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British Society of Incorporated Accountants and Auditors.....

80 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.




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

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

Falk, Henry J. (Obituary)....

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

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

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

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.

Insurance Expense Accounting. W. H. Draughon...
Introduction to Actuarial Science. H. A. Finney.

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

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...

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

Missouri Society of Certified Public Accountants.

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

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

Oklahoma State Board of Accountancy....

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

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

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

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

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

Retail Clothing Store Accounting. Max Schlessinger.

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

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



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

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...

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

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

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

Washington State Board of Accountancy...

Water Utilities Accounting. Will-A. Clader.

Working Papers, Audit. William H. Bell.


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 įn the year 1917, with its enormous federal taxes, there was

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