Page:Walter Renton Ingalls - Wealth and Income of the American People (1924).pdf/230

208 The purchasers are buying those dividends. Similarly, if the company puts its surplus into plant and eventually capitalizes it and distributes a stock dividend, the benefit to the stockholders, in the last analysis, is the dividends that they are going to get from the additional stock.

However, it may be that corporate surplus is incapable of disposition in either of the above ways, for it may be that it is only temporary or fictitious. Ona rising market surplus accumulates through the increase in inventory of goods on hand. On a falling market it shrinks by virtue of opposite factors. Through the gamut of such ups and downs a surplus may be but temporary. Indeed, it may be nothing more than a bookkeeping affair.

The question with respect to fictitious surplus is more complicated. It has been a common and chronic failing among corporations to write off enough for amortization of their plants. In other words, net earnings are often figured fictitiously large by omitting to make a debit for the consumption of capital accumulated in the past. This has brought many a business to disaster. Among more conservative corporations it has been a practice to pay in dividends only a portion of the estimated net earnings and put the remainder into so-called improvement of the property, frequently crediting this to capital account, i.e., earned surplus. Often this merely replaces plant that has worn out or has become obsolete, and really there is no addition to capital account, except on the books. Surplus thus figured is of course fictitious.

The incidence of the income tax laws since 1916 has caused American corporations to be more particular