…considerably less that it would be if these “assets” did not exist

chapter-32.md

@@ -190,3 +190,11 @@ On the other hand, Swift and Company reduced its reported earnings in the fiscal
 *Last-In, First-Out.* The first variation from this method consists of taking as the cost of goods sold the actual amount paid for the *most recently acquired* lots. The theory behind this method is that a merchant’s selling price is related mainly to the current replacement price or the recent cost of the article sold. The point is of importance only when there are substantial changes in unit values from year to year; it cannot affect the aggregate reported profits over a long period but only the division of results from one year to another; it may be useful in reducing income tax by avoiding alternations of loss and profit due to inventory fluctuations.
 
 *The Normal-stock or Basic-stock Inventory Method.* A more radical method of minimizing fluctuations due to inventory values has been followed by a considerable number of companies for some years past. This method is based on the theory that the company must regularly carry a certain physical stock of materials and that there is no more reason to vary the value of this “normal stock” from year to year—because of market changes—than there would be to vary the value of the manufacturing plant as the price index rises or falls and to reflect this change in the year’s operations. In order to permit the base inventory to be carried at an unchanging figure, the practice is to mark it down to a very low unit price level—so low that it should never be necessary to reduce it further to get it down to current market.
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+As long ago as 1913 National Lead Company applied this method to the three principal constituents of its inventory, *viz.*, lead, tin and antimony. The method was subsequently adopted also by American Smelting and Refining Company and American Metals Company. Some of the New England cotton mills had followed a like policy, prior to the collapse in the cotton market in 1930, by carrying their raw cotton and work in process at very low base prices. In 1936 the Plymouth Cordage Company adopted the normal-stock inventory method, after following a somewhat similar policy in 1933—1935; and for purpose of concrete illustration we supply the relevant data for this company, covering the years 1930—1939, in Appendix Note 49, page 785 on accompanying CD.
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+**Idle-Plant Expense.** The cost of carrying nonoperating properties is almost always charged against income. Many statements for 1932 ear-marked substantial deductions under this heading.
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+*Examples:* Youngstown Sheet and Tube Company reported a charge of $2,759,000 for “Maintenance Expense, Insurance and Taxes of Plants, Mines, and Other Properties that were Idle.” Stewart Warner Corporation followed the exceptional policy of charging against *surplus* in 1932, instead of income, the sum of $309,000 for “Depreciation of Plant Facilities not used in current year’s production.” The 1938 report of Botany Worsted Mills contained a charge against income of $166,732, picturesquely termed “cost of idleness.”
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+The analyst may properly consider idle-plant expense as belonging to a somewhat different category from ordinary charges against income. In theory, at least, these expenses should be of a temporary and therefore non-recurring type. Presumably the management can terminate these losses at any time by disposing of or abandoning the property. If, for the time being, the company elects to spend money to carry these assets along in the expectation that future value will justify the outlay, it does not seem logical to consider these assets as equivalent toa permanent liability, *i.e.*, as a permanent drag upon the company’s earning power, which makes the stock worth considerably less that it would be if these “assets” did not exist.