Profits available for dividends;

              90 HASKINS & SELLS December
Profits Available for Dividends
PROFIT and profits are broad terms.
When the word "profit" is used with­out
a qualifying word or phrase it ordi­narily
has a non-technical meaning and in­dicates
the excess of proceeds over cost in a
specific or incidental transaction, such as
the sale of a bond at a price above cost.
The word "profits" usually is used with
some qualifying expression, such as "gross
profits" or "net profits."
The general rule is that dividends must
come from profits. Net profits as shown
on a statement of income and profit and
loss should represent the amount available
for dividends and earned surplus. The
accountant is faced with conflicting views
as to what factors must be considered be­fore
arriving at a figure for the profits
available for dividends.
The business man is interested in what
are his profits available for dividends.
Directors of corporations must know the
amount of profits available for dividends
in order not to declare illegal dividends and
become subject to penalties imposed by
law. The accountant's task is to set forth
in financial statements for the directors
the amount of net profit or the profits
available for distribution. In the accom­plishment
of this work he must give recog­nition
to the law in relation thereto and
to the accounting problems involved.
One of the first questions to arise is
whether profits, to be available for divi­dends,
must be realized or may be un­realized.
Most writers take the view that
dividends must be based on realized profits.
Collateral to this is the question of what
constitutes realization. The average
lawyer is likely to be of the opinion that
nothing is profit until realized in cash.
The accountant generally considers profit
realized when a sale is made.
There is no question about the necessity
or propriety of deducting from gross profits
the ordinary operating expenses such as
cost of supplies purchased, wages, fuel, light,
heat, and, in general, all manufacturing,
selling, and miscellaneous expenses for
which cash is spent or a liability incurred.
It seems fairly well settled also that accrued
depreciation, interest, and taxes likewise
must be deducted. Furthermore, in mak­ing
any charge against profits, care must
be taken that capital expenditures are prop­erly
distinguished from revenue expendi­tures.
In the case of the upward valuation of
fixed assets there is a difference of opinion
as to whether or not the resulting profit
or surplus is available for distribution.
Accountants seem to object almost in­stinctively
to any inflations on the basis of
market or appraised values. Fixed assets
are required if a business is to operate, it
cannot sell them, and no profit can be
realized until they are sold. Therefore,
accountants usually feel that dividends
cannot be paid from unrealized profits re­sulting
from writing up assets to a market
value higher than cost. This idea is held
even though some decisions of the courts
may be found upholding the legality of such
dividends. On the other hand, downward
fluctuations of fixed assets, indicating a
theoretical loss, need not be considered in
determining profits available for dividends.
Some accountants suggest that if it is
desired to give stockholders the benefit of
increased market value of fixed assets, it
would be much better to declare and pay
a stock dividend. In that case, if profits
eventually turned out to be losses, such
losses could properly be charged against
the capital stock issued under the form of
dividends.
There is one case where it seems only
just that unrealized appreciation of fixed
assets be given consideration. Suppose
that a corporation desires to market an
issue of bonds, and that the fixed assets
which are to stand as security for the issue
have appreciated greatly. Then it seems
fair to bring the appreciation on the books,