It is not customary to show contingent assets and contingent liabilities in the balance sheet proper. Nevertheless, contingent liabilities should be stated in a footnote in the balance sheet, if not included in the balance sheet itself. If both contingent assets and contingent liabilities are included in the balance sheet, they will be grouped under their appropriate caption.
11. Conclusions to be inferred from the liabilities.— Having thus considered the nature, interpretation and the valuation of assets and liabilities, it remains now to consider what inferences may be drawn. The capital assets or the fixed assets are usually acquired in part by the issue of fixed liabilities and capital stock. In all cases there should be a reasonable equity in the fixed property. In other words, bondholders and mortgagees ought to be protected by a reasonable equity against the possibility of loss. What this equity should be depends upon circumstances, but in practice it should seldom be less than 25 per cent.
Creditors on open accounts as well as bondholders are also interested in the relation which exists between current assets and current liabilities. There should always be a reasonable excess of quick assets over quick liabilities in every concern that issues mortgaged or bonded debts. Here, again, ratios vary because the conditions will vary in the different lines of business. In the meat packing industry, the quick assets will show a much better ratio than in the textile industry, because of certain differences in the nature of the business transactions. At any rate, under ordinary
circumstances, there should be at least twice the amount of quick assets as of quick liabilities. A large amount of cash on hand and a large amount of accounts payable might be an indication of careless management. If the accounts payable are subject to cash discounts, it might be more profitable for the organization to increase its loans and use the cash in the reduction of accounts payable thru taking ad vantage of all discounts. A "business cannot stand still for any length of time. It will either advance Dr go backward.
Unfavorable conditions that do not show improve ment will be due to the following possible causes. It may be that the machinery and processes which are in use are not the best to be had or the most modern that science has developed. Perhaps new blood is neces sary in the sales organization or in the operating de partment. Suggestions may sometimes be obtained from a study of the methods of competitors.
A careful study of all those factors and an analysis of financial statements by all those inter ested in any business, will benefit not only the business men themselves, but also the vast army of employes who are dependent upon the prosperity of those who foot the pay-roll.
The following is an illustration of Income and Profit-and-Loss Statement and a Balance Sheet of a manufacturing establishment.'