5. Lumping of worst arrangement of assets is when physical and intangible items are thrown together in one sum as "property account" or "real estate, plant, etc." Such a grouping usually is made to prevent the discovery of the water in the stock, and to prevent a calculation of the proper amount of depreciation on the physical plant. The endeavor to make intangible property appear as tan gible, or the desire to keep its value secret, is sufficient evidence from those who ought to know best that the intangible assets are not a solid foundation upon which to rest capitalization.
6. asset, "securities owned," forms an important feature in three types of consolidated balance sheets ; namely, those of railway companies which have built up systems out of smaller lines, those of public utility holding companies, and those of in dustrial holding companies. These companies con trol their subsidiaries thru the ownership of their stock.
This same entry forms an interesting item when it appears in primary balance sheets. This occurs: (1) in the balance sheets of companies which have such ample assets that they are able to make pure invest ments; and (2) in fraudulent enterprises which make a showing by entering worthless securities, the iden tity of which is carefully hidden.
An example of the company powerful enough to make pure investments may be found in the 1914 record of assets of the Ford Motor Company of De troit.
As an example of the fraudulent balance sheet, the assets of the United Wireless Company, as of January 1, 1909, are offered. The company is defunct, but it still lives in the recollection of its 15,000 stockholders.
Of these securities, Mr. C. M. Keys wrote, in the World's Work for March, 1911, as follows: Three years ago last October, this office was visited again and yet again by a gentleman who came to complain that in letters to many people this magazine had "lambasted" the United Wireless, and pronounced it a fraud.
At last, in curiosity, the editor went down to the com pany's of He asked for a balance sheet. One was pro duced. Turning it over, he asked casually what was meant by the item of $14,000,000 "other securities," listed in the statement.
"Those," said President Wilson, "are the stocks and bonds of other companies." "Have you got them?" he was asked.
"We have," he said. He called the secretary and in structed him to show the stocks and bonds. I went with him into another room of the office suite. There, piled up on wooden shelves, in a room that had on it an ordinary spring lock, in the heart of a fire-trap office building, lay all that wealth ! "Wonderful!" said I. And thereupon and immediately the United Wireless, thru its official secretary, received the one and only cash offer ever made for its $14,000,000 assets. It was an offer of twenty-five cents—if the company would deliver the securities.
The securities of other companies, if they are held for the purpose of controlling subsidiaries, should not be considered as current assets, for the marketing of them at a time when the parent company is in diffi culty is likely to be almost as difficult as the sale of fixed assets. It involves, too, an equal disturbance of business plans, by breaking up the intercorporate relations which have been perfected. The presence of the item, "securities owned," is an invitation to the investor to pursue his inquiries into the balance sheets of the issuing corporations. It is, in effect, a cross reference to other balance sheets.
7. Working and trading assets—inventories.—In ventories comprise raw materials, supplies and fin ished goods. High inventories are carried where the merchandise handled is of high intrinsic value, as in the slaughtering and meat-packing industry. Wit ness the assets of Morris and Company, of Chicago, as of October 31, 1914.
Inventories are large also where the purchase of raw material is seasonal, as in the linseed-oil indus try, or where the manufacturing process requires a long period, as in whiskey-distilling. An analysis made in 1911 showed that in ten Southern textile mills the inventories were 26 per cent of the total assets, in ten New England textile mills the proportion was 32 per cent, among seventy-three jobbers the propor tion was 40 per cent, and in fifty-three retail depart ment stores, 46 per cent.
A large inventory lays a corporation open to the danger of running into a period of depression with un salable goods. Such an inventory should always raise the question, "Has there been a change of design or of consumer's taste, so that the inventory may consist of obsolete merchandise?" 8. Current assets.—Current assets are properties which are shifting and changeable in their form. They are frequently liquidated and frequently re invested in the course of business. They purchase materials and finance the labor, administrative and dis tributive processes by which the fixed assets of a busi ness are exploited. A prime characteristic of cur rent assets is that they can be converted quickly into cash without heavy loss. They are, therefore, suited to form a safeguard, or elastic member, between the fixed assets and all impending and imperative claims.
They comprise cash, notes and accounts receivable, balances receivable from agents, and inventories of raw materials, supplies, and finished goods.
9. Working capital. Working capital is the ex cess of current assets over current liabilities. Its purity and value depend upon the composition of the items from which it emerges. The amount of work ing capital which should be provided depends upon the characteristics of the business. The Interna tional Agricultural Company of New Jersey, on De cember 31, 1914, had current assets of $86,137,404 and current liabilities of $28,688,053, leaving a work ing capital of $57,449,351 with total assets of $129,260,182. So large a provision was required be cause of the necessity for manufacturing in advance, and of storing products to supply a short selling sea son, and also because of long credits.
Some corporations having large working capital are the United States Steel Corporation, the Stand ard Oil Company of New York and the General Electric Company. Railroads which do a cash busi ness, and which receive money about as it is paid out, require smaller amounts of working capital. On the other hand, industrial corporations which must take advantage of seasonal markets for materials or for finished products, and which must operate over peri ods when bank-borrowing or the sale of securities to the investor are practically impossible, have need of large supplies. The more an undertaking partakes of the nature of a mercantile business, the greater will be the need for working capital.
10. Deferred assets include pre paid insurance and taxes, prepaid royalties and dis count in the sale of corporate securities. To the dis cussion of this subject an entire chapter is devoted in the Text on "Financial and Business Statements."