Inquiry into the details of a sinking fund suggests the questions: Is the fund in the hands of the bor rowing corporation or of a trustee? If in the hands of the corporation, in what form is it? Is it invested in the business and so, perhaps, to be made available Only with difficulty? If it is to be expended in the cancellation of bonds, are the bonds callable at a fixed price? If so, has the insertion of this condition raised the rate of bond interest required by investors? If the fund is to be maintained separate until maturity, what reason is there to assume that the interest rate upon which the scale of payments to the fund must have been calculated, will hold for the life of the bonds? 12. Unappropriated income, less fixed charges, gives surplus. Surplus minus divi dends and reserves appropriated for specific pur poses, such as for betterments, new construction, pen sions, etc. (but not reserves to maintain assets at par) gives unappropriated surplus.
13. Series of margins of safety.—It will be no ticed that the income account is arranged as a series of deductions and diminishing remainders. Each re mainder is a margin of safety indicating the excess by which the previous balance exceeded the deduction made from it, and hence insuring the fund for that particular deduction against an equal shrinkage. Net income is the margin of safety that operating ex penses will be met. Surplus is a margin of safety that fixed charges will be met. Unappropriated sur plus is a margin of safety that dividends will be paid.
14. Columnar detecting the significance of progressive changes in the business of a corporation it is useful to arrange the items of the balance sheet and income account in columnar form by years. This may be illustrated by a rearrange ment of the income account of the Bethlehem Steel Corporation, as follows : 15. Appraisals and audits.—It adds authority to
financial statements if the physical properties are ject to appraisal by independent experts from time to time, and if the books are subject to periodical audit by a firm of certified public accountants. Appraisals not only are valuable to check book accounts, sup plement audits, and prove the accuracy of assumed rates of depreciation, but form a basis for insurance adjustments and for credit rating. When audits are made by committees of directors they are likely to be perfunctory; when they are made by permanently em ployed auditors they are likely to be trimmed to suit the controlling interests.
The latter therefore have it in their power to sup press the parts of the auditor's report which they do not wish to make public. After the auditor has given his certificate with reservations and made his comment and suggestion a part of his report, the company very often states that the books have been audited, but does not print the official certificate which has been pre pared by the auditor.
The hall-mark of financial independence in this country is the signature of a certified public account ant. As has been stated in the Text on "Financial and Business Statements," the form of this certificate deserves and should have the most careful attention. Thru the fact that auditors there enjoy a greater inde pendence, Great Britain is in some respects ahead of us in auditing practice.
Railway reports are now excellent, thanks to the requirements of the Interstate Commerce Commis sion; for public utilities they are improving, especially in states with efficient Commission control. For other corporations the situation still has to be endured.