Carol Normand
and
Charles W. Wootton
EASTERN ILLINOIS UNIVERSITY

THE RECOGNITION AND VALUATION OF CURRENT ASSETS ON THE BALANCE SHEET IN THE UNITED STATES, 1865 – 1940

Abstract: A. C. Littleton [1933, pp. 149151] in Accounting Evolution to 1900 wrote that the subdivision of financial statements and the valuation of assets were two of the most important elements in the development of modern financial statements. The purpose of this paper is to explore the historical evolution of the recognition, grouping, and valuation of current assets on the balance sheet in the United States between 1865 and 1940 at which time the basic format for reporting such assets had been adopted. The paper expands the examination of the balance sheet beyond a traditional emphasis on longlife assets to an investigation of the evolving classification of current assets with a special emphasis on the influence of financial users (especially creditors) for its unique development. Historical illustrations of the ways in which companies presented and valued current assets on the balance sheet are presented.
In matters of form the greatest change which later statements showed was the grouping of data into subsections [A. C. Littleton, 1933, p. 149].

INTRODUCTION

In 1913, Charles Sprague [1913, p. 26] wrote that “the balance sheet may be considered as the groundwork of all accountancy, the origin and the terminus of every account”. At that time, however, some companies still issued annual reports that did not include balance sheets or, if balance sheets were in
Acknowledgment: We wish to gratefully acknowledge the numerous excellent suggestions from the editor and two anonymous reviewers.

cluded, the financial information was often minimal. Additionally, at the beginning of the 20th century most companies did not classify balance sheets, and in the statements of the few companies that did, there was no consistency in the grouping of items.

Moreover, neither the order of liquidity nor market or net realizable values were determined for assets such as accounts (bills) receivables or inventories. In fact, Foulke [1968, p. 189] notes that it was after 1900 that public accounting firms commonly used the terms ‘current assets’ and ‘current liabilities’. Yet, as Foulke [1945, p. 70] writes: “The classification of current assets is undoubtedly the most important classification in a balance sheet, as current assets largely determine the going solvency of a business concern.” This lack of classification also affected credit analysis as pointed out by Brown [1955, p. 18] in her dissertation on the history of ratio analysis: “For years the financial statements published by banks were not adequate for extensive analysis because of a lack of significant classification and clarity of expression.” Although her statement concerned banks, the inability to conduct meaningful financial statement analysis was equally true for other industries.

Despite the lack of significant balance sheet classifications at the beginning of the century, by 1940 the basic format for reporting current assets on the balance sheet had been adopted. Instead of following British precedent established under the Companies Acts, the American (or Continental Europe) balance sheet had its own characteristics, especially in regard to the classification and position of current assets. Although many of these characteristics developed after the start of the 20th century, antecedents of these changes began shortly after the end of the U. S. Civil War and reflect the evolution of the business environment itself.

Immediately after the Civil War there was little need for classified balance sheets. By 1940, it was impossible not to have them. During that period, the business world evolved from one that consisted primarily of sole proprietorships with little need for financial statements to one consisting of larger businesses that had to provide basic financial statements to their creditors. The American business world then evolved towards larger corporations that had to provide financial information to shareholders, analysts, creditors, and various governmental entities. This paper examines how the economic, legal and social forces that contributed to the reorganization of the American business world also contributed to the recognition, grouping, and valuation of current assets on the balance sheet and explores how these forces created the unique needs of the American business system which led to the development of financial statements different from those developed in Britain.

Several accounting historians have investigated the evolution of financial statements into their present form. However, most studies have concentrated on the overall development of financial statements or upon the presentation and valuation of longterm assets on the balance sheet rather than current items. Examples of these investigations are numerous. Claire [1945] examined the evolution of the annual report of United States Steel Corporation (USS) from 1902 to 1943 while Schiff [1978] contrasted the 1902 and 1974 annual reports of that corporation. Vangermeersch [1970, 1971/72, 1986] also examined financial reporting milestones in the annual reports of USS over seven decades as well as USS’s depreciation policies. Reed [1989] contrasted the historical depreciation reporting practices of USS with replacement cost estimates for 1939 and 1987. In Financial Reporting Techniques in 20 Industrial Companies Since 1861, Vangermeersch [1979] continued his analysis of annual reports. Here, Vangermeersch examined the financial reporting techniques of companies such as General Electric and Pullman & Company in regard to 63 aspects of reporting in eight major topical areas such as balance sheets, income statements, depreciation, and inventory. Through these studies, Vangermeersch examined in depth the changing role and format of the balance sheet over the years. However, these studies concentrated primarily on the changing balance sheet itself instead of changing classifications on the balance sheet such as current assets. Edwards [1984] in Studies of Company Records 18301974, presented a historical discussion on the development of financial statements. In Corporate Financial Reporting and Analysis in the Early 1900s Brief [1986] presented the early annual reports of companies such as International Harvester Company and American Telephone & Telegraph Company as well as a series of historical comments on those reports. In an article the following year, Brief [1987] further discussed the financial reports of leading companies at the turn of the 20th century. Recently, Previts and Samson [2000] examined the annual reports of the Baltimore and Ohio Railroad for the period, 18271856. In addition, there have been two major conceptual studies on working capital and solvency. In his dissertation, Huizingh [1967, p. vii] examined the genesis and development of the working capital concept (especially through the expressions of academic/financial writers) and proposed a new structure for its presentation. In the AICPA’s Accounting Research Monograph 3 (Financial Reporting and the Evaluation of Solvency), Heath [1978], presented an extensive discussion of the concept of solvency, the principles of balance sheet classifications, and problems incurred in defining current assets.

This paper expands the examination of the balance sheet beyond the traditional emphasis on longlife assets to an investigation of how the classification of current assets on the balance sheet evolved from the end of the Civil War in 1865 to 1940 by which time the basic format had been adopted for the reporting and valuation of current assets. A special emphasis is placed on the influence of financial users (especially creditors) in this development process. As Anton [1962, p. 5] writes: “the great historical influence of bankers on financial statements cannot be overemphasized . . . preparation of statements for the granting of credit influenced not only the statements themselves but accounting principles as well.

The end of the Civil War is used as the beginning point for this investigation because at that time the major factors that led to the increased importance of the balance sheet and the ultimate need for the classification of current assets emerged. For example, Huizingh [1967, p. 62] writes that it was soon after the Civil War that the practice of purchase on open account developed; Horrigan [1968, p. 285] states that it was in the 1870’s that “commercial banks began to request financial statements for lending purposes”; and Foulke [1945, p. 618] stated that “efforts were made by The Mercantile Agency in the 1870’s … to obtain balance sheets, which at that time were better known as property statements [emphasis in original], for the use of the mercantile and bank creditors.” Littleton and Zimmerman [1962, p. 92] note that it was during this period that bankers encouraged “utilizing shortterm bank loans as a source for much of the working capital needed by business.

In order to address the development of current asset classification, the paper is divided into four periods: (a) 1865 to 1879, (b) 1880 to 1899, (c) 1900 to 1920, and (d) 1921 to 1940. For each period, a historical overview of the business environment and the attitudes of management toward financial information are discussed. The impact of the public accounting profession, academic writings, judicial precedent, and statutory authority on the reporting and valuation of current assets are also reviewed. Additionally, historical illustrations of the ways in which companies presented and valued current assets are presented.1 The final section presents the summary and conclusions.

A MINIMUM AMOUNT OF INFORMATION, 18651879

Prior to and at the end of the Civil War, the great majority of businesses were small proprietorships or partnerships that had little need to prepare financial statements because the owners personally knew the financial condition of their businesses. Additionally, most businesses dealt directly with their suppliers and, as Lough [1917, p. 113] stated, trade credit was the most important form of credit where “purchases of merchandise were customarily settled by notes running six, eight, or ten months . . . which were readily indorsed [sic] and discounted.

During the War and continuing afterwards, however, “merchandise business came down to a basis of cash or of credit of only ten to thirty days” [ibid]. This policy continued until the early 1880s, when credit terms became somewhat longer but “these terms were combined with offers of liberal discount for cash payments” [Lough, 1917, p. 113]. Thus, as Lough [1917, p. 114] writes, with the end of the Civil War, “trade credit … is relatively less important, and bank credit is more important.

Although bank credit was now more important, a new problem was created for the banks. Instead of discounting twoparty commercial notes, banks began to issue singlename paper [Foulke 1945, p. 68] and, as Huizingh [1967, p. 62] points out, “having foregone the security of double protection, they sensed the need of obtaining more adequate and reliable financial information from their clients.” The reliable information desired in most cases was the balance sheet, and on the balance sheet, the liquidity of the assets became the major consideration. Huizingh [1967, p. 62] writes: “His [banker’s] preference was to obtain a statement indicating the probability that he would be able to recoup his investment even though the business were not to continue beyond the term of his loan.” With the greater credit exposure, there was an increase in the importance of the mercantile credit agencies that had been established before the Civil War and placed upon these agencies an

1In selecting illustrations, an effort was made to select companies respective of the major industries and to select companies with financial statements illustrative of the various methods of presentation and valuation of current assets on the balance sheet at that time.

obligation to obtain “exact financial information as a trained intermediary for creditors” [Foulke 1945, p. 68].

Although the great majority of businesses were not incorporated at the end of the Civil War the corporate form was common in certain industries such as canals, railroads, banks, and insurance. Incorporated during the first part of the 19th century under special state charters and during the latter part under general charters, these entities often were required by their charters to issue some form of annual report. Often, however, the reports did not include balance sheets or profit or loss statements. For example, the 28 page annual report of the Union Canal Co. of Pennsylvania, 1865 contained an extensive narrative of the company’s operations and offered great detail about tonnage hauled and changes in cash balances. However, the report contained neither a balance sheet nor an income statement while the total revenues and ordinary expenses were stated only in the management narrative.

Among companies that included balance sheets in their annual reports, there was no uniform style. Each company developed its own format and decided what was to be included on the statement. The formats of most balance sheets, however, were variations on the “account form,” “columnar trial balance” form, and the “beginning of the [use of the] ‘report'” form [Littleton, 1933, p. 143]. The columnar trial balance form was similar to today’s work sheet in that a trial balance was extended to various columns such as a balance sheet column and, in time, “the inclusion of a profitandloss column” [Littleton, 1933, p. 143].
Regardless of the format, assets on the balance sheet were not classified into categories (e.g., current assets).2 Moreover, it was often the practice to offset certain assets with liabilities and present only the net amount as the balance: in some cases basically creating net working capital. For example, on the balance sheet of the Delaware and Hudson Canal Co., 1870, receivables were presented under the heading “Cash assets, Notes

2Although Littleton [1933, p. 149] stated that one of the greatest innovations in financial reporting was the “grouping of data into subsections,” he pointed out that in the United States broader classification concepts had to be resolved before this could occur. Littleton [1933, p. 149] wrote “In the nineteenth century … some wished them called real and representative … others wished accounts classified as material, property, personal, profitandloss; still others as real, personal and imaginary … [Thus] the generally accepted classification of real and nominal accounts came later, as did the subdivision of the balancesheet into current assets.”

receivables, etc. deducting Liabilities, $2,197,959.51.” With this presentation, the reader had the amount of working capital of the company. However, there were no individual amounts for either assets or liabilities.

In 1865, the Lehigh Coal and Navigation Company [1865, pp. 2426] issued its 44th annual report which included both a “profit and loss account” and a “summary of the liabilities and assets,” however, accounts on neither statement were classified. The only headings on the “balance sheet” were Liabilities (listed first) and Assets. Under Liabilities, equity was listed first followed by liability accounts. Lehigh’s $11+ million of assets were represented by only six accounts which are presented in Exhibit 1. The six assets were apparently listed in inverse order of liquidity.

EXHIBIT 1

Asset Section, Balance Sheet, January 1, 1865
Report of The Board of Managers
Lehigh Coal and Navigation
Canal and River Improvements $ 4,455,000.00
Lehigh and Susquehanna Railroad 1,917,895.35
Real Estate, cost of coal mine land. . .
and improvements 2,072,984.50
Moveable effects, Debts due the Company,
Bills Receivable, Bonds and Mortgages, &c. 2,128,112.02
Contingent Fund: cost of investments 640,952.02
Cash on hand 165,975.86
$11,380,919.75

Due to state incorporation laws, railroads were subject to greater regulation and annual reports were often required [Littleton and Zimmerman, 1966, p. 94]. State laws, however, were often vague and charters did not always address management’s reporting responsibilities [Hawkins, 1963, p. 136]. Thus, the reporting practices varied widely between railroads and from year to year within the same railroad. Some railroads provided no annual reports as was seen when the New York Stock Exchange asked the Delaware, Lackawanna & Western R.R. Co. for copies of any reports that it had recently issued. In its reply to the NYSE, the Railroad declared [McLaren, 1947, pp. 45]: “The Delaware, Lackawanna & Western R.R. Co. make no reports and publish no statements and have done nothing of the sort for the last five years.”

In contrast to no reports or minimum accounts by some railroads, the balance sheet (represented by a General Account) of the Philadelphia and Reading Railroad Company, 1865 showed over 20 types of assets. However, there was no subclassification of assets and items such as cash and freight receivables were offset with liabilities for wages and materials.

During this period, companies that intended to present a more complete financial picture had few reporting guidelines available. Unlike in Britain, U.S. companies had no railway or companies acts to provide basic models for financial statements.3 It would be nearly two decades before practitioner journals such as Accountics and the BookKeeper emerged with discussions of such accounting concerns.

In the few accounting/bookkeeping texts that were available at the time of the Civil War, the preparation of financial statements often was ignored. For example, the 60th edition of Mayhew’s Practical BookKeeping [1861, p. 6] devoted 200 pages to a discussion of “general bookkeeping, commercial calculations, philosophy & morals of business, and double entry bookkeeping.” It did not, however, address or illustrate either a profit and loss statement or a balance sheet.
One author of the period that went beyond bookkeeping was Thomas Jones. In contrast to writers even in the early 1900s, Jones’ 1855 Bookkeeping and Accountantship dealt broadly with the issue of valuing current resources. Under the heading of “Resources”, Jones [1855, p. vii] listed “Merchandise on hand valued at,” which Jones explained was “an estimated value [set] upon his merchandise.” Moreover, Jones advocated that each year a company establish a reserve account in which the estimated bad debts of the following year would be recorded.

A later text that examined the preparation of a balance sheet was the 1878 Bryant and Stratton Common School Book

3The Joint Stock Companies Act of 1856 offered a model balance sheet on which assets were classified into three categories (property held by the company, debts owing to the company, and cash and investments). These in turn were subclassified into categories such as immoveable (i.e., buildings) and moveable (stock in trade) property. Moreover, on the balance sheet, “receivables” were to be divided into good and “debts [receivable] considered doubtful and bad” [Edey and Panitpakdi, 1956, pp. 364365]. In regard to the separation of current items on the Companies Act, 1856 model balance sheet, Chatfield [1996b, p. 63] writes: “The distinction made by classical English economists between fixed and circulating capital may have persuaded legislators to separate current from longterm assets and liabilities.”

Keeping. The balance sheet presented in this text was based upon the columnar work sheet concept. That is, the initial trial balance was extended to succeeding columns designated: inventory, business accounts, stock, and financial statement [Packard and Bryant, 1878, p. 141]. The financial statement column in turn was separated into two columns — resources (assets) and liabilities (liabilities and capital). No reserves (allowances) for either bad debts or depreciation were shown.

As Brief [1969, pp. 12] points out, external influences can impact accounting behavior. However, at this time with the exception of banks, external influences were minimal. For example, in 1869, the NYSE’s Committee on Stock List adopted the policy that, once listed on the Exchange, companies must publish an annual financial report. Many companies, however, did not follow the policy and the NYSE usually did not take action [Hawkins, 1963, p. 149].

In contrast to many other external influences, the U.S. judiciary has both a review process and an enforcement mechanism. Because of these characteristics, the legal system has played an important role in the development of accounting standards and practices. As Mills [1988, p. 13] writes in The Legal Literature of Accounting: “accounting practices have been subject to and shaped by legal constraints throughout their history.” Moreover, as Reid [1987, p. 256] points out, legal actions often predate the development of an accounting concept.

At a time when some companies did not provide financial statements and most companies did not classify their balance sheets, courts began to respond to the needs of the public. One early case was Rubber Company v. Goodyear [1869].4 Although the case largely dealt with patent issues, an additional concern of the Court was the costs which should be considered in a company’s determination of profit. Justice Swayne, writing for the United States Supreme Court [9 Wall. 804], stated that among: “other necessary expenditures, if there be any, and bad debts, are to be taken into the account, and usually nothing else.” Thus, under the court’s reasoning, a company’s profits should reflect an estimate for bad debts. Although the court gave consideration to the profit and loss statement, it did not address the corresponding effect on assets in the balance sheet.
4Full legal citations for all cases are presented in the references.

THE EMERGENCE OF LARGE CORPORATIONS, 18801899

During the last decades of the 19th century, the business environment in America changed drastically. As Alfred D. Chandler [1959, p. 4] points out, America was transformed from a largely agrarian economy to one in which “major industries were dominated by a few firms that had become great, vertically integrated, centralized enterprises.” It was a time of mergers and the creation of substantial industrial and distribution corporations such as General Electric Company, United States Rubber Company, and Sears, Roebuck & Company. With the growth of such companies, ownership was separated from management while shareholders became more numerous and important. As corporations sought outside sources of capital, they faced new demands for financial information because investors, bankers, and bureaucrats often had to rely on financial statements for decision making [Littleton, 1933, p. 366].

Although there was an increase in the importance of financial information, there was little change in the preparation and appearance of the financial statements themselves. In contrast to Britain, where the concept of stewardship greatly influenced the concept of the balance sheet, the preparation of the balance sheet in the U.S. continued to be influenced by the needs of creditors. It was during the last decade of the nineteenth century that requests by banks for financial statements became “a widespread practice” [Horrigan, 1968, p. 285]. Reflecting on why the liquidity concept continued to prevail in the U.S., Montgomery [1912, p. 212] wrote: “it has the sanction of the bankers and credit men of this country, who use balance sheets oftener than any other class.”
Even with new demands for financial information, the attitude prevalent in the previous period toward the disclosure of financial information often prevailed. Consequently, companies often did not keep stockholders informed of the results of their operations, the information provided was influenced by the viewpoint of the managers, and the information was often unreliable because of what it excluded [Hawkins, 1963, pp.135]. Moreover, the information provided was often of little value for intercompany comparisons because there were few accepted rules for the recognition of financial items such as depreciation or reserves [Previts and Merino, 1998, pp.125126]. Even in regulated industries such as railroads, where more detailed information was required, accounting practices varied with state requirements [Hawkins, 1963, p. 135].

In this environment, reporting practices varied widely despite a growing need for financial information. For example, in 1881, American Bell Telephone’s Report of the Directors did not include a balance sheet. The following year, American Bell’s annual report [1882, p. 10] included a balance sheet, however, over $7 million of assets were listed in seven broad categories such as patents, other stocks and bonds, merchandise, and bills & accounts receivable. A reserve account was presented on the liabilities side of the report but its purpose was not disclosed. In 1885, Lehigh Coal and Navigation Company issued its 64th Annual Report that included both a “revenue and expenses” statement and a “balance sheet.” The 1885 balance sheet, however, differed little from the 1865 balance sheet (see Exhibit 1) except that a greater number of accounts were shown. As in 1865, the 1885 balance sheet neither classified the assets (e.g., current) nor valued the assets (receivables or plant).

Despite the greater detail provided in the annual reports of railroads, the structure of their financial statements had not advanced much beyond those of other corporations.5 Little or no classification or valuation was presented. Although some railroads did provide information about selected accounts in a narrative or supporting statements, these statements led to confusion. For example, on a financial statement included in the 1880 fiscal year report [1881, p. 38] of the Atchison, Topeka, and Santa Fe Railroad Co., Accounts Receivable was valued at $1,428,008.67. In General Statement 4, however, Bills Receivable (not accounts receivable) was listed as $2,288,185.82 which included $119,599.82 interest on delinquent accounts. Then, in a separate narrative, the following information was provided:

Our bills receivable Dec. 31, 1880, on live sales, amount to $2,288,185.82. Of this amount, $341,006.

5The developing nature of the balance sheet was shown in a 1883 article in The AmericanCounting Room. In “CountingRooms Chats,” readers posed questions for the writers to answer. A reader asked: “what form of balancesheet is best and shortest.” In reply, the article [“On BalanceSheet,” 1883, p. 346] stated that the columnar (worksheet) balance sheet form, “in actual business it has become almost universally condemned.” Then, the article illustrated two acceptable forms for a balance sheet. The first was a simple “trial balance resource and liability” form with all assets’ balances on the debit side and liabilities (including capital) on the credit side. The second example was a “financial condition of the business” statement. Under this format, assets were classified in three categories: actual resources (cash, real estate), commercial resources (merchandise, other companies’ stock), and personal resources (billsreceivable, accountsreceivable).

is overdue and unpaid. During the year 1880, dead sales to the amount of 10,496.73 acres, $55,989.91, have been cancelled.
The Atchison, Topeka, and Santa Fe continued this method of reporting receivables on the balance sheet throughout the 19th century.

Unfortunately, the New York Stock Exchange (NYSE) did not address variation in balance sheet reporting. In 1869, the exchange had established a requirement that newly listed companies must publish annual financial reports, but the NYSE generally did not enforce its policy.6 In 1885, the NYSE further weakened the policy by establishing a dual listing of stocks. In order to attract companies that did not want to disclose financial information, the NYSE created an Unlisted Department where companies “were not required to furnish the Exchange with financial information relevant to the issue . . . nevertheless, these shares were traded with regularly listed securities, unlisted stocks being distinguished on quotation sheets only by an asterisk” [Hawkins, 1963, p. 150].
While the NYSE was lessening its disclosure requirements, American courts were establishing new guidelines. In 1890, the issue of the proper inclusion and valuation of current assets was addressed by the Supreme Court of Iowa in Hubbard v. Weare. Examining several accounts, which the appellant contended “were improperly included as assets, and others omitted from the statement of liabilities,” the court set guidelines for the balance sheet. In regard to inventory, the Iowa court held that “until it had an actual value it should not have been included as an asset.” The court then addressed the issue of the valuation of receivables. The appellee had listed on his 1879 balance sheet receivables with a value of $22,821.39; however, no provision had been made for a loss. The Supreme Court of Iowa held that the reported value of receivables on the balance sheet must include an estimate for the “shrinkage or loss in collections,” for “without such an approximation, the result would not show with any reasonable certainty the state of the company’s affairs” [Hubbard v. Weare, 44 N.E. 920]. Thus, with this decision, we see judicial precedent for changes in the way assets were valued and reported which coincides with Reid’s

6For example, as late as 1923, over 30% of NYSE listed companies were not required to issue annual reports to their shareholders, and only 25% of the companies provided both annual and quarterly reports to their shareholders [Seligman, 1995, p. 48].

[1987, p. 256] proposition that legal actions often predate the development of an accounting concept. Subsequently, other courts established similar guidelines.
Perhaps because the courts were beginning to set accounting principles through legal actions during the 1890s, accounting and auditing texts were more expansive in their coverage of current assets. For example, Dicksee’s7 1892 Auditing included a page and a half discussion of “bad and doubtful debts.” In his guideline for receivables, Dicksee [1892, p. 45] wrote:

An intelligent system of dealing with the difficult question of on as a debt became sufficiently overdue to merit attention, it should be transferred to a “Doubtful Debts Ledger.” Dicksee [1892, p. 46], however, cautioned that an account should not be written off “until it is irretrievably bad.” The second phase consisted of establishing a provision for Bad and Doubtful Debts through a Bad Debts Suspense Account. The suspense account was credited with the estimated loss while the Bad Debts Account was debited “in the usual way” [ibid].

7Due to the scarcity of American accounting texts, during the late 1800s and early 1900s, basic British accounting texts or American versions of British texts often were used. On this scarcity, John Carey [1969, p. 101] writes “in the first 30 years of its existence, however, the American accounting profession had little native technical literature with which to work.” On the importance of British writers, Carey [1969, p. 101] adds: “[at this time], the most important book available was the American edition of Auditing: A Practical Manual for Auditors, by Lawrence R. Dicksee, Professor of Accounting at the University of Birmingham, England. The American version was edited by the amazing Robert H. Montgomery.” One interesting aspect of Dicksee’s Auditing was its consideration of the effects of legal rulings upon the profession and its liability. In addition to legal discussions in the body of the text, Appendix B contained nearly forty pages of “Reports of Cases, The Decisions of which are of Professional Interest.

8In Auditing, Dicksee [1892] did not state whether the created “suspense” account for bad debts should appear on the liability side of the balance sheet or as an offset to accounts receivable. Later in his Advanced Accounting, he stated that while the created “reserve” account could be shown on the liability side of the balance sheet; “it is preferable, however, in the case of Reserve Accounts raised to provide for shrinkage in the value of specific assets, to deduct them from those particular assets, in which case, no entry whatever will appear upon the liabilities’ side of the balance sheet” [1903, p. 232].

In the early 1890s, many corporations did not follow the lead of the courts or the texts. For example, United States Rubber Company (USR) issued its first annual report in 1893. Its financial statements provided minimum information. Only five categories were employed for USR’s $29 million assets and all liabilities were listed in one account. No provision for losses in the receivables or valuation of plant assets were shown. USR continued its minimal reporting throughout the 1890s and into the early 1900s except that in most years assets were listed in four categories. However, in one sense, USR’s balance sheet was forward looking because current assets were listed first. At this time, many American companies followed the British practice of listing current assets last, and it was not until the late 1930s that several large industrial companies reversed the practice.9 The 1893 asset section of USR’s balance sheet is presented in Exhibit 2.

EXHIBIT 2

Asset Section, Balance Sheet, March 31, 1893
First Annual Report United States Rubber Company
Cash on hand and in bank $ 56,194.02
Notes and Accounts Receivable 2,846,163.50
Value of Rubber and other Mdse.
on hand, estimated 674,011.51 $3,576,369.03
Furniture and Fixtures:
New York and Boston $4,587.18
Investments $25,267,833.69 25,272,420.87
Total Assets $28,848,789.90

In contrast to the minimal financial reporting practices of companies such as American Bell Telephone and United States Rubber, a few corporations provided information about their current assets. For example, in January 1893, General Electric
9Littleton and Zimmerman [1962, pp. 9293] in Accounting Theory: Continuity and Change stated there was a logic in the British and American presentations of current assets — “The British had a strong natural interest in the relationship of permanent capital and fixed assets. Belief in the interpretative usefulness of placing these elements at the top of the balance sheet is a logical result of such an interest. … [In America] the party most interested in seeing the balance sheet was the lender; his chief concern was logically the borrower’s ability to repay a shortterm loan.”

Company (GE) issued its first annual report and much of the current asset data presented is similar to that included today. In its report, GE listed Stocks And Bonds Of Local Cos., Cash, Notes Receivable, Accounts Receivable, Inventories, and Work In Progress in a classification titled “Other Assets.” GE was unique in including the last account, for at that time, work in progress often was not listed on the balance sheet. It was not until nearly 50 years later that Dun & Bradstreet [Foulke, 1945, p. 81] would emphasize that a comprehensive balance sheet must include “a breakdown of the inventory of manufacturers into three parts, raw materials, in process, and finished merchandise” (emphasis Foulke).

Again unique for the period, GE estimated the net realizable value of two current assets (inventories and receivables) while many companies valued neither. Inventories were listed at $2,307,225.13 “less 10%” for an estimated net realizable value of $2,075,502.62. The basis for the 10% reduction was not given. Also, listed at estimated net realizable values were Notes Receivable ($5,151,950.64) and Accounts Receivable ($7,078,879.15). Although there were no indications on the balance sheet that receivables had been evaluated, in the text of the Report, GE [1893, p. 7] stated “after careful examination, deductions have been made from the notes and accounts receivable to cover fully all bad and doubtful items.

In General Electric’s annual report, 1895 the “Other Asset” section was dropped and instead all assets were reported on the left side of the balance sheet with no subheadings. In contrast to the reduction of information on the balance sheet itself, GE’s management [1895, p. 10] expanded its discussion of receivables:
This account represents what is believed to be a conservative value of notes and open accounts of customers, after deducting and charging off to Profit and Loss old notes and accounts receivable of 466 debtors, not now dealt with except on a C.O. D. basis, amounting to $2,291,844.48, heretofore carried at $234,973.69, but no longer carried as assets, except for the aggregate sum of $466, being one dollar for each debtor. They will be liquidated as speedily as possible.

Although most large industrial companies still did not classify their balance sheets, by 1890 several major railroads had started to do so and included, among other subheadings, a section for current assets. For example, the balance sheet in The Great Northern Railway Company’s first Annual Report [1890]

included a current asset section in which cash, receivables, and “material supply” were listed. There was, however, no provision for losses associated with the receivables.

In the same year, the Atchison, Topeka & Santa Fe Railroad Company (AT&SF) issued a detailed balance sheet listing nearly $350 million of assets classified under five major headings (Franchise & Property, Permanent Investments, Other Investments, Deferred, and Current). Each heading in turn had subheadings. Under the Current heading were the subheadings Accounts Receivables, Bills Receivable, Cash, and Securities Owned. Instead of listing inventory as a current asset, the AT&SF listed “Material and fuel in stock” as a “Deferred” item along with “Sundry Advances” and “Deposits.” Like The Great Northern, the AT&SF made no provisions for bad debts or depreciation.

Although many companies did not include provisions for bad debts, by the end of the 1890s the importance of such a provision was being discussed. For example, in April 1897, P. W. Sherwood presented a paper to the Associated Accountants entitled “The Preparation of Accounts for Legal and Other Purposes” which was published in Accountics. In his paper, Sherwood discussed the importance of the proper preparation of the financial statements, and he emphasized that receivables on the balance sheet must be reported at their estimated net realizable values. Sherwood’s [June 1897, p. 54] illustration of the proper valuation and presentation of receivables is presented in Exhibit 3.

EXHIBIT 3

Presentation of Receivables on the Balance Sheet P. W. Sherwood, April 1897
Accounts Receivable $50,000
$6,200 6,000 2,000 14,200
3,000 600 35,800 3,600
$39,400
Deduct Worthless Accounts
Deduct Accounts Appraised at 50 percent
Deduct Accounts Appraised at 30 percent
Add Accounts at 50 percent of $6,000 Add Accounts at 30 percent of $2,000
Source: Sherwood, P.W. [1897], “The Preparation of Accounts For Legal and Other Purposes,” Accountics, Vol. 1, June: 54.

MINIMAL UNIFORMITY IN STATEMENTS, 19001920

At the turn of the century, there was increased public concern regarding potential market abuses by large corporate trusts [Merino and Neimark, 1982, p. 45]. Partially, as a result of these concerns, in June 1898, Congress established the U.S. Industrial Commission to hold hearings on the possible restraint of trade by large corporations [Previts and Merino, 1998, p. 184].10 During four years of hearings, various examples of corporate abuses relating to competition and stock issuance were presented and, in 1902, the Commission issued its recommendations.

In the Commission’s Final Report, Thomas W. Phillips set forth recommendations that included the need for independent audits, recognition of potential conflicts of interest, preparation of financial statements, and liability for material misstatements. Moreover, the Report [Phillips, 1902, p. 3] recommended that the balance sheet include: “A statement of the method of valuing assets, whether at cost price, by appraisal, or otherwise, and of the allowance made for depreciation.” Because the Commission’s proposals were only recommendations, companies often ignored its demands for greater disclosure.11 The lack of disclosure can vividly be seen in the 1905 balance sheet of American Smelting and Refining Company (AS&RC). With over $113 millions in assets, AS&RC reported its assets in only five broad categories: Property ($86,845,670.51), Investments ($3,982,576.08), Metal Stocks ($16,418,542.68), Material ($1,118,901.73) and Cash ($4,636,649.18). No receivables, depreciation, or reserves were listed on the balance sheet.

In October 1906, in response to the growing demand for information, Thomas Warner Mitchell began a series of twelve articles12 in The Journal of Accountancy on the topic of financial

10 For a further discussion of the history of the U.S. Industrial Commission see Barbara Merino [1996] “U.S. Industrial Commission.”
11Vangermeersch [1979, pp. 13] points out that the financial reports of early companies sometimes did not even include balance sheets and it was not until the 1920s that several major companies first reported current assets as a separate section of the balance sheet. Vangermeersch also points out that companies that reported current assets often listed them in an inverse order of liquidity.

12″The October 1906 column was not attributed to Mitchell but the others [articles] were” [Brief, 1986, “Introduction,” np]. Thomas Warner Mitchell was a professor at the University of Pennsylvania and a widely “perceptive” analyst [see Brief, 1986, “Introduction,” np].

80 Accounting Historians Journal, December 2001
reports and financial analysis [Brief, 1986, “Introduction,” np]. These articles, in the Journal’s words [Editorial, 1906, p. 458], were: “a critical review of the reports of American Corporations.”13 In his articles, Mitchell often criticized the lack of information in statements, lack of review by an independent accountant, and the company’s manner of presentation. Sometimes, Mitchell suggested ways for improving the statement. For example, in reviewing the International Paper Company’s current assets, Mitchell [1907, p. 397] stated the problem with presenting only a simple listing of assets:

This assumes that the inventories and accounts and bills receivable were stated at their real worth in the balance sheets; of course if the inventories could be duplicated at much less cost or if the ‘accounts and bills receivable’ included an accumulation of ‘dead wood’ from past years, the working capital has been impaired and is really much less than the sums stated.

During this time, accounting writers began to devote more time to the importance of the balance sheet and the presentation of current assets. In The Philosophy of Accounts, after stating that he thought the American mode (assets on the left) of preparing the balance sheet was preferable, Sprague considered the order of items on the balance sheet. He wrote: “The arrangement of the items in the balance sheet is of some importance especially if the list is voluminous.” [Sprague, 1913, pp. 3233]. Although in an example of a balance sheet, he listed the items in order of “liquidation,” Sprague stated that an argument could be made that “in an industrial enterprise where it was thought that productivity or earning power was more important … it might be that the fixt [sic] plant was entitled to the first place among the asset.” [ibid.] Sprague then added: “But, at any rate, some (emphasis Sprague) principle of arrangement is better than haphazard.” [ibid].14

13In August and September of 1910, The Journal of Accountancy again examined the proper preparation and presentation of the balance sheet in two articles by John Noone [1910a,b].

14Although the classified balance sheet was becoming the common illustration, many textbooks [e.g., Cole, 1910, Paton & Stevenson, 1916] continued to list plant assets as the first classification. On the importance of the order, Paton and Stevenson [1916, p. 188] wrote: “Some accountants prefer to place the current assets and current liabilities above the fixed assets and capital, but the location of these groups is a matter of minor importance.”

In his 1909 landmark [Zeff, 2000, p. 93] text Modern Accounting: Its Principles and Some of Its Problems, Hatfield extensively examined the valuation and presentation of specific current assets on the balance sheet. In his biography of Hatfield, Zeff [2000, p. 95] points out that Hatfield with Modern Accounting became a pioneer in the development of the concept of the contra or offset approach of presenting valuation accounts on the balance sheet. In his discussion on inventory, Hatfield [1909, pp. 101102] stated that although the “going concern” concept made a strong logical case that “merchandise for sale be valued at the present selling price with a reduction to cover selling expenses” generally accepted practice required “merchandise shall be inventoried at cost.” Moreover, Hatfield [1909, p. 101] continued “prudence further demands that merchandise which evidently cannot be sold except at a loss, be marked down even below cost.”
Hatfield also devoted three and a half pages to the recording and valuation of book accounts, acceptances, and promissory notes. In addition to discussing the merits of the percentage of sales or receivables methods in estimating allowances, Hatfield linked the accountspecific information with a discussion of reserve accounts and their impact on the Surplus account.15 According to Hatfield, the Allowance for Bad Debt had to be established in order to properly value the Surplus account so that the appropriate dividends could be paid.

The influence of the judiciary upon the establishment of accounting standards can be seen in Hatfield’s writings. For example, Hatfield cited the 1869 Supreme Court case of Rubber Company V. Goody ear [9 Wall. 788] in his Modern Accounting. In regard to the court’s influence and guidance, Hatfield [1912, p. 100] wrote:
That such allowance should be made is not only dictated by business prudence and accounting practices, but is as well commanded by the United States Supreme Court. . . . The amount is to be decided in each individual case but it certainly should not be much

15Hatfield [1912, p. 233] explained the Surplus account as: “But it is unusual to distribute all of the profits earned and there is ordinarily further action by the directors or stockholders deciding to retain part of the profits. The profits thus reserved from distribution are called Surplus, and constitute an addition to the capital of the concern.”

below what has been generally accepted in the specific business concerned.

Following this ruling, Hatfield [1912, p. 100] provided the following illustration as the proper presentation of receivables and allowances:

Bills Receivable $99,900
Less Allowance for doubtful debts 100 $99,800

Hatfield’s example of valuing receivables and presenting the related bad debts as a subtraction from the receivables was echoed in Montgomery’s 1912 Auditing Theory and Practice. However, Hatfield’s contraapproach towards the allowance account was not universally accepted. In his 1910 text Accounting and Auditing, Cole indicated that the allowance account should be shown as a liability account separated from Accounts Receivable. Cole [1910, pp. 324325] supported his position with the following statement:

A devise must be provided therefore to reduce assets by the amount of expected shrinkage in these claims; and yet if that reduction is made by subtracting from any figure of assets, the balance sheet is out of accord with the books. We saw long ago that subtraction is practically never performed in bookkeeping, and, therefore, we fall back on the devise of increasing the other side … Its appearance on the liability side of the balance sheet indicates that the business is responsible to make good this shrinkage, and that the amount has been subtracted from income to satisfy that responsibility.

Several other authors of accounting textbooks agreed with Cole’s approach to the reporting of the allowance account. For example, Klein [1913] and Paton and Stevenson [1918] advocated that the allowance should be included on the equity side of the balance sheet.

Despite these discussions of current assets, some large corporations16 still provided a minimum amount of financial information. However, by 1910, other companies had begun to classify balance sheets and to establish reserve accounts for

16For example, on their 1910 nonclassified balance sheets, American Smelting & Refining Company reported over $93 million of assets in only five categories while United States Rubber Company reported over $120 million of assets in eight categories.

selected assets.17 One of the leading companies18 in this regard was International Harvester Company (IH) which, in the early 1900s, began extensive disclosure and evaluation of its current assets (inventories, receivables, and cash). For example, in its 1908 Report, IH stated in a narrative that all inventories (raw materials, work in progress, finished goods) were reported at the lower of original production cost, actual purchase price, or current market price. Moreover, IH provided a supporting schedule of the inventory. Receivables were listed on the balance sheet offset by an accumulated reserves for contingent losses, and a note on the balance sheet indicated that a discussion of the contingent losses could be found on a separate page. Here, IH presented the loss reserve at the beginning of 1908, the amount written off in 1908, and the loss provision established for 1908. Finally, due to the length of time it extended for credit, IH stated that it was its policy to maintain a reserve to reflect the expenses incurred in the collection of receivables. Although IH was a leader in the disclosure and valuation of current assets, the order in which they were presented was traditional. As did most companies, longerlife current assets were listed first and cash listed last [Claire, 1945, p. 49]. The 1908 current asset section of IH’s balance sheet is presented in Exhibit 4.
17Merino and Neimark [1982] write that a major reason for the increased disclosure by select companies was to avoid future federal regulation. In the early 1900s, there were increased expressions of concern about the reporting policies of many companies. This concern was expressed in hearings before the Industrial Commission, the final report of the Commission, and in Mitchell’s series of articles in The Journal of Accountancy.

18Two other leading companies at this time in the reporting of current assets were General Electric Company and Westinghouse Electric and Mfg. Co. Although its 1910 Balance Sheet was not classified, GE defined the major current assets (e.g., work in progress, receivables, consignments) in a narrative and stated that proper allowances had been made for losses in the accounts. In confirmation of this, GE’s auditor (Marwick, Mitchell & Company) in its report [1910, p. 26] stated: “The amount at which the notes and accounts receivable are included in the Balance Sheet represents their realizable value. . . . We have satisfied ourselves that these inventories have been carefully taken, that have been valued at cost price or under, and that due allowance has been made for old and inactive stocks.” For 1910, Westinghouse Electric presented a detailed classified balance sheetlisting both current and working & trading assets sections. The latter section included raw materials, work in progress, finished goods, and goods on consignment. In the liability section, Westinghouse listed a reserve for loss account; however, it was a general reserve which included potential losses on materials, finished goods, and receivables.

EXHIBIT 4

Current Assets, Combined Balance Sheet,
December 31, 1908 The International Harvester Company
Inventories:
Finished Products, Raw
Materials, etc., at close of
1908 Season $33,854,932.88
Subsequent Material
Purchases and Manufacture
for 1909 Season 13,832,123.38
$47,687,056.26 Receivables:
Farmers’ and Agents’ Notes $25,471.132.81
Accounts Receivable 13,064,927.11
$38,536,059.92
Deduct:
Accumulated Reserves for
Contingent Losses, (See Page 7) 2,224,829.91 36,311,230.01
Cash 9,339,054.90
93,337,341.17

Although corporations like IH were moving toward more disclosure, in April 1917, the first national attempt at a formalization of authoritative reporting standards occurred with the publication in the Federal Reserve Bulletin on “Uniform Accounting” [Brief, 1987, p. 149].19 Prior to the statement’s issuance, the Federal Trade Commission, under chairman Edwin Hurley had strongly advocated the establishment of “uniform accounts” for several industries, independently
19After the initial committee (Harvey Chase, George O. May, Robert H. Montgomery) assigned to establish the criteria for an uniform plan for the independent audit of the balance sheet failed to reach agreement, George O. May (senior partner Price Waterhouse) gave the committee a report by John Scobie prepared several years before for Price Waterhouse’s internal use that addressed the needs of an independent audit of financial statements [Allen and McDermott, 1993, p. 51]. This report was accepted by the committee and forwarded to the Federal Reserve. As related in the Federal Reserve Bulletin [Uniform Accounting, 1917, p. 270], this report after approval by the FTC and the FRB and conferences with the FTC and AIA, the FRB then “submitted it [Uniform Accounting] to the banks, bankers, and banking associations throughout the country for their consideration and criticism.”

audited financial statements, and a federal register of accountants. After opposition by professional groups to specific aspects of the proposals, Hurley, emphasizing the need for uniform accounts and audits, transferred the proposal to the Federal Reserve Board which had expressed an interest in the idea. As Carey [1969, p. 132] writes:

The Federal Reserve Board, however, was keenly interested in the credit worthiness of organizations whose commercial paper was discounted by Federal Reserve Banks . . . the Board, therefore, had an immediate and vital interest in the reliability of certified financial statements of such enterprises.
Moreover, the Federal Reserve Board stated that a major impetus for the issuance of the statement was the importance that banks and bankers assigned to the balance sheet [Huizingh, 1967, p. 69]. In fact, in 1908, the Committee on Credit Information of the American Bankers Association had recommended that banks request “statements certified by reputable public accountants,” however, “[banks’] fear of offending customers and losing business was still too strong to permit effective enforcement of such a regulation” [Brown, 1955, p. 13].

In 1917, after reviewing a major fraud case in which a financial statement was not requested, Lough [p. 119] in Business Finance wrote: “In the absence of financial statements . . . there is really no method of telling whether a corporation is borrowing beyond the limits of safety or not.” Moreover, Lough [1917, p. 125] wrote that the Federal Reserve Bank “favors” paper based upon certified financial statements and probably will “insist that some evidence be given that bank loans are ‘selfliquidating’.” Finally, Foulke [1945, p. 599] wrote that the Federal Reserve had a deep interest in the development of more uniform methods for the preparation of the balance sheet, “so that the analyst would have more uniformly reliable information on which to base his interpretation of business figures.

Although the “Uniform Accounting” statement (a joint effort between the Federal Reserve Board, the Federal Trade Commission, and the American Institute of Accountants) was largely directed toward audit procedures, the report presented a model “Comparative statement of profit and loss” and a “Form of balance sheet,” for banks to follow. In 1918, the Federal Reserve Bulletin’s article was reissued in pamphlet form as the Approved Methods for the Preparation of Balancesheet Statements. When compared to the balance sheets then being issued by many companies, the model statement was quite innovative. As Vangermeersch [1996, p. 387] points out the “focus group of the report was bankers performing their credit function by shortterm loans,” and thus, based upon their perceived needs, “its [balance sheet] format was in the ‘current assets first format’ in the order of liquidity, except for marketable securities.” This order was in sharp contrast to the British balance sheet, in which capital and liabilities were listed first, and also differed from the statements of many U.S. corporations in which longterm assets were listed first.

EXHIBIT 5
Uniform Accounts
Federal Reserve Bulletin
Current Assets, 1917 Form of Balance Sheet
Cash
1a. Cash on hand—currency and coin 1b. Cash in bank
Notes and accounts receivable:
3. Notes receivable of customers on hand (not past due)
5. Notes receivable discounted or sold with indorsement or
guaranty
7. Accounts receivable, customers (not past due) 9. Notes receivable, customers, past due (cash value $) 11. Accounts receivable, customers, past due (cash value $) Less: Provisions for bad debts
Provisions for discounts, freights, allowances, etc.
Inventories:
17. Raw materials on hand
19. Goods in progress
21. Uncompleted contracts
Less payments on account thereof 23. Finished goods on hand
Other quick assets (describe fully):
Total quick assets (excluding all investments)
Securities:
25. Securities readily marketable and salable without
impairing the business
27. Notes given by officers, stockholders, or employees 29. Accounts due from officers, stockholders, or employees
Total current assets
20As late as 1938, some major industrial companies continued to list longterm assets first on their balance sheets [Vangermeersch, 1996, p. 387].

Moreover, in contrast to many balance sheets, the model balance sheet (presented in Exhibit 5) was classified (Current Assets, Fixed Assets, Deferred Charges, Other Assets) with noticeable detail about the classification of both “Quick and Current Assets.” When Cash, Notes & accounts receivable, Inventories, and Other quick assets were combined, they created “Total Quick Assets.” The addition of “Securities” to Quick Assets created “Total Current Assets.” Heath [1978, pp. 3233] notes: “many different terms were used to describe asset categories during the early part of the century,” and this included the quick assets — “often used as a synonym for current assets.”21 On the balance sheet, assets were listed in the order of liquidity starting with the current assets;22 a provisions for bad debts was established and directly subtracted from receivables; and inventories included raw materials, goods in process, uncompleted contracts, and finished goods. Later, “the more comprehensive financial statement forms of commercial banking institutions, Dun & Bradstreet, Inc., and larger mercantile concerns” would require a breakdown of inventory similar to this [Foulke, 1945, p. 81]. Although the pamphlet was directed

21In its description, the Federal Reserve [Uniform Accounting, 1917, p. 272] explained the use of the two terms: “The term ‘Quick assets’ is used here in the sense in which it is used by Federal Reserve practice. ‘Current assets’ is used to comprise these assets and other assets which through current are excluded in determining the eligibility of the paper for Federal Reserve purposes.” Although Heath [1978, p. 33] noted that at this time “quick assets” and “current assets” were used sometimes interchangeably, “quick assets” at this time could refer to a subcategory of current assets, namely cash, trade receivable, and inventoryexcluding only marketable securities and receivables from stockholders, officers, and employees.

22Even, leaders in informative financial reports such as Westinghouse Electric and Mfg. Co. [Annual Report 1920, p. 10] still listed plant assets first on the balance sheet. For Westinghouse Electric, recognition as a leader in the area of financial disclosure was a major change. During the late and very early 1900s, Westinghouse was constantly cited as an example of a company that held no annual meetings (18971906) and provided little or no financial information [Brief, 1987, p. 147]. Furthermore, Westinghouse had gone into receivership in 1907; emerging in 1908. However, by 1910, Westinghouse’s financial reports were among the most comprehensive and informative of all major companies. In fact, after reviewing Westinghouse history and financial problems, Arthur Dewing [1914, 200fn] in Corporate Promotions and Reorganizations wrote: “This [Westinghouse] annual report of March 31, 1911, is worthy of permanent preservation for its fullness, frankness . . . the present writer knows not its equal among corporation reports.” For an interesting history of the beginning, reorganization, receivership, and recovery of Westinghouse Electric see Dewing’s Corporate Promotion and Reorganizations [1924, pp. 165202].

primarily at banks, Huizingh [1967, p. 69] writes “large segments of the business community accepted the recommended form … as extending to the preparation of all balance sheets.” However, since the model balance sheet only was a recommendation, its acceptance was limited.

At the same time as the model balance sheet was proposed, courts again addressed the issue of current asset valuation and the resulting effects of such valuations on the financial statements.23 In Cameron v. First National Bank [1917], the Court of Civil Appeals of Texas [194 S.W. 469] held that “to include in such statements as assets accounts which had proven uncollectible and which by general commercial custom and usage should not be included in a financial statement” was sufficient to charge the corporation’s directors with false representation of the assets. In this case, a company had included in its receivables the accounts of deceased persons, persons in bankruptcy, and accounts barred by limitation. Instead of charging such accounts to the profit or loss, the company placed such accounts in a “suspended ledger account” which continued to be listed as an asset. Concluding, Chief Justice Pleasants for the court [194 S.W. 474] considered: “This method of keeping books and preparing financial statements is contrary to commercial custom and usage.

EXPANSION, DEPRESSION, AND REGULATION, 19211940

Beginning as a time of prosperity and ending with the start of a major depression, events in the 1920s provided much of the impetus for the greater self and governmental regulation of financial statements that occurred in the 1930s. As the 1920s began, there were major variations in the preparations of the balance sheet especially in regard to current assets [Baxter, 1951, p. 158].24 For example, in its annual report 1920,

23In Cornell v. Seddinger [1912, p. 396], the Supreme Court of Pennsylvania held that “Work in Progress” should not be reported at cost when the contract price was “less by more than $180,000 than the vessels cost to build.

24In 1926, The Atlantic Monthly published “From Main Street to Wall Street” and “Stop, Look, Listen!” by William Z. Ripley (Professor of Economics at Harvard University); these articles were quite critical of the financial reporting practices of many major corporations. The articles, later a part of Ripley’s book Main Street and Wall Street [1927], provided numerous examples of the inadequate and sometimes nonreporting practices of companies such as United States Rubber Company, Royal Baking Powder Company, and National Biscuit Company. In regard to the “progressive improvement in the practice of accounting,” Foulke [1945, p. 596] credits Ripley as “probably the Renaissance American Can Company issued a nonclassified balance sheet with only five asset accounts (Plants, Real Estate, &c., Other Investment Items, Cash, Accounts & Bills Receivable, Materials & Products Inventory) totaling over $140 million.

Financial statements such as these probably prompted the comments of authors such as William Z. Ripley [1927, p. 191] who, in his widely read book, Main Street and Wall Street, wrote “Balance sheets are prone to be inadequate or misleading in two principal respects. One is downright omission of important items . . . another is the failure to disclose the method of the valuation.” To illustrate the vagueness of valuations, Ripley [1927, p. 191] gave the example of Punta Alegre Sugar Company which listed on its balance sheet “Planted and Growing Cane, $3,651,579.42.” In determining its value, Ripley [1927, p. 191] wondered “what price they counted on getting” and “how they found out what the weather was going to be.

In the reports that did classify assets, some companies (e.g., Commonwealth Edison Company, Cuba Cane Sugar Corporation, The North American Company) listed plant assets or longterm investments first on the balance sheet while others (e.g., General Motors Corporation, United States Rubber Company) listed current assets. Additionally, while some (e.g., Pacific Gas and Electric Company, International Harvester Company) offset receivables directly with allowances (reserves), others (e.g., Westinghouse Electric, Commonwealth Edison) listed reserves in the liability section. In turn, reserves could be specific or general in nature. For example, in a narrative, The North America Company [1920, p. 6] stated it had increased its general reserves by 27.14% which included “substantially increasing the Reserves for Depreciation.” One major factor in the increased acceptance of the allowance concept was the Revenue Act of 1921. The 1921 Act allowed the use of bad debt allowances, which as Chatfield [1996a, p. 59] writes: “encour

of more recent years in this broad subject was due more to William Z. Ripley than to any one other individual.” In a letter to the New York Times and in an address to the AIA published in The Journal of Accountancy, George O. May (Chairman of Price Waterhouse & Co.) responded to Ripley’s articles. Although May [1926, pp. 321324] stated that Ripley’s information was somewhat dated and “did not constitute an altogether fair presentation of the situation which exists today,” he conceded that improvements could be made in the reporting process. Moreover, May wrote that it would be an advantage to corporations to have common reporting standards for companies “who desire to be guided by the best practice.”

aged taxpayers to anticipate bad debt losses and deduct them before they occurred.

During the 1920s, the reporting of inventories varied among companies. Some companies (e.g., General Electric, Westinghouse Electric) stated in a narrative that their inventories were carried at the lower of cost or market while other companies such as Sears, Roebuck and Co. stated on the balance sheet itself that inventories were carried at “Cost or Market, Whichever is Lower.” American Woolen Company stated on its balance sheet that its inventories were carried at market. Companies that reported inventories at LCM often did not state what market meant.

This problem was highlighted in a 1926 article in The Accounting Review in which E. L. Kohler stated that, over the last five years, there had been an increasing tendency to report inventories at LCM; however, this information was not always useful for “market has at present no commonly accepted business meaning.” Kohler [1926, p. 5] therefore stressed: “Because of the variations in the methods of valuing inventories, a balance sheet must be judged incomplete if the basis of the inventory valuation has been omitted.

Although there were substantial differences in the financial statements of companies, accounting textbooks by the early 1920s were more uniform in their presentation of current assets [Huizingh, 1967, p. 56]. In most textbooks, the classified balance sheet was the common illustration and current assets were listed first.25 Despite this agreement, textbooks differed in their definitions of what current assets were.26 For example, Kester [1922, p. 26] in Accounting Theory and Practice provided the following definition: “Asset items are classified as current if conversion into cash is expected within three to six months,” and included cash, receivables, and merchandise inventory. Kester classified assets such as prepayments and most supplies as Deferred Charges. In contrast, Montgomery [1922, p. 393] in Auditing, Theory and Practice advocated that prepayments be included with other current assets and predicted that “within a
25On the need for classification, Roy B. Kester [1922, p. 25] wrote: “The balance sheet, accordingly, should be so arranged that the condition of the business as related to its ability to pay its debts will be apparent.

26Although “current” was the most commonly used term for this classification of assets some writers such as Scovill [1924, p. 278] used the term “quick assets” for the classification. Scovill noted that corporations used both terms for the classification. On the Federal Reserve Bulletin’s 1917 Model Balance Sheet, Current Assets minus Securities equaled Quick Assets.

short time good accounting practice will sanction the inclusion in current assets of all current prepayments.”
By the early 1920s, more textbooks had adopted the use of the net realizable method for receivables with the reserve (allowance) account a direct offset on the balance sheet. In an unusual twist, Montgomery advocated the use of the realizable concept. However, he stated that the estimated uncollectible amount need not be reported. Montgomery [1923, p. 128] stated his reasoning:

It is not necessary to state in published balance sheets the gross amount of accounts receivable and the reserves to be deducted therefrom. It is information of interest to competitors more than to anyone else.

It is proper to state that accounts receivable are “net of reserves,” but it is not necessary, because an unqualified certificate implies that the accounts and notes receivable have been stated at their realizable value.

Unlike the other methods, Montgomery’s method actually presented less information by netting the two accounts.

Also, by the 1920s, the importance of ratio analysis had been recognized. Arthur Andersen (founder of Arthur Andersen & Co.) wrote an article for Manufacturing Industries entitled “Operating and Balance Sheet Ratios.” In this article, Andersen [1926, p. 351] wrote: “One of the most significant indices to the condition of a business is that afforded through the use of ratios developed from balance sheet and operating statement figures.” He then noted that of special importance was the “bankers ratio” — that is the working capital ratio.

In 1929, the Federal Reserve Board issued Verification of Financial Statements which was a revision of its 1917 balance sheet audit guidelines and which, like its predecessor, included a model balance sheet. Since its issuance in 1917, the “Uniform Accounting” bulletin had become subject to the criticism that its general instructions for an audit had actually “debased audit standards” [Previts and Merino, 1998, p. 290]. Also, as Carey points out, the 1929 guidelines were in response to the changing nature and needs of an audit and of financial statements. The 1917 statement [Carey, 1969, p. 159] “stressed balance
27Agreeing with Montgomery, Kohler [1926, p. 5] wrote: “Prepaid expenses, such as insurance and rent, are always properly a part of current assets, although often denied that classification by accountants.” Kohler cautioned that it was important not to confuse prepaid expenses with deferred charges such as organization costs which should be reported separately.

sheet items, as was natural in that day when commercial bankers, whom the bulletin was mainly intended to serve, were more interested in liquidity than earning capacity.” In contrast, the 1929 bulletin stressed the importance of internal control and “the use of tests instead of detailed verification when internal controls were reliable” [ibid] as well as the increasing important issue of income taxes which were not material in 1917.

Although similar, there were some differences between the two models presented by the Federal Reserve Board in regard to current assets. For example, the term “Current Assets” replaced “Quick Assets.” The valuation account to offset accounts receivable was now the “reserve for bad debts” instead of “provisions for bad debts.” In addition, more information on receivables was required on the balance sheet. If receivables had been assigned, the amount of assignment had to be shown. Receivables from directors, officers and employees were to be listed separately from trade receivables. On the 1917 statement, only investments in short term securities were shown while on the 1929 statement, both current (marketable securities) and longterm investments (securities of affiliated companies) were listed.28 Inventories were to be “stated at cost or market price, whichever are the lower at the date of the balancesheet.”29 One classification, however, did not change. On both model state

28Verification of Financial Statements [1929, p. 329] distinguished between the two types of investments: “Under the caption ‘Securities’ must be listed securities in which surplus funds of the company or firm have been temporarily invested and those which are considered available as ‘current assets,’ i.e., items which can be turned into money in time of need. Where stocks of bonds represent control of or a material interest in other enterprises, the ownership of which constitutes value to the holder aside from the dividend or interest return, they should be considered as permanent investments and be stated apart from current assets in the balance sheet.

29This prevailing academic viewpoint of inventory was in sharp contrast with the base stock method set forth by Maurice Peloubet the name partner of Peloubet & Co. (a leading accounting firm at that time) and former President of the New Jersey Society of CPAs. In a presentation at the 1929 International Congress of Accounting, Peloubet argued that current assets should be considered a “fixed investment” in that receivables, inventories, and supplies are always present and normally are maintained at rather constant levels, and therefore for certain business, it should be carried at original cost. Peloubet [1930, p. 573] wrote: “Regardless of Government requirements the books of corporations engaged in a business meeting the tests described above and the financial statements drawn therefrom should show their inventories on a basis of normal stocks at fixed prices so that the management and public may get a true view of the position of the company and its realized, distributable net income, unaffected by any marking up or down of a fixed asset.”

ments, “prepaid expenses, interest, insurance, taxes, etc.” were listed not as current assets but as “Deferred charges” which followed fixed assets on the balance sheet [Verification, 1929, pp. 321354].

To Heath [1978, p. 34] the continued classification of these charges (and sometimes inventories) as noncurrent assets or in a separate category (deferred items) reflected the influence of bankers upon financial statements and “the bankers’ liquidating point of view” in classifying assets. As Heath [1978, p. 34] points out, to bankers, deferred charges “were clearly different in some sense from cash and receivables,” and, moreover, there was a question “whether deferred charges would yield anything at all on liquidation.” Under this reasoning, if current is defined as immediate liquidation to cash at or near stated value, then deferred charges may be deemed closer to longterm assets than current and thus classified as such.

During the 1920s, the courts dealt with two important cases which addressed the valuation of current assets. In 1928, in Branch, Trustee v. Kaiser et al., the Supreme Court of Pennsylvania while addressing the question of solvency and directors’ responsibility, examined the issue of inventory valuation. Among other alleged misrepresentations on the balance sheet, the Girard Grocery Company reported its sugar inventory at cost — which ranged between 26 to 28 cents a pound. However, after Girard had purchased the sugar, prices “suddenly dropped to as low as 5 1/2 cents a pound, entailing in this one item, a loss of $500,000.” On the importance of reporting a realistic inventory value on the balance sheet, Justice Frazer [1928, pp. 546547] writing for the court stated: “In addition, they presented inflated inventory sheets, giving to the actual merchandise the company had on hand a cost valuation, when in fact the value had enormously decreased.” Thus, under Pennsylvania law, a material decline in the value of inventory had to be recognized both in the income statement and on the balance sheet.

In 1930, the Federal Circuit Court of Appeals examined the purpose and the proper presentation of the reserve for bad debts on the balance sheet in LandesmanHirschheimer Co. v. Commissioner of Int. Rev. The court observed that the real purpose of the reserve “is to show the probable, true, present value of the accounts [receivable], or that sum which it is expected will be realized from such accounts.” Therefore, for balance sheet purposes, the appeals court [44 F.2d 522] stated:

The real situation could better be shown by deducting the amount of the reserve from the total of the accounts receivable, on the asset side of the statement, and thus fixing the valuation of accounts receivable at that sum which is probably collectible thereon.

With these decisions and others, as pointed out by Berle and Fisher [1932], by 1930 the support of the judiciary for the valuation of receivables and merchandise inventory was rather clear. Under the court’s rulings, receivables normally should be reported at estimated net realizable value and inventories should be reported at the lower of cost or market. Moreover, Berle and Fisher noted that the law placed certain responsibilities on the accountant to help ensure the proper valuation of such accounts. Illustrating the accountant’s responsibility, Berle and Fisher [1932, p. 600] addressed the valuation of receivables:

The law must look to the accountant to discover whether the account receivable has in fact that quality of collectivity connoted by the label which it bears; whether the apparent realization of profit permitting an addition to surplus in fact exists.

With the collapse of the securities market in 1929 and the revelation of massive fraud in a New York Stock Exchange listed company, the concept and requirements for financial reporting underwent a massive change. Moreover, the responsibility and potential liability of management for financial reports expanded. In January 1933, Richard Whitney (President of the NYSE) announced that companies applying for a listing on the NYSE had to have their financial statements (balancesheet, income statement, and surplus statement) certified as to correctness by an independent public accountant. Mr. Whitney insisted that the scope of the audit “must be not less than that indicated” in the revised guidelines set forth by the Federal Reserve Board in May, 1929 [Stock Exchange, 1933, pp. 8182]. Additionally, in a letter to each listed company and published in The Journal of Accountancy, Whitney emphasized the importance of the scope of the audit. He requested that each listed company provide the NYSE with an auditor’s letter that addressed such points as “whether in their opinion the form of the balancesheet and of the income, or profit and loss, account is such as fairly to present the financial position and the results of operation” [Accountants, 1933, p. 242].

At the same time, landmarks in the regulation of accounting and financial reporting occurred — the passage of the Securities Act of 1933 and the Securities and Exchange Act of 1934. The 1933 Act conferred upon the FTC the authority to prescribe accounting methods for companies. Under the act, accountants could be held liable for losses that resulted from material omissions or misstatements in registration statements they had certified. The 1934 Act transferred the authority to prescribe accounting methods to the newly established Securities and Exchange Commission (SEC) and required that financial statements filed with the SEC be certified by an independent public accountant. Moreover, the 1934 act gave the SEC “broad authority to prescribe the form and content of financial statements required to be filed by registrants.” Specifically, the SEC was given the power to determine “the items or details to be shown in the balance sheet” [Hills, 1957, p. 52].30 Thus, with the passage of the securities acts of 1933 and 1934 and the establishment of the SEC, the classified balance sheet and the valuation of listed assets (e.g., accounts receivables, inventories) were now a required part of financial reports for many companies.

After the market crash, the resulting investigations, and the securities acts of 193334, the accounting profession became the target of substantial criticism for not accepting professional responsibility for the results and accuracy of its audits, especially in regard to inventory [Previts and Merino, 1998, p. 290]. When the profession pointed out that an audit statement made clear the audit’s limitations in regard to the detection of fraud and understatement of assets, critics questioned the purpose of an audit. The establishment of a federal bureau of auditors which would be certified by the federal government was even suggested [Previts and Merino, 1998, pp. 291293].

In response to the criticism and threats, the American Institute of Accountants (AIA), established a committee headed by Samuel Broad to address the issue. In doing this, Previts and Merino [1998, p. 293] write: “the minutes of the AIA show that the institute’s major objective was to establish the autonomy of the accounting profession over audit standards.” In 1936, in one of the first examples of the profession’s greater responsibility for selfregulation, the AIA issued the official release, Examination of Financial Statements. Unlike the 1917, 1918, and 1929 bulletins issued through the Federal Reserve Board, this report
30Required registrants were those subject to the Securities Act of 1933, Securities and Exchange Act of 1934, and the Public Utility Holding Company Act of 1935 [Hills 1957, p. 52].

was published by the AIA with the Federal Reserve Board “acknowledging that the latest bulletin . . . superseded the 1929 edition” [Carey, 1969, p. 205].
As in the previous bulletins, the 1936 statement included a model balance sheet, and although the changes were small, there were differences in the treatment of current assets between the models. The valuation basis for inventory was now listed directly on the balance sheet as was the basis for marketable securities. Previously, the valuation bases were not presented for either asset. The “Reserve for bad debts” became the “Reserve for doubtful notes and accounts,” while “Goods in process” became “Work in process.” Additionally, notes receivable now followed accounts receivable in the order of liquidity [McLaren, 1947, p. 28].

As with the Federal Reserve Pamphlets of 1917 and 1927, the AIA 1936 Model Balance Sheet included prepaid expenses in the Deferred Charges category. Graham and Meredith [1937, p. 25] explained the basis of exiling prepaid items to the longterm category: “The item Prepaid Expenses is of little importance in analysing [sic] the balance sheet, except that it gives some information as to how the company’s business is conducted.”31 The AIA’s 1936 model current asset section is presented in Exhibit 6.

By the late 1930s, most accounting texts’ illustrations were similar to the AIA model balance sheet. No longer was the reserve for bad debts listed with the liabilities and inventories were normally valued at the lower of cost or market. Accounting textbooks, thus, followed the lead of the judiciary and enacted legislation in their discussions of the valuation and presentation of this financial statement component.

31It was not until 1947 that the AIA in Accounting Research Bulletin No. 30 recommended that prepaid expenses be included in the current asset section [Vangermeersch, 1979, p. 3]. ARB No. 30 contained another major change in that it changed the basic definition of current assets/liabilities. Previously, one year often was used as a primary determinant whether or not an asset was a current asset. In 1944, in The Journal of Accountancy, Anson Herrick set forth the argument that the operating cycle of a business should be used in this determination not simply an arbitrary period of one year. Herrick [1944, pp. 4849] writes: “working assets are available cash and those which are made to appear and disappear by the operations of the ‘operating cycle’.” Herrick then basically defined the operating cycle as the time in which merchandise is purchased and sold, cash to cash. As a member of the Committee on Accounting Practice saw his idea prevail in the committee’s unanimous vote for the “now classic ‘one year or the normal operating cycle, whichever is greater’ rule” [Vangermeersch, 1996, p. 388].

EXHIBIT 6
American Institute of Accountants
Examination of Financial Statements
Current Assets, 1936 Form of Balance Sheet
Cash in banks and on hand Marketable securities (state basis) Notes and accounts receivable: Customers:
Accounts receivable Notes receivable Others Less:
Reserve for doubtful notes and accounts Reserve for discounts, freight, allowances, etc. Inventories (state basis)
Raw materials and supplies Work in progress Finished goods Other current assets:
Indebtedness of stockholders, directors, officers and
employees (current)
Indebtedness of affiliated companies (current) Other items (describe) Total current assets

Also, in the 1930s, the importance of the analysis of financial statements and the role of ratios in the analysis was seen in the publications of two classic financial texts Security Analysis [1934] by Graham and Dodd and The Interpretation of Financial Statements [1937] by Graham and Meredith. Here, Graham and Meredith set forth an extensive discussion of what constituted cash, inventories, current assets, working capital, and the working capital ratio and what should be considered in evaluating them — including the importance of “offsetreserves” in determining the proper valuation of assets. They concluded with a comprehensive example of “analyzing a balance sheet and income account by the ratio method.

The influence of the Securities Acts of the 1930s, the new listing requirements of the NYSE, and the AIA’s model balance sheet on the evolution of the current asset section perhaps can best be seen by contrasting balance sheets of the early 1930s with those at the decade’s end. While some companies’ statements already met the AIA’s 1936 balance sheet recommendations, other companies had to create new financial statements.

By 1930, The American Brake Shoe and Foundry Company’s annual report presented its current assets almost identically to those on the AIA’s 1936 model balance sheet. The balance sheet was classified, current assets listed first, current assets were evaluated, and the valuation basis given.

For Sears, Roebuck and Co. to meet the 1936 guidelines, only modest changes were needed. Although Sears, Roebuck’s balance sheet in 1930 presented much greater detail than most companies’ statements, the report of 1940 was still more informative and nearly identical to the AIA model. In 1930, fixed assets were listed first on the balance sheet. However, in 1940, current assets were first. In the 1930 report, by contrast to inventories which were reported at LCM, marketable securities were listed but no method of valuation was given. In 1940, both cost and market for marketable securities were presented. In 1930, Sears presented accounts receivables with no offset for bad debts and used a general reserve. Ten years later, accounts and notes receivable were subclassified (customers, employees, other) and a direct offset (reserve for collection and doubtful accounts) was employed.

Although, in the late 1800s and early 1900s, General Electric Company was a leader in the development of a detailed balance sheet, its balance sheet evolution had not progressed as far as American Brake Shoe or Sears. On GE’s 1930 balance sheet, there was no stated valuation of either inventory or notes/accounts receivable; only a general reserve was shown. In 1930, marketable securities were listed but whether a cost or market valuation was used was not disclosed. In GE’s 1940 report, marketable securities were reported at the lower of par or market with both values given. Inventories were reported at the lower or cost or market (less reserves) although whether cost or market was used was not stated. Accounts and notes receivable were reported net of reserves. However, in contrast to most companies, the reserve was not a direct offset to receivables but it was reported in the general (miscellaneous) reserves in the liability section.

32International Business Machines was another company whose 1930 current asset section of its annual report met the recommendations of the 1936 model. IBM’s balance sheet listed current assets first, evaluated current assets, and reported the valuation basis. The only noticeable difference between IBM’s 1930 and 1940 current asset sections were inventories were reported “at cost or lower” in 1930 and “lower of cost or market” in 1940.

Unlike American Brake Shoe and Foundry, Sears Roebuck, and General Electric, there were companies like American Can Company that, between 1930 and 1940, developed an entire set of financial statements. For example, in American Can’s annual report, 1930 its “Profit Statement” consisted of four lines starting with “Net earnings for 12 Months” (with no explanation of how this amount was derived) less “amount written off for depreciation” less “reserve for federal taxes” equals “balance” ($22,883,940.63). In 1930, with nearly $200 million in assets, American Can presented a six line nonclassified asset section. By 1935, although its “Consolidated Income Amount” Statement still consisted of four lines, American Can’s “Consolidated Sheet” (balance sheet) was now classified and presented some detail on current assets. Although valuations for neither inventories nor receivables were presented, in the President’s Letter, the valuation method was reported. And, unlike 1930, “Marketable Securities” were reported at both cost and market in 1935.

Although still rather brief when compared to many companies’ reports, by 1940, American Can’s balance sheet met the general guidelines of the 1936 AIA model for current assets. Current assets were listed first. In a note at the bottom of the balance sheet, American Can stated the basis or the value of its inventory.33 Receivables were divided into “accounts and bills receivables” and “deferred accounts and bills receivable” with the latter reduced by an allowance account.

SUMMARY AND CONCLUSIONS

Brief [1987, p. 155] writes that the development of financial reports and disclosure in the U.S. was a “period of experimentation and innovation” for, during most of the period, few authoritative standards existed to guide the construction and presentation of the financial data. The development of the balance sheet and the resulting classification of current assets was, therefore, the response of various entities to a changing business environment. In their discussion of why the American and British balance sheet differed, Littleton and Zimmerman [1962, p. 92] wrote: “In America as in England, the accounting action
33The note to American Can’s balance sheet [1940, np] stated: “As heretofore, a fixed quantity of tin plate (approximately onehalf of our average inventory in flat stock) is carried at a constant price which is substantially lower than present market price; the remainder of the inventory is valued at the lower of cost or market.”

taken came in response to local conditions; different conditions demanded different solutions.”

In contrast to America, by 1870 through the Companies Act, 1862 and the Regulation of Railways Acts, 1868, the basic concept of the British balance sheet had been established: “a horizontal division was made in the British balance sheet . . . the upper portion reported share capital and mortgage debt on the left, permanent assets and ‘balance down’ on the right” [Littleton and Zimmerman, 1962, pp. 8185]. This was a logical presentation, since “British balance sheets were designed to publicize both the stewardship of the initial use of the shareholders’ investments and the stewardship of the company officers in maintaining capital while seeking profits” [Littleton and Zimmerman, 1962, p. 92].

By contrast, in 1870, the purpose, form, and order of the American balance sheet was not settled — the balance sheet was a fluid document. In fact, at this time, many businesses did not issue annual reports. While corporations such as transportation companies, banks or insurance companies were often required by state charters to issue annual reports, these reports did not always include financial statements. If financial statements were included, they were often of a minimal nature.

In truth, there was little reason for companies to do otherwise. There were no authoritative guidelines to follow, no Federal Reserve Board, no SEC, few demands by banks, no requests by security analysis, no CPAs to audit the statements, no editorials demanding more informative statements, and few shareholders to satisfy. As Littleton and Zimmerman [1962, p. 92] point out: “American business did not at that time draw significant amounts of capital from the public sale of securities; there was as yet no history of large issues of stock or of extensive investor losses from stock speculation.” Therefore, unlike the situation in Britain, the concept of stewardship did not dominate the preparation of the few statements they were being issued.

Thus, while the balance sheet concept was still quite fluid, a significant change occurred in credit policy. As has been discussed, during and immediately following the Civil War, trade credit became less important and bank credit became more important. Instead of discounting twoname notes which carried with them a certain degree of security, banks often issued singlename notes. With singlename notes came more risk and banks began to review their credit procedures. Although they often had personal knowledge of the business seeking credit, banks began to make more use of mercantile credit agency reports in their decisions. Moreover, banks began to require more financial statements, especially balance (property) sheets from customers. As most debts were short term, banks placed special emphasis on the ability of a business to repay a loan. Instead of looking at solvency (the ability to repay over the life of a business), banks concentrated on liquidity (the ability to repay immediately or in the short run — working capital).

One problem that banks faced was traditional balance sheets did not readily provide liquidity information. At this time, most balance sheets were not classified by assets and if they were, longlife assets were normally listed first. Thus, banks developed their own balance sheet forms for customers to complete on which assets were listed in the order of liquidity. Similarly, because banks were concerned with the repayment of shortterm debts, credit agencies and merchandising firms placed great emphasis on the balance sheet and especially the liquidity of the assets.

Because of this trend, by the time the great American corporations emerged and a corresponding increase in shareholders occurred, the general format of the balance sheet had been established. The credit aspects of business still determined the financial reporting practices. Littleton and Zimmerman [1962, pp. 9293], write: “Circulation of financial statements to shareholders would not be necessary; because of the nature of the loan, the working capital position of the debtor was of greatest interest to these banks . . . the party most interested in seeing the balance sheet was the lender; his chief concern was logically the borrower’s ability to repay a shortterm loan.”

The banker’s balance sheet (assets on the left and in the order of liquidity) gained credence with the 1917 issuance of the “Uniform Accounting” statement by the Federal Reserve Board. Although the model balance sheet in the statement was not required, it provided guidelines for companies to follow at a time when few guidelines were available. Yet, at this time, some companies still did not issue classified balance sheets and many listed plant assets first. The usefulness of the availability of such classifications was shown by the increase in the number and importance of security analysis.34
34In 1919, Alexander Wall, SecretaryTreasury of the Robert Morris Associates set forth a systematic method of analysis and followed that with analysis studies based upon the comparison of companies within industries [Brown, 1955, pp. 1415].

In 1929, the Federal Reserve System issued the Verification of Financial Statements, a revision of its 1917 balance sheet audit guidelines and, like its predecessor, included a model balance sheet. As before, the model was only by way of a guideline and it was not always followed. Its similarity in format, however, reinforced the concept of listing items in the order of liquidity. Moreover, although the 1917 and 1929 reports were largely directed at banks, other business often looked upon the model balance sheets as basic guidelines for their own statements [Huizingh, 1967, p. 69].

With the collapse of the securities market and the revelation of improper financial reporting, financial reporting underwent an extensive investigation and ultimately a permanent change. The Securities Act of 1933 conferred upon the FTC the authority to prescribe accounting methods for companies. The 1934 Securities and Exchange Act transferred the authority to prescribe accounting methods to the newly established SEC and required that financial statements filed with the SEC be certified by an independent public accountant. Additionally, the 1933 Act required the inclusion of a balance sheet and profit and loss data “in such form as the Commission shall prescribe” while the 1934 act gave the SEC “broad authority to prescribe the form and content of financial statements” [Hills, 1957, p. 52].

In 1936, the AIA issued its Examination of Financial Statements. This report, which superseded the 1929 bulletin issued by the Federal Reserve Board, was the accounting profession’s first major step toward self regulation and a commitment to more uniform financial statements. As in previous bulletins, the statement included a model balance sheet. Although this was similar in many ways to previous statements, it placed greater emphasis upon the proper valuation of current assets on the balance sheet.

Although comprehensive guidelines for the presentation and valuation of current assets were put forth in 1917 and 1927, these guidelines often were ignored. Only after the 193334 securities acts and the issuance of the AIA’s model current asset section in 1936 did companies have the liability incentive and the authoritative guidelines available to disclose and appropriately value current assets on the balance sheet.35 Although

35Although railroads were leaders in their acceptance of the classified balance sheet, it was the 1950s before many railroads discontinued the practice of listing current assets after plant assets and investments on the balance sheet.

current assets have been reexamined and redefined several times since the 1936 model was presented, the overall format of today’s current asset section is still quite similar to that of 1936. Accounting historians might continue the exploration begun in this paper by contrasting the historical development of that model with the historical development of the presentation and valuation of current assets in countries such as Britain or France in which government regulation of companies and authoritative reporting standards developed much earlier.

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ANNUAL REPORTS
American Bell Telephone Co. 1881. Report of the Directors of the American Bell
Telephone Co. Boston: Alfred Mudge & Son. American Bell Telephone Co. 1882. Report of the Directors of the American Bell
Telephone Co. Boston: Press of Rockwell & Churchill. American Brake Shoe and Foundry Company. 1930. The American Brake Shoe
and Foundry Company Annual Report.
American Can Company. 1920. American Can Company Annual Report. American Can Company. 1930. American Can Company Annual Report. American Can Company. 1935. American Can Company Annual Report. American Can Company. 1940. Annual Report American Can Company. American Smelting and Refining Company. 1905. Sixth Annual Report of the
American Smelting and Refining Company. American Smelting and Refining Company. 1910. Eleventh Annual Report of
• hi. \iiii.i:i..iu Siiii.ii Hi: ..V Hi. i Hi Hi: (.’.HI:’, i u\
American Woolen Company. 1920. Twentysecond Annual Report of the American Woolen Company. Atchison, Topeka, and Santa Fe Railroad Co. 1881. Annual Report of The Board
of Directors. Boston: Press of Geo. H. Ellis. Atchison, Topeka, and Santa Fe Railroad Company. 1890. Eighteenth Annual
Report of the Board of Directors to the Stockholders. Atchison, Topeka, and Santa Fe Railway Co. 1900. Fifth Annual Report of the
Atchison, Topeka & Santa Fe Railway Company. New York: C. G. Burgoyne. Commonwealth Edison Company. 1920. Report of the Commonwealth Edison
Company.
Cuba Cane Sugar Corporation. 1920. Cuba Cane Sugar Corporation Fifth Annual Report. Delaware and Hudson Canal Co. 1870. Annual Report of the Board of Managers
of the Delaware and Hudson Canal Co. New York: Nathan Lane. General Electric Company. 1893. First Annual Report of the General Electric
Company. General Electric Company. 1895. Third Annual Report of the General Electric
Company. General Electric Company. 1900. Eighth Annual Report of the General Electric
Company.
General Electric Company. 1910. Nineteenth Annual Report of the General Electric Company. General Electric Company. 1920. TwentyNinth Annual Report of the General
Electric Company. General Electric Company. 1930. ThirtyNinth Annual Report General Electric
Company. General Electric Company. 1940. FortyNinth Annual Report General Electric
Company.
General Motors Company. 1915. Report of General Motors Company. General Motors Company. 1920. Report of General Motors Company. General Motors Company. 1925. Report of General Motors Corporation.
The Great Northern Railway Company. 1890. First Annual Report of The Great Northern Railway Company. St. Paul: The Pioneer Press Company.
International Business Machines Corporation. 1930. Nineteenth Annual Report of the International Business Machines Corporation.
International Business Machines Corporation. 1940. Twentyninth Annual Report of the International Business Machines Corporation.
International Harvester Company. 1908. Report of The International Harvester Company.
International Harvester Company. 1920. Annual Report of The International Harvester Company.
Lehigh Coal and Navigation Co. 1865. Report of the Board of Managers of the Lehigh Coal and Navigation Co. to the Stockholders. Philadelphia: John C. Clark & Son, Printers.
Lehigh Coal & Navigation Company. 1885. SixtyFourth Annual Report of the Board of Managers. Philadelphia: Allen, Lane & Scott’s Printing House.
The North American Company. 1920. Thirtyfirst Annual Report to the Stockholders of The North American Company.
Pacific Gas and Electric Company. 1920. Fifteenth Annual Report of The Pacific Gas and Electric Company.
Philadelphia & Reading Railroad Co. 1865. Report of the President and Managers of the Philadelphia & Reading Railroad Co. to the Stockholders. Philadelphia: H. G. Leisenring’s StreamPower Printing House.
Sears, Roebuck and Co. 1920. Sears, Roebuck and Co. Consolidated Balance Sheet and Income Account for Year Ending December 31, 1920.
Sears, Roebuck and Co. 1930. Sears, Roebuck and Co. Consolidated Balance Sheet and Income Account for Years Ending December 31, 1930 and December 31, 1929.
Sears, Roebuck and Co. 1940. Sears, Roebuck and Co. and Subsidiary Companies Annual Report.
Union Canal Co. of Pennsylvania. 1865. Annual Report of the Managers of the Union Canal Co. Of Pennsylvania.
United States Rubber Co. 1893. First Annual Report of the United States Rubber Co.
United States Rubber Co. 1895. Third Annual Report of the United States Rubber Co.
United States Rubber Co. 1900. Eighth Annual Report of the United States Rubber Co.
United States Rubber Co. 1910. Eighteenth Annual Report of the United States Rubber Co.
United States Rubber Co. 1920. United States Rubber Company TwentyNinth Annual Report.
Westinghouse Electric and Mfg. Co. 1893. Annual Report of the Board of Directors May 17th, 1893. New York: C. G. Burgoyne.
Westinghouse Electric & Manufacturing Company. 1910. Westinghouse Electric & Manufacturing Company Annual Report March 31, 1910.
Westinghouse Electric & Manufacturing Company. 1920. Westinghouse Electric & Manufacturing Company Annual Report March 31, 1920.
Westinghouse Electric & Manufacturing Company. 1925. Westinghouse Electric & Manufacturing Company Annual Report March 31, 1925.