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Ch. 3] COMPUTATION OF THE SURPLUS 501
profitable sale of capital assets it comes into the treasury as
money. As such it is without earning power and should be
immediately invested. Likewise if the surplus arises through
mere bookkeeping balances, it stands merely for an increase
in the unappropriated property of the corporation. If the
corporation is a railroad the surplus stands merely for more
cars or more finished roadbed than is warranted by the apparent
claims of stock- and bondholders; if the corporation is a
soap factory it stands merely for more soap or more grease
than the liabilities of the company call for. In no case is it in a
form that can be distributed in dividends or even used to meet
a sudden and unpredictable demand for money.
The fact remains, therefore, that the surplus of a corporation
is kept entirely in the form of actual money only in
extreme cases.' The proportion that should remain in bank
deposits and readily realizable cash items will depend on the
nature of the business and the frequency or nearness of sudden
cash demands. The surplus of certain corporations,
notably insurance companies, is of the nature of a trust fund
which must be kept inviolable to meet unforeseen demands.
Preparation to meet unexpected losses is the very nature of
the insurance business. Under most circumstances the ordinary
receipts take care of the ordinary disbursements, but at the
time of a conflagration the surplus must be encroached upon,
since the customary reserves are insufficient. That is the
reason why an insurance company should, irrespective of its
theories of investment, keep a large part of its surplus invested
in short-time loans or listed securities easily liquidated. Other
1 During September, 1917, a corporation engaged in the grinding of corn
found itself unable to secure enough raw material to maintain its grind.
The factories were closed for two weeks. On October l, 1917, the trial
balance showed an enormous accumulation of cash, so large in fact as to
approximately equal a bookkeeping surplus that had taken years to build
up. By November i the cash had been reduced by grain purchases and other
disbursements to normal amounts. When the company's bookkeeping surplus
was represented by actual money, the company was in no stronger position
than when its surplus was tied up in raw materials and semi-finished goods.
In fact, its position was not so strong, because the heavy accumulations of
bank deposits indicated a paralysis of the normal business operations of the
company.
Beschrijving voorwerp
| Titel | The financial policy of corporations |
| Auteur | Dewing, Arthur Stone |
| Jaartal | 1926 |
| Collectienaam | NIVRA Historisch Archief, UBVU gedigitaliseerd |
| PPN | 344552586 |
| Toegangsgegevens (URL) | http://imagebase.ubvu.vu.nl/getobj.php?ppn=344552586 |
| Signatuur origineel | NIVRAHA149 |
| Evaluatie |
Beschrijving
| Titel | NIVRAHA149_00525 |
| Transcript | Ch. 3] COMPUTATION OF THE SURPLUS 501 profitable sale of capital assets it comes into the treasury as money. As such it is without earning power and should be immediately invested. Likewise if the surplus arises through mere bookkeeping balances, it stands merely for an increase in the unappropriated property of the corporation. If the corporation is a railroad the surplus stands merely for more cars or more finished roadbed than is warranted by the apparent claims of stock- and bondholders; if the corporation is a soap factory it stands merely for more soap or more grease than the liabilities of the company call for. In no case is it in a form that can be distributed in dividends or even used to meet a sudden and unpredictable demand for money. The fact remains, therefore, that the surplus of a corporation is kept entirely in the form of actual money only in extreme cases.' The proportion that should remain in bank deposits and readily realizable cash items will depend on the nature of the business and the frequency or nearness of sudden cash demands. The surplus of certain corporations, notably insurance companies, is of the nature of a trust fund which must be kept inviolable to meet unforeseen demands. Preparation to meet unexpected losses is the very nature of the insurance business. Under most circumstances the ordinary receipts take care of the ordinary disbursements, but at the time of a conflagration the surplus must be encroached upon, since the customary reserves are insufficient. That is the reason why an insurance company should, irrespective of its theories of investment, keep a large part of its surplus invested in short-time loans or listed securities easily liquidated. Other 1 During September, 1917, a corporation engaged in the grinding of corn found itself unable to secure enough raw material to maintain its grind. The factories were closed for two weeks. On October l, 1917, the trial balance showed an enormous accumulation of cash, so large in fact as to approximately equal a bookkeeping surplus that had taken years to build up. By November i the cash had been reduced by grain purchases and other disbursements to normal amounts. When the company's bookkeeping surplus was represented by actual money, the company was in no stronger position than when its surplus was tied up in raw materials and semi-finished goods. In fact, its position was not so strong, because the heavy accumulations of bank deposits indicated a paralysis of the normal business operations of the company. |
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