Accounting theory and practice, Volume 2 (of 3) : a textbook for colleges and…

sheet the present market value. It would seem, therefore, that valuation at cost with the present market value shown on the face of the balance sheet, is the most desirable practice from every viewpoint. Depreciation of Stock-in-Trade Quite apart from this discussion of the proper basis for valuation, which concerns itself with marketable merchandise, is the problem of the method of handling deterioration or depreciation of stock-in-trade as distinguished from fluctuations in value. Such deterioration may result from shelf wear, use of goods for display purposes, changes in style and shape, overstocking which causes an accumulation of goods which soon are out of date or of sizes and qualities seldom used, broken lots where such will injure the sale value, and so on. Many devices, such as the “spiff” or the offer of a premium to salesmen, are employed by up-to-date merchants to keep their stocks free from these items of deterioration; but in spite of all that can be done, it usually proves impossible to keep the stock live in every particular. A valuation at cost under these circumstances would be an obvious inflation of values. If the concern had purchased that quality of goods originally with the expectation of resale, valuation at cost, under the limitations suggested above, would be the correct basis for showing. Since, however, such is not usually the case, the proper basis of valuation is now the market price—the present price at which goods of similar kinds and qualities can be bought. It may be objected that the effect here also is unduly to burden the current period with unrealized losses, but this is not the case. The deterioration in value is a very real loss which is entirely independent of any fluctuations in the market. If goods are shelf-and window-worn from display usage, the deterioration is just as much an expense incurred for advertising as a display advertisement in a daily paper. The deterioration due to overstocking is a penalty which the current period should bear because of its poor buying effort or its inadequate sales efficiency. Thus, valuation of the inventory of any stock of goods must have regard to the effect of its present condition on its marketability. Any deterioration which renders the stock less salable is an expense to be borne by the present period and not the period in which the sale is made. Full Costs of Stock-in-Trade Cost having been established as the basis for valuing a stock of marketable merchandise, there must next be considered the elements of cost and their application to different classes of goods. By cost of goods is meant full cost, i.e., not only invoice price but all additional costs, needed to place them ready for sale. All costs, therefore, up to the point where goods are ready to create income are proper charges against the stock-in-trade. Customary costs of this kind are freight, drayage, insurance during transit and storage, duty, seasoning or aging costs, warehouse charges, and all similar items. The information as to these costs is usually recorded separately, but at a summary period they are loaded on the invoice cost of stock-in-trade. In connection with this question of the proper composition of cost, attention is called to two other items sometimes requiring consideration. The first deals with the handling of cash discounts. The point at issue is as to whether the invoice figure should be recorded at the price quoted on a cash basis or on a credit basis. This point is discussed at length in Chapter XXXVI of the first volume where the conclusion reached is that the _credit_ policy of each concern must govern the manner of making the record. If the concern has a fixed policy of buying at a cash price, that price should be the price of record; whereas if all financial and other related policies are based on a 30-or 60-day credit term, the credit price for that term should be the price of record. Particularly is this true when viewed from the sales standpoint where the fixing of the selling price is a part of the financial policy. The second point requiring consideration in connection with cost is the item of interest on the money invested in stock. At the close of the fiscal period should the stock sold and that left on hand be burdened with interest on the average amount of capital tied up in it during the period? The student is referred to