Unissued and Treasury Stock on the Balance Sheet
When showing capital stock on the balance sheet, it is best to treat unissued and treasury stock as valuation items. The reason for this was stated and discussed in [Chapter XIV]. Here the relevancy of showing the unissued stock will be considered, as a statement of the outstanding stock is thought by some to be all that is required. It has been argued that the unissued stock does not in any sense represent an asset nor does it show proprietorship. Why not, therefore, leave it off the balance sheet statement entirely? It is true that an investor, a creditor, or a stockholder is interested in the main only in the condition of the business as shown by its present assets and liabilities. Unissued stock has no value till placed on the market; all that it shows is that certain legal requirements have been met authorizing its issue and to that extent it has a contingent value which may become a real source of capital to the corporation if additional funds become necessary. While, therefore, the omission of the item entirely from the balance sheet does not affect present conditions, it is considered best, in the interest of full information as to the exact status of the company, to show the amount of the authorized capital with the amount unissued extended short on the balance sheet, the difference being the amount outstanding—which is full-extended as the significant item, thus:
| Capital Stock Authorized | $1,000,000.00 | |
| Less Amount Unissued | 250,000.00 | |
| Amount Outstanding | $750,000.00 |
A similar showing of the treasury stock is also considered best, although good authority can be found for its inclusion among the assets.
Preferred Stock Covered by Redemption Contract
On the border line between liabilities and proprietorship is preferred stock covered by an unfulfilled redemption contract. Such stock is issued with a definite redemption contract to become effective at stated dates, and is manifestly different from preferred stock redeemable upon call at any time after a named date. In the latter case the option of redemption is with the company, whereas in the former case the company binds itself to a contract enforceable at a definitely stated time. From the financial standpoint the wisdom of a company binding itself to a contract enforceable some time in the future may be open to question because of the inability at the time of issue to foretell the company’s condition at the time of redemption; although in this respect the condition is practically the same as that confronting a company at the time of a bond issue. There is this marked difference, however: A bond issue is always a liability and continues as such after maturity; but in the case of a stock redeemable at a given date, the point at issue is whether the failure of the company to redeem automatically changes the status of the owner of the stock from that of a proprietor to that of an outside creditor.
“For instance, a corporation sold $750,000 of first preferred stock, with a provision for the retirement of $150,000 annually after a certain period had elapsed. When the first instalment became due the corporation was unable to meet its obligation. There was no provision in the certificate bearing on the treatment of the overdue payment in the accounts or the balance sheets. The auditors declined to certify the balance sheet until a decision was reached as to whether or not the amount represented a liability to be liquidated as soon as funds were available. So long as this possibility existed the position of the general creditors was subject to change. Finally it was decided to secure an extension from all stockholders and upon satisfactory evidences thereof the auditors passed the balance sheet.
“No general rule can be laid down for the auditor’s guidance in such cases as this, as each case must be decided on its merits. The most important facts for the auditor to ascertain are the rights of stockholders to insist upon payment, and the aggregates and due dates of all probable obligations. Their disposition in the accounts is then a matter of disclosing full information to creditors, prospective creditors, and to other stockholders.”[51]
CHAPTER XXII
PROFITS
Difficulty of Determining Profits