15. The valuation of furniture and asset may be subdivided between the furniture and fixtures in the manufacturing plant and that in the general office or in branch offices. It consists of all furniture, machines and devices for calculating or for clerical use, lighting fixtures, partitions, and the like. In dealing with this asset, it is not uncommon for firms to capitalize the expense of a complete and adequate outfit, and charge any annual expenditures incurred subsequently in renewals or replacements, direct to the expense account. Other organizations find more satisfactory the method of capitalizing all new pur chases and writing off depreciation periodically. Most conservative organizations follow the practice of depreciating these assets rapidly because, if aban doned, they are worth very little for scrap. A bank ing organization will write down its building and fix tures much more rapidly than would the ordinary manufacturing organization. It is true, this creates a secret reserve, but it is considered good business pol icy in organizations of this type.
16. The principles employed in the valuation of stable and garage equipment.—Horses and mules are ordinarily revalued from year to year by appraisal. Automobile trucks are usually depreciated at the rate of from 20 to per cent. The balance of the stable equipment will ordinarily be depreciated at rates from 12% to 20 per cent.
17. Patterns, drawings, and dies.—It will not be necessary here to amplify the discussion dealing with the class of assets represented by patterns, drawings, dies and the like, which the reader has already found in the volume on "Cost Finding." Care and discre tion and a great deal of common sense must be used in the valuation of these assets. The failure to pro vide adequately for .depreciation is a very common occurrence, and if an asset of this kind appears in a published balance sheet for a large amount, the stock holder or investigator is justified in regarding it with considerable suspicion.
18. The general problem of depreciation.—Atten tion has already been called, in the Texts on "Ac counting Principles" and on "Accounting Practice," as well as in that on "Cost Finding," to the general subject of depreciation, its importance, the methods of providing for it, and the necessity of giving it due recognition in the accounts. Our interest at present lies in the general subject from the point of view of the interpretation of a balance sheet.
If depreciation reserves appear on a balance sheet merged with other reserves or with surplus, as is very often the case, a just suspicion may arise that this method of combining the reserves and the surplus has been adopted because of the fact that the depreciation provisions are not adequate. If the reader of a pub lished balance sheet has the current income account at hand, perhaps he may satisfy himself as to the ade quacy of the depreciation provision for the current period. But this will not be an indication which may
always be relied upon. Some firms often follow the practice of providing heavily for depreciation in pros perous years and ignoring the provision during lean years.
19. Special factors to be considered in interpreting a balance sheet.—The assets which we have described above comprise the tangible fixed capital of ordinary undertakings. It is not usual to find the elements of the capital assets classified in sufficient detail in a published balance sheet. For example, the land and buildings may be merged in one account, or land, buildings and equipment may be merged in one ac count. Inasmuch as the reader of the balance sheet probably would not be in a position to know the value of the land or the building or the equipment, he would be at a loss to decide whether or not the amount of capital invested in this class of assets was excessive or inadequate. Neither would it be possible for him to determine satisfactorily the adequacy of the re serves provided for depreciation.
In other cases, the intangible fixed capital of good will, patent rights, copyrights, trade-marks or fran chises may be merged with the tangible fixed capital In cases where this occurs it is a fair assumption thai the intangible fixed capital constitutes a large pro, portion of the total value of the assets. It is• to be noted, however, that many of the larger corporations now follow the practice of stating separately, in their balance sheets, the valuation of the tangible and the intangible fixed assets. Occasionally in public bal ance sheets we find the tangible fixed capital grouped under an account, "cost of property." However, this is no indication of its true value.
The relation between total fixed assets and the ag gregate amount of capital and long-term debt is im portant. In coigidering this relation, the reserve for depreciation may be ignored, for theoretically the cash which represents this reserve is available for the repair of any waste or decline in the value of the fixed tangible assets or it has been reinvested in property. -Many organizations make the mistake of investing too much of their capital in costly plant, and do not leave enough working capital with which to conduct their operations profitably. It may then be necessary for them to raise large amounts of floating debt with which to finance the purchase of working and trading assets, pending the conversion of their current assets into cash. As pointed out in the Text on "Corpora tion Finance," these floating liabilities may be a source of weakness or the cause of insolvency in times of panic or depression.