discussion follows and all aspects of the asset in question are brought to light. As a consequence, the figures which are finally presented to the credit manager represent deliberations which could not take place in the absence of two different viewpoints. The treasurer of a Louisville hardware firm writes in part, as follows: In the first place, the verification of the figures gives greater assurance against errors. In the second place, it is the testimony of two witnesses against one, the second one being an uninterested witness. We always regard such statements as being more accurate and dependable than when compiled by a firm without the assistance of accountants. FIFTH It assures accuracy. This feature received very little attention by the credit managers in their replies, but it is without doubt essential. The accountant, trained in the matter of accuracy, with his numerous methods of proving the correctness of accounts, has eliminated from the mind of the credit manager any doubts he may have had as to the accuracy of audited balance sheets. SIXTH It furnishes valuable information as to earnings. It is a well-known fact among accountants that profits resulting from the sale of capital assets or however acquired, other than from the regular operation of the business, are frequently included in the unaudited balance sheet as earnings for the year, which, if not detected by the credit manager, will lead to erroneous conclusions as to the earning power of the firm seeking credit. Some unaudited balance sheets will exhibit simply the surplus from year to year and the credit manager arrives at the firm's net increase in assets by deducting from the surplus shown on the current statement the amount of the same account as shown on the previous statement. It is easily seen how a borrower can include such items of profit in his earnings from operations without actually stating the fact, by simply permitting the credit manager to assume that the net increase in surplus account represents the earnings. The credit manager of a wholesale drug firm in Dallas writes in part as follows: The audited statement from a credit manager's standpoint is a guarantee of accuracy as to assets and liabilities, and also supplies him with information as to income and expense that it is hard for him to secure otherwise. SEVENTH: It enables the credit manager to give constructive advice. The credit manager, with his fund of information regarding the affairs of business houses in the same branch of industry, can determine from the audited balance sheet the weaknesses, if any, which may exist in the financial condition of the individual borrower, which enables him to give sound advice, when the same is pertinent, and frequently prevents failure. It is hardly necessary to say that advice based on unaudited statements, which are quite frequently incorrect, would be of little value to the borrower. This feature is clearly emphasized by the president of a large wholesale grocery house in Texas, as parts of his letter, which I quote, will show: We have been having our books audited for several years and find it is very satisfactory to the stockholders of this company, and I feel quite sure it is more satisfactory to those we do business with and borrow money from to have outside public accountants to do the work and report on the audit than to take our own clerical force's word for it. If our customers would only view the matter as we do and let us go over their books in this way, we would save a great many of them from bankruptcy and ourselves frequently from loss. The credit man's job is one more of guessing and reading human nature than scientifically handling facts and figures, as it should be. EIGHTH Finally, the audited balance sheet gives to the credit manager that much desired feeling of satisfaction which comes with the assurance that all information pertinent to the financial condition of the borrower is before him; that each item exhibited on the statement has been subjected to thorough verification; that every feature surrounding each item has been considered, and the assets, liabilities and earnings are finally entered on the statement under the proper headings according to the judgment of the qualified accountant. And, if the condition of the borrower does not warrant the credit asked for, the refusal can be made with a clear conscience that, whether regrettable or not, the decision is based on facts and therefore just. Published monthly for The American Association of Public Accountants by THE RONALD PRESS COMPANY, We are glad to be able to publish in this issue of THE JOURNAL OF ACCOUNTANCY four important articles dealing with credit relations. This is a subject which is of increasing importance and at the present moment occupies the attention of the entire financial and commercial world of America because of the inauguration of the new federal reserve board and its concomitant banking system. The article by Mr. F. G. Colley expresses excellently the views which THE JOURNAL entertains as to the urgent necessity for immediate regulation in the matter of statements in support of all commercial paper offered for rediscount. Mr. Charles E. Meek, president of the National Association of Credit Men, endorses in the strongest terms the proposal to insist upon certified statements in connection with commercial paper and his article on Credit Granting is one that should be read and studied by everyone concerned with the purchase or sale of commercial paper. The article entitled Credits from the Viewpoint of a Certified Public Accountant by Mr. Frederick H. Hurdman, C. P. A., has already been mentioned in the editorial pages of this magazine and we have pleasure in presenting the article itself in this issue. Mr. Hurdman's article has done much to im press upon bankers the necessity for certification of borrowers' statements. The rapid development of the movement is further demonstrated by the article entitled The Value of an Audited Statement prepared by Mr. A. G. Moss. Altogether the four articles mentioned constitute one of the most emphatic pleas ever made in favor of the adoption of sound business principles in the granting of credit on the security of commercial paper. The federal reserve board has not yet insisted upon the certification of borrowers' statements, but there is every reason to believe that in the near future satisfactory regulations will be issued and that the security to the general public, the lender and the borrower, afforded by proper certification of statements, will become compulsory under the ruling of the board. Valuation of Merchandise Inventories SHOULD CASH DISCOUNTS BE DEDUCTED? The following is a copy of a communication which a bank president recently sent to nineteen different concerns, of whom seven were bankers, two note brokers, and ten large wholesale and retail dry goods merchants: We have seen a statement exhibited by certified public accountants, to which this comment is attached: "The merchandise inventories, which have been certified by the company's officials as to quantities and marketable condition, have been valued at cost, but cash discounts have not been deducted. "This comment has become a subject of discussion, and desiring to secure a collective opinion as to the correct procedure in valuing a merchandise inventory, I am writing to you to ascertain whether in your judgment a valuation should be determined as above stated, or by the cost of the goods less the cash discount taken. "Your reply will be appreciated." An analysis of the replies shows that Thirteen stated that in their opinion the discount should most certainly be deducted; Two considered that the discount should not be deducted; Four were non-committal. Of the replies from the thirteen who considered that the discount should be deducted, five came from bankers, two from note brokers, and six from dry goods companies. These replies are interesting. A bank in Chicago writes: "We have taken the subject-matter up with several of our leading local authorities and we are advised that it is the general custom in appraising merchandise to list it at cost less the cash discounts which it has been possible to secure and take advantage of." A Boston bank stated that "a statement showing merchandise inventories from which cash discounts have not been deducted would look very unusual to us, ... it would look as though the concern which wished to have its statement attested in this way was seeking to pad its figures." A Philadelphia bank wrote stating that discount should be deducted, and adding: "We would like to see this policy universally adopted by the certified public accountants." The letter of a New York bank is especially interesting as it emphasizes the necessity of definiteness in the wording of the accountant's certificate. We quote as follows: . "Personally, I consider that merchandise should always be inventoried at its net purchase price, but it is impossible to accomplish any degree of uniformity on this subject. Because, therefore, of the wide differences of opinion existing on this question, I always allow anywhere from 20 per cent to 35 per cent for shrinkage in merchandise values when analyzing statements, according to the particular line of business under consideration. Similar practice is followed by many bankers, and I think it is safer as a rule to work on that principle than to accept figures which are not made perfectly clear and satisfactory." The majority of the replies from the dry goods companies are short and emphatic in their opinion that cash discounts must be deducted, one large firm adding that the concern that takes its stock without taking into consideration the discount allowed only fools itself. Of the two replies received which stated that they did not consider it necessary to deduct the cash discounts, one is a wholesaling and retailing company in the east and the other a retail dry goods company in the southwest. Of the four that were non-committal, two replies were from bankers and two from wholesale dry goods houses. Of the two |