The next section covers administrative expenses, including the details that make up these expenses. Then come either the profit-and-loss charges, or the credits, which are the various items not directly con nected with the main function or functions of the busi ness.
This form of statement is simply made out in ac cordance with the knowledge that to be most valu able, information must be classified and condensed, and yet must be presented in such a form as to indi cate where the details of each classification may be ascertained. If profits are low, the cause may be first located in a section of the profit-and-loss state ment; then it is necessary to investigate in detail all the accounts in that particular branch.
6. Manufacturing, trading, and profit-and-loss.— The principal operations of a manufacturing or mer cantile business are: 1. Purchasing raw material or finished salable merchandise 2. Purchase of fuel and various kinds of supplies, stationery and equipment consumed in the manufacturing process 3. Transportation of these commodities to the place of manufacture 4. Receiving and storing the purchased articles, in cluding inspection of quality and condition and the variation of quantity 5. Processing or manufacturing these materials into finished goods, including the application of labor, and the service of various produc tion aids, such as machinery, buildings, and the 6. Advertising, or general publicity—making the goods or services furnished by the business known to the general public 7. Selling or obtaining orders for goods or serv ices .8. Deciding upon the credit and the terms to be offered to the customers 9. Delivering the goods to the customer—that is, furnishing the service 10. Collecting from customers for goods delivered or services 11. Financing, or providing funds with which to pay for goods purchased and to meet the labor expenses 12. Miscellaneous general activities, including the keeping of records.
A manufacturing, trading and profit and loss state ment must furnish exact data on the cost that each of these functions involves. It will be noted that on page 212 the statement sets forth, first, the manufac turing cost, secondly, the marketing cost, thirdly, the general administrative cost, and fourthly, the general miscellaneous sources of income or outgo.
7. Other find in frequent use other forms of statements besides those mentioned above. They are usually forms within forms. In other words, the two forms that have just been described are standard, and any other that may be used is gen erally simply a variation of one or the other of these two standards. For example, one has the choice of
listing the items in such a way that all debits will be placed on the left hand, and all credits on the right, or of expressing the items in narrative form, begin ning with the sales and deducting the various classes of expenses as they are accumulated. The form illustrated on page 208, is of the debit versus the credit type, while that on page 212, is an example of the narrative form.
8. Arrangement of is no stand ard rule for the arrangement of the accounts within the economic summary. The decision, in each case, will depend upon the particular needs of the partic ular business and the accounts which are to be em phasized. It is, of course, customary to adopt a log ical arrangement that will show the process of the disposition of the goods.
For instance, the first step would be to accumulate the costs of the raw material in the order in which those costs were incurred. To these would be added' the manufacturing costs, then the marketing expenses, then the general administrative expenses, and finally the miscellaneous expenses in connection with financ ing the work.
It is sometimes difficult to decide whether a certain acccount represents charges for manufacturing, trad ing, administration or profit-and-loss. There are many and conflicting arguments regarding the classi fication that should be made of taxes, depreciation, cash-discount and similar charges.
Some claim that taxes should be charged to admin istration, or profit-and-loss, because they do not in any way pertain to the operation of the business.
And some argue that depreciation, because its amount is more or less indefinite, should not be made a part of the manufacturing cost, even when this depreciation is actually a direct result of manufacturing opera tions. After all, however, the main purpose of financial statements is to furnish information that will guide the management in the administration of the business. The chief consideration governing the arrangement of the information in these statements is the practical value of that information. If a man ager is to compare the progress of his own business with that of similar lines, his financial statements must be of the same general order as those of the other firms. It has been found best to ascribe to each func tion all expenses which the operation of that function involves. Therefore a manager, if he would obtain accurate results, must adopt this method. He must also classify the income statement in detail in order that he may be able to allocate the proper costs and expenses to that account.