Commercial News

Auckland Star, Volume LXXV, Issue 251, 23 October 1944, Page 3

Commercial News

OVER-VALUED STOCK

DANGER TO BUSINESS

NECESSITY FOR VIGILANCE

When peace comes the value of some of the merchandise inflated by wartime conditions may dro'p precipitously. .To over-value stocks, therefore, might bring financial disaster to some businesses. The Prices Commission deserves congratulation on its work, but care must be exercised if reductions of overhead to the danger point are to be avoided. Warnings on this subject were contained in the address given by the chairman, Mr. F. E. Lampe, at the annual meeting of Manton and Sons, Ltd., retail department stores, Melbourne, recently.

"During wartime, stocks have to be valued with extreme care, and this presents a difficult problem," said Mr. Lampe. "The factors which have governed the situation during the period are: (a) Due to increased manufacturing costs, higher shipping freights, war insurance and other causes, a large percentage of merchandise must be purchased at prices much higher thatv those ruling before the war. when these exceptional wartime conditions cease to operate, the value of the merchandise which we will then have in stock will drop precipitously.

Austerity Goods . ■ "(b) The percentage of 'ersatz' or substitute merchandise and of austerity fashion merchandise has increased from year to year. When restrictions are removed much of this merchandise will be saleable only at greatly reduced prices. For example, when the prohibition on vests in men's suits was lifted, the sale of the unwanted vestless suits involved heavy losses—suits which had cost 60/ to 70/ having to be sold for 39/11.

"There are three ways of assessing the value 'of stock: (1) Actual cost>-this Is self-explana-tory; (2) replacement cost—goods In this category are valued after allowance has been made for factor (t) mentioned earlier; and (3) the cost based on the potential market selling price— goods in this category are valued after allowance has been made for factor (W mentioned "It will be clear that sound financing demands that, as stocks of austerity fashion, substitute merchandise, and goods purchased at temporarily inflated cost increase, adequate allowances need to be made so that the stock should appear in the balance-sheet at a cost which correctly corresponds to its potential selling price. . "It is clear if the financial stability of the manufacturing and distributing trades is to be preserved, that the potential profit percentage •cannot be consistently reduced when factors which up to now have offset such reductions are no longer available or commence to operate "Unless caution Is exercised, the only possible method of preserving financial stability in the distributing trades will ba by dangerous reduction of overhead expense, which could conceivably bring about Insecurity of employment, reduction in the demand for merchandise, and a downward spiral which would ultimately usher in depression."