36 FOREST VALUATION 



cost of purchase of tangible assets as a basis of value, they 

 condemn the assumption that subsequent expenses, or items 

 customarily entered under outlay and income, or profit and loss, 

 add anything to the value of assets or furnish a basis for valuing 

 these assets. The theory is that such expenditures are made 

 for the direct purpose of producing income sufficient to offset 

 them, and that if this result is not secured, the loss must be shown 

 as a deficit, and not concealed by adding an equivalent of this 

 loss to the value of the assets. 



This theory is justified for business undertakings supposed to 

 produce annual income, for if the income which should cancel 

 expenses fails to do so, the deficit cannot be construed to 

 represent anything but absolute loss, leading to insolvency. 



This reasoning is then extended to apply to undertakings 

 in their formative period ( 23), and the practice of retaining 

 investments in the inventory at their original cost is highly 

 commended, in spite of the fact that practically all expenses 

 during this period require additions to capital ( 24), and this 

 treatment of assets is thus bound to result in an apparent deficit 

 or state of insolvency. 



Yet no one would undertake such long time investments 

 unless he expects an increase in the value of his assets in a meas- 

 ure corresponding to or paralleling the accumulation of cost 

 and interest. That this fact is assumed has a remarkable con- 

 firmation in the revolutionary practice of accounting authorized 

 in case of railroad properties during the course of construction 

 and before it is possible to earn an income. In Germany and 

 England it is permitted by law to include as an addition to the 

 value of the assets, not only the revenue expenditures during 

 construction, but the interest on bonds and dividends to stock- 

 holders.* This is the very process so vigorously and justly 

 condemned in case of business undertakings which should pay 

 annual dividends, nor would it be tolerated in the case of rail- 

 roads except during the period of construction. 



A case closely parallel to the above is found in forest planta- 



* "Modern Accounting," by Henry Rand Hatfield, pp. 76, 77. D. Appleton 

 & Co.. IQOQ. 



