Book review;Additions to the Library;

              Bulletin HASKINS & SELLS 95
Book
Ratio Analysis of Financial Statements*,
by Alexander Wall and R. W. Duning, sets
forth the procedure and methods advocated
and used by the authors in analyzing a
credit risk.
The three factors: personal, financial,
and cyclical, that must be taken into con­sideration
in a credit risk, are explained
briefly in the first chapter. The authors
generally give the approximate values of
40% to the personal factor, 40% to
the financial factor, and 20% to the
cyclical factor. The remainder of the
book develops the methods of analyzing
the financial factor.
Two chapters are devoted to the nomen­clature
of the balance sheet and one chap­ter
to the profit and loss statement. The
authors differ from many accountants on
certain accounting principles when they
state that savings accounts and certificates
of deposit should not be included in cash,
receivables should represent only claims
against firms for goods sold, and supplies
should never be included in inventories.
In their analysis, they hold that deprecia­tion
should be shown as a deduction from
the asset, but it is not uncommon, they
state, for accountants to show the asset
net, after depreciation, or to show one
reserve, which includes reserves that are
true liabilities, appropriated reserves, and
depreciation reserves which apply to assets.
The "common size or 100% statement"
is valuable in making it easier to compare
one company with another. In this state­ment
the total assets and liabilities are
* Harper & Brothers, New York, 1928. 353 p.
Additions to
Alford, Leon Pratt. Laws of Manage­ment
Applied to Manufacturing. (New
York, The Ronald Press Company, 1928.
266 p.)
American Paper and Pulp Association.
Its Organization, Purpose, Program and
each set equal to 100% and the proportion
of each individual item to its respective
total is shown on the statement.
The most important ratios are the four
static ratios: the current ratio, merchan­dise
to receivables, net worth to fixed
assets, and net worth to total debt; and the
four dynamic ratios: sales to receivables,
sales to merchandise, sales to fixed assets,
and sales to net worth. To these eight,
supplementary ratios are added. The
authors describe and explain their relative
importance, but state that a person must
determine the weight that is to be placed
on the ratios in each situation.
Ratios are of little value unless there is a
basis with which to compare them. Two
methods for finding a ratio are used by the
authors. It is inadvisable to choose a
certain year as a basis, as that year may be
a very weak year; consequently, the ratios
for the period under consideration might
show improvement over the basic year,
but the business might be a poor credit
risk. Therefore, it is recommended that a
five-year period be used as a basis; the
total for the five years of each of the two
accounts in the ratio is used. The other
method of determining a basic ratio is to
take the average ratio of a number of
similar concerns. To find this average,
the authors use the average of the ratios
found by using the arithmetical method,
the mode, and the median figure.
The last half of the book is an appendix
in which the authors take actual cases to
illustrate the principles they use when
analyzing the financial condition of a
credit risk.
the Library
Accomplishments. (New York, American
Paper and Pulp Association, 1928. 12 p.)
Byrne, James Anthony. Accounting
System Suitable for Use of a Club. 4 p.
(Clipping from The Pace Student, April,
1924.)