Evening star., 1942-06-22
Corporations Building
Reserves 10 Meet
War Contingencies
Special Funds os Well
As 1uxes Account for
Drop in Earnings
BY FRANK MacMILLEN,
Wide World Nusiness Writer.

"sAS "VAi SosAhese VAltSAs
NEW YORK. June 0.-With
enough figures In to give an &C.
curate outline Of the drop-on In
corporatee profits in the first quar-
ter OF this year, the main factors In
the decline are becoming clearer
and the blame lies by no means
wholly with increased taxes.
War has brought a host Of other
detrimental factors to bear on profit-
and-loss accounts, which in the
initial three months OF the year
showed the first drop in two years
or more.
A fair indication of the extent OF
profit decline Is furnished by the
New York Stock Exchanges COM
pilation of 48l companies whose
stocks are listed In the market.
Their net profit. even though 1t
aggregated the enormous sum OF
56l million, was 14.3 per cent below
the first quarter Of 194l.
Becomes Major Item.
In addition to much higher taxes,
a conspicuous item in many income
accounts was the large amount de-
Quoted by many corporations Tor
CONTINGENCIES" arising largely out
of war conditions.
Net profits OF which stockholders
get their dividends. are calculated
after these contingency deductions.
Hidden under the accountants
technical term. contingency re-
serves, this simply means money
set away for forseeable or partly
estimable losses or expenditures At
a later date. which would have been
charged against current earnings II
manaeements had known exactly
how much to charge.
But while contingency money Is
not credited on the books as cur
rent profit. and so is not available
now for paying dividends. invest
ment experts pointed out that 1t
tends to protect such payments to
shareholders later when the war
has passed and plants must be re-
adjusted to normal output.
Affords Protection.
This insurance money. as it might
be called, Is being laid by for
such diverse risks as compensation
against . drop in prices after the
war which might catch 4 company
stocked up with high-priced goods,
against plants. bdsy with war work
now, which may have reduced or
may be OF no usefulness IN peace
time: against such hard-to-estimate
factors as unusual wear on ma
chinery from clock-around opera
ton; damage to machinery by inex-
perienced workers. deferred mainte-
nance and repairs because OF press
,re of work and many others which
will come to mind readily.
The total Of this form OF protec-
ton against future loss or expendi-
ture cannot be measured accurately,
but one authority says 1t has run
into the hundreds of million dollars
in the past l8 months.
A study Of recent annual and quar-
terly corporation reports mas re-
vealed a few companies with un-
usual war problems which have set
aside nearly as much in contingency
insurance As has been credited to
the stockholders as net profit.
Even where the deductions have
been smaller they have often
amounted to from TO 50 per cent
Of the amount reported as net profit.
Reservoir Built Up.
Besides the bulwark which this
growing pile of funds provides to
insure dividends which might be
endangered in readjustment to
peacetime work. 1t means two other
important things, experts pointed
out:
l. The security holders have lit
orally bought insurance. against hav-
ng on their hands rundown, wornout
or obsolete plants after the war.
2. A reservoir of corporation
spending money is being built up
which will help business and en-
ployment as it is spent in the re-
adjustment period