CORPORATION REPORTS: ASSETS 1. Character of reports.—All railroads make re ports to their shareholders, and uniform reports are filed with the Interstate Commerce Commission at Washington. Most industrial corporations publish reports, altho there is to be found among them the utmost variety, from explicit statements to meager information. Few mining or mercantile corpora tions publish reports. The inadequacy of the finan cial information imparted by some companies may indicate the opinion of the management that its earn ing power depends upon secrecy as to some method or market. Inasmuch as secrets in business which are worth while do not long remain secrets, all securities of companies which maintain a policy of secrecy in their accounts and in the customary data of corpora tion reports, should be looked upon as too speculative and uncertain for the average investor. A pinched and blind balance sheet is a danger sign.
The facts which an investor needs to know are not such as need be kept secret for the good of the busi ness. They are such matters as the following: 1. That the project is of a permanent character, producing an article or rendering a service which is of merit and which is staple in character.
2. That appropriate physical equipment has been provided for producing the article or rendering the service.
3. That this equipment is being kept up-to-date, in good repair and fully intact as a productive agency.
4. That a conservative valuation is placed upon all assets, and especially upon those of an intangible na ture.
5. That adequate current assets are maintained to meet the claims of current liabilities.
6. That there is an excess of current assets over current liabilities sufficient to provide adequate work ing capital.
7. That accounts are paid promptly and collections made promptly.
8. That fixed charges are kept down to a safe per centage of net income.
9. That there is efficiency in operation, as shown by the proportion of gross income absorbed by operat ing expenses.
10. That reserves are maintained sufficient to pro vide for obsolescence and depreciation of physical equipment, possible losses thru uncollectable accounts and other similar contingencies.
11. That, in general, the management is conduct ing the business upon principles which are fair, can did and far-sighted.
2. Balance significant portions of a corporation report are the balance sheet, the income account, and the general descriptive information. A balance sheet is a systematic statement of the financial condition of a business at a given date, as shown by the books. It is a classified summary of the property holdings and of proprietorship claims to that prop erty. It is important to emphasize the clause "as shown by the books," for the balance sheet sometimes does not represent a business as competent and in dependent appraisers and auditors would represent it, were they to make a report upon it.
Altho the general scheme of arrangement of ac counts in the balance sheet is seldom twice alike in the reports of different corporations, it is possible to formulate a classification of sufficiently broad appli cation to assist in the analyses of financial reports, Thus assets may be grouped according to the classi fication—fixed, working and trading, current and de ferred assets. The liabilities and capital are subject to the following general grouping: capitalization, current liabilities, deferred liabilities, reserves and surplus.
Before proceeding to the discussion of these items it may be remarked that most of the falsifications of the balance sheet, intentional or otherwise, occur in the form of padded or overstated assets rather than in the form of understated liabilities. There are sev eral reasons for this. Outside parties have accounts which tally with the liabilities, so that an understate ment of them is more likely to be discovered. Fur thermore, the accurate valuation of property is more difficult than the valuation of legal claims. It is easier to convict a person of fraud in understating liabilities than in overstating assets. It is not a crime for a person to be unduly optimistic about the value of his property.