privilege in some years of deducting from the gross income the full amount of loss represented by the declines in the market value of current assets, without crediting the profits of other years with the recovery of such losses. How far such practices will result in evasion of the tax may never be determined. Concerns having on hand large supplies of commodities such as iron ore, cotton, grain, etc., which are subject to sharp fluctuations in market price, will have ample opportunity to adjust the returns to suit their purposes. A problem of no small importance in relation to corporation profits at the present time and one that may be ignored entirely in the assessment of the tax is the treatment of the so-called "paper profits." Such profits are not realized in the form of cash or its equivalent and are accordingly not brought into the revenue statement of the corporation. These profits arise usually in the exchange of assets or in the redemption of liabilities. They may, however, be the result of the revaluation of assets or the receipt of stock dividends. Although the crediting of such profits directly to surplus does not affect the income account of the year during which the profits are "written" on the books, the actual income earned in future years may be affected whenever the increased value of the assets represented by the "paper profits" are realized in the form of cash through sale of the assets. In such an event the final realization of the "paper profits" would escape taxation, since no profits will be shown by the books of the corporation. Thus, a corporation exchanges securities of $1,000,000 cost value for other securities having no definite market value, but which are placed on the books by the directors at $1,500,000. The resulting "paper profit" of $500,000 is credited to the surplus account of the corporation, but inasmuch as nothing is received in the form of cash assets, the profit does not appear in the income statement of the year. Accordingly no tax can be assessed for B-VIII-25 the amount. During the next year, however, the securities in question are sold at their book value. The "paper profit" which was credited to surplus the previous year thus becomes an actual profit and is available for distribution among the shareholders. The amount is not subject to the tax, however, for the books show no additional income during the year from the sale of the securities, but merely a transfer of assets. Evasions of this character would not be uncommon in these days, when many of the large corporations are holding companies, and mergers through exchange of securities are constantly taking place. Many other instances may be cited of possible conflicts with modern accounting practice in the application of the federal corporation tax. It can hardly be expected that a revenue measure of as wide an application as the one under consideration can meet all the conditions arising from the complexity of modern business organization. It seems to be the administration's policy to interpret the provisions of the law as broadly and as liberally as is consistent with faithful execution, and corporations subject to the tax are not required to follow specific methods of bookkeeping in order to comply with the measure. SECTION E. PRIMER ON COST KEEPING.* 1. The Primer on Cost Keeping is based on the assumption that a system of cost keeping should prove of value to practically every administrative officer required by his position to judge of the relative efficiency of different men, appliances, and methods in the economical production of finished work. 2. The degree of refinement to which the analysis of costs in any system should be carried must be determined by experience. Certain general principles can, however, be laid down. If the system does not go sufficiently into detail, it is probable that discrepancies in the cost of identical products at different locations, under different conditions, handled by different employes, or produced by different methods, will not be indicated, and that the purpose of cost keeping will be defeated. If the system is too complex, it will be slow and heavy, may break of its own weight, and its results may be reached too late to apply corrective measures. 3. The successful system must be along lines coming within these limits, and for a beginning it is believed that it should be as simple as will secure results, with a view to its expansion along such lines as experience may show to be desirable. It should, however, be planned to have the cost accounts square in or be in agreement with the general fiscal records. The additional expense of such a detail is usually more than compensated for by the check thus afforded upon both systems and the additional re * Originally prepared under the direction of a special committee appointed by President Roosevelt and here reproduced by permission of Hon. Lawrence O. Murray, chairman. spect which cost data from such systems receive. While exact agreement is the accounting ideal, approximate agreement will secure valuable results; and if absolute accuracy can be obtained only at great expense such approximation may be sufficient. 4. In making the initial outline for a cost system it will be advisable to carry the analysis further along the line of the purposes or operations for which expense is incurred than along the line of the nature of the individual items of expense. Thus, in a scientific bureau it is of more importance to know the costs of the field investigations, the office investigations, the laboratory work, the computing, the editing, and the administration than to know the costs for services, travel, purchases, rentals, etc. 5. It is absolutely necessary in planning such a system to have in mind the scheme of organization upon which it rests. For this reason no uniform system is possible for organizations of different kinds. Such systems are at best only suggestive of others. If, however, it is desired to study some such systems and to note the relation of various forms devised to record the steps in the processes, the reader is advised to consult the two books by Horace Lucian Arnold, The Complete Cost Keeper, and The Factory Manager and Accountant. Probably neither of these systems could be adapted to the needs of any governmental organization, but these books and the others hereafter referred to are suggestive and valuable. 6. As the results are valuable, primarily, to the administrative officer in direct charge of the operations covered by the cost accounts, he should suggest the lines along which they should be kept, and should know of the steps followed in its processes, and thus he will be able to judge of its results. He need not prepare the forms or keep the records-bookkeepers and clerks will be available to perform such service-but he should be able to judge of the quality of the work submitted upon the outline he has laid down. 7. Cost keeping is that branch of accounting which is concerned with the segregation of the various items of expense, incurred in the prosecution of a single piece of work, from among all other items of expense incurred in a general line of industry, and the setting over against the total of such segregated items the quantity of resultant work or product. The definition of cost keeping as a part of a general system of accounting can, perhaps, be made clearer by the following contrast, wherein under "Scope of general bookkeeping" we include all fiscal transactions of every class, and under "Scope of cost keeping" such transactions of each class as are necessary for a complete cost system for so much of the organization's operations as the system is intended to cover. Commercial accounting is more and more nearly approaching the ideal as to costs, but it is not yet the universal rule to have commercial bookkeeping show a complete analysis of the purpose of all transactions. Governmental bookkeeping, except in certain classes of accounts, has always been limited to a record of cash transactions, and when so limited excludes from its record all transactions resulting in accounts receivable or payable and all transactions wherein there is a transfer of property or of services without any corresponding transfer of money, either contemporaneously or subsequently. General bookkeeping, as here used, includes every transaction which involves the fiscal condition of the organization. SCOPE OF GENERAL BOOK- 8. General bookkeeping is concerned with all A-resources; valuable assets of whatever nature available for use in the operations of any SCOPE OF COST KEEPING. 10. Cost keeping, on the other hand, considers only those A-resources which are employed in the operations for which costs are sought, as the ma |