◆ SpookStack

ae 20 you look down the coluniti of figures in an annual report and note that a dividend was paid out of capital sur- - plus. An innocuous eriough 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 thé 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, “Tt comes close to motal 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 ona’ "--~ 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 Corpota- tion of America reported a net in- come of $95 million in the 14 years - from 1922 to 1935, an annual average - of $6.8 million. But if they had fol- lowed .a mote ‘conservative and moré orthodox procedure in handling their’ sutplus account, their average net in- come for the period would have ap- péared as $700,000 a year, or about one-tenth of what they actually showed in their annual report. . Light for the layman HIS is, of course, highly technical ‘i 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 leaders in the pell-mell collapse that followed. ’ V.P. FOR GIRDLES ' But; if anual reports are so full 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. Professor 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 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- accounting procedure whatever on the ground that it will place these financial dilettantés.on an équal footiag with seri- ous students of the subject.” In case you don’t want to be on an equal footing, but would just like to _ get 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 fy the rest of us?--T. H. - bility for proposing any NEW REPUBLIC " past figures that sheds some light’ on :what-the-company may do.in the future. Then. if: you. aré. really ‘to “understand any -orie company, you must first haye some idea of the entire’ industry in “which it functions. So ‘get. the reports of other firms that are: in. thé same or a similar businéss..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 will make little sense to you unless you are well up on the debate now going on in Washington over future government policy 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: a company’s earnings may have no relation to the strange behavior of its stock in the market. Otherwise, all accountants would have retired long ago as a result of successful. specula- tions. The fact that most of them still work for a living should prove to you that not even a professional understand- ‘ing of annual reports will enable you automatically to pick a winner. And, finally, remember that the pub- lic-relations director who prepared the ‘annual report had you in mind. For in the last analysis, the annual report is a public-relations device whose theme wrptarcrim~ ote song is “love that corporation.” And as , _ Dr. Frickey puts it to his students, no annual report ever took the place of an extra dividend. NOW YOU SEE IT, NOW YOU DON’T