stock retired during the year (Spiegel, retired (Revere Copper and Brass Inc.) through Inc.) sinking funds (Colonial Stores Inc.) Discount on preferred stock acquired for sink­ Excess of par value over cost of common stock ing fund (Willys-Overland Motors, Inc.) acquired per tender (Pennsylvania Coal and Coke Corp.) Treasury stock—sale and distribution Cost of par value over cost of treasury stock Net profit from sale of common stock held in acquired (H. K. Porter Co., Inc.) the treasury (United Cigar-Whelan Stores Corp.) Excess of stated capital over cost of preferred Excess of market value over cost of reacquired stock retired or held for retirement (Brown Shoe common stock awarded as bonus, less U. S. capi­ Co., Inc.) tal gains tax (Hercules Powder Co.) Excess of aggregate discounts over aggregate Excess of sales price over cost of treasury stock premiums paid for the acquisition of common sold (Time, Inc.) stock reacquired and held in treasury (D. Emil Excess of sales price over carrying value of Klein Co., Inc.) treasury stock sold during year to key employees Excess of par value of preferred stock retired (Stewart-Warner Corp.) over the purchase price thereof (Le Roi Co.) Excess of quoted market over cost of treasury Excess of carrying value over cost of preferred shares sold to officers and key executives (dif­ stock repurchased (May Department Stores) ference between market and selling price charged Difference between par value and cost of pre­ against income) (Eaton Mfg. Co.) ferred stock purchased and cancelled during the Issuing price over par value of common treas­ year (Dresser Industries, Inc.) ury stock issued (General Shoe Corp.) Excess of stated value of preferred stock pur­ Profit from sale of treasury stock (Mid-Conti­ chased over cost thereof (Avco Mfg. Corp.) and nent Petroleum Corp.) retired (R. G. Le Tourneau, Inc.) Difference between par value or principal Excess of par value of preferred stock retired amount and cost of stock and debentures acquired over cost thereof (Borg-Warner Corp.) and disposed of net (Ward Baking Co.) Discount on capital stock purchased (Crucible Excess of market quotations over cost of ac­ Steel Co.) quired capital stock distributed to employees, less Increase through acquisition of common treas­ provision for income tax (Johnson & Johnson) ury stock net of shares sold (Alaska Pacific Sal­ Excess of realization over cost of treasury stock mon Co.) sold (Standard Oil Co. (Ohio)) Excess of par value over cost of preferred stock redeemed during year (Philip Morris & Co. Ltd., Stock options and warrants Inc.) Excess of fair market value over option price at Acquisition, at a discount, of preferred shares date common stock option was exercised by an for the sinking fund (National Supply Co.) officer—charged to general and administrative Excess of stated value over cost of preferred expenses (Clyde Porcelain Steel Corp.) 118 Section 4—Retained Income Excess of option price of common stock option serves) of subsidiary companies at dates of acqui­ exercised by an officer over par value of common sition (Dresser Industries, Inc.) stock (Clyde Porcelain Steel Corp.) Capital surplus of subsidiary, less portion ap­ Premium received upon the exercise of em­ plicable to shares purchased prior to merger and ployees’ options to purchase capital stock (Lock­ other treasury shares, all of which were retired heed Aircraft Corp.) (McGraw Electric Co.) Excess of amount received upon exercise of Surplus arising from acquisition of additional common stock options over par value of the com­ interests in subsidiary company (Bay Petroleum mon stock (Republic Aviation Corp.) Corp.) Credits resulting from transactions under em­ Earned surplus attributable to additional in­ ployee stock plan (Libbey-Owens-Ford Glass vestment made in subsidiary company not pre­ Co.) viously consolidated (Arden Farms Co.) Excess of market value over par value of com­ mon stock sold under company’s stock option plan (Brown Shoe Co., Inc.) Transferred from reserves Premium on shares of cumulative preferred Reserve for retirement of preferred shares at stock issued under employees’ stock purchase beginning of each year restored to surplus, the contracts (American Cyanamid Co.) corporation’s obligation in this respect having Excess of sales price over cost of shares of the been met (Interchemical Corp.) corporation’s stock purchased during the year (in­ Transfer from general reserves of unused pro­ cluding excess of sales price over par value of visions for losses on disposal of obsolete machin­ fifty shares of treasury stock) with respect to ery, equipment and inventories (A note explained capital stock sold to certain officers and em­ that reserves had been created prior to date of ployees under stock allotment agreements (Na­ corporate adjustments.) (United States Rubber tional Steel Corp.) Co.) Excess of proceeds over par value of common Excess reserve for contingencies restored to stock issued upon exercise of warrants (Ward surplus (American Republics Corp.) Baking Co.) Transfer from reserve for self-insured risks Credit with respect to warrants exercised (Lehigh Portland Cement Co.) (Federated Department Stores, Inc.) Excess of reserve for contingencies set up out Excess of proceeds received from sale of com­ of capital surplus in prior year over additional mon stock under option agreement over the par 1944 federal income tax paid during year (Park & value thereof (Radio-Keith-Orpheum Corp.) Tilford, Inc.) Restoration or realization of assets previously written off Negative goodwill Excess of net assets at date of acquisition over Restoration of reserve for investment in cost of investment in subsidiary (Avon Allied Italian subsidiary (American Radiator & Stand­ Products, Inc.) ard Sanitary Corp.) Excess of book amount over cost of investment Realization from disposal of assets previously in subsidiary (City Products Corp.) written down by charges to capital surplus, etc. Excess of book amount over cost of minority (Curtiss-Wright Corp.) interests acquired (City Products Corp.) Credits arising through disposal or utilization Excess of acquired equity in net assets of of properties previously written off against capi­ partly-owned subsidiary consolidated over cost tal surplus (Borden Co.) of investment therein (Remington Rand Inc.) Merger and consolidation adjustments Adjustments for minority shares acquired dur­ Stock dividends ing the year (Stokely-Van Camp, Inc.) Earned surplus capitalized with respect to Undistributed earnings of a partly owned com­ stock dividend (Cuneo Press, Inc.) pany prior to acquisition of the remainder of its Excess of (approximate) market value over par stock (Radio-Keith-Orpheum Corp.) value of common stock issued as a stock dividend Adjustments to net assets (income tax accruals (182, 392) and refund claims and property and related re­ Earned surplus capitalized by a wholly owned Capital Surplus Credits 119 subsidiary company in connection with a stock under Section 722 of the Internal Revenue Code, dividend (Dow Chemical Co.) prior to the dates of their acquisition as subsidiary Transfer from earned surplus in connection companies (Burlington Mills Corp.) with issuance of common capital stock and the distribution thereof among the holders of com­ Other presentations mon stock in proportion to the number of shares The statement of Scovill Manufacturing Com­ held by each (Falstaff Brewing Corp.) pany titled “Analysis of Capital Invested” Amount transferred from earned surplus in con­ showed “Excess of par value over cost of 2,853 nection with capital adjustment—excess of charge shares of 3.65% Cumulative Preferred Stock” as to earned surplus over par value of common stock an addition to “additional capital” and the excess to be issued (Foremost Dairies, Inc.) of “Expenses of issuance of 4.30% Cumulative Increase in connection with stock dividend; Preferred Stock” over “amount in excess of par equal to approximately $6 per share for shares paid in by stockholders” as a deduction. The issued as stock dividend (Granite City Steel Co.) balance of $17,616,037 additional capital at De­ Transfer from earned surplus in connection cember 31, 1949, carried the following footnote with stock dividend (Standard Oil Co. of Calif.) reference: Dividends payable in stock (Standard Oil Co. (N.J.)) “The additional capital at December 31, 1949, was Excess of approximate market value over par in part supplied by stockholders during the years 1937 value of stock dividends (Alan Wood Steel Co.) and 1946 by the purchase of stock for $2,113,123 in Excess of assigned value over par value of com­ excess of its par value, and partly from earnings re­ mon stock declared as stock dividends (Skelly tained for use in the business." Oil Co.) The above-mentioned addition to and deduc­ Transfer from earned surplus resulting from tion from the additional capital have not been stock dividend paid during year (Beech Aircraft included in either of the foregoing tabulations of Corp.) retained income (earned surplus) or capital sur­ Excess of amount transferred from earned sur­ plus. plus over par value of common stock issued as E. I. du Pont de Nemours & Company did not stock dividend (Food Machinery and Chemical separate its capital surplus from retained income Corp.) (earned surplus) and presented an analysis of Portion of common stock dividend in excess of “surplus” which is shown in the notes to be “sur­ stated value (par value) of shares issued (233, plus (earned, paid-in, and arising from revalua­ 462) tion of assets).” Therefore, surplus charges and Excess of quoted market value on record date credits have been excluded from the above tabu­ over par value of shares of common stock issued lations. In 1949 there were surplus credits for as a stock dividend (Johnson & Johnson) “adjustment resulting from revaluation of invest­ ment in General Motors Corporation” and for Miscellaneous credits “excess of issue price over par value of common Reclassification to earned surplus of cost of stock issued to employees under the bonus intangibles charged to capital surplus (to con­ plan.” form with currently preferred accounting prac­ The annual report of Kimberly-Clark Corpora­ tice) (Schenley Industries, Inc.) tion for the year ending December 31, 1949, dis­ Miscellaneous (Foremost Dairies, Inc.) closed a decrease of $793 in the “additional paid- Credit arising from expired common stock in capital” which was not explained and there­ scrip certificates (Booth Fisheries Corp.) fore could not be included in the above tabulation Emergency facilities acquired in prior years, of capital surplus charges. An increase in the which had been fully amortized and carried at no account shown in a subsequent report for the net value, reinstated at cost less estimated de­ four months ended April 30, 1950, however, has preciation to date (Federal Machine and Welder been included in the above capital surplus credits. Co.) The April 30, 1950, report was issued because of a Contribution toward construction of new plant change in the annual reporting period from the (Electric Auto-Lite Co.) calendar year to a fiscal year ending April 30. Credit on expiration of scrip certificates for Lehigh Portland Cement Co. did not present a common stock (American Colortype Co.) separate statement of “amount in excess of par Recoveries by subsidiary companies of taxes, value” but the increase in 1949 was explained by 120 Section 4—Retained Income a parenthetic balance-sheet notation “transferred ard Oil Co. (New Jersey). The charge for the in 1949 to capital” which appeared after the cap­ stock distributed as a dividend represented the tion “Reserve for self-insured risks.” Several average carrying value of the stock with equaliz­ other companies used a similar method of dis­ ing cash payments in lieu of fractional shares. closing changes in capital surplus. The per share market value on the distribution date was shown parenthetically. Arden Farms Co. paid a dividend in stock of Diced Cream of America Co. and charge dearned surplus with Dividends—where charged the cost price of the stock. The market value of the stock distributed was not stated. 1949 1948 1947 Eight companies deducted cash dividends from 461 462 465 Retained income (earned sur­ net income at the foot of a separate income state­ plus) (44, 50, 83, 116, 123, 162, ment. S. H. Kress & Co. and U. S. Steel Corp. 244, 270, 305, 346, 411, 417) did not present separate statements of retained 36 23 31 None shown income (earned surplus), but the latter company 8 17 15 Charged at foot of separate in­ made a parenthetical balance sheet reference to come statement (10, 378, 403, its income statement regarding the year’s addi­ 508, 514) tion to its “income reinvested in business.” 19 21 12 Deducted after net income but before earned surplus opening Johnson & Johnson carried the balance of net balance in combined income and earnings for the year, after deduction of cash surplus statement (18, 22, 42, 66, dividends, to the statement of “balance of earn­ 117, 180, 186, 188, 434, 511) ings retained in the business” before deducting 1 2 Deducted in separate statement the dividend declared payable in common stock. of disposition of net profit (240) The other five companies added the balance of 2 Divided between capital surplus net income to the opening balance in the state­ and earned surplus ment of earnings retained. 525 525 525 Granite City Steel Co. presented a separate (Numbers in parentheses refer to companies listed statement of disposition of net profit in which the in Appendix.) dividends were deducted from the net income for the year. (See Exhibit 4, p. 23.) Stock dividends Atlantic Refining Co. and Liggett & Myers In the 525 reports tabulated in 1949 only Tobacco Co. deducted preferred stock dividends twenty dividends payable in the company’s own from net income to arrive at the balance of net stock were noted, compared with thirty-five in income applicable to common stock but trans­ the previous year. Several companies deducted ferred the entire net income to the statement of stock dividends from retained income (earned earnings retained where both preferred and com­ surplus) at assigned or par values but did not mon stock dividends were deducted. Several explain the basis for any values assigned (79, other companies deducted all dividends from net 117, 166, 201, 293, 361, 394, 445, 458). Alan Wood income at the foot of the income statement but Steel Company, Johnson & Johnson, The Dow carried the entire net income forward to the state­ Chemical Co., and Glidden Co. deducted the ment of earnings retained where dividends were stock dividends at market values. Granite City also deducted. (57, 423, 453) Steel Co. deducted the stock dividend from net Peden Iron & Steel Co. did not furnish either income for the year in a separate statement of an income statement or a statement of earnings disposition of net profit. retained but a balance sheet note mentioned pay­ In a note concerning its stock distribution Fore­ ment of a dividend. most Dairies, Inc., stated: The surplus account of Allied Chemical & Dye “ . . . This capital adjustment was recorded in the Corporation reported the dividends declared on Company’s accounts for the year 1949 by a transfer of common stocks but reduced that amount by $556,205.35 from earned surplus account to common “dividends on treasury stock, not included in in­ stock account ($38,768.60, representing the par value come” before deducting it from surplus. of 193,843 shares) and capital surplus account In addition to cash dividends, Standard Oil ($517,436.75). These transfers were computed in Co. (Indiana) also deducted from net income the amounts which maintain in the common stock and extra dividends payable in capital stock of Stand­ capital surplus accounts, after the capital adjustment, Retained Income (Earned Surplus) Restrictions 121 the same amounts per share of common stock as tabulations) where the board of directors had existed immediately prior thereto.” placed restrictions upon the retained income Food Machinery and Chemical Corp., Ruber­ (earned surplus) and seven other cases where it oid Co., Standard Oil Co. (New Jersey) and Sun was indicated that there were restrictions but no Oil Co. also paid stock dividends but did not ex­ explanation was furnished. plain the basis for the amount deducted from re­ tained income (earned surplus). 1949 1948 1947 1946 279 292 322 . . . None indicated 120 117 Loan agreements 146 110 77 72 Bond indentures Retained income (earned surplus) 38 35 37 41 Preferred stock provisions restrictions 18 16 17 19 Purchase of treasury stock 18 18 Restrictions established ... by certificate of incorpora­ tion The number of companies reporting restric­ 9 9 Oil company earnings re­ tions on retained income (earned surplus) in­ stricted by Elkins Act creased only slightly in 1949. There were five 5 5 . . . Dividends in arrears on instances noted (not included in the following preferred stock section 5: accountant's report

10 Recommended form not adopted (7, 25, 111, 203, 260, 352, 381, 386, 389, 403) Recommended short-form report 1 Canadian form used (273) 1 No accountant’s report (105) In October 1948, the Committee on Auditing 525 Procedure recommended the use of the following (Numbers in parentheses refer to companies listed revised short-form of accountant’s report or cer­ in Appendix.) tificate : Of the ten accountant's reports which did not “We have examined the balance-sheet of X Com­ follow the recommended form, all continued to pany as of December 31, 19—, and the related state­ mention the examination of the system of internal ment(s) of income and surplus for the year then ended. control and the detailed audit of the transaction Our examination was made in accordance with gener­ and eight referred to auditing standards applica­ ally accepted auditing standards, and accordingly in­ ble in the circumstances. cluded such tests of the accounting records and such other auditing procedures as we considered necessary Single paragraph form in the circumstances. “In our opinion, the accompanying balance-sheet In 1949 one of the large accounting firms used and statement(s) of income and surplus present fairly the following single paragraph form of report: the financial position of X Company at December 31, “In our opinion, the accompanying consolidated 19—, and the results of its operations for the year balance sheet and consolidated statement of profit and then ended, in conformity with generally accepted loss and unappropriated earned surplus present fairly accounting principles applied on a basis consistent the financial position of Allis-Chalmers Manufacturing with that of the preceding year.” Company and its subsidiaries at December 31, 1949, The above form differs from the one previously and the results of their operations for the year then recommended by the Institute in that it excludes ended, in conformity with generally accepted account­ ing principles applied on a basis consistent with that of any reference to the examination of the system of the preceding year. Our examination of such state­ internal control or to the omission of a detailed ments was made in accordance with generally accepted audit of the transactions and corrects the incon­ auditing standards and accordingly included such sistent expression relating to auditing standards tests of the accounting records and such other auditing applicable in the circumstances. procedures as we considered necessary in the circum­ An analysis of the forms of reports furnished stances.” by accountants for the 525 companies included in the 1949 study disclosed: The above form, which contains the opinion in the opening sentence, was used in forty instances 415 Recommended form adopted in full (14, 31, 44, 73, 89, 107, 113, 206, 217, 221, 355, 58 Recommended form adopted with minor word changes (65, 97, 104, 149, 167, 200, 210, 226, 359, 421, 458, 477). In three reports the words 282, 382, 415, 455, 473, 494) “accordingly” and “such” were omitted (247, 40 Single paragraph report used in 1949 by one 269, 488), in two the word “including” was used large accounting firm (See discussion which in place of “accordingly” (118, 378); and in two follows) other instances where other auditing procedures 124 Section 5—Accountant's Report than those generally accepted had been used the In classifying variations in wording of the word “such" was used but “accordingly” was opinion paragraph, it was usually found that the omitted (20, 195). words “except” or “exception” were used by accountants in referring to accounting treatments Treatment of material uncertainties which they did not consider to be in accord with The following quotation from Statements on generally accepted accounting principles. Auditing Procedure No. 15 dealing with “ma­ Only the phrasing which appears in the opinion terial uncertainties” contains recommendations paragraph is quoted below, although in some as to their treatment in the auditor’s report. cases a brief reference to the nature of the excep­ tion is added parenthetically. “Disclosure in auditor's report “The necessity of disclosure of, or emphasis on, the “In our opinion, subject to the exception indicated existing uncertainties, in the independent auditor’s in the preceding paragraph ...” (Net income is report presents a further problem. The auditor may after “additional provision for estimated cost of wear feel in some instances that disclosure in the financial and exhaustion of facilities computed on the basis of statements (of which the footnotes are an integral present replacement cost.”) (American Asphalt Roof part) should be supplemented by mention thereof in Corp.) his report. Exceptions in the report should be “.. . on a basis consistent with that of the preced­ avoided so far as reasonably possible, particularly as ing year, except that the parent corporation’s per­ to matters over which the client has no control or centage of depletion procedure above described is not which the client cannot correct. generally followed.” (Based on percentage of income “With respect to material uncertainties, three types as computed for United States income-tax purposes.) of situations, among others, may be contemplated: (Cerro de Pasco Copper Corp.) “(1) The case in which the auditor believes that the “In our opinion, the accompanying balance sheet financial statements, so far as possible, present fairly presents fairly . . . and, except for the matter set forth the position and the results of operations, but feels in the preceding paragraph ...” (Cost of goods sold that the uncertainties are such that special attention and consolidated loss reduced by a transfer from a re­ should be drawn to them in his report, as well as in serve which under generally accepted accounting the statements themselves, but without taking an ex­ principles would have been restored directly to earned ception. surplus.) (United States Leather Co.) “(2) The case in which one or more uncertainties "... in conformity, except as noted in the preceding are such as to require an exception. paragraph, with generally accepted accounting prin­ “(3) The case in which the cumulative effect of the ciples ...” (Inventories at beginning and end of uncertainties is so great that no opinion is possible, year priced at market prices less estimated marketing although the auditor may be able to make a statement expenses and conversion costs, and at the end of the as to the extent to which he approves the statements year inventories were approximately $160,000 in ex­ and the reasons for omitting the usual opinion on the cess of cost.) (Michigan Sugar Co.) statements as a whole. “In our opinion . . . present fairly (except that “Each independent public accountant will, of Canadian currency has been included at the former course, prepare his report to meet the circumstances official rate of $1.00 Canadian for $1.00 United peculiar to the particular case and, accordingly, your States) the consolidated financial position ...” committee does not propose any specific form.” (American Wringer Co. Inc.) We believe that the above quotation may prove “In our opinion, subject to the exception in the pre­ helpful to the reader when examining the wording ceding paragraph, the accompanying ...” (Devalua­ of the auditors’ reports quoted in the following tion of Canadian currency is reflected in the accounts only to the extent of realized losses.) (Marshall pages. Wells Co.) “In our opinion, subject to the comment in the pre­ Exceptions taken to ceding paragraph ...” (Reserve for inventory con­ tingencies established in prior years is shown as a de­ accountin g treatments duction from the gross amount of inventories on the balance sheet.) (Burlington Mills Corp.) “In our opinion subject to the exception noted in The list of exceptions which follows is not con­ the preceding paragraph ...” (Portion of reserve for fined to the 525 reports tabulated but also in­ depreciation provided in 1947 equivalent to construc­ cludes many noted in a survey of hundreds of tion costs deemed excessive should be treated as a additional statements. surplus reserve and included in the reserve section of Opinions Subject to Uncertainties 125 the statement of financial condition.) (Hercules Powder Co.) Opinions subject to uncertainties “In our opinion, with the exception stated in the preceding paragraph ...” (Book value of gas rights based upon par value of stock issued to parent com­ In the listing which follows we have attempted pany therefor which was in excess of parent company’s to distinguish between exceptions by the auditor cost. Asset accounts not relieved of excess which may to accounting treatments (see preceding section) apply to rights expired or forfeited, and no provision and qualifications expressing uncertainty as to has been made for depletion or amortization of gas the eventual outcome of unsettled matters. rights.) (Houston Pipe Line Co.) Under the above heading we have also included “In our opinion, with the exception that no provi­ several qualifications which express uncertainty sion has been made for interest accrued and unpaid on as to the valuation of particular assets or groups the notes payable to Houston Oil Company of of assets. Texas ...” (Southwestern Settlement and Develop­ It will be noted that nearly all of the qualifica­ ment Corp.) tions mentioned below use the phrase “subject “In my opinion, subject to the comment in the pre­ to ...” ceding paragraph ...” (“Of the reserve for possible future inventory price decline adjustments established “In our opinion, subject to the comments contained by appropriations of net income in prior years, $50,000 in the preceding paragraph ...” (Foreclosure pro­ was restored during the year in the attached compara­ ceedings by RFC against debtor) (Fruehauf Trailers) tive statement of income; and the balance is shown “In our opinion, except for such additional pro­ under reserves in the balance sheet.”) (Ludwig vision, if any, for federal taxes on income as may be Baumann & Co.) required upon final determination of a subsidiary’s tax “In our opinion, the accompanying ... in conform­ liability ...” (Stokely Van Camp, Inc.) ity with generally accepted accounting principles “Except for the effect, if any, of the matter set forth applied on a basis consistent with that of the preceding in Note 2 of the notes to the financial statements, in year, except that no provision has been made in the our opinion ...” (Litigation) (Electric Boat Co.) accompanying exhibits on account of future payments “In our opinion, based upon our examination and of claims and damages, including cost of litigation in­ on the accounts and information furnished to us and cident thereto (see Notes 5 and 6 to Balance Sheet).” subject to the adjustments which may ultimately be (Market Street Railway Co.) required to be made in respect of recording the original “In our opinion, to conform with generally accepted cost of gas plant, as explained in note 1 . . . ” (Cities accounting principles, the item ‘Refund of prior years’ Service Co.) federal income taxes, $77,798’ should have been re­ “In our opinion, with reservation as to the effect of ported in the statement of consolidated income for the settlement of the suit referred to in the preceding the year ended December 31, 1949, rather than treated paragraph ...” (Granite City Steel Co.) as a direct credit to consolidated earned surplus. “In our opinion, subject to additional Federal in­ Otherwise, in our opinion, the accompanying . . . ” come taxes for the year 1938 and to the possibility of (International Salt Co.) additional Federal income taxes for the years 1939 to “With the exceptions referred to in the preceding 1942 ...” (Air Reduction Co.) two paragraphs ...” (Company was restrained by “In our opinion, subject to such adjustments, if court order from recording on its books the revision of any, as may be required as to the profit of contracts capitalization approved by the stockholders and the subject to the Renegotiation Act of 1948 ...” (Grum­ Public Service Commission of the State of New York man Aircraft Corp.) in 1944. The Public Service Commission has deter­ “In our opinion, subject to such adjustments as may mined that it will not approve the said plan as so result from final determination of taxes on income ...” modified, unless the alleged estimated deficiency in (O’Sullivan Rubber Corp.) depreciation reserves is credited to such reserves, “In our opinion, subject to the effect of final deter­ rather than to “Unearned Surplus—Special” account mination of Federal and State taxes on income ...” as provided in the amended plan of consolidation and (H. K. Porter Co. Inc.) recapitalization.) (Long Island Lighting Co.) “ . . . subject to final determination of income taxes “ . . . and the results of their operations for the year for the years since January 1, 1947 ...” (Eastern then ended, in conformity with generally accepted Malleable Iron Co.) accounting principles (except with respect to accruing “In our opinion, subject to any refunds which may undistributed profits of partly-owned companies) be required under the profit limitation provisions of applied on a basis consistent with that of the preceding the Vinson Act...” (W. L. Maxson Corp.) year.” (United Artists Theatre Circuit, Inc.) “In our opinion, subject to the effect of the Govern- 126 Section 5—Accountant's Report merit's anti-trust litigation mentioned in Note E .. . ” chase price and liability for damages not yet deter­ (United Artists Theatre Circuit, Inc.) mined in regard to parent company) (Permanente “Except for the loss which may be sustained on the Cement Corp.) investment in and advances to International Meters, “In our opinion, except for the effect of such adjust­ Inc. ...” (American-La France-Foamite Corp.) ments as may be required upon final determination of the parent company’s liability for federal taxes on in­ “Except for the reservation expressed in the preced­ come for years through 1949 and of the values to be ing paragraph, in our opinion ...” (Settlement of assigned to certain non-operating properties . . . ” mail rates) (Pan American World Airways Inc.) (Tennessee Products & Chemical Corp.) “In our opinion, subject to the ultimate disposition “In our opinion, except that the ultimate effect on of the contingencies referred to in the above para­ the accounts of the matters referred to in the preceding graph ...” (Federal taxes and certain claims for paragraph cannot presently be determined ...” (Cer­ reparation of freight charges instituted by the Gov­ tain matters are in litigation and in dispute before ernment of the United States) (Chicago, Milwaukee, various courts and regulatory commissions) (Pennsyl­ St. Paul and Pacific Railroad Co.) vania Water & Power Co.) “In our opinion, when read in conjunction with the “Except to the extent, if any, to which the financial explanations set forth in the preceding para­ position of the companies may be affected by the result graphs ...” (Depreciation, tax returns, profits and of the litigation, in our opinion ...” (Complaint losses on properties) (Chicago & Western Indiana charges officers and directors with acts of malfeasance Railroad Co.) and nonfeasance, alleging damages of $3,000,000) “In our opinion, subject to the remarks contained (Hunt Foods Inc.) in the preceding paragraph ...” (Reference to dis­ “Subject to the possible effect of the litigation and cussion in Treasurer’s report of receivables from and matters mentioned in Note 1, to the balance sheets, in investments in plantation companies) (C. Brewer & our opinion ...” (Two actions under Sherman Act Co., Ltd.) and possibility of additional Business and Occupation “In our opinion, subject to the adjustments which taxes) (Columbia Gas System Inc.) may ultimately be required to be made in respect of “In our opinion, subject to the eventual realization recording the original cost of gas plant. . . ” (Ar­ of foreign investment and advances to subsidiaries kansas Natural Gas Corp.) operating in foreign countries which is not now de­ “In our opinion, subject to the comments contained terminable ...” (Lanston Monotype Machine Co.) in the preceding paragraph ...” (Extent of effect of “In our opinion, subject to the comment in the pre­ regulatory action on the original cost of utility plant ceding paragraph ...” (Possible recoveries under accounts and depreciation not presently determinable) claims for just compensation from the United States (American Water Works Co.) Government) (American-Hawaiian Steamship Co.) “Subject to the adequacy of the reserve for possible “Subject to the valuation of the investment in the additional federal taxes on income referred to in Note Mexican subsidiary ...” (Valuation includes un­ B to the financial statements, in our opinion ...” realized appreciation and equity in undistributed (National Enameling and Stamping Co.) earnings) (Lucky-Tiger-Combination Gold Mining “The extent to which the financial statements will Co.) finally be affected by consummation of the Plan re­ “In our opinion, except for the possible ultimate ferred to in the preceding paragraph, cannot be deter­ effect of the matter referred to above ...” (The mined definitely at this date. With this qualification Public Service Commission has questioned the ade­ and also subject to the adequacy of the accumulated quacy of the reserve for depreciation) (Consolidated reserves for utility retirements (see Note 4) it is our Edison Co. of N.Y. Inc.) opinion ...” (Plan filed with SEC in connection with “In our opinion, except as to the adequacy of the application for exemption from Public Utility Holding provisions for retirement of utility plant . . . ” Company Act of 1935) (Eastern Gas & Fuel Associ­ (Tampa Electric Co.) ates) “In our opinion, giving consideration to the ex­ “In our opinion, subject to the remarks in the pre­ planation in the notes to the financial statements and ceding paragraph ...” (Effect of compliance with subject to the adequacy of the provision for deprecia­ Federal Power Commission rather than Montana Pub­ tion for the year and the accumulated reserves there­ lic Service Commission) (Montana Power Co.) for ... ” (Cincinnati Street Railway Co.) “In our opinion, subject to the uncertainties as to “In our opinion, with the explanation in the pre­ final determination of Federal taxes on income ...” ceding paragraph, and subject to the realizable value (Giorgio Fruit Corp.) of the indebtedness of Southwestern Settlement and “In our opinion, subject to the final determination Development Corporation (see balance sheet foot­ by the courts of the foregoing matters ...” (Court note) ... as to which we are not in a position to express decision required subsidiary to sell properties. Pur­ an opinion ...” (Houston Oil Company of Texas) Inconsistencies with Prior Year's Treatments 127 “In our opinion, except that no provision has been While this is not in accordance with generally accepted made for the possible tax liability described above, accounting principles, we do not object to the amount which may be substantial ...” (Tel Autograph Co.) of the revised valuation in view of the indication of substantial earnings applicable to Pathé’s investment. “In our opinion, except for such additional pro­ “Expenses and losses aggregating $1,067,512.86 vision, if any, for federal taxes on income as may be have been charged directly to the deficit account. required upon final determination of a subsidiary’s tax While these items are of an extraordinary nature, we liability ...” (Stokely-Van Camp, Inc.) believe that they should have been included in the “In our opinion, based upon such examination and statement of consolidated income and expense. subject to the correctness of the amount stated for the “As explained in Note 7 to the financial statements investments in joint ventures ...” (Morrison-Knud­ the maturity date of certain notes payable to banks son Co. Inc.) aggregating $6,330,973.35 has been extended to Janu­ ary 15, 1951, and these notes have been classified as “Based upon our examination and upon the man­ non-current in the accompanying balance sheet. At agement’s valuations of assets referred to above, in our December 31, 1949, and at the date of this report cer­ opinion ...” (Assets totaling $7,152,388 are carried tain ‘events of default’ existed, as defined in the loan on the basis of management’s valuations which the agreements, which should they remain uncured after auditors were not in a position to substantiate) (Atlas appropriate notice would result in all the notes becom­ Corp.) ing immediately due and payable. Although the banks have been advised as to the existence of ‘events We believe that the following paragraphs from of default’ to our knowledge no action has been taken the auditor’s report presents an interesting array to date by them with respect thereto. of comments on the financial statements of Pathé “In our opinion, with the explanation contained in Industries, Inc.: paragraph six with respect to notes payable to banks and subject to the qualifications in paragraphs two, “We have examined the consolidated balance sheet three, four and five and to the omission of any pro­ of Pathé Industries, Inc., and subsidiaries as of Decem­ vision for special legal fees (See Note 17), the accom­ ber 31, 1949, and the related statement of income and panying consolidated balance sheet and statement of expense and deficit for the year then ended. Our ex­ consolidated income and expense and deficit present amination was made in accordance with generally fairly the financial position of Pathé Industries, Inc. accepted auditing standards, and accordingly included and subsidiaries at December 31, 1949, and the results such tests of the accounting records and such other of their operations for the year then ended, in con­ auditing procedures as we considered necessary in the formity with generally accepted accounting principles circumstances. applied on a basis consistent with that of the preceding “In determining the net amounts at which advances year.” to other producers are carried, the company has relied as heretofore on estimates of revenues from domestic and foreign sources and for the first time has given weight to estimates of substantial income anticipated Inconsistencies with prior year's from rerelease and other rights. Although the com­ treatments pany has enjoyed steadily increasing foreign income in recent years, there is not sufficient evidence, except in the case of domestic income, to enable us to form an opinion regarding the ultimate realization of the com­ Changes in accounting treatments during the pany’s estimates. If the ratio of foreign and miscel­ year were generally mentioned at the end of the laneous residual revenues to domestic first run reve­ opinion paragraph in the auditor’s report after nues which prevailed in 1949 remains unchanged, the the phrase “applied on a basis consistent with reserve provided against advances to other producers that of the preceding year.” In a few instances will require to be increased by approximately $1,000,­ it was noted that the opinion paragraph ended 000. 00. with the phrase “in conformity with generally “The liquidation of long-term notes receivable is accepted accounting principles,” with a change in dependent almost entirely on the volume of distribu­ accounting treatment being described in a prior tion to be achieved While substantial cash payments have been made in 1949, it would appear that the notes paragraph ending, “In other material respects, will not be fully paid for several years. Under these the principles of accounting maintained by the circumstances we believe it would have been preferable companies during the year were consistent with to have taken into income only the amounts realized. those of the preceding year.’’ (See National Steel “During the year the investment in Van Sweringen Corp.) Corporation was further written up by $1,007,580.00 In some cases where a retroactive adjustment as described in Note 1 to the financial statements. of 1948 statements was made, so that the 1949 128 Section 5—Accountant's Report statements were consistent therewith, a wording A division of the Sperry Corp. changed its similar to the following was used: method of valuing contracts in progress from a “ in conformity with generally accepted account­ percentage of sales price based on extent com­ ing principles applied on a basis consistent with that pleted to the lower of cost or market basis. Sales of the preceding fiscal year after restatement for com­ are now recorded upon shipment instead of on a parative purposes as explained in appended note.” percentage of completion basis. (For variations see Willys-Overland Motors, Inc., The A.P.W. Products Co. Inc. eliminated in­ Elastic Stop Nut Corp. and Lukens Steel Co.) terest on plant investment from inventories. Plymouth Oil Co. valued refinery products of The auditors of Lawrence Portland Cement the refinery at the lower of cost or market, rather Co. expressed an opinion on the financial state­ than as a percentage of certain quoted prices. ments of 1948 as well as those of 1949. They RKO Radio Pictures, Inc., adopted a longer commented on changes effected in 1948 as fol­ feature amortization table for writing off the lows : cost of released pictures. ".. . in conformity with generally accepted ac­ counting principles applied on a basis consistent with that of the preceding year, except for the following Depreciation changes effected in 1948, of which we approve: (1) change in capitalization, (2) adjustment of buildings, Four companies adopted an accelerated depre­ machinery and equipment and related reserves to in­ ciation policy, three of them retroactively come tax basis, and (3) transfer to additional paid-in (Libbey-Owens-Ford Glass Co., Lukens Steel Co., capital of the balance remaining in reserve for con­ Johnson & Johnson). First National Stores Inc. tingencies.” adopted an accelerated policy on certain new facilities acquired in the fiscal year ending in The auditors of North American Aviation, April, 1950. Inc., referred to changes in balance-sheet classifi­ Kimberly Clark Corporation included depre­ cation in the September 30, 1948, balance sheet ciation on assets of Canadian subsidiaries at furnished for comparative purposes, wherein amounts in excess of normal provisions. Gair progress payments and prepayments were reclas­ Company Canada Limited, a subsidiary of sified to correspond with the new classification of Robert Gair Co., Inc., computed its provision for these items adopted in the 1949 report. depreciation in accordance with the revised in­ Inconsistencies noted in auditors’ reports are come tax regulations. Collins and Aikman of classified by subjects and described below: Canada, Ltd., changed from the straight-line to the diminishing balances method, as also did the Inventories National Lead Co. Four companies refined or extended the Lifo Anderson Prichard Oil Co., Michigan Chemical method of valuing inventories which had been Corp. and Remington Rand Inc. adjusted depre­ previously adopted (Johns-Manville Corp., Phil­ dation charges to reflect revised estimates of lips Petroleum Co., National Steel Corp. and service life of certain equipment. Kimberly Clark Corp.). In addition, Phillips American Window Glass Co. set up estimated Petroleum Co. eliminated certain interdepart­ service life and rates for each individual asset mental and intercompany profits not previously rather than using overall group rates. Some­ eliminated from inventories. Jewel Tea Co. what similarly, The Midvale Company applied adopted the Lifo method for the first time during depreciation rates to individual classes of assets the year. On the other hand, Clinton Foods, rather than providing an over-all amount deter­ Inc., changed from the Lifo to the Fifo basis for mined by the board of directors. bulk inventories. Loew’s Inc., reduced certain depreciation rates The Eagle-Picher Co. adopted the base stock to those fixed by the Internal Revenue Bureau. method of valuing inventories while the Endicott Bendix Home Appliances, Inc., revised its amor­ Johnson Corp. extended the use of that method. tization rate on tools and dies to the Treasury On the other hand, Mid Continent Petroleum Department basis. Corporation valued refined products at the lower American Crystal Sugar Co. did not provide of cost or market rather than at fixed costs. any amount for extraordinary obsolescence such Fruehauf Trailer Co. priced used trailers at as had been provided in each of three preceding their appraised values less estimated disposal years. costs, instead of at $1 each. Anheuser Busch, Inc., restated property and Inconsistencies with Prior Year’s Treatments 129 related depreciation accounts on the basis of cost, than adding such profit to the general reserve, as thereby eliminating appreciation surplus. had been the former policy. American Steel Foundries Inc. discontinued Consolidation policy the reserve method of providing for repairs, re­ Six companies were noted which excluded some building, workmen’s compensation and product or all foreign subsidiaries from consolidated state­ guarantees, charging such costs directly to in­ ments, having previously included them in con­ come. solidation (Armour & Co., Armco Steel Corp., Prospecting, research and development costs Bristol-Myers Co., Minneapolis-Moline Co., are now charged to income by Freeport Sulphur Johnson & Johnson, and Warner Bros. Pictures Co., no longer being charged to a reserve. Inc.). Armco Steel Corp. excluded all but Cana­ dian subsidiaries; Bristol-Myers Co. excluded Capitalization vs. expense foreign subsidiaries, branches, and licencees in A portion of the expense of AB brake applica­ England, Australia, South Africa, and Latin tion was capitalized by Union Tank Car Co. per America from consolidation. It had been the for­ Internal Revenue Department ruling. Previous mer policy of Warner Bros. Pictures Inc. to in­ policy had been to charge such expense to main­ clude foreign income and expenses in the consoli­ tenance. dated statement of profit and loss but to deduct The Public Service Electric and Gas Co. the equity in undistributed earnings of foreign adopted the practice of capitalizing interest and subsidiaries in arriving at the net profit of the real estate taxes associated with construction of combined companies. utility plant. Former policy had been to treat Remington Rand Inc., whose former policy such items as expenses. was to consolidate only wholly-owned active sub­ Bamsdall Oil Company now capitalizes leases sidiaries, now consolidates majority-owned sub­ instead of treating them as expenses. Abandoned sidiaries active in the United States. Subsidi­ leases are charged to expense. aries in Belgium, Netherlands and Norway were reinstated in consolidation during the year. Unclassified Standard Oil Co. of California now includes Preproduction development costs formerly car­ wholly-owned foreign subsidiaries operating in ried by the Howe Sound Company as “mining foreign countries in consolidated statements, property buildings machinery and equipment” formerly having shown an investment therein on are now carried as a deferred charge to be amor­ the balance sheet, although profits and losses tized as such new mining properties come into thereon had previously been recognized in con­ production. solidated income statements. Profits on foreign sales by Gulf Oil Corp. are Weyerhauser Timber Co. now consolidates all not recognized until converted to dollars or other­ subsidiaries instead of only those wholly-owned. wise utilized. Former policy was to include such Panhandle Producing and Refining Co. ex­ profits in income as sales were made. cluded from consolidation a subsidiary whose Allegheny Ludlum Steel Corporation now stock had little equity value. accrues vacation costs when employees qualify The W. L. Maxson Corp. eliminated a wholly- rather than when they are paid for such vaca­ owned subsidiary from consolidation in view of tions. the disposal of the parent company’s interest Universal Leaf Tobacco Co. (6/30/49) now shortly after the balance sheet date and in view charges the entire cost of premiums under the of the subsidiary’s cumulative deficit exceeding pension plan to current earnings. Previously the its outstanding capital stock and surplus. past service portion was charged to earned sur­ plus. Reserves and expenses The American Metal Co., Ltd., adopted a In 1949 Gulf Oil Corporation established a Lifo method for computing tax accruals on reserve for amortization of non-producing leases metals purchased for treatment. and mineral fee properties against which cost of Premiums on installment notes receivable pur­ surrendered leases and mining fees are to be chased and adjustments of prior year taxes are charged. Previous policy was to charge income charged or credited to income by the Beneficial with such costs in the year of surrender. Industrial Loan Co., formerly having been treated General Electric Co. included profit on sale of as surplus adjustments. miscellaneous securities in net earnings rather Both the North American Investment Co. and 130 Section 5—Accountant's Report the Commonwealth Investment Company take The following examples, several of which also dividends into income at the ex-dividend date mention the absence of a confirmation of ac­ rather than when actually received. counts receivable, describe situations where The Philadelphia Electric Co. accelerated its either the client did not take an inventory or the amortization of premium and expense on retired auditor was not present when the inventory was bonds in order to complete such amortization. taken: The Holly Sugar Corp. during the year changed “We have examined the consolidated balance sheet its practice with respect to the accrual of addi­ of Geo. E. Keith Company and its subsidiary com­ tional beet payments. panies as of October 31, 1949, and the related con­ The tax provisions shown in the income state­ solidated statements of income and surplus for the ment of The United Gas Improvement Company fiscal year then ended. Our examination was made are made on a consolidated return basis rather in accordance with generally accepted auditing than on a separate return basis as in the previous standards, and accordingly included such tests of the accounting records and such other auditing pro­ year. cedures as we considered necessary in the circum­ Howe Sound Company now reflects foreign ex­ stances, except that the scope of our examination did change adjustments in profit and loss rather than not include verification of inventory quantities and in earned surplus. values; such quantities and values are as stated by Johnson & Johnson eliminated estimated the companies. taxes on undistributed net income of subsidiaries. “In our opinion . . . subject to the limitation of the Contractual obligations for equipment and scope of our examination . . .” (Geo. E. Keith Co.) construction are now recorded by Anheuser “. . . except as stated in the following paragraph. Busch, Inc., upon receipt and approval of in­ “The inventory at December 31, 1949, as shown in voices. Formerly such obligations were entered the accompanying balance sheet was determined from in the accounts at the time the contracts were quantity records, without physical count, for ap­ signed. proximately 90% of the total inventory and from a physical count at that date for the remainder. The quantity records for items having large dollar value had been adjusted for counts made at various dates Auditing procedures omitted during 1949. We have reviewed the basis of pricing, obsolescence and clerical accuracy of the inventory to the extent we considered necessary, but we were not present when a sufficient number of test-counts were In all the instances mentioned below, the made to adequately test inventory quantities. Dur­ auditor’s certificate noted the omission of cer­ ing our review nothing came to our attention which tain auditing procedures. In some cases it was would materially affect the inventory quantities. also stated that he had satisfied himself by some “In our opinion, subject to such adjustment as other means. No reference was made to the might result from a complete physical inventory ...” opinion paragraph of the reports from which (Pyle-National Co.) excerpts are presented below unless such para­ “At the Kalamazoo unit whereat the greater por­ graph was qualified with regard to the omitted tion of the inventory is located a physical inventory auditing procedures. was taken as of May 31, 1949, and the books of ac­ count were adjusted to the inventory valuation then Inventories determined. At the New York subsidiaries physical inventories were taken as of December 31, 1949, and Several cases were noted where it was deemed the books of account were adjusted to the inventory impractical to take a physical inventory. An ex­ valuations then determined. Book figures at Decem­ ample follows: ber 31, 1949, were accepted, after reasonable tests "... Because of the manner of storing bulk materials at both locations, in the preparation of our state­ (stone and sand and gravel, etc.) in extensive and ments and have been certified by responsible officials, irregular piles, no one of which represented a rela­ as noted in the balance sheet.” (Checker Cab Mfg. tively significant portion of the total, it was im­ Corp.) practicable to take physical inventories of such items “Inventories of coal, merchandise and supplies are by weight or measurement, but we satisfied ourselves stated in accordance with the corporation’s records with respect to these materials by means of other without detailed examination by us as to quantities, auditing procedures, including inspection of sub­ prices or conditions; confirmation of accounts and stantial quantities at various locations.” (Warner notes receivable was not obtained by direct cor­ Co.) (See also McDonnell Aircraft Corp.) respondence with the debtors but we satisfied our­ Auditing Procedures Omitted 131 selves by other means as to these items.” (Alabama Royal Typewriter Co., International Textbook Fuel and Iron Co.) Co., and American Woolen Co. Inc.) “. . . Inventory quantities and value were accepted Other instances were noted where it was by us as submitted by the Company. We did not deemed impractical to obtain confirmation from independently confirm Accounts Receivable but have customers abroad: chain-stores, hotels, and satisfied ourselves by means of other auditing pro­ customers of a foreign subsidiary. The following cedure.” (Coronet Phosphate Co.) are examples: “. . . Finished machines inventories located at Company field offices throughout the United States “Our examination of the financial statements was were not established by physical examination, but made in accordance with generally accepted auditing we satisfied ourselves by other auditing tests of the standards except that owing to special conditions no substantial accuracy of these inventories.” (Mar- confirmations were obtained from customers in cer­ chant Calculating Machine Co.) tain foreign countries.” (American Banknote Co.) ”... Except that we were not represented at the “It was impracticable to confirm by direct com­ physical inventory counting, our examination was munication amounts receivable from the United made in accordance with generally accepted auditing States Government departments and agencies and standards, and accordingly included such tests of the certain foreign accounts as to which we have satis­ accounting records of the companies and such other fied ourselves by other auditing procedures.” auditing procedures as we considered necessary in the (Archer-Daniels-Midland Co.) circumstances.” (American Wringer Company, Inc.) “Certain chain-store companies, in reply to our “The inventory of supplies included in the balance requests for confirmation of accounts receivable, re­ sheet as a deferred charge to operations was certified ported that they could not verify balances owing by to us by responsible officers of the Company, but we them at any specific date. As to these balances, have not applied the generally accepted auditing pro­ however, we satisfied ourselves by means of other cedures of testing or otherwise verifying the prices auditing procedures.” (Adams-Millis Corp.) or physical quantities of the inventory.” (Park “Accounts receivable were not confirmed by direct Utah Consolidated Mines Co.) (See also Blufield communication with the debtors, except to a limited Supply Co.) extent, as we deemed it neither practicable nor reasonable to do so. Such accounts represent mostly Accounts receivable the current accounts of hotel guests; the amounts due from other debtors were verified by appropriate A considerable number of instances were noted tests, including requests for direct confirmations. In (particularly in the aircraft manufacturing com­ connection with inventories, which are stated at cost, panies) where reference was made to the audi­ we made test checks of the quantities reported. We tor’s inability to obtain confirmation of accounts also reviewed the inventory records and made tests receivable from the U. S. Government. Here of prices and computations.” (Knott Corp.) are several examples of wording used in such in­ “We did not confirm accounts receivable from sales stances : representatives of Avon Products, Inc., and Avon “It was not practical to confirm receivables from Products of Canada, Limited, subsidiaries, by cor­ the U. S. Government, but we satisfied ourselves as to respondence with the individual debtors of those their substantial accuracy by other means.” (A. C. F. companies. These accounts, aggregating approxi­ Brill Motors Co.) mately 98% of the total consolidated trade accounts receivable, consist of a large number of small balances, “Receivables from the United States Maritime and it was not considered practicable or reasonable Commission were not confirmed, but we have satis­ to verify balances by direct correspondence. How­ fied ourselves by means of other auditing procedures ever, we satisfied ourselves by other auditing pro­ as to these balances.” (United States Lines Co.) cedures as to their substantial correctness.” (Avon “It is not the general practice of the United States Allied Products, Inc.) Government departments and agencies to confirm accounts receivable or payable; in the absence of Other instances where it was indicated that confirmation, we followed such other audit procedures accounts receivable were not confirmed without as we deemed appropriate.” (Wright Aeronautical any effect on the opinion paragraph are the Corp.) following: (See also Curtiss-Wright Corp., Grumman ”... Customers’ accounts receivable were not con­ Aircraft Engineering Corp., Lockheed Aircraft firmed by correspondence. With this exception, our Corp., The Glenn L. Martin Co., Republic examination was made in accordance with generally Aviation Corp., Willys-Overland Motors, Inc., accepted auditing standards applicable in the cir­ 132 Section 5—Accountant’s Report cumstances and included all procedures which we statements as shown by such reports. The total assets considered necessary.” (Waco Aircraft Co.) of the branch and the subsidiaries amount to approxi­ “. . . Our examination of such statements was mately 28% of the consolidated total and their sales made in accordance with generally accepted auditing and net income aggregate approximately 37% and standards except that, in accordance with instruc­ 41% respectively of the consolidated totals. tions, we did not obtain confirmation of accounts re­ “In our opinion, which as to the English branch ceivable of the parent company and certain sub­ and the Canadian subsidiaries is based upon the re­ sidiaries direct from the debtors; however, with ports of other accountants, the accompanying ...” respect to these receivables, we have satisfied our­ (H. H. Robertson Co.) selves by means of other auditing procedures. The examination included such tests of the accounting An example where the opinion was not quali­ records and such other auditing procedures as we fied follows: considered necessary in the circumstances.” (Ely & “We have examined, except as mentioned below, Walker Dry Goods Co.) the consolidated balance sheet of Miller Manufactur­ In the report which follows, the opinion para­ ing Co. and its subsidiary companies as of September 30, 1949, and the related statements of income and of graph was qualified presumably with reference accumulated net income retained for use in the busi­ to the valuation of the investments: ness for the year then ended. Our examination of the ‘‘We have examined the balance sheet of The financial statements of Miller Manufacturing Co., Byrndun Corporation (a New York corporation) as The Buckeye Forging Company, Economy Valve at December 31, 1949, and the income and surplus Company and Precision Manufacturing Company was accounts for the year then ended, have reviewed the made in accordance with generally accepted auditing system of internal control and the accounting pro­ standards, and accordingly included such tests of the cedures of the company, and, without making a de­ accounting records and such other auditing procedures tailed audit of the transactions, have examined or as we considered necessary in the circumstances. It tested accounting records of the company and other was not practicable to confirm receivables from the supporting evidence by methods and to the extent United States Government but we satisfied ourselves we deemed appropriate. Our examination was made by other means as to these items. The financial in accordance with generally accepted auditing statements of Monroe Steel Castings Company have standards applicable and included all procedures not been examined by us and are included in the ac­ which we considered necessary in the circumstances. companying consolidated financial statements on the The investments of your Corporation in stocks of basis of a report thereon furnished by other inde­ United States Hat Machinery Corporation and Hat pendent public accountants. The subsidiary not ex­ Corporation of America were verified by physical amined by us had approximately 33% of the consoli­ count and inspection. dated sales and 29% of the consolidated total assets.” ‘‘Investments are stated herein at book value at (Miller Mfg. Co.) December 31, 1949. ‘‘Subject to the preceding paragraphs, in our In some cases the reports of other accountants opinion, the accompanying balance sheet and related were accepted without any reservation. Ex­ statements of income and surplus present fairly the amples are the following: position of The Byrndun Corporation as at Decem­ “The accounts of the foreign subsidiaries were ex­ ber 31, 1949, and the results of its operations for the amined by other independent accountants resident in year then ended, in conformity with generally accepted the foreign countries, and copies of their respective accounting principles applied on a basis consistent reports thereon have been submitted directly to us. with that of the preceding year.” (Byrndun Corp.) We have reviewed and accepted the reports of these Subsidiaries or branches audited by others accountants.” (Black and Decker Mfg. Co.) “I have further reviewed the report and work papers There were a large number of cases in which the of . . . independent certified public accountants, who auditor had not himself audited the accounts of have certified to me in connection with the examina­ subsidiaries. In about 60% of these cases the tion of the West-Coast Division at Berkeley, California, and it is my opinion that the examination was made auditor inserted a phrase in the opinion paragraph in accordance with generally accepted auditing stand­ of his report referring to this situation, in a man­ ards, applicable in the circumstances and without ner similar to the following: omission of any auditing procedures they deemed “ As to the Company’s English branch and the necessary.” (Dobeckmun Co.) Canadian subsidiaries, we examined reports of other accountants, and the accounts of the branch and the In the following instance the reports of foreign subsidiaries have been included in the accompanying accounts were qualified as to scope: Auditing Procedures Omitted 133 “ We have received reports of chartered ac­ “Examinations of the financial statements of foreign countants upon their examinations of financial state­ consolidated subsidiary companies have been made by ments of the company’s foreign branches as of Septem­ other independent public accountants, in most in­ ber 30, 1949, and of its wholly owned subsidiaries as of stances at the close of the calendar year. The latest December 31, 1949. Opinions expressed in the re­ available reports of such accountants and the latest ports of the chartered accountants are qualified as to available company reports have been submitted to us scope of their examinations which omitted generally for review. We have accepted the reports of the audi­ accepted auditing procedures of confirming accounts tors of the foreign subsidiaries in the same manner as receivable and making physical tests of inventories. if we had prepared them, relying not alone upon the Our examination at the domestic offices of the com­ reputation of such other accountants, but more par­ pany was made in accordance with generally accepted ticularly upon review, analysis, and investigation of auditing standards, and accordingly included such such reports to satisfy ourselves that the financial tests of the accounting records and such other auditing statements of such foreign subsidiaries have been procedures as we considered necessary in the circum­ stated in conformity with the manner in which we stances. would have prepared them. “In our opinion, based upon such examination, “The consolidated financial statements for the same foreign branch reports and reports of chartered ac­ period of National Theatres Corporation and its vot­ countants, the accompanying balance sheet and state­ ing-controlled domestic subsidiaries have been examined ments of income and surplus present fairly the con­ by . . . The net assets of such companies represent solidated financial position of MacAndrews & Forbes approximately 26% of the consolidated net assets at Company and its wholly owned subsidiaries at Decem­ December 31, 1949. ber 31, 1949, and the consolidated results of their “From the aforementioned financial statements operations for the year then ended, in conformity with there have been prepared the accompanying consoli­ generally accepted accounting principles applied on a dated balance sheet and memorandum of foreign as­ basis consistent with that of the preceding year.” sets and liabilities of Twentieth Century-Fox Film (MacAndrews & Forbes Co.) Corporation and voting-controlled subsidiary com­ panies at December 31, 1949, and the consolidated Variations in the wording of the modification statements of earnings and surplus for the fiscal year of the opinion paragraph follow: (53 weeks) then ended. “In our opinion, accepting the financial statements “In our opinion, accepting the report of other ac­ of National Theatres Corporation and its voting-con­ countants with respect to the Canadian subsidi­ trolled domestic subsidiaries, relying upon the report ary ...” (A. G. Spalding & Bros. Inc.) of the independent public accountants who examined In some cases both consolidated and uncon­ such financial statements, the accompanying ...” solidated subsidiaries were audited by other ac­ (Twentieth Century-Fox Film Corp.) countants : “ . . . Our examination, which included the accounts There follows an example of an instance where of the parent company, ten of the thirteen consolidated another accountant’s report was used by the subsidiary companies and three of the four unconsoli­ accountants as the basis for an opinion expressed dated subsidiary companies, was made in accordance on a specific item: with generally accepted auditing standards, and ac­ cordingly included such tests of the accounting records “We have examined the balance sheet of American of these companies and such other auditing procedures Cigarette and Cigar Company as of December 31, as we considered necessary in the circumstances. The 1949, and the related statement of income and earned accounts of the three consolidated and one unconsoli­ surplus for the year then ended. Our examination of dated subsidiary companies not examined by us (repre­ the prices paid for the cigarettes manufactured for the senting approximately $2,060,000 of Warren Brothers company under the agreement referred to in Note 3 Company’s equity in the consolidated net assets) were accompanying the financial statements was limited to examined by other independent accountants. The an inspection of the related invoices but other inde­ reports on their examinations were submitted to us for pendent public accountants have reported to us that review. in their opinion, based upon a test examination, the “In our opinion, based upon our examination and prices at which the manufactured cigarettes were review, the accompanying financial statements re­ billed to the company were in accordance with the ferred to above, with the notes thereto, present terms of the said agreement. Our examination was fairly ...” (Warren Brothers Co.) made in accordance with generally accepted auditing standards and included such tests of the accounting A rather extensive discussion of the reasons for records and such other auditing procedures as we con­ accepting the reports of other independent ac­ sidered necessary in the circumstances. countants follows: “In our opinion, based upon our examination and 134 Section 5—Accountant’s Report the report of other independent public accountants based upon continuous book records verified from referred to above, the accompanying ...” (American time to time by physical inventories taken by em­ Cigarette and Cigar Co.) ployees of the companies. We have reviewed the book records and the related inventory procedures and have satisfied ourselves that the methods of inventory taking were satisfactory and that they were carried Auditing procedures followed out effectively. We also made by inspection substan­ tial test checks of the inventory quantities. The basis of pricing and the clerical accuracy of the inven­ The following quotation from “Extensions of tories were thoroughly tested by us and, in addition, the quantities and condition of the inventories were Auditing Procedure” discusses the disclosure by certified to us by responsible officials of the com­ the auditor of auditing procedures followed: panies. We also communicated with a majority of “Assuming that normal procedures have been car­ the companies’ customers having open balances at ried out, it is not considered necessary to describe the June 30, 1949, and received replies confirming about details of the examination in this form of report. 90% of the total of receivables as of that date.” Any such details as are given should be included in (American Hide and Leather Co.) separate paragraphs of the report. For example, “Physical inventories of crude oils, finished prod­ reference may be made to procedures which the ac­ ucts and work in process other than those located in countant has adopted regarding the examination of independent pipe line transportation systems were inventories and receivables; also, it may be pertinent taken by E. W. Saybolt & Company and Chas. Mar­ to mention the fact that certain portions of the audi­ tin & Company, independent petroleum inspectors, tor’s work have been carried out at different times and the quantities thereof were certified directly to during the course of the year. This may be indicated and accepted by us. Quantities in independent pipe by inserting the words ‘at times’ in the first paragraph line transportation systems were confirmed to us of the short form of report immediately after the words directly. We have tested the clerical accuracy of the ‘by methods.’ ” inventory records and reviewed the basis of inventory valuation.” (Crown Central Petroleum Corp.) Inventories and accounts receivable “The inventory of materials, supplies, work in proc­ Procedures followed with respect to the audit ess and finished parts and machines, valued by the of inventories and accounts receivable were those company’s officials at cost or standard cost, is based as to quantities upon the company’s stock records, most often disclosed in the scope paragraph of checked at intervals by the company during the year. auditors' reports. Here are a number of ex­ With respect to finished machines and assemblies, the amples where no exception was taken in the quantities were also checked in December 1949. We opinion paragraph of the auditor’s report: were present at the company’s plant during that month “In line with generally accepted auditing stand­ and by observation and physical tests of inventory ards, we requested confirmation of the accounts re­ quantities, satisfied ourselves as to the reliability of ceivable by direct communication with the debtors the company’s stock records. We also tested inven­ and made a physical inspection and test check of the tory prices and computations. inventories at several of the plants.” (Columbia “In our opinion, the accompanying balance sheet Baking Co.) and related statement of profit and loss and surplus, “Our verification of the inventories included attend­ with the explanation set forth in the notes thereon, ance of our representatives in departments constitut­ present fairly... ” (Jones & Lamson Machine Co.) ing 95% of the total. A comprehensive test-check “Our examination included tests of accounts re­ was made in these departments of items selected at ceivable by direct correspondence with debtors and random as reflected on detailed inventory sheets. tests by count of the inventories and a review of the Total quantities shown on the detailed sheets were adequacy of the company’s check and control of book traced to the final inventories. Merchandise out of inventories and of the procedures followed in the tak­ the mill was verified by examination of correspondence. ing of the physical inventories.” (American Color- The mathematical accuracy of the inventories was ex­ type Co. of N. J.) tensively test-checked. Cost prices of many of the “Inventories are based on physical inventories, items were checked against the cost records. Market taken at the respective plants at various times during values of finished fabrics were test-checked against the year, to which have been applied interim transac­ sales billed subsequent to the close of the year. tions from the inventory dates to the end of the year. “In our opinion, based upon such examination. As to such inventories, we have examined the records, (Botany Mills, Inc.) reviewed the related procedures and tested the prices “The inventory quantities at June 30, 1949, were and computations and have received certificates from Auditing Procedures Followed 135 Company officials as to quantity and condition. Our opinion, represent proper capital charges. In so far examination also included observation of the taking of as we could ascertain from our examination and as the principal physical inventories and other test represented to us by the management, all retirements checks in respect to quantities.” (Phelps Dodge of property were removed at cost from the property Corp.) accounts. “Accounts payable were test-checked to detailed (For other disclosures see reports of Automatic records and creditors were circularized on a test basis. Voting Machine Co., Durez Plastics and Chemi­ Computations of accrued liabilities were checked and cals, Inc., Gotham Hosiery Co., Pacific Mills, supporting data were reviewed. In so far as we could Park & Tilford, Inc., Reynolds Tobacco Co., ascertain from our examination, all liabilities of the Verney Corp., and Waumkeag Steam Cotton Co.) Company at December 31, 1949, are reflected in the accompanying statement of financial position, and the management has represented to us that all liabili­ Detailed audit report ties are so reflected. The number of shares of capital One example of an auditor’s report wherein a stockoutstanding at December 31, 1949, was confirmed summary is presented of the audit procedures in­ by correspondence with the registrar and transfer volved in relation to a number of asset and lia­ agent. “In our opinion, the accompanying statement of bility accounts follows: financial position and statements of income and earn­ “We have examined the statement of financial posi­ ings employed in the business present fairly the finan­ tion of The Bullard Company (a Connecticut corpora­ cial position of The Bullard Company as of December tion) as of December 31, 1949, and the related state­ 31, 1949, and the results of its operations for the year ments of income and earnings employed in the busi­ then ended, and were prepared in conformity with ness for the year then ended. Our examination was generally accepted accounting principles applied on a made in accordance with generally accepted auditing basis consistent with that of the preceding year.” standards, and accordingly included such tests of the (Bullard Co.) accounting records and such other auditing procedures as we considered necessary in the circumstances. We (See also reports of United Shoe Machinery had previously made a similar examination for the Corp., Aero Supply Mfg. Co. Inc., Fruit of The year ended December 31, 1948. Further comments Loom Corp., Clayton Silver Mines, C.I.T. on the scope of our examination with reference to the Financial Corp., Peoples Drug Stores, Inc., and principal assets and liabilities of the Company at Quincy Market Cold Storage and Warehouse Co.) December 31, 1949, are submitted in the following four paragraphs. Limited audit “Cash in banks was reconciled with balances re­ ported to us by the depositaries and cash on hand was The auditors of Aetna Insurance Co. did not counted. Certificates for United States Government express an opinion on the fairness of presentation securities were inspected. The accounts receivable of the financial statements but confined their were checked to the subsidiary records and were tested opinion to the several specific items which they by direct communication with the debtors. had audited: “The inventories at December 31, 1949, represent book inventories which had been adjusted, as of “We have examined the books of the undernoted September 30, 1949, to conform to an aggregate Companies in so far as they relate to bonds and stocks amount determined by pricing at cost the quantities and cash on hand and in bank, as included in the re­ shown by the detailed inventory records as on hand at spective accounts of these Companies at December 31, September 30, 1949, and after recording transactions 1949: for the period from September 30, 1949, to December Aetna Insurance Company 31, 1949, at cost. Costs used were generally standard The World Fire and Marine Insurance Co. costs which were not in excess of market values. The Century Indemnity Company Quantities shown by the detailed inventory records Piedmont Fire Insurance Company were test-checked by physical counts made by the Standard Insurance Company of New York Company’s employees throughout the year. Our “We counted the cash on hand at the New York, examination of the inventories at December 31, 1949, Hartford, Chicago, San Francisco, Charlotte and included a review of the inventory accounting methods Toronto offices and confirmed the bank balances main­ employed by the Company, test checks of the trans­ tained at these offices by certificates obtained from the actions shown in the book accounts maintained for depositaries. We inspected on January 9, 1950, the inventories and tests by physical count of quantities securities and documents in respect of the investments shown to be on hand by the detailed inventory records. in bonds and stocks. “Plant and equipment is stated at cost. Additions “We have pleasure in reporting that the bonds and during the period were reviewed by us, and, in our stocks and the cash on hand and in bank were found to 136 Section 5—Accountant’s Report be in agreement with the accounts of the respective assumption that the amended plan of consolidation Companies at December 31, 1949.” (Aetna Insur­ and recapitalization, as modified, had been consum­ ance Co.) mated at December 31, 1949. However, we are not in a position to furnish an opinion regarding these pro forma statements since the proposed plan has not been finally adjudicated in the courts.” (Long Island Lighting Co.) Pro- f o rma statements “In our opinion, the pro forma income statements for the year 1949, appearing on pages 18 and 19, which were reviewed by us, have been prepared properly on In order to illustrate varying treatments of the bases indicated in the notes to the statements. pro-forma statements in auditors’ reports we are These statements have been adjusted to show what quoting below excerpts from five such reports: the effect would have been on net income if certain “The accompanying pro forma consolidated balance transactions, mentioned on page 20, had been con­ sheet at December 31, 1949, and pro forma consoli­ summated at December 31, 1948. Such transactions dated statement of income for the year ended that were consummated during 1949, except for the liquida­ date have been prepared to show the effect of the tion of North American Light & Power Company.” merger of The Ohio Public Service Company into Ohio (North American Co.) Edison Company on the basis indicated in Note 1 to “In our opinion, the accompanying consolidated the financial statements. The financial statements of balance sheet of the constituent companies of Niagara The Ohio Public Service Company were not examined Mohawk Power Corporation and subsidiary companies by us but we were furnished with a report of other presents fairly the financial position of the companies independent public accountants thereon. Based on at December 31, 1949, after giving effect to the ‘Con­ our examinations of the financial statements of Ohio solidation Plan’ consummated January 5, 1950 (see Edison Company and its subsidiary, Pennsylvania page 20) and the consolidated statements of income Power Company, the report of other independent pub­ and surplus present fairly the results of operations of lic accountants applicable to The Ohio Public Service the companies for the year then ended, after giving Company, and our review of the pro forma entries effect to such Plan, in conformity with generally ac­ made to give effect to the merger, in our opinion, the cepted accounting principles applied on a basis con­ pro forma consolidated balance sheet at December 31, sistent with that of the preceding year. Our examina­ 1949, and pro forma statement of consolidated income tion of the financial statements was made in accord­ for the year ended that date have been prepared to ance with generally accepted auditing standards, and reflect fairly the consolidated financial position of the accordingly included such tests of the accounting companies and the consolidated results of operations records and such other auditing procedures as we con­ had the merger been effective on the basis indicated as sidered necessary in the circumstances.” (Niagara of January 1, 1949. Such financial statements cannot Mohawk Power Corp.) be considered as representative of the consolidated financial position of the companies or the consolidated results of their operations until the merger is com­ pleted.” (Ohio Edison Co.) “In our opinion, the accompanying pro-forma con­ Additional disclosures solidated balance sheet and pro-forma statement of consolidated income, with the footnotes, present fairly, in conformity with generally accepted accounting prin­ “It should be borne in mind that the financial state­ ciples, the financial position of the companies at De­ ments, with all supplemental descriptive and ex­ cember 31, 1949, and the results of their operations for planatory data, including footnotes, are regarded as the year then ended on the basis of the transactions representations of the client. It is upon all these and adjustment summarized in Notes A and C to the representations that the independent certified public pro-forma consolidated financial statements having accountant renders his opinion. If he considers ex­ been consummated as of January 1, 1949, instead of in planations essential or desirable, and they have not 1950. ” (Equitable Gas Co.) been made in the financial statements, it will be “Supplementing our examination of the aforemen­ necessary for him to make such explanations in a tioned financial statements, we have reviewed the pro separate paragraph of his report.” forma balance sheet of the Consolidated Corporation at December 31, 1949, and the related pro forma state­ The following excerpts from auditors’ certi­ ment of income for the year then ended, and nothing ficates contain the type of informative disclosure came to our attention which would indicate that these which is generally found in footnotes to the statements had not been properly prepared on the financial statements and is dealt with in the Additional Disclosures 137 preceding paragraph from “Extensions of Audit­ “The consolidated balance sheet reflects properties, ing Procedures”: plant and equipment at amounts representing 1913 values with subsequent additions at cost, less unit “The companies operate at various locations under depletion on ore bodies, coal deposits and timber, and long-term leases, the major portion of which expire after adequate depreciation on plant and equipment. successively to 1959. Rentals paid during the year The report of the General Manager for the year amounted to approximately $1,400,000.” (General ended December 31, 1949, which is a part of the report Shoe Corp.) of the Company for the same year, shows a reserve of “In connection with this opinion it is noted that, 21.024,000 tons of developed ore which includes due to the cycle method of billing, there is a sub­ 461,000 tons of broken ore in shrinkage stopes. The stantial amount of unbilled revenue at the close of present value of the ore, coal and timber is not re­ each year which, in effect, acts as a reserve against flected in the balance sheet item of properties, plant uncollectible consumers’ accounts.” (Haverhill Gas and equipment, either gross or net after depletion, Light Co.) inasmuch as the books of the Company are kept on “Profit before federal taxes on income of $619,­ the basis above stated and as the assets are not sub­ 348.71 and net profit of $454,348.71 were originally ject to interim appraisals.” (Homestake Mining Co.) reported for the year 1948 after a charge of $106,­ “The mining properties are stated at book value 174.12 for the reduction in federal taxes on income without provision for depletion with the exception of attributable to the total cost of moving machinery, properties acquired from the Ontario Silver Mining equipment and inventories of C. J. Tagliabue Cor­ Company which have been fully depleted. Like­ poration (N.J.). The balance of $159,261.20 of wise, no deduction for depletion appears on the profit such costs was charged against earned surplus. We and loss statement attached hereto. believe the costs of moving, less the related tax re­ “The inventory of supplies included in the balance duction attributable thereto, were properly a charge sheet as a deferred charge to operations was certified against earned surplus, but, to meet requirements to us by responsible officers of the Company, but we of the Securities and Exchange Commission, said have not applied the generally accepted auditing pro­ balance was retroactively charged in 1949 against cedures of testing or otherwise verifying the prices or income for the year 1948.” (Weston Electrical In­ physical quantities of the inventory. strument Corp.) “In our opinion, the accompanying balance sheet and related condensed statement of profit and loss “In accordance with the company’s practice es­ and analysis of deficit present fairly the position of tablished in 1939, the appropriation representing the the Park Utah Consolidated Mines Company at increase of $361,518 between the amounts of over­ December 31, 1949, and the results of its operations head included in the inventories at the end and be­ for the year then ended, in conformity with generally ginning of the year has been deducted from income for accepted accounting principles applied on a basis the year.” (Wagner Electric Corp.) consistent with that of the preceding year, except as “The majority of the inventories are valued at follows: standard material, labor and indirect manufacturing “No provision is made for depletion of the mine costs. These standard values are revised periodically property which has been sustained in an unascer­ by changes in standard material prices and costing tainable am ount. If the amount of it were ascer­ rates. During 1949, revisions in standard values tainable, generally accepted accounting principles were completed at those locations where such re­ would require that depletion sustained to December visions were in process at December 31, 1948. As of 31, 1949, be provided for in the balance sheet and that December 31, 1949, the standard values in effect are depletion sustained in 1949 be provided for in the based generally on material prices paid and current statement of operations.” (Park Utah Consolidated labor and other costs.” (Westinghouse Electric Mines Co.) Corp.) “Depletion on the extraction of ore and coal is “As long as the notes payable to Metropolitan Life provided on the percentage basis allowed for Federal Insurance Company are outstanding, the amounts income tax purposes. The percentage depletion on which may be applied in payment of dividends (other ore and coal mined is reflected in the consolidated than dividends payable in the corporation’s capital statement of operations and has been carried direct stock) and in purchase or retirement of capital stock to consolidated surplus. Provision for timber de­ are limited to the amount of undistributed earnings pletion is on a unit basis. Depreciation on plant after January 31, 1945, plus $1,000,000.” (Best & and equipment has been taken at rates considered Co. Inc.) adequate to retire these assets within the period of “The practice of showing depletion as a separate de­ their useful life, which rates in the case of Homestake duction in the Surplus Account rather than as a Mining Company were revised to conform with the deduction in the Income Account and, accordingly, rates used for income tax purposes. of showing in the Income Account net income before 138 Section 5—Accountant's Report depletion, has been followed by the Company for is recognizing variations in the annual rate of activity. many years. While it is recognized that charges The average annual rate of activity during the ten- made for the amortization of cost of fixed assets are year period ended December 31, 1940, has been used generally shown as deductions in income accounts, as a base and in comparison therewith the activity the difficulty of determining the extent of ore reserves in the year 1949 results in depreciation of $421,416 and of allocating the depletion charges between cost in addition to that calculated on the basis used in and appreciation, the variance in the amount of the 1946 and prior years.” (Bigelow-Sanford Carpet charge during the different periods depending upon Co., Inc.) the particular properties operated, and other un­ “More than eighty (80%) per cent of the trade certainties and variables, have caused the Company receivables are not yet due for payment, and less than to follow consistently the practice above mentioned five (5%) per cent are more than thirty days past due; with respect to depletion.” (Phelps Dodge Corp.) the provision for doubtful accounts approximates “The minority interest in McGraw-Hill Inter­ seventy-five (75%) per cent of the past due items. national Corporation at December 31, 1949, consisted “The pension trust contains no restrictive cove­ of 3,700 shares of $3.00 Cumulative Preferred Stock nants; the funds and securities so designated are without par value. This stock is redeemable at therefore available for general corporate purposes at $75.00 per share and accumulated dividends. the pleasure of the board of directors.” (Craddock- “On December 31, 1948, McGraw-Hill Book Com­ Terry Shoe Corp.) pany, Inc., a wholly owned subsidiary of McGraw- Hill Publishing Company, Inc., purchased all the stock of The Gregg Publishing Company, which in turn owns all the stock of two British companies, Wording variations The Gregg Publishing Company, Ltd., and The Gregg Schools, Ltd. The amount to be paid for these foreign subsidiaries has not been determined, being dependent on appraisals of specific assets which have Accepting the recommended short form of not been completed. No provision has been made in auditor’s report as standard phrasing, the follow­ the consolidated balance sheet for the undetermined ing additions and variations were deemed inter­ liability for purchase of the Gregg foreign subsidiaries, esting or unusual: and no assets, liabilities or operations of the Gregg foreign subsidiaries have been included in the con­ “. . . in conformity with generally accepted ac­ solidated statements. The assets of these com­ counting principles.” (No consistency phrase) panies, and the corresponding liability of McGraw- (O’Sullivan Rubber Corp., Higgins, Inc.) Hill Book Company for the purchase price, amount to “We further advise that we are independent audi­ less than 2% of the consolidated total assets. tors and accountants.” (Atlantic City Sewerage “No attempt is made in the balance sheet to reflect Co.—after opinion paragraph) actual present value of Fixed Assets, Publication “These audits are complete and cover among Titles, Copyrights, Subscription Lists and Good­ other items . . .” (Yuba Consolidated Gold Fields) will.” (McGraw-Hill Publishing Co., Inc.) “. . . in conformity with principles of accounting “Refined sugar on hand or in process at September prescribed by the Interstate Commerce Commission 30, 1949, has been valued at the lower of cost or for Class I motor carriers ...” (Associated Trans­ market. Raw sugar on hand, sold or shipped subse­ port Inc.) quent to September 30, 1949, has been valued at “We have examined the balance sheet of . . . as of prices existing at date of sale or shipment and the re­ December 31, 1949, the consolidated and consolidat­ mainder, still on hand, at estimated realizable prices. ing balance sheets of the company . . .” (Peoples Molasses, both blackstrap and refinery, still unsold Gas Light and Coke Co.) have been valued at estimated market. A provision “. . . and were prepared in conformity with gen­ has been made for estimated expenses of shipping erally accepted accounting principles consistently sugar to port. applied during the period under review.” (Florida “The cost of cane purchased from colonos has been Power Corp.) based on an estimated promedio price of $4.40 per 100 pounds of sugar for the 1949 crop, the final official “As independent auditors elected at the annual price not having yet been published.” (Cuban- meeting of stockholders of United States Steel Corp. American Sugar Co.) held on May 2, 1948 . . .” (U. S. Steel Corp.) “Effective January 1, 1947, the company with our “. . . applied on a basis consistent in all material approval changed its policy regarding depreciation so respects with that of the preceding year.” (Bethle­ that, without change in estimated useful lives of the hem Steel Corp.) assets and resulting average rates of depreciation, it “Our audit has revealed no irregularities in the Wording Variations 139 accounts for the period reviewed. We found the Unions in addition to the General office. It is the books and records were well maintained and we wish opinion of the legal department of the General Office to acknowledge our appreciation of the cooperation of that the Joint Boards and Local Unions are essen­ your entire staff.” (Union Stock Yards Co. of tially autonomous in matters of finance although the Omaha) General Office, under certain circumstances, reserves “Including the period under review, we have made the right to the assets of the Joint Boards and Local regular examinations of the records of American Gas Unions.” (Amalgamated Clothing Workers of and Electric Co. from December 31, 1911, to December America) 31, 1949, and of those of its subsidiaries from Decem­ “We have audited the books and accounts of . . . ber 31, 1931, to December 31, 1949.” (American Gas and have prepared from the books the foregoing ...” and Electric Co.) (“56” Petroleum Corp.) “In our opinion, the accompanying statements . . . “In our opinion, based upon the examination and present fairly . . . for the year then ended, after charg­ upon the reports of other . . . and without considera­ ing accumulated earnings at September 20, 1949, tion of present market value of assets or provision for with the effect of the decline in conversion value of loss in the future realization of assets ...” (Tishman Canadian currency at that date . . .” (Safeway Realty & Construction Co.) Stores, Inc.) “The examinations of the companies included in “In accordance with instructions we have prepared the consolidated group were completed between the accompanying summary of assets and liabilities January 12 and February 10, 1950.” (Central & as at December 31, 1949, on the basis stated.” South West Corp.) (Statement based on market quotations—Capital “The net profit carried to surplus after providing Administration Co. Ltd.) for all expenses including depreciation and federal “Accounting principles consistently maintained.” income taxes for the year ended December 31, 1949, (Durez Plastics & Chemicals Inc.) amounted to $65,632.12.” (Fitz Simons & Connell “. . . for the fifty-two weeks then ended.” (Jewel Dredge & Dock Co.) Tea Co. Inc.) “In our opinion, the accompanying . . . and the “We have audited the books of . . . and based upon comments contained in our detailed audit report under the information disclosed by such audit have pre­ date of March 1, 1950, present fairly . . .” (Argo pared the foregoing balance sheet . . .” (D. Emil Oil Corp.) Klein Co. Inc.) “We have examined the books and accounts of . . . “The balance sheet and related statement of in­ Company and in our opinion, the accompanying come which we have examined are the statements of Balance Sheet presents fairly the position of . . . the General Office only, although the organization for the year ended December 31, 1949.” (North comprises several hundred Joint Boards and Local Pondre Irrigation Co.) a p p e n d ix

list of 525 corporations on which tab u lations were based

1. A. P. W. Products Co., Inc. 46. American Woolen Co. 92. Bond Stores, Inc. 2. Adam Hat Stores, Inc. 47. American Wringer Co., Inc. 93. Booth Fisheries Corp. 3. Adams-Millis Corp. 48. American Writing Paper Corp. 94. Borden Co. 4. Addressograph-Multigraph Corp. 49. Ampco Metal, Inc. 95. Borg-Warner Corp. 5. Ainsworth Mfg. Corp. 50. Anaconda Copper Mining Co. 96. Brach (E. J.) & Sons 6. Air Reduction Co., Inc. 51. Anchor Hocking Glass Corp. 97. Bridgeport Brass Co. 7. Alabama Fuel & Iron Co. 52. Anderson, Clayton & Co. (Inc.) 98. Briggs Mfg. Co. 8. Alan Wood Steel Co. 53. Anderson-Prichard Oil Corp. 99. Briggs & Stratton Corp. 9. Alaska Pacific Salmon Co. 54. Archer-Daniels-Midland Co. 100. Bristol-Myers Co. 10. Allegheny Ludlum Steel Corp. 55. Arden Farms Co. 101. Brockway Motor Co., Inc. 11. Allied Chemical & Dye Corp. 56. Argo Oil Corp. 102. Brown & Sharpe Mfg. Co. 12. Allied Mills, Inc. 57. Armco Steel Corp. 103. Brown Shoe Co., Inc. 13. Allied Stores Corp. 58. Armour & Co. 104. Brunswick-Balke-Collender Co. 14. Allis-Chalmers Mfg. Co. 59. Armstrong Cork Co. 105. Buckeye Steel Castings Co. 15. Alpha Portland Cement Co. 60. Art Metal Construction Co. 106. Bucyrus-Erie Co. 16. Amalgamated Sugar Co. 61. Artloom Carpet Co., Inc. 107. Budd Co. 17. American Agricultural Chemical Co. 62. Arundel Corp. 108. Buffalo Bolt Co. 18. American Asphalt Roof Corp. 63. Associated Dry Goods Corp. 109. Burlington Mills Corp. 19. American Bakeries Co. 64. Atlantic Co. 110. Butler Bros. 20. American Bank Note Co. 65. Atlantic Refining Co. 111. Byrndun Corp. 21. American Box Board Co. 66. Atlas Powder Go. 112. Byron Jackson Co. 22. American Can Co. 67. Autocar Co. 113. California Packing Corp. 23. American Car & Foundry Co. 68. Avco Manufacturing Corp. 114. Camden Forge Co. 24. American Chain & Cable Co., Inc. 69. Avon Allied Products, Inc. 115. Campbell (A. S.) Co., Inc. 25. American Colortype Co. 70. Babcock & Wilcox Co. 116. Cannon Mills Co. 26. American Cyanamid Co. 71. Baldwin Locomotive Works 117. Case (J. I.) Co. 27. American Hardware Corp. 72. Barber Oil Corp. 118. Caterpillar Tractor Co. 28. American Hide & Leather Co. 73. Barker Bros. Corp. 119. Celanese Corp. of America 29. American-La France-Foamite Corp. 74. Bath Iron Works Corp. 120. Central Soya Co., Inc. 30. American Locomotive Co. 75. Bausch & Lomb Optical Co. 121. Century Electric Co. 31. American Maize-Products Co. 76. Bay Petroleum Corp. 122. Cessna Aircraft Co. 32. American Metal Co., Ltd. 77. Bayuk Cigars, Inc. 123. Champion Paper & Fibre Co. 33. American Metal Products Co. 78. Beatrice Foods Co. 124. Chicago Pneumatic Tool Co. 34. American Optical Co. 79. Beech Aircraft Corp. 125. Chicago Railway Equipment Co. 35. American Radiator & S.S. Corp. 80. Beech-Nut Packing Co. 126. Chicago & Southern Air Lines, Inc 36. American Republics Corp. 81. Belding Heminway Co., Inc. 127. Chile Copper Co. 37. American Safety Razor Corp. 82. Bell Aircraft Corp. 128. Chrysler Corp. 38. American Shipbuilding Co. 83. Bendix Aviation Corp. 84. Bendix Home Appliances, Inc. 129. Cities Service Co. 39. American Smelting & Refining Co. 85. Best Foods, Inc. 130. City Products Corp. 40. American Stores Co. 86. Bethlehem Steel Corp. 131. City Stores Co. 41. American Sugar Refining Co. 87. Bigelow-Sanford Carpet Co., Inc. 132. Clark Equipment Co. 42. American Tobacco Co. 88. Billings & Spencer Co. 133. Clearing Machine Corp. 43. American Transformer Co. 89. Blaw-Knox Co. 134. Cleveland Builders Supply Co. 44. American Viscose Corp. 90. Boeing Airplane Co. 135. Clyde Porcelain Steel Corp. 45. American Window Glass Co. 91. Bohn Aluminum & Brass Corp. 136. Coca-Cola Co.

142 Appendix

137. Colgate-Palmolive-Peet Co. 204. Federated Department Stores, Inc. 268. Ingersoll-Rand Co. 138. Collins & Aikman Corp. 205. Firestone Tire & Rubber Co. 269. Inland Steel Co. 139. Colonial Stores Inc. 206. First National Stores, Inc. 270. Interchemical Corp. 140. Colorado Fuel & Iron Corp. 207. Fishman (M. H.) Co., Inc. 271. International Business Machines 141. Colorado Milling & Elevator Co. 208. Florsheim Shoe Co. Corp. 142. Columbia River Packers Assoc., Inc. 209. Follansbee Steel Corp. 272. International Harvester Co. 143. Columbian Carbon Co. 210. Food Machinery and Chemical Corp. 273. International Nickel Co. of Canada, 144. Commercial Solvents Corp. 211. Foremost Dairies, Inc. Ltd. 145. Congoleum-Nairn, Inc. 212. Fruehauf Trailer Co. 274. International Paper Co. 146. Consolidated Cigar Corp. 213. Garlock Packing Co. 275. International Shoe Co. 147. Consolidated Paper Co. 214. Gaylord Container Corp. 276. International Silver Co. 148. Consolidated Vultee Aircraft Corp. 215. General American Transportation 277. Interstate Bakeries Corp. 149. Container Corp. of America Corp. 278. Iron Fireman Mfg. Co. 150. Continental Baking Co. 216. General Aniline & Film Corp. 279. Jantzen Knitting Mills Inc. 151. Continental Can Co., Inc. 217. General Baking Co. 280. Johns-Manville Corp. 152. Continental Motors Corp. 218. General Bottlers, Inc. 281. Johnson & Johnson 153. Continental Oil Co. 219. General Box Co. 282. Jones & Lamson Machine Co, 154. Continental Steel Corp. 220. General Cable Corp. 283. Jones & Laughlin Steel Corp. 155. Copperweld Steel Co. 221. General Cigar Co., Inc. 284. Joslyn Mfg. & Supply Co. 156. Corn Products Refining Co. 222. General Electric Co. 285. Kahn’s (E.) Sons Co. 157. Craddock-Terry Shoe Corp. 223. General Mills, Inc. 286. Keith (Geo. E.) Co. 158. Crane Co. 224. General Motors Corp. 287. Kennecott Copper Corp. 159. Creamery Package Mfg. Co. 225. General Railway Signal Co. 288. Keystone Steel & Wire Co. 160. Crown Central Petroleum Corp. 226. General Refractories Co. 289. Kidde (Walter) & Co., Inc. 161. Crown Cork & Seal Co., Inc. 227. General Shoe Corp. 290. Kimberly-Clark Corp. 162. Crown Zellerbach Corp. 228. General Tire & Rubber Co. 291. Kingan & Co. 163. Crucible Steel Co. of America 229. Giddings & Lewis Machine Tool Co. 292. Kinney (G. R.) Co., Inc. 164. Cuban-American Sugar Co. 230. Gillette Safety Razor Co. 293. Klein (D. Emil) Co., Inc. 165. Cudahy Packing Co. 231. Gimbel Bros., Inc. 294. Koppers Co., Inc. 166. Cuneo Press, Inc. 232. Gleaner Harvester Corp. 295. Kresge (S. S.) Co. 167. Curtis Publishing Co. 233. Glidden Co. 296. Kress (S. H.) & Co. 168. Curtiss-Wright Corp. 234. Globe Steel Tubes Co. 297. Kroger Co. 169. Cutler-Hammer, Inc. 235. Godchaux Sugars, Inc. 298. Kuner-Empson Co. 170. Deere & Co. 236. Goldblatt Bros., Inc. 299. Lambert Co. 171. Derby Oil Co. 237. Good Humor Corp. 300. Lawrence Portland Cement Co. 172. Devoe & Reynolds Co., Inc. 238. Goodrich (B. F.) Co. 301. Lear, Inc. 173. Diamond Match Co. 239. Goodyear Tire & Rubber Co. 302. Le Roi Co. 174. Diamond T. Motor Car Co. 240. Granite City Steel Co. 303. Le Tourneau, (R. G.) Inc. 175. Diana Stores Corp. 241. Grant (W. T.) Co. 304. Lehigh Portland Cement Co. 176. Dictaphone Corp. 242. Great Western Sugar Co. 305. Lerner Stores Corp. 177. Di-Noc Co. 243. Griess-Pfleger Tanning Co. 306. Libbey-Owens-Ford Glass Co. 178. District Theatres Corp. 244. Gruen Watch Co. 307. Libby, McNeill & Libby 179. Dixie Cup Co. 245. Grumman Aircraft Engineering 308. Liberty Products Corp. 180. Doehler-Jarvis Corp. Corp. 309. Liggett & Myers Tobacco Co. 181. Douglas Aircraft Co., Inc. 246. Gulf Oil Corp. 310. Lily-Tulip Cup Corp. 182. Dow Chemical Co. 247. Hall (W. F.) Printing Co. 311. Lima-Hamilton Corp. 183. Drackett Co. 248. Haloid Co. 312. Link-Belt Co. 184. Dresser Industries, Inc. 249. Hamilton Watch Co. 313. Lockheed Aircraft Corp. 185. du Pont (E. I.) de Nemours & Co. 250. Harbison-Walker Refractories Co. 314. Loew’s Inc. 186. Dwight Mfg. Co. 251. Hamischfeger Corp. 315. Lone Star Cement Corp. 187. Eastern Malleable Iron Co. 252. Harshaw Chemical Co. 316. Lorillard (P.) Co. 188. Eastern Stainless Steel Corp. 253. Harvill Corp. 317. Lukens Steel Co. 189. Eaton Mfg. Co. 254. Haskelite Mfg. Corp. 318. Luscombe Airplane Corp. 190. Elastic Stop Nut Corp. of America 255. Hayes Mfg. Corp. 319. Macfadden Publications, Inc. 191. Electric Auto-Lite Co. 256. Hazel-Atlas Glass Co. 320. Mack Trucks, Inc. 192. Electric Boat Co. 257. Hearst Consolidated Publications, 321. Macy (R. H.) & Co., Inc. 193. Electric Storage Battery Co. Inc. 322. Mallory (P. R.) & Co., Inc. 194. Elgin National Watch Co. 258. Hercules Motors Corp. 323. Marathon Corp. 195. Ely & Walker Dry Goods Co. 259. Hercules Powder Co. 324. Marmon-Herrington Co., Inc. 196. Emerson Radio & Phonograph Corp. 260. Higgins, Inc. 325. Marshall Field & Co. 197. Endicott Johnson Corp. 261. Hooker Electrochemical Co. 326. Martin (Glenn L.) Co. 198. Ex-Cell-0 Corp. 262. Hormel (Geo. A.) & Co. 327. Master Electric Co. 199. Fairbanks Co. 263. Houdaille-Hershey Corp. 328. Maxson (W. L.) Corp. 200. Fairbanks, Morse & Co. 264. Howell Electric Motors Co. 329. May Department Stores Co. 201. Falstaff Brewing Corp. 265. Hudson Motor Car Co. 330. Mayer (Oscar) & Co., Inc. 202. Farquhar (A. B.) Co. 266. Hygrade Food Products Corp. 331. McCall Corp. 203. Federal Machine & Welder Co. 267. Industrial Brownhoist Corp. 332. McGraw Electric Co. Appendix 143 333. McGraw-Hill Publishing Co., Inc. 396. Phillips Petroleum Co. 461. Standard Oil Co. (N. J.) 334. McKesson & Robbins, Inc. 397. Pillsbury Mills, Inc. 462. Standard Oil Co. (Ohio) 335. Mead Corp. 398. Piper Aircraft Corp. 463. Standard Stoker Co., Inc. 336. Medusa Portland Cement Co. 399. Pittsburgh Plate Glass Co. 464. Stewart-Warner Corp. 337. Melville Shoe Corp. 400. Pittsburgh Screw & Bolt Corp. 465. Stokely-Van Camp, Inc. 338. Metal & Thermit Corp. 401. Pittsburgh Steel Co. 466. Struthers Wells Corp. 339. Mid-Continent Airlines Inc. 402. Pittston Co. 467. Studebaker Corp. 340. Mid-Continent Petroleum Corp. 403. Polaroid Corp. 468. Sun Oil Co. 341. Miller & Hart, Inc. 404. Porter (H. K.) Co., Inc. 469. Sunshine Biscuits, Inc. 342. Miller Mfg. Co. 405. Pratt & Lambert, Inc. 470. Super-Cold Corp. 343. Minneapolis-Honeywell Regulator 406. Pullman Inc. 471. Superior Oil Co. Co. 407. Pure Oil Co. 472. Sutherland Paper Co. 344. Mohawk Carpet Mills, Inc. 408. Purity Bakeries Corp. 473. Swift & Co. 345. Mohawk Rubber Co. 409. PurOlator Products, Inc. 474. Texas Co. 346. Monsanto Chemical Co. 410. Quaker Oats Co. 475. Texas Gulf Sulphur Co. 347. Montgomery Ward & Co., Inc. 411. Radio-Keith-Orpheum Corp. 476. Thompson Products, Inc. 348. Moore Drop Forging Co. 412. Ralston Purina Co. 477. Tide Water Associated Oil Co. 349. Morrel (John) & Co. 413. Rath Packing Co. 478. Time, Inc. 350. Motor Products Corp. 414. Raybestos-Manhattan, Inc. 479. Timken Roller Bearing Co. 351. Motor Wheel Corp. 415. Rayonier Inc. 480. Twentieth Century-Fox Film Corp. 352. Moxie Co. 416. Regal Shoe Co. 481. Union Bag & Paper Corp. 353. Nash-Kelvinator Corp. 417. Remington Rand Inc. 482. Union Carbide & Carbon Corp. 354. National Biscuit Co. 418. Republic Aviation Corp. 483. Union Oil Co. of Calif. 355. National Cash Register Co. 419. Republic Steel Corp. 484. Union Tank Car Co. 356. National Co., Inc. 420. Revere Copper & Brass Inc. 485. United Aircraft Corp. 357. National Cylinder Gas Co. 421. Rexall Drug, Inc. 486. United Artists Theatre Circuit, Inc. 358. National Dairy Products Corp. 422. Reynolds Metals Co. 487. United Cigar-Whelan Stores Corp. 359. National Distillers Products Corp. 423. Reynolds (R. J.) Tobacco Co. 488. United Drill & Tool Corp. 360. National Lead Co. 424. Rice-Stix Inc. 489. United Fruit Co. 361. National Paper & Type Co. 425. Richfield Oil Corp. 490. United Merchants & Mfrs., Inc. 362. National Steel Corp. 426. Roberts & Mander Corp. 491. United Piece Dye Works 363. National Supply Co. 427. Robertson (H. H.) Co. 492. United Shoe Machinery Corp. 364. New Britain Machine Co. 428. Ruberoid Co. 493. U. S. Finishing Co. 365. Newberry (J. J.) Co. 429. Ruppert (Jacob) 494. U. S. Gypsum Co. 366. Newport News Shipbuilding & Dry 430. Safety Car Heating & Lighting Co., 495. U. S. Industrial Chemicals, Inc. Dock Co. Inc. 496. U. S. Potash Co. 367. Niles-Bement-Pond Co. 431. Safeway Stores, Inc. 497. U. S. Rubber Co. 368. North American Aviation, Inc. 432. Samson United Corp. 498. U. S. Smelting Refining & Mining 369. Northrop Aircraft, Inc. 433. Schenley Industries Inc. Co. 370. Ohio Match Co. 434. Scott Paper Co. 499. U. S. Steel Corp. 371. Ohio Oil Co. 435. Scovill Mfg. Co. 500. United Stove Co. 372. Oliver Corp. 436. Scranton Lace Co. 501. Universal-Cyclops Steel Corp. 373. O'Sullivan Rubber Corp. 437. Sears, Roebuck & Co. 502. Universal Leaf Tobacco Co., Inc. 374. Otis Elevator Co. 438. Sharon Steel Corp. 503. Universal Match Corp. 375. Owens-Illinois Glass Co. 439. Sharp & Dohme, Inc. 504. Vanadium-Alloys Steel Co. 376. Pacific Mills 440. Shattuck (Frank G.) Co. 505. Wagner Electric Corp. 377. Packard Motor Car Co. 441. Shell Oil Co. 506. Walgreen Co. 378. Pan American Petroleum & Trans­ 442. Sherwin-Williams Co. 507. Walworth Co. port Co. 443. Simmons Co. 508. Ward Baking Co. 379. Panhandle Producing & Refining Co. 444. Sinclair Oil Corp. 509. Warner Bros. Pictures, Inc. 380. Paramount Pictures Inc. 445. Skelly Oil Co. 510. Wesson Oil & Snowdrift Co., Inc. 381. Park & Tilford, Inc. 446. Smith (A. O.) Corp. 511. West Virginia Pulp & Paper Co. 382. Parker Pen Co. 447. Socony-Vacuum Oil Co., Inc. 512. Western Auto Supply Co. 383. Parkersburg Rig & Reel Co. 448. Southern Advance Bag & Paper Co., 513. Westinghouse Air Brake Co. 384. Pathe Industries, Inc. Inc. 514. Westinghouse Electric Corp. 385. Patterson-Sargent Co. 449. Spalding (A. G.) & Bros., Inc. 515. Weston Electrical Instrument Corp. 386. Peden Iron & Steel Co. 450. Spencer Kellogg & Sons, Inc. 516. Wheeling Steel Corp. 387. Penney (J. C.) Co. 451. Sperry Corp. 517. Willys-Overland Motors, Inc. 388. Pennsylvania Coal & Coke Corp. 452. Spiegel, Inc. 518. Wilson & Co., Inc. 389. Peoples Drug Stores, Inc. 453. Sprague Electric Co. 519. Woolworth (F. W.) Co. 390. Pepsi-Cola Co 454. Square D Co. 520. Worthington Pump & Machinery 391. Permutit Co. 455. Stahl-Meyer, Inc. Corp. 392. Pet Milk Co. 456. Staley (A. E.) Mfg. Co. 521. Wright Aeronautical Corp. 393. Phelps Dodge Corp. 467. Standard Brands Inc. 522. Wrigley (Wm.) Jr. Co. 394. Philadelphia Dairy Products Co., 458. Standard Oil Co. of Calif. 523. Yale & Towne Mfg. Co. Inc. 459. Standard Oil Co. (Ind.) 524. York Corp. 395. Philip Morris & Co., Ltd. Inc. 460. Standard Oil Co. (Kentucky) 525. Youngstown Sheet & Tube Co.