Who owns the goods?;

              6 H A S K I N S & S E L LS April
Who Owns the Goods?
THE ROBERT MORRIS ASSOCI­ATES
recently has called attention to a
practice existing in certain industries which
affects current position in balance sheets in
accordance with the manner in which the
matter is treated. The question raised is
as follows:
"For many years it has been the custom
in several lines of industry to eliminate
from the balance sheet on statement date,
merchandise on hand but unpaid for, pur­chased
and intended for next season's busi­ness.
This custom has been particularly
prevalent among shoe manufacturers and
dry goods jobbers. Before credit men
were sufficiently familiar with the prac­tices
in these industries to require informa­tion
about such merchandise holdings, the
complete facts were not always revealed.
Now that the custom of handling new
season's merchandise has become so well
understood, credit men have required full
particulars, and the information is fur­nished
in some instances in a foot-note.
Title to such merchandise unquestionably
rests with the purchaser of the goods who
has them in his possession, and who is, or
at least should be, paying insurance on
them. On the seller's balance sheet they
appear as accounts receivable. A com­pany's
object in having the figures made
up in this way is to have the balance sheet
show a smaller debt and a better current
ratio, and to attain this end they overlook
the fact that it tends to make the credit
man feel that his customer is attempting to
influence his opinion by an unduly favor­able
arrangement of the financial facts. If
the merchandise and the liability therefor,
were included among the assets and lia­bilities,
it would create greater confidence.
"A practice in which the principle is
somewhat similar to the above is found in
the textile industry. Mills frequently buy
machinery from the manufacturer, giving
notes in payment running over a period of
years. The manufacturer retains a lien on
the machinery but it is installed in the mill,
is in active use, and to all intents and pur­poses
is the mill's property. The mill fre­quently,
however, does not include in its
balance sheet either the machinery as an
asset or the offsetting liability for notes
payable, but reports them in a foot-note.
The pledged machinery and the secured
liability unquestionably belong in the bal­ance
sheet. Omission so to include them
creates the same unfavorable impression as
in the case of the next season's merchandise
of the shoe manufacturer or dry goods
jobber.
"Now the question is, how can the de­sired
result best be brought about. Our
suggestion would be to have the accountant
or the bank, or maybe both, show the
owners of the business how their balance
sheet looks as it is set up on the bank's
comparative statement form where the
item is included on both sides. As it is
now, the borrower brings the statement to
his bank and has a very distinct impression
that it is a good showing, properly pro­portioned,
etc., whereas the bank analysis
indicates an entirely different picture.
There must be one right way of showing
such an item and this we believe to be the
method just indicated; therefore, the ac­countants
and the banks should work
toward the goal of showing the situation
uniformly and in the right way."
There can be but one right way, it seems,
of handling an item such as the one in
question. However, the right way de­pends
upon the facts in each particular