Directly opposite to an insufficient main tenance resulting in a showing of earnings not really made but amounting to an essential conversion of capital, the management may return to the plant more earnings than are necessary to keep the capital unimpaired. If earnings are diverted to capital by way of maintenance the management is developing a concealed asset which may be discoverable by analysis. Cost of proper maintenance comes much nearer to a standard than cost of operat ing, which depends directly on conditions of plant which cannot be standardized. The expense of maintenance depends directly on the cost of materials and of labor. These are the same for one enterprise as for another of the same kind. An examination of maintenance costs in a given business over a series of years indicates the amount a management must average to expend to keep the capital value of a property unimpaired. By comparing the proper average cost with the amount the management of a given enterprise actually ex pends for maintenance, a skillful analyst of accounts in the given business can make a pretty close estimate as to whether capital is just being maintained or is being encroached upon or added to through the operation of the maintenance account. It should be re marked that what is said of an excessive main tenance account does not apply to railroads since 1907. Since that date the accounting regulations of the Interstate Commerce Com mission have stipulated against such practices. In that year expenditures for other purposes than strict maintenance were limited to $200 for any one item. Since 1915 even the $200 has not been allowed.
Especially in railroad enterprises, for which so much accounting information is available through the accounting requirements of the Interstate Commerce Commission, skillful analysts of railroad reports can draw many important inferences from an examination of the accounts besides the information the re ports convey directly. With some knowledge of the physical condition of the road derivable from various sources they can come to some pretty accurate conclusions about the operat ing skill of the management from an examina tion of the cost of operating account.
Of course the ability to draw the inferences from the accounting reports depends largely on the volume of material available for com parison. The most accurate and extensive reports of a single enterprise leave too much open to surmise. Variations in the cost of operating may indicate that the management is now more efficient or less efficient than formerly. They not show at all that the best management the corporation has had may not be worse than a management of aver age efficiency. Variations in the cost of main tenance, unless over a very long term of years, with a full knowledge on the •part of the an alyst of variations in the cost of materials and labor over all those years, give no answer to the question as to whether the property is be ing over-maintained or under-maintained. For
these purposes the analyst must have a fund of information gained from a knowledge of the business extensive enough to give him valuable averages for enterprises conducting that kind of business. Only the railroad busi ness at present offers a sufficient fund of in formation to make analyses of this kind really scientific. The various public utilities are just beginning to afford the basis of general information. For any kind of manufacturing enterprise conclusions are much more hazard ous. In the railroad field, however, analysts of accounts have long made deductions from them that have gone much below the surface in arriving at opinions about the value of specific railroad securities.
The general form of income accounts pre sented so far serves substantially for a trans portation or other public utility concern. With a manufacturing concern the cost of raw materials comes in to make such a fundamen tal difference in the nature of the business that expenditures cannot be accounted for in this manner and give anything like an adequate idea of the manner in which the business is being conducted. A form of income account which might be used would follow this outline: — With this form giving the "Cost of Ma terials," the item "Cost of Manufacturing and Selling" gives a clue to efficiency of management and plant, and " Maintenance " gives a clue as to whether or not the capital of the corporation is being milked or fed through the maintenance account. What has been said on this matter applies as fully in principle to a manufacturing business as to any other.
One can hardly overstate how important it is that a corporation should show, as com pletely and accurately as possible within the reasonable limits of an annual report, a state ment of its affairs so far as accounting science can show them. The precise form that the report should take is no part of our subject. That is the province of the expert accountant, and affords a sufficiently large world for his profession to conquer. But the capitalist who has presented for his investment the securi ties of a corporation, without being shown a reasonably full accounting statement of the affairs of the corporation, ought to refuse even to consider them. If he commits his capital to such an enterprise, he takes the position of a man who buys a pig in a poke, or purchases "sight unseen." If the corporation is a holding company, the investor is purchasing almost equally sight unseen unless he also sees rea sonably full information about the affairs of the subsidiaries. The discussion in the next chapter will develop the reason for this.