CORPORATE INCOME discussion of corporation finance so far has assumed enough knowledge of ac counting for an understanding of the elemen tary terms of the balance-sheet and the in come account. The brief consideration of the subject in this chapter is presented for the benefit of those who do not have this prelim inary acquaintance with the elements of ac counting. The reader should not assume, however, that the statements made in this chapter are intended to present a model of ac counting practice. The immediate discussion attempts only to give, as directly and briefly as possible, enough of an explanation to en able the reader to grasp the significance of corporation accounting in relation to corpora tion finance.
Though we have just used the term "cor poration accounting" we must not assume that the accounting of corporations differs in any essential way from the accounting of any other method of conducting business. The nature of the business governs the method of accounting rather than the nature of the proprietorship; that is, whether the proprietor is an individual, a partnership, or a corpora tion. The seeming though not real exception should be made of the holding company. This presents some special aspects of income which we shall discuss in the next chapter.
Throughout our discussion so far we have used an old and still the more familiar nomen clature of accounting, and made statements in a condensed form. For the purpose of making easy the process of comparison and present ing the financial discussion in its simplest form this has been desirable, and for these reasons the old condensed form of statement is still the one generally used in presenting the results of accounting to show conditions for the purpose of financing the capital account.
Our income account so far has presented only the items — Gross Income.
Operating Expense.
Net Income.
Fixed Charges.
Surplus Available for Distribution.
Only the slightest thought is needed to see that such a statement presents a totally in adequate analysis of income and expenditure on account of conducting a business, and that elements of a very different nature must be included under a single head. With this con
densed statement all sources of income of whatever nature must be included under the head of " Gross Income." Obviously, how ever, if business for the manufacture of ma chinery includes the ownership, for some special reason, of $100,000 New York City 4 per cent bonds, the $4000 a year of income from this source is a very different thing from the money received for the sale of machinery. One can get no complete understanding of the business situation without recognizing the distinction and knowing such a situation when it exists.
The chapter in the first volume on "Trad ing on the Equity" set out the varying na tures of gross incomes on account of the na ture of the business producing the income, and made the general assumption for the pur pose of the discussion that all the income of the corporation came as a result of conducting the business. If the corporation is wholly or in part a holding company, the nature of the income is a very different thing. We shall dis cuss this more at length in the next chapter.
The next item of operating expense obvi ously must include even more diverse ele ments. For example, lacking a special head for "Taxes," moneys paid out for that pur pose must come under the head of "Operat ing." Yet the difference between an expendi ture imposed on the business by the State and entirely outside of the control of the manage ment needs no further pointing out. If the nature of the business is manufacturing, and the income account has no other head, the cost of the raw material must come under the head of "Operating Expense." Again, the essential difference between the cost of the material and the cost of converting it into the finished product needs no elucidation beyond the mere mention. This is a distinc tion that applies as between a manufacturing business and a transportation or other public service business. The distinction between a merchandising business, in which the very goods which are bought are sold without any change in form, is even greater than the dis tinction between a manufacturing business and a public utility.