The usual method of handling overdue notes receivable is given in Volume I, Chapter XXXVIII. As there stated, where payment is allowed to lapse, it is generally advisable to insist on the giving of new notes in place of the old. There may be circumstances in which this is not advisable, but the proper method will usually be apparent in each case.
Interest on Notes Receivable
The valuation of notes receivable—using the term to include all written promises to pay, i.e., promissory notes, accepted drafts, and the like, requires a consideration of interest. By far the larger number of notes given in trade are non-interest bearing and are not therefore worth their face value until they become due. The interest problem in the valuation of notes is thus whether the notes should be shown at their face value or present, i.e., discounted, value. Notes which are interest bearing from their date of issue are, of course, worth their face, on the assumption that the interest takes care of the discount. Where non-interest bearing notes form a very considerable item it is well to value them on a discounted basis; if their amount is small, theoretical principles of valuation give place to practical considerations and they may be valued at their face. Where notes bearing interest are valued on a discounted basis, care must be exercised not to include the interest accrued both in their face valuation and also under the head of accrued income.
Balance Sheet Titles for Notes Receivable
The problem of terminology is also met in handling notes receivable. Under the balance sheet caption “Notes Receivable” should usually be included only notes received from trade debtors, and certainly it should never represent any but current asset items. Notes received from officers and employees, of indefinite term and the payment of which will not be pressed, should be recorded under some such title as “Notes Receivable Special.” Long-term notes and those representing loans or advances of any sort should be properly earmarked, as should also loans carried on open account, salary overdrafts, and the like. The latter should be shown under Deferred Charges. These nicer points of valuation cannot be presented on a condensed balance sheet, but care should at all times be taken to make such a showing as will not be misleading and will serve the purpose for which the statement is to be used.
CHAPTER XIII
MERCHANDISE STOCK-IN-TRADE
Definition and Scope of Term
Stock-in-trade, as the term is usually understood, comprises all commodities purchased for resale. Thus, assets, which in one concern belong to the fixed asset group, may be the stock-in-trade of other concerns. In stating the principles of valuation for these assets, it is definitely to be understood that they apply only to such as are used as stock-in-trade, and not to the same items when used as fixed assets. Oftentimes the process of manufacture intervenes between the purchase of a commodity and its sale. In such a case the commodity, at the time of valuation, may be in different stages of completion. It is then usually so listed on the balance sheet under suitable titles, such as Raw Material, Goods in Process, and Finished Goods, all of which are treated as current assets. Included in the problem of valuation of stock-in-trade is the treatment of goods out on consignment, goods of others held for sale on a commission basis, and scrap material. Finally, some points to be observed in taking the physical inventory will be considered.
Valuation at Market or Cost Price
Inasmuch as stock-in-trade is purchased solely for resale or ultimate conversion into cash, it is desirable for the balance sheet to reflect the proper value of what remains on hand unsold. Such goods may have a realizable value higher or lower than cost value, from the standpoint of the market in which they were purchased, and will usually have a higher value in the market where they are to be sold. The value of all current assets to be shown on balance sheet is usually stated at the present realizable value. As applied to stock-in-trade, that must not be understood to mean sale or retail value. To value the stock-in-trade on such a basis would result in taking into the current period the profits on sales not effected until the next period; furthermore, these profits would not even be offset by the costs of making the sale. It may be laid down as a principle of business practice based on sound reason, that the period in which the sale is made should be given credit for it. Stock-in-trade must therefore be valued on the basis of its purchase or wholesale market price and according to well-established practice, either at cost or market, whichever is the lower. This principle has the support of conservative practice throughout the world.