Cost vs. market value. sentation may also be a suppression of the fact that part or all of the assets held out as a basis for credit are exempt from levy on execution and for that reason are unavailable as a credit asset. Thus it is frequently found that a debtor who lists among his assets, valuable real estate, is later found to hold such real estate by entirety with his wife, which places the real estate beyond the reach of creditors. This is a common form of error or misrepresentation (as the case may be) and should be carefully guarded against, by the creditor. Again, the debtor may represent as his own, property, machinery, apparatus and personal property held by him on a purchase-contract in which he has but a small equity, or no interest at all." § 11. Falsity as to valuation basis: cost vs. market value. The falsity of the debtor's representation may consist in showing "cost" as "present market value" when "cost" is considerably more. This constitutes a fraudulent inflation of the value of the assets. Likewise the misrepresentation may consist of a showing of a value at which the assets taining credit, was upheld on appeal, on account of the lien and on account of other conditions affecting the net value of the business for purposes of credit. 2. In Stevens vs. Ludlum, 46 Minn. 160, 48 N. W. 771, the defendant represented to a mercantile agency that he was the sole proprietor of a pie company, whereas the business was the property of another party. Defendant was held liable in a fraud action. Falsity as to material, raw and in process. can be sold to the retail trade, whereas the replacement cost to the debtor represents a much smaller value. These matters should be covered with particularity in a credit statement, in order that neither debtor nor creditor is misled in the showing made on the financial statement. Market value as well as cost (and all other necessary data) should appear in the debtor's financial statement. The amount of accounts and bills receivable, their character and value, should be stated with particularity. § 12. Falsity as to amount of manufactured goods, goods in process of manufacture, raw material. The falsity in connection with statements made by manufacturing companies may lie in a mis-statement of the amount of raw materials on hand, of the amount of goods in process of manufacture, or in the amount of finished, unsold stock. These factors very frequently determine the character of the risk undertaken by the creditor. The manufacturer who has a large unsold product, and notwithstanding this, puts a large amount of raw material in the course of manufacture, is bound to be left with a heavy surplus of finished product on hand. So also the weakness in the business of a manufacturing company may be made to appear where the undelivered orders are large and a large amount of raw material is on hand, with no finished product. Such a condition would show that notwithstanding the large operations of the business, there is an essential Credit terms, expenses, profits. weakness in production. So also, an over-supply of raw material, without a demand for the finished product, or an over-supply of finished goods, are material elements in determining the character of the credit risk. A statement materially false in these respects, furnishes the basis of a fraud suit the same as though the assets had been overstated or the liabilities understated. § 13. Credit terms, expenses, profits. The proportion of outstanding accounts compared with the amount of sales, and the terms of credit given to customers, are material in a financial statement. Large sales or small sales, with too many bad accounts, will generally furnish a bar to the extension of a full line of credit. Even though the accounts be considered good, if the amount of the unpaid accounts is out of proportion to the gross sales, it will soon become apparent to the person extending credit, that the debtor is operating a larger business than his capital warrants. The evidence of such over-expansion is very material on a financial statement. Consequently the proportion of unpaid outstanding accounts as compared with the sales made by debtor, should be dealt with in detail, and representations made in regard thereto, are material in the extension of credit. The merchant's expense is likewise material in dealing with the question of credit. Likewise the profit which he is charging, must be considered by the person extending credit, for this, also, is material in the extension of credit. Small profits and large Sales, current liabilities, and liquid assets. expenses are soon fatal to the success of any business. If a Trade terms should also be considered. merchant cannot prosecute his business in the usual way, but in order to make sales, is required to grant his customers such terms of credit that he cannot reasonably hope to collect his accounts for unusually long periods of time, the entire machinery of his business is bound up to such an extent that he will not be able to succeed. For this reason, the question of trade terms is highly important, when wholesaler, manufacturer, or banker is about to extend credit to a merchant.3 § 14. Falsity as to sales; fixing amount of current liabilities and liquid assets. The amount of sales has a recognized standing in the consideration of particular credits allowed to customers. It is an established fact that each par 3. See note 6, Sec. 9, for reference to compilation of Statistical Department of Federal Reserve Board, as to usual trade terms in the various lines of business. 4. As pointed out by John Whyte, Ph.D., Director of Education and Research of the National Credit Men's Association, in "Observations and Conclusions on the Rate of Stock Turn:" "If goods are properly priced (and, other things being equal), increasing the rate of turnover increases business profits because: a. It increases the stock without increasing the investment. b. It reduces interest on the merchant's loans. c. It prevents the merchandise from becoming unsalable at the original mark up. Sales, current liabilities, and liquid assets. ticular line of business, if conducted on a normal schedule, should have a certain "turnover."" Sales compared with merchandise inventory should represent a definite proportion in each business. The re 6 d. It keeps the merchandise in good condition and prevents it from being marred, soiled, chipped or defaced. e. It saves the time of the merchandiser and the sales force. f. It releases shelf and storage room. g. It enhances the reputation of the concern for dealing in stylish and up-to-date merchandise. h. It reduces inefficiency and waste." 5. Recent studies in stock turnover have developed the following facts: (a) Turnover varies in different locations in a given business. (b) Turnover varies for different years in a given commodity. (c) What is a normal turnover is so closely approximated in a given business that the turnover is a commonly known figure in the trade. For examples, stock-turn in the following lines of business, figured as the ratio of the total sales, to the inventory cost, or sales Mdse. cost J 1918: stock-turn, appears to have been as follows for 6. Attention is called to the fact that the percentage of turnover is computed in two ways: First, the common way is to |