APPENDIX 387 



corn at the close of the year were credited to the Corn ac- 

 count at selling price, such an entry would result in a paper 

 profit. The difference in effect between the two credits named 

 is in the offsetting debit. In the case of the "sale" of corn 

 to the swine, the offsetting debit to Swine account is one 

 which increases the cost (decreases the profit) from swine. 

 This leaves the net farm profit the same as if the corn were 

 fed at any other price. In the case of the corn inventory 

 entry at selling price, the offsetting debit is recorded as a 

 charge against the operations of the next year. This inflates 

 the profits in corn of the current year without causing a de- 

 crease in the profits of any other farm element. As a result 

 the net profit of the farm is inflated. 



Fictitious profits are not created, then, as a result of trans- 

 ferring commodities from one department of the farm to an- 

 other, no matter what prices are used. Fictitious profits are 

 created by placing prices above cost price on any property 

 for inventory purposes. 



Pricing Inventories. It is hardly necessary to state any 

 more principles concerning the pricing of property for in- 

 ventory purposes, if one could apply the statement in the 

 preceding paragraph to all forms of property, without any 

 further assistance. The statement that "inventories should 

 be recorded in the books of account at cost or market price, 

 whichever is lower," is a very common one in commercial ac- 

 counting. Such a policy of pricing inventory should be prac- 

 ticed in every department of the farm. 



The tendency to overvalue property for inventory purposes 

 does not arise in the case of buildings or equipment, since the 

 percentage method is used in these types of property. In 

 placing a fair value on livestock, the various products (grains 

 and feed), household furnishings and miscellaneous supplies, 

 however, there is usually more of an inclination toward over- 

 valuation. 



A few brief principles may be stated for pricing inventories 

 of each of the classes of property mentioned. 



Livestock: It is quite impossible to find the cost of raising 

 the various animals up to a given age. Accordingly the in- 



