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80

British Society of Incorporated Accountants and Auditors....
Business, Federal Taxes in Relation to. Homer N. Sweet..

121
Candy Manufacturers' Accounts. William A. Shenton.

197
Capital Stock of No Par Value. Frederick H. Hurdman....

246
Capital to Excess Profits Tax, Relation of Invested. Stephen G. Rusk 273
Certified Public Accountants of Massachusetts, Inc......

80
Clothing Store Accounting, Retail. Max Schlessinger....

25
Consolidated Accounts. George R. Webster....

258
Corporations, Federal Taxation of. F. R. Carnegie Steele....

420
Correspondence :
Some Phases of Capital Stock...

.74, 158, 474
Cost Accountant, Duties of a Factory. Lee Heyer White...

190
Cost Accounting, Some Reflections On. J. Paul Suter.....

95
Cost-Plus-Profit Contracts, Accounting for Cost of Naval Vessels
Under. Francis P. Farquhar...

180
Depletion in Relation to Invested Capital, Depreciation and. William
B. Gower

353
Depletion in Tax Returns, Depreciation and. William Cairns....... 204
Depreciation and Depletion in Relation to Invested Capital. William
B. Gower

353
Depreciation and Depletion in Tax Returns. William Cairns.. 204
Dubbell, P. J. (Obituary)...

80
Duties of a Factory Cost Accountant. Lee Heyer White..

190
Editorial :
Approaching Standardization

126
Auditors' Certificates

456
Branch Office Ethics..

212
Efficiency

455
Fair Examination

286
Filing Tax Returns....

372
Holding the Accountant Responsible.

39
Income Tax Inequities.

369
National Budget ...

42
Professional Ethics

451
Sir James Martin.

129
Tax Return Makers.

454
Value of Audited Statements...

454

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Excess Profits Tax, Relation of Invested Capital to. Stephen G. Rusk 273
Expense Accounting, Insurance. W. H. Draughon...

16
Factory Cost Accountant, Duties of a. Lee Heyer White..

190
Falk, Henry J. (Obituary).

399
Federal Taxation of Corporations. F. R. Carnegie Steele..

420
Federal Taxes in Relation to Business. Homer N. Sweet..

121
Firm, Transactions Between Partner and. W. A. Paton..

33
Flour Mill Accounting, Some Aspects of. James L. Dohr...

161
Growing Responsibilities of the Public Accountant. J. Porter Joplin 9
Income Tax Department. Edited by John B. Niven,

44, 131, 217, 297, 374, 458
Influence of the War on Balance-sheets. R. H. Montgomery.

1
Insurance Expense Accounting. W. H. Draughon..

16
Introduction to Actuarial Science. H. A. Finney.

.321, 435
Iowa State Board of Accountancy......

80
Invested Capital, Depreciation and Depletion in Relation to. William
B. Gower

... 353
Invested Capital to Excess Profits Tax, Relation of. Stephen G. Rusk 273
Los Angeles Chapter, California Society.

80
Maryland Association of C. P. A.'s.....

160
Missouri Society of Certified Public Accountants...

80
Naval Vessels Under Cost-Plus-Profit Contracts, Accounting for Cost
of. Francis P. Farquhar..

180
No Par Value, Capital Stock of. Frederick H. Hurdman.

246
Oklahoma State Board of Accountancy...

160
Partner and Firm, Transactions Between. W. A. Paton.....

33
President, Report of the. Waldron H. Rand...

241
Profits in Relation to Rising Prices, Renewal Costs and Business.
John Bauer

413
Public Accountant, Growing Responsibility of the. J. Porter Joplin 9
Relation of Invested Capital to Excess Profits Tax. Stephen G. Rusk 273
Renewal Costs and Business Profits in Relation to Rising Prices.
John Bauer

413
Report of the President. Waldron H. Rand...

241
Retail Clothing Store Accounting. Max Schlessinger..

25
Some Aspects of Flour Mill Accounting. James L. Dohr..

161
Some Reflections on Cost Accounting. J. Paul Suter...

95

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Stock of No Par Value, Capital. Frederick H. Hurdman..

... 246
Students' Department. Edited by Seymour Walton,

55, 143, 226, 302, 382, 461
Taxation of Corporations, Federal. F. R. Carnegie Steele.

420
Taxes in Relation to Business, Federal. Homer N. Sweet..

121
Tax Returns, Depreciation and Depletion in. William Cairns.. 204
Transactions Between Partner and Firm. W. A. Paton....

33
Uniform Accounting, Advantages of. A. B. Manning..

113
War on Balance-sheets, Influence of the. R. H. Montgomery

1
Washington State Board of Accountancy..

319
Water Utilities Accounting. Will-A. Clader.

81
Working Papers, Audit. William H. Bell..

104

The Journal of Accountancy

Official Organ of the American Institute of Accountants

Vol. 28

JULY, 1919

No. 1

Influence of the War on Balance-sheets*

By ROBERT H. MONTGOMERY Most balance-sheets of recent date differ radically from those published prior to the commencement of the world war. Changes worthy of comment appear not only in the surplus account but particularly in such items as plant, inventories and reserves. Many of the dubious items on the asset side, such as deferred charges and capitalized expenditures of doubtful permanent value, have disappeared. Will this desirable state of affairs continue?

The noticeable change in balance-sheets due to war conditions commenced in 1916. At the end of 1914 depression was quite general, values were down, federal tax rates were low and there was little inclination on the part of business men to make any changes in their balance-sheets other than those which had periodically been made during prior years.

At the end of the year 1915 no substantial change had taken place. There had, however, been some recovery in business and large orders were being placed for war purchases, chiefly emanating from foreign governments. Federal tax rates continued low.

Throughout 1916 business continued to improve and with the enactment of the federal revenue law of September 8, 1916, effective as of January 1, 1916, which carried with it increased federal taxes, business men commenced to scrutinize their balance-sheets with an interest which had no precedent and was unique in thoroughness.

On March 3, 1917, the first federal excess profits tax law was passed. Consequently from the beginning of the year 1917 the majority of business men have constantly had in mind the effect

An address delivered at the annual convention of the New York State Bankers' Association at Albany, New York, June 12, 1919.

of federal taxes on profits. As almost every item of a balancesheet affects directly or indirectly the computation of taxes, it is obvious that the greatest single influence which has ever been felt on balance-sheets is the federal excess or war profits tax.

Generally speaking, balance-sheets are accurate when tax rates are high and profits are substantial. It cannot be said that the average balance-sheet is accurate when tax rates are low or when tax rates are high and profits are not substantial. I am referring now to the balance-sheet as it is made up without supervision or certification from an outside source. The tendency to fool one's self has been so strong and so general that the ordinary balancesheet in the pre-war period, when subjected to investigation by a disinterested third person, required drastic treatment.

Except in the comparatively few cases where special reasons existed for understating values or understating profits, most business men were unwilling to provide sufficient depreciation; they were unwilling to cut down inventory values; and they were reluctant to provide sufficient reserves against accounts receivable. They insisted on carrying "souvenirs” as perfectly good assets, and they borrowed large sums of money on the strength of such souvenirs. This tendency was so general that most bankers in scrutinizing balance-sheets mentally calculated additional reserves against the assets mentioned. The result was that the conservative business man who had provided sufficient reserves suffered the penalty of having, in effect, his actual quick assets reduced because the non-conservative man had neglected to provide sufficient reserves.

The attitude of the treasury department in the matter of federal taxation during the years 1909 to 1917 was not helpful from the point of view of conservative balance-sheets. The agents of the department were constantly disallowing depreciation and amortization charges; allowances for obsolescence were stricken out, and, in general, business men were encouraged to carry their assets on their books at inflated values.

Bankers' insistence upon accurate balance sheets, supplemented by the action of another governmental agency, viz., the federal reserve board, offset the influence of the treasury department and worked for a constantly increasing improvement in the trustworthiness of balance-sheets. Progress, however, was fairly slow until in the year 1917, with its enormous federal taxes, there was

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