◆ SpookStack

20 you look down the column fi, . és in an annual report and note that a dividend was paid out of capital sur- Plus. An innocuous enough item, you . might think. William Wrentz, an SEC accountant writing in the authoritative Journal of Accountancy, not only gives ' the practice his blessing, but adds that “no one will dispute the arguments in favor of dividends from paid-in sur- plus.” But if you asked Colonel Robert Mont- gomery, another noted accountant and author, his opinion of this prac- tice, he would say, “It comes close to moral turpitude.” W. A. Paton, an outstanding teacher of accounting, would tell you that “such a dividend deserves the general condemnation + accorded it by account- ants,” and that “it is deplorable that it is given legal sanction.” Any accountant can take you on a guided tour of an annual report and kick each figure around for hours, if you can follow the intricacies involved. Some of these items are of such im- portance that a variation in accounting procedure can change the entire im- Pression of the report. Consider, for instance, the innocent item marked “surplus.” Using one method of ac- counting this item, the Radio Corpora- tion of America reported a net in- come of $95 million in the 14 years i, from 1922 to 1935, an anoual average . of $6.8 million. But if they had fol- i lowed a mote ‘conservative and more I orthodox procedure in handling their surplus account, their average net in- come for the period would have ap- peared as $700,000 a year, or about one-tenth of what they actually showed in their annual report. ee ae Beate se GD meee 4 ee. Mea: oe ws <_ ve oo OB eee eee Light for the layman T* is, Of course, highly technical staff. But it has wide implications, The stock of RCA—thanks to its annual- report policy—was one of the leaders * in the market speculations of the late twenties, and also one of the Icaders in the pell-mell collapse that followed. ade oe V.P. FOR GIRDLES a But, if annual reports are so | of intricacies, is there any point in looking at them or studying them at all? The answer, gleaned from talk- ing to a cross section of accounting pro- fessors and public accountants, is—yes and no. Professcr Edwin Frickey of Harvard, one of the country’s outstand- ing teachers of the subject, gives a fa- mous course in which students spend months analyzing just a few corporation reports. And an investment ana- lyst will take weeks or even months to reach any conclusion on the meaning of a single an- nual report. What about the rest of us? T. H. Sanders speaks for the professional accountants when he cautions: “As for the man in the street or ‘the casual investor,’ no sensible person will assume the responsi- bility for proposing any accounting procedure whatever on the ground that it will place these financial dilettantes on an equal footing with scri- ous students of the subject.” __ In case you don’t want to be on an equal footing, but would just like to _ Bet some idea as to how your pet cor- poration is doing, what then? In the first place, never look at one year's figures alone. It is the comparison with Will make little sense to_you unless you | NEW REPUBLIC: ose figures that sheds some light’ on ; what the company may do in the future. ° Then if you are really to understand : any one company, you must first have. - some idea of the entire industry in *: which it functions. So get the reports _- of other firms that are in the same or “. a similar business. A little study of the ~ over-all problems and prospects of the industry will help, too, For example, the — Present crop of rubber-company reports _ are well up on the debate now going on . in Washington over future government - Folicy in the buying of raw rubber and : the development of synthetics, - : And when you have done all this, there is one more thing to remem. _ ber: 2 company's earnings may have * no relation to the strange behavior of its * Stock in the raarket. Otherwise, all accountants would have retired long | ago as a result of successful specula- q tions. The fact that most of them still : work for a living should prove to you 3 that not even a professional understand- ing of annual reports will enable you = automatically to pick a winner. i. And, finally, remember that the pub- > lic-relations director who Ptepared the * annual report had you in mind. For in . the last analysis, the anaual teport isa = public-relations device whose theme song is “love that corporation.” And as Dr. Frickey puts it to his students, no annual repost ever took the place of an extra dividend.