Publisher's Synopsis
Excerpt from Reading Accounting Records
With regard to the item of surplus in the financial statement of a corporation, many a stockholder has discovered that the handsome surplus was not really a surplus at all but instead a withdrawal of assets for purposes of dividends. A weak board of directors, desiring to make a good showing, may de clare dividends out of a surplus that either has been wrongly created or that should have gone into needed expansion or improvement. This is a dangerous practice which inevitably will weaken and perhaps even cripple the business.
For that reason it is important that the prospective investor or lender endeavor to ascertain just what has gone into the surplus account and how much of this amount, if any, is required for reinvestment in the business, so that it may be determined just how much may be safely distributed as dividends. It is not always an easy thing to find this out, however, since it involves a consideration of the peculiar needs of the business, the relation of assets to liabilities, the amount of quick assets needed for current finances, the various classes of assets and liabilities and the various divisions of surplus carried on the books.
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