The Analysis of Current Liabilities Accounts Payable represent money owed for goods purchased on open account. If the volume of accounts payable is large the volume of bills payable should be small, and vice versa. A firm which borrows but little from its banking connections or on the open market is probably letting its bills of sale run to maturity and the item of Accounts Payable would be large. On the con trary, if its bills payable, both those discounted at its bank and those sold through note-brokers, are of large volume, the concern should be in a position to pay its trade obligations within the dis count period and its volume of accounts payable should be small. In order to keep their accounts payable at the very minimum and to maintain the highest standing possible with those from whom they purchase, some companies make a practice of anticipating their bills, that is, paying them even before the discount date, in which case they usually get an extra discount at, say, 6 per cent per annum for the unexpired time. An investigation as to how the concern is caring for its purchases in the trade will determine the proper relation of the items, Accounts Payable and Bills Payable, to each other and to the other items of the statement. Note should be taken whether any of the accounts payable are overdue, whether they all represent merchandise bought, and whether there is any merchandise in stock which is not accounted for by bills or accounts payable.
Bills Payable represents either money owed for goods bought or money borrowed. Purchases of goods not bought on account may be settled by notes; money may be borrowed on note by the buyer from his bank or through note-brokers on the open market; notes may also be issued for the purchase of equipment, fixtures, etc., and for capital advances. Notes floated through brokers and those payable to local banks should bear an inverse relation to each other. If a dealer borrows from his bank to his limit and also on the open market to his limit, he has no reserve borrowing power. If he floats much paper on the market he should reserve his credit with his bank as a defense against emergency. As most businesses are seasonal, the item of Bills Payable will be large when a company is buying heavily, but when its receipts come in from the sale of goods the item should be automatically reduced. This can be checked up from time to time without calling upon the company for a statement, simply by ascertaining its indebtedness to the different banks with which it has relations and the amount of its paper outstanding through its brokers. Information on both these matters may be acquired by direct application to the banks and brokers dealt with.
Wages, Insurance, and Taxes explain themselves.
The Analysis of Fixed Assets While quick assets and current liabilities are given first con sideration and are the parts of the statement to which most im portance is attached in considering the advisability of granting unsecured credit, the other items should be carefully investigated and closely watched. These other items are often ignored, for it is
"assumed that in the brief period that commercial paper has to run there will be no material change in such fixed assets or slow liabilities." They are a valuable consideration only with a view to ultimate liquidation or to probable continuity of business. The degree of liquidity varies widely and the banker wishes to liquidate his paper with as much ease as possible; if the paper rests upon a commercial transaction which will liquidate it, or if there are sufficient current assets to cover all current liabilities, the paper can be liquidated and the concern kept going. It is only in default of these conditions that foreclosure of fixed assets is resorted to. In the case of those manufacturing an article in the making of which not many others are engaged, and in the case of those whose property is not centrally located, the items of Real Estate, Plant, Machinery, Fixtures, etc., would not yield much to the general creditor in the event of liquidation; for in such cases the plant is either equipped for the manufacture of a particu lar line and could not be used for any other line without being entirely remodeled, or it is so located that a different manufac turing enterprise could not be economically located there.
With manufacturing companies it should be known whether the real estate, plant, etc., are entered at a fair valuation, whether they are being kept at a high standard of operating efficiency, and whether proper reserves are being set aside for depreciation, re newals, replacements, etc. In the case of cotton manufacturing concerns the plant is the principal item in the statement, and the current liabilities may fall below the usual i : 2 ratio to quick assets and be nearly as large as the latter and the company still be in sound condition, provided its plant is maintained in good condition, is not overcapitalized per spindle, and carries no encumbrance.
Investments in other corporations may constitute very good assets, but in order to determine what proportion of them is quick and what slow, the statement of the company or companies whose stock is owned should be considered in connection with that of the subject concerned. In the case of investments in subsidiary concerns, the statements of the subsidiaries should also accom pany that of the parent concern, and where there are several sub sidiaries, it is desirable to have a statement which combines those of parent and subsidiaries.