W. A. Paton

English

Research Papers in Economics

This PDF is a selection from an out-of-print volume from the National
Bureau of Economic Research
Volume Title: Corporate Profits as Shown by Audit Reports
Volume Author/Editor: W. A. Paton
Volume Publisher: NBER
Volume ISBN: 0-87014-027-2
Volume URL: http://www.nber.org/books/pato35-1
Publication Date: 1935
Chapter Title: Introduction
Chapter Author: W. A. Paton
Chapter URL: http://www.nber.org/chapters/c5599
Chapter pages in book: (p. 8 - 17)IINTRODUCTION
THIS study is based upon the income-sheet and balance-sheet
statistics of some 700 corporations for the three years 1927,
1928and 1929.Theoriginal data were compiled for the
National Bureau of Economic Research by members of the
American Institute of Accountants, from their files, upon
the official request of the Institute.' The reports were drawn
from all parts of the country and represent clients of many
accounting firms. The instructions given to the cooperating
firms called particular attention to the importance of fur-
nishing a representative sample from their files, including
unsuccessful as well as successful enterprises, and it is be-
lieved that these instructions have been substantially ad-
hered to.
Although the period covered is short, and relatively pros-
perous, and the number of reports received small, the mate-
rial was deemed of sufficient importance to deserve tabula-
tion and analysis, particularly for two reasons. In the first
place the reports represented for the most part that group of
relatively small yet substantial corporations which plays an
1See Appendix A for copy of communication submitted by the Institute to
its members and for form of data sheet used.
The procedure followed in the preparation and submission of the material
was such as to ensure that there be no violationprofessional confidence.
Neither names of companies nor of accountants reporting the information were
given on the data sheets, and arrangements were made by which the initial
work of tabulation was done in the offices of the Institute at CedarStreet,
New York City. This made it possible to retain the original sheets in the files
of the Institute at all times.
8INTRODUCTION 9
important role in American business but is ordinarily neg-
lected or inadequately represented in studies of corporate
income and jinance. In the second place the reports fur-
nished were in a more satisfactory and complete form than
those usually available, and hence might be expected to
yield, within the limits imposed by the size of the sample,
unusually reliable results. Moreover, it was hoped that an
analysis of these reports might serve as a forerunner of a
later more extensive study, or perhaps ultimately of a regu-
lar periodic report, through the same channels.
CHARACTER OF SAMPLER
In number the 714corporationscovered represent but a
small percentage of the 280,000 industrial and trading cor-
porations reporting to the Treasury Department in 1928,
and their assets constitute only ipercent of the assets of
the corporations reporting in that year. Moreover, certain
industries are represented more fully than others, as is ap-
parent from the following figures. Since banks, insurance
companies, other large financial organizations were de-
liberately excluded from the sample, only a small portion
of the field of real estate and finance was covered. In the
second part of the tabulation, therefore, the comparison is
made without this group.
The size of the corporations in the sample is indicated
by their average net assets of $2,244,000.Averagenet assets
of all corporations reporting in the United States in 1928
(excluding the public utilities, which are not represented
in the present sample) were $643,000. But while the average
size of the companies in the sample is larger than the average
of all corporations (this is true also of all the major groups
2The material under this heading was prepared by Mr. Fabricant.io CORPORATE PROFITS
except real estate and finance) no very large corporations
are included.
A complete examination of the representativeness of the
corporations in the sample would require further comparisons
DISTRIBUTION OF ALL CORPORATIONS AND SAMPLE
CORPORATIONS AMONG INDUSTRIAL GROUPS
BY NUMBER AND TOTAL NET ASSETS
PERCENTAGE PERCENTAGE
• DISTRIBUTION DISTRIBUTION
OF NUMBER OF TOTAL NET ASSETS2
OF CORPORATIONS OF CORPORATIONS
AMONG INDUSTRIES AMONG INDUSTRIES
CODE ALL COR- ALL COR-
NO. INDUSTRIAL GROUP PORATIONS'SAMPLEPORATIONS'SAMPLE
Including rea) estate and finance
A Extraction 4.8 5.2 5.5 8.o
B Construction 4.2 3.2 1.1 0.4
CManufacturing 23.2 49.0 28.5 53.2
D Trading 31.1 31.2 9.1 28.5
EService 7.2 8.o 2.5 8.8
FReal estate and finance 29.5 3.4 53.3 1.1
Total(6 groups) ioo.o 100.0 100.0 100..
Excluding real estate and finance
A Extraction 6.8 5.4 ii.8 8.i
BConstruction 6.o 3.3 2.4 0.4
CManufacturing 32.9 50.7 6i.o 53.8
D Trading 44.1 32.3 19.5 28.8
EService 10.2 8.3 5,3 8.9
Total(5 groups) 100.0 100.0 100.0 100.0
Statistics of Income for1928.
2Totalbook assets less recorded depreciation and other offsetting figures.
of geographicareas covered,acloser determination of
whether unprofitable as well as profitable corporations are
adequately represented, and an examination of the ages of the
corporations included in comparison with those derived from
other sources of information. The sample is of course biased
to the degree—if any—that concerns which rely upon the serv-INTRODUCTION ii
ices of public accountants are not fairly representative of
American business corporations as a whole. For the present
purpose it is sufficient to have noted that the sample consists
mainly of the small(yet not the very smallest) and the
medium-size corporations doing business in the United
States, and is restricted to certain industries and to the three-
year period 1927-29.
One reason for restricting ourselves to samples when finan-
cial data for all American corporations are collected and pub-
lished by the Treasury Department is that in the income tax
statistics totals only are given; typical figures, therefore, can-
not be obtained from them. Nor is it possible to determine
the differences in, and the relationships among, various finan-
cial and operating characteristics and ratios from the compila-
tions of the Bureau of Internal Revenue. In addition, sam-
ple data, as in this study, can be had in more detail, and by
finer industrial divisions, than the Treasury Department
figures.
The materials of the present sample differ, also, from sta-
tistics collected by Professor Epstein and already analyzed
by the National Bureau of Economic Research.3 The corpora-
tions included are drawn from a different group of corpora-
tions, and the average size is smaller. More important, the
data available here were in much more detailed form, mak-
ing possible the computation of various ratios and some
analysis of the financial and operating figures of the corpora-
tions included.
A further identification of the sample used here is afforded
by the following comparison. (All the groups shown include
corporations reporting losses as well as those making profits.)
R. C. Epstein, Industrial Profits in the United States (National Bureau of
Economic Research, 1934).12 CORPORATE PROFITS
AVERAGE RATE OF EARNINGS ON STOCKHOLDERS' EQUITY1
MANUFACTURING TRADING
Small and medium-size corporations,
1927-29 (the present sample2) 9.6 7.9
Medium-size and large corporations,
1927-28 (R. C. Epstein3) 10.2 12.7
All corporations, 1927-29
(Treasury Department4) 7.4 5.6
1The ratios are the weighted arithmetic average earning rates on total stock-
holders' capital and surplus invested in the several industries. As such they
may not be typical of the earnings of individual companies in these industrial
groups. (It is for this reason that detailed figures by companies are essential.
Ratios derived from aggregates may hide more than they reveal.)
2341manufacturing corporations, 220 trading corporations (see Table II).
2,046 manufacturing corporations, 664 trading corporations(Industrial
Profits in the United States). Data for 1929 are not available.
' fromdata for about 90,000 manufacturing corporations and
125,000 trading corporations published in Statistics of income, 1927-29.
The differences shown are no doubt due in part to variation
in the size of corporations included in the several samples.
But probably these differences arise chiefly from unequal
representation of the various industrial groups included.
(Size of company is, of course, related to kind of industry.)
It is interesting to note the depressing effect on the average
rate of return when the host of very small companies is in-
cluded.
CLASSIFICATION OF COMPANIES
The reports received from the cooperating members of the
Institute are largely from the industrial and trading fields, as
was requested, although a considerable number of companies
in other lines are represented. For purposes of tabulation and
analysis a classification of reports has been adopted that recog-
nizes four minor groups (extraction, construction, real estateINTRODUCTION
and finance, service) in addition to the two major fields of
manufacturing and trading. The classification used, together
with a measure of the average size of company in each main
group, is given below.
NUMBER OF COMPANIES
CODE BY SUB- AVERAGE
NO. GROUP TOTAL GROUPS SIZE
A Extraction 37 $3,450,385
A-iLogging 8
A- 2Oiland gasextraction io
A-Mining and quarrying 15
A.4 Miscellaneous extraction' 4
BConstruction 23 306,692
B-iGeneralbuilding contracting g
B- 2Specialcontracting 14
C Manufacturing 350 2,436,498
C-iMilling 6
C- 2Icecream and other dairy products 13
C-Meat products 6
C- 4 Fruit and vegetable canning 6
C- Miscellaneous food products 23
C-6 Cotton goods 17
C-7 Silks and woolens 14
C-8 Carpets, rugs,andother textiles 8
C- g Clothing and dry goods 19
C-ioTanning 8
C-it Shoes 14
C-12 Lumber 13
C-iBoxes and barrels 8
C-14 Miscellaneous wood products 14
C-isFurniture, pianos, radios ii
C-i6Paper boxes 7
C-17 Paper 11
C-iSDrugs and chemicals 20
C-igCement and ceramic products 17
C-2oHeavy forgings, bars, billets,
sheets, castings, etc. 23
C-21 Electricalmachinery 8
C-22 Agricultural, construction and
mining machinery to14 CORPORATE PROFITS
NUMBEROF COMPANIES
CODE BYSUB- AVERAGE
NO. GROUP TOTAL GROUPS StZE
CManufacturing (cont.)
C-23 Stoves and other heating apparatus g
C-24 Miscellaneous machinery and
equipment 17
C-25 Hardware 12
C-26 Miscellaneous iron and steel
specialties 19
C-27 Unclassified i
D Tiading 226
i Automobile sales and service;
gas and oil—wholesale and
retail 12
D- 2 Men's and women's clothing—
retail 12
D-Cotton and wool merchants 7
D-Department stores 20
D- 5 Dry goods—wholesale to
D- 6 Fuel, lumber, and building
materials—retail i
D 7 Fuel, lumber, and building
materials—wholesale 17
D- 8 Fruit, vegetables, dairy products,
grain, etc. 12
D- g Furniture—retail 21
D-io Groceries—wholesale 11
D-ii Hardware—wholesale and retail 15
D-12 Jewelry—wholesale and retail 7
Paper and leather products—
wholesale 8
D-14 Auto supplies, electrical equip-
ment, radios, sporting goods
—wholesale and retail 17
D-15 Unclassified 2 42
E Real estate and finance 24 745,196
E- 1 Real estate operators 20
E- 2 Finance companies 4INTRODUCTION
NUMBER OF COMPANIES
CODE BYSUB- AVERAGE
NO. GROUP TOTAL GROUPS SIZE
F Service 57 $2,475,230
F- i Advertising 6
F- 2 Laundry and dry cleaning i
F-Printing, publishing, litho-
graphing, engraving, etc. 23
F- 4 Miscellaneous, including hotels,
restaurants, warehouses, etc. 17
All fields 714 $2,243,863
1Tworose growers, a cattle ranch, and a specialized farming and dredging
enterprise.
aIncludesfour retail furriers, four wholesale drug dealers, three retail music
stores, two retail shoe dealers, and one example each of twenty-nine other
highly specialized lines.
The average size is in terms of net book assets (total book
assets less accrued depreciation and other valuation reserves),
and was determined by dividing the grand total of the net
book assets for every company in the group for each date
reported by the total number of instances in the group. In
such a calculation, it is evident, a company whose report was
available for only two years would contribute but two figures
to the group total.
It will be noted that an effort has been made to preserve
the integrity of specialized subsidiary groups as far as feasible,
and that no stress is placed on intermediate groupings. How-
ever, to facilitate comparison in the manufacturing division
some care has been taken to place related subgroups in juxta-
position. Printing, publishing, etc., listed here under service,
might, and perhaps more properly, have been placed under
manufacturing.i6 CORPORATE PROFITS
TECHNICAL LIMITATIONS AND QUALIFICATIONS
The great majority of reports received were completely
and accurately filled out, as was to be expected. In a few, bal-
ance-sheet data only were given; these have been used in cal-
culations requiring balance-sheet figures alone. In a few, the
income figures reported could not be made to check; these
were eliminated as far as income calculations were concerned.
A few balance-sheet reports have not been used for the same
reason. The omission of these incomplete reports accounts
for discrepancies between the number of companies used in
calculating balance-sheet ratios and the number used in de-
termining certain income-sheet ratios. In several reports the
figures given for 'net balance available for dividends' were
accepted since they were in harmony with the respective sur-
plus accounts, although the inconsistency of the other figures
composing the income sheet made it unwise to use them in
other income calculations. This explains the difference in
number of companies represented in Tables I and II.
Several reports did not give data for all three years. In par-
ticular a considerable number gave no 1927 figures. If other-
wise complete, the data on these reports have been used for
the years available, allowance being made for the missing
years in taking averages and in other similar calculations.
Since book values are used throughout, the calculations
made are subject to the limitations inherent in such mate-
rial. Book values of fixed assets are notoriously inconsistent,
owing to diverse depreciation policies and methods of han-
dling maintenance, .additions, retirements, and other features
of plant accounting. Further, original cost figures for con-
cerns launched at different dates naturally vary with the price
levels prevailing at the time of organization or reorganiza-
tion. Also the treatment of organization costs and of intangi-INTRODUCTION 17
blesdiffers. On the whole, it is fair to assume that the balance-
sheet values used are fairly conservative, in line with accepted
accounting standards, and that aside from this general bias
the effects of special accounting practices tend to offset one
another to some degree, in the larger groups of companies
in any event.

Corporate Profits as Shown by Audit Reports

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