The following extract will show that the cost price per centage is not only the true basis mathematically, but is also in accord with economic principles :—"The capitalist, then, may be assumed to make all the advances and receive all the produce. His profit consists of the excess of the produce over the advances ; his rate of profit is the rate which that excess bears to the amount advanced." (John Stuart Mill.) 10. Outward freight and cartage.—The question as to whether outward freight and cartage paid by a firm for goods sold F. 0. B. destination should be deducted from the selling price or treated as a selling expense, is the cause of considerable discussion. It would seem that if the general custom of the concern in question is to deliver goods F. 0. B. destination, the amount may be very well treated as an offset to the net sales in this section of the income account. how ever, the allowances are not the general custom, but are under the direct control of the sales manager, it is better to treat the amounts paid for freight and cartage on shipments of goods to customers as a sell ing expense.
11. Service certain enterprises it is customary for the service or merchandise to be paid for in advance. Thus, a gas company supplying gas to so-called "prepayment meters," or a restaurant or a railroad selling commutation tickets, will always have a greater amount of ,revenue received for serv ice or for merchandise than has actually been deliv ered to the customers. Therefore, all income or rev enue received from this source may not necessarily be income of the present period. It will be necessary to determine by some fair and adequate means, what proportion of this revenue is to be credited to the current income account, and what proportion is to be set up as a deferred credit to income or deferred lia bility, representing the service liability to be delivered in the succeeding period.
12. Instalment firms do business on the instalment plan, the sales account should be in terpreted in the light of the practices of the firm, with reference to the provisions set aside for the loss on doubtful accounts and collection expenses in connec tion therewith. It is also important to note that the income account of the period under review has not been credited with a greater amount in respect of such sales than may be properly taken to the credit of income.
13. Containers included in sales must be used to see that the sales account does not receive credit for containers charged. • Thus, in sales of cer tain chemicals, such as anhydrous ammonia, con tainers are charged with the merchandise to customers in the invoice. It is evident that the sales account
should not receive credit for charges for returnable containers. A special reserve account should be opened for such credits and when, from time to time containers are returned, the reserve amount should be debited for the amount paid out in cash or credited to the account of the customer. When the reserve is large, it may be advisable to create a special fund for it to the extent of the debits to customers in respect thereof, collected in cash.
14. Other items of miscellaneous casionally, extraordinary profits result from the sale of land holdings, patents which are of no further use to the enterprise, or other assets of which it may seem advisable to dispose. Such unusual profits should not be merged with the profits from business opera tion, because to do so would throw the operating revenues out of proportion and destroy the possibility of comparison. The proper practice is to state such items separately, under descriptive headings, and to carry them as miscellaneous income. Sometimes these items are of such an unusual nature as to con stitute a direct addition to surplus and should not appear in the income statement at all.
15. Comparisons of sales with the amount of the final order to determine the of the management, it is well to make a comparison between the total volume of the sales and the amount of the final inventory. In making this comparison, however, consideration must be given to the length of time it takes to manufacture the goods. For ex ample, if a concern has annual sales amounting to $1,200,000, and reports an inventory on hand at the end of the period amounting to $500,000, the indica tions on the surface are that the firm is carrying too much of an-investment in stock in trade. This might appear all the more probable if it were known that the manufacturing process took approximately twenty days. The presence of this large inventory would indicate poor ma,nagement in allowing stock to ac cumulate, or the presence of a large amount of dead stock, or an inflation of inventory values.
If the gross profit on trading operations were ap proximately the same in the period under considera tion as in preceding periods, the question of the in flation of the inventory could be dismissed. Possi bly, a quantity of dead stock, and goods out of style or fashion, may be included in the inventory at cost prices, or it may be that the firm has overestimated its requirements in the way of raw material, or may have manufactured too heavily, and thus has too much of its liquid capital invested in merchandise.