5. Definition of the term "Statement of Affairs." —The term "statement of affairs" is a technical term used to designate a statement prepared by the account ant for a receiver or assignee showing the assets at their nominal value as well as at their realizable value at forced sale, and the liabilities in the order of their rank.
6. Relation of balance sheet to statement of affairs. —Some authors have said that the statement of affairs is an estimated balance sheet. This is an unhappy expression because, after all, a balance sheet is a state ment of estimate or opinion and not a statement of fact. It is impossible to tell whether or not the prop erty is stated at its true value in the balance sheet, since no one can say what the amount of the actual depreciation on fixed assets has been. Furthermore, the merchandise on hand as shown by the inventory may not realize the amount at which it is valued in the balance sheet, and the accounts receivable may not all prove collectable. Moreover, the balance sheet sim ply aims to show financial condition, stating assets at their book value and the liabilities with respect to their status as fixed or current.
The statement of affairs, on the other hand, goes farther than the balance sheet, in that it not only shows the assets at their book value but also the value that they are expected to realize at forced sale, and in ad dition it shows the liabilities in the order of their rank. Obviously, a balance sheet prepared in the usual man ner will not disclose as much information as the state ment of affairs. The ordinary balance sheet will not show the status of the different creditors. Thus, if there are $75,000 worth of assets and $100,000 worth of liabilities, a balance sheet prepared in the usual manner will indicate to the creditors on its face that the concern will be able to pay 75 cents on the dollar. But if creditors holding $25,000 in claims have liens on the assets amounting to $25,000, there will remain only $50,000 worth of assets to pay claims amounting to $75,000; therefore, the unsecured creditors may ex pect to receive, in this instance, only 66 2/3 cents on the dollar. Hence a balance sheet will not disclose facts of vital importance to the partly secured and the unsecured creditors. The statement of affairs pre sents this important information.
7. Parties at has been stated by some authors that the statement of affairs is made on be half of the proprietor or on behalf of the creditors. This is not strictly true because the proprietor will have been displaced either by the assignee or the re ceiver. The statement is prepared for the purpose
of enabling the receiver to make his report to the credi tors. The preferred creditors are not particularly in terested in the which the accountant for the receiver prepares, because there will usually be suffi cient assets to their claims. The statement is rather of interest to the creditors who are partially secured since it enables them to know what loss they may expect to suffer on that portion of their claims which is not secured. It is also interesting to the un secured creditors because the statement will disclose to them what they may expect to receive out of the assets.
8. Mechanism, of the statement of affairs.—There is no authoritative method of preparing the statement of affairs but it is desirable, as a rule, to state the as sets in the order of their probable realization. Under one form which is commonly employed, three money columns are provided; the first column is headed "book or nominal values"; the second column is headed "ex pected to realize" and the third column "deficiency." In the column headed "book or nominal values," the values at which the assets are stated on the ledger are shown and it follows that if any reserves for de preciation have been provided for any of the assets, the amount of such reserves will be deducted in stat ing the value of the assets in the book value column.
Assets which have specific liens against them are stated short; for example, if the book value of the land and buildings, after deducting the reserve for depreciation, was $90,000 and if there was a mort gage on the property, with interest accrued amount ing to $86,000, the value stated in the "expected to realize" column will be the equity of the proprietor in the property, or $4,000. It will thus be seen that the "expected to realize" column will contain the as sets or the portion thereof which comes into the re ceiver's hands free and clear of all claims which the receiver will be able to use for the satisfaction of the claims of the unsecured creditors; a deduction of the amount of the preferred claims, which are a general lien on all of the assets, is made from the total of this column since these claims take precedence over the claims of fully secured creditors. After this deduc tion has been made, the remainder represents the values which the receiver expects to have at his dis posal for the satisfaction of the claims of unsecured creditors.