Evening star., 1948-10-31
Dollar Value
.RaisesQuery
For Business
Experts Split Over
Balance Sheet
Accuracy
By Lawrence N. EIdred

~ We 6s0bCo
CHICAGO.-A three-way battle of
the balance sheet is shaping up in
the land of business facts and
figures.
Management, economists and &C
countantS are at odds over how to
handle overstuf1ed dollars Of infla-
ton. The division of ranks is not
clear-cut, however. Members of all
three groups can be found in oppos-
ing camps.
Business says its very life depends
on finding ways to retain enough
capital from earnings to replace, i'm
prove and expand plant and equip
ment. 1t also wants to finance a
larger volume Of business, even at
higher price levels.
Accountants contend some book
keeping devices used to achieve
these ends are unwise, at least, and
prefer others. Economists insist vir-
tually the whole profit and loss and
balance sheet setup Is mistaken and
needs complete overhauling, ad-
justed closely to f1uctuating price
levels.
Depreciation Questioned
Crux of the problem is handling
of depreciation. depletion and in
ventory figures. Spokesman for all
three groups had say at the recent
Chicago convention of the Amer
lean Institute of Accountants.
Management asks, should these
long-term elements be based on his
torical values, as most firms now
carry them? Should a thousand
dollar asset in 1888 still be carried
at that amount on the books today
although replacement might cost
SO 900 now?
The economist wants them ad-
justed by system of indexes to. the
constantly changing purchasing
power of the dollar.
Lets show them historically on
traditional financial statements with
"a supplemental statement detailing
their current relative WORTH" says
the accountant.
The Illinois Certified Public Ac-
countant says editorially such de-
vices as reserves from earnings for
possible future inventory price de-
clines are illogical, capricious and
entirely unacceptable"
Balance Sheet Meaningless
The magazine adds that the Last
In-First Out method of inventory
accounting has the effect of max
ing the balance sheet almost mean
ingless."
The editorial declared:
When costs, incurred at varying
price levels, are brought together
as though they were homogeneous
units, the results can be deceptive.
During periods of imitation, as now,
costs incurred prior to the time
they become charges, against in
come cause imitation to be trans
lated into profit.
This is true of inventories, and
even more so of fixed properties.
Conventional accounting based on
historical dollars fails to reflect
economic income or loss"
At the accountants convention,
speaking for management, Joel M.
Bowlby, president of the Eagle
Pitcher Co., Cincinnati, declared:
THE problem that faces us today
revolves around the vital question
of how American enterprise is going
to obtain the capital required to
replace existing plant and equip
ment: to provide the improved and
expanded facilities essential to the
growing needs of a larger popula-
ton and higher standard of living,
and to finance a larger volume of
business at higher price level"
Il believe the position of man
agement could be improved and its
existence made easier by deducting,
in arriving at reported earnings, an
amount rejecting amortization of
the estimated excess of replacement
cost over historical cost.
Il also believe that balance
sheets should continue to reflect
historical cost. and that such cost
should be retained as the normal
cost depreciation base"
Figures Incompatible
From the economists group came
the comment Of Solomon Frabri-
cant, professor of economics at New
York University and a member of
the research staff of the National
Bureau of Economic Research.
Accounting calculations Of busi-
ness income are unacceptable to
economists. Current accounting re-
ports yield figures for different
companies that are not comparable
with one another, yield figures for
a single companys operations in
one year that are not comparable
with figures for the same company
in another year.
During period of imitation,
such as we are in, these incompara-
bilities are serious.
Economists follow the principle
that costs should be related to reve-
nues on the same price level basis.
and that the income of one period
should be compared with the income
of another period on the same price
level basis.
In accord with this principle,
economists believe that inventory
revaluations should be excluded
from business income. Economists
also believe that revaluations of