Professional _—- English in Usestrike prive sivatk pris 35 structured product strakt fou prodakt 47 subjective sabugekuy. 8 submit sab'mie 10) subsidiary /sob'sidiari’ 8, 22 40 substantial Soh /staene pl" 38 substantially Sab'staent li) 38 sudden ‘sash’ 38 suddenly °sadenti? 38 supervise Suspovar7y 23 supplier ‘s9'plars’ 11 supply é2'plai? 23, 30 surplas Saeplos! 14 swap sup) 35 syndicate sindikat! 47 synergy //sinaugi 40 systematic risk / stl amet isk 3d systems of control /,sistam7 av kon'troul! 10 acts "tekuuks! 50 take a shovt position (eth a fo po,zafon’ 31 takeover cork saver! 39 takeover bid ("tetk,aov9 bid 4, 21.39) tangible assets | leendseb) esets) 12 arg kastamay 18 cariff ieril! 43,49 tax ticks: 12,49 taxation /tvk’serfon’ 48, 49 tas avoidance teks, ayvondonts! 49 ax harden teks bach! 49 tas evasion (‘tks 1.verson/ 4Y tax haven Mtzks ,henven! 49 tax shelter ‘tacks , elt technical analysis teknikel a'nuelasis 32 telephone banking bagkig’ 19 terms and conditions /,tamz and kon'difenz/ 20 theft ety 4 time deposie Laum di, pnztt ‘customer /,tazgtt "ehifoon time-period ("tain ,pretiad! 8 times dividend covered é,taim7 dividend 'Kavad! 15 times incerest earned jae amurast “sind 1 time value of money /taum vaeljus ov mani’ 41 top our App "ant! 38 tracker fund "triekar fand! 36 trade mark ‘seend oath 12 trade surplus. ‘rend suzpplos 4 Transaction uven'zek on 3,4 transfer “inentstus 20 Iraveller’s cheque ‘trevala, Uek 19 bu 29 reasury born! i hon trend rend) 32 ial balance sant beelants 4 trough “rot 48 true and fair view. truz ond fea 'yjus 37 1 tumover /tsin auvar’ 6. 14 underpriced |.and>'praust! 4 undervalued | sndo'sieliie 40 underwrite (andorait 22, 29 underwriter andar array 47 unique djus'ni:h mat kDsts 18 Unie-of measure urn aw mes) 8 unit teust /jusnit ‘trast! 36 unsecured |nst'kjvad! 25 uunyystematic isk jansistametik ‘isk! 32 upswing "apswan! 48) upturn sprain’ 48 valuation /,veelju'eifn value stock /'vieljur stnk 30 value-added tax (VAT) unit cost /.ju neeljus ceded teks vis ey tis 49 variable costs /'Veariabl ,knsts ; variable interest rave i,yeariohl Imiast gen 24 Velocity /vi'Insair velocity of circulation iv av sazkjo'terpan venture capital vent] kept 28 venture capitalist went [a ‘keepuilist! 26 senifiable "vert"arsbl 8 vertical innegtarion |v 2:1 uk>l santrgresy =n! 39 visible trade "vazobl etd! 43 volatile “vnlotail 36 wages werdgi7! 1 warrant ‘worn! 35 wear out /,wear ‘aut! 9 weiuh? certificate Nwen padutikat: 43 white Knight av nants 39 withara sd withecawal wal diaial 19 working capital wakiq kept) 2.36 ‘prougrey 12 World Trade Onsanizavion ipeion | rait om wwrice off rant ne! 12 wronedoiny, “ron dui 6 yield ish Zero coupun bond usm bond! 33 pera-suar game Professional Englch in Use Finance 139ia Contents INTRODUCTION BASIC TERMS. GD Money and income A Currency B Personal finance Bw A Capital B Revenue ess finance © Financial searements ACCOUNTING GB Accounting and accountancy A Accounting B Auditing € ta rules and standards @B Bookkeeping A Double-entry bookkeeping B-Day books and ledgers © Balancing the bixky EB Company taw 7 A Parcnetships B Limited liability © Founding companies CB Company law 2 A Private and public companies B AGIs Accounting policies and standards A Valuation an] measurement Historical cose anc! inflation accounting @B Accounting assumptions and principles A Assumptions B Principles 10 14 16 1B 20 22 GD Depreciation and amortization 24 A Fixed assets B Valuation © Depreciation systems OD Auditing 26 A Internal auditing B External audicing © Irregulaciues The balance sheet 1 28 A. Assets, liabilities and eapital B Shareholclers’ equity The balance sheet 2: assets 30 A. Fixed and current assets B Valuation © Tangible anc incangible assets The balance sheet 3 liabilities 32 A Liatulities B_ Accrued expenses © Sharcholders’ equity en the balance sheet The other financial statements 34 A. The profit and lose account B The cash flow sratement @ Financial ratios 1 36 A. Types oi financial cation B_Liquidie and solvency ratios © Earnings and dividends GB Financial ratios 2 38 A. Profiabilie B Leverage Cost accounting 40 A. Dineet and indirect costs B. Fixed and variable costs © Breakeven analysis 3 Pricing 42 A. Manufavturers'peiting stateyies B Retail pre rates Professional English n Use FinanceBANKING @®) Personal bankin 44 A. Carrent accounts B_ Baoking products and services © E-banking Commercial and retail banking 46 A Commercial and retail hanks: 8 Credit © Lnans ond risks A Types of financial ustuian B Dereyulacios © Specialized banks inancial institutions 48 Investment banking 50 4 Raising capital B Mergers andl acquisicions © Consulting and research BBY Central banking 52 A. The functions of censral banks 8 The central hank and the couunercial hanks © Central banks and exch rates Interest rates 54 A Interest rates and monetary policy B Different interest rates Money markets 56 A ‘The money markers 8 Common money marker instruments © Repos © Islamic banking 58 A Tnterest-free banking, B Types uf accounts © Leasing and short-term loans Money supply and control 60 A” Measuring money 8 Changing the money supply © Monerarisin Professional English in Use Finance CORPORATE FINANCE EBB Venture capital Raising eapical 8 Rete EBD Stocks and shares 1 A. Stocks, shares and estes B Going public © Ordinary and preference shares EDD Stocks and shares 2 4 Buying gn selling shames B New share ines © Categories of stocks and shares Shareholders A tnsestis 8 Divkleuds an capital gains © Speculators EBD Share prices A Inthionces om share prives B Preticring prices © Ispes of risks EB) Bonds A Government and corporate bonds B Prices and yiclds © Other typos of bonds Futures A Commodity futures B Linancial h Derivatives A Options B In-the-money and onr-of-the-money © Warranss and soraps EBB Asset management A. Allocating and diversifying assets B Types of investor © Active and passive investment Hedge funds and structured products Hedge funds Leverage, shorting and arbitrage © Structured products 62 64 66 68 70 72 74 76 78 80Describing charts and graphs 82 A Increase and dee B Rate of change © High points, low points, and staying the Mergers and takeovers 84 A. Mergers, takeovers and joint ventures B Hostile or friendly? © otepeation Leveraged buyouts 86 A. Conglomerates B Raiders GBD Financial planning 88 A Financing new investments B Discounted cash flows © Comparing investment reeuens Financial regulation and supervision 90 A Goxernmnent regulation 8 Anternal controls © Sarbanes-Oxley ECONOMICS AND TRADE 8} International trade 92 A Trade B_ Balance of payments © Protectionism Exchange rates 94 A Why exchange rates change B Fined and floating rates © Government ingervention Financing international trade 96 A Documentary credits B hills of exchange © Export documents Incoterms 98 A. Transport and additional costs B The E and F terms © The Cand D terms Insurance 100 A Insuring against esks B Life insurance and saving © Insurance companies GB) The business eyele 102 A. Expansion and coneraction B_Hiseal policy © Moneiary policy Taxation 104 A Dieser tases Bindi © Non-pa ment of ra Business plans 106 A. Marker oppoctunities B_ The compans, the prociuet anil che marker © ‘he financial analysis Language reference 108 Market idioms Numbers Wo siress Uctsh and American vocabulary Answer key 114 Index 132 Acknowledgements 140 Professional Englth in Use FinanceWB Money and income BD Corny The money used in a country = cures, dollars, yen, ete, ~is its currency, Money in notes thanknotes) and coins is called cash. Most money, however, consists of bank deposits: money that people and organizations have in hank accounts. Most of this is on paper ~ existing in theory only —and only about ten per cent of it exists in the form of cash in the bank. MEEED Personal finance All the money a person receives or earns as payment is his or her income, This can include: | Br: note or banknote | Ame: bill a salary: money paid monthly by an employer, or wages: money paid by the day or the hour, usually received weekly wm overtinie: money received for working extra hours commission: money paid to salespeople and agents ~ a certain percentage of the income the employee generates ma bonus: extra money given for meeting a target or for good fnancial results Fees: money paid to professional people such as lawyers and archizects social security: money paid by the government to unemployed and sick people a pension: money paid by a company vr the government to a retired person. Salaties and wages are often paid after deductions such as social sevuvity charges and pension contributions, Amounts of money thar people have to spend regularly are ourgoings, These often include: 1m living expenses: money spent on everyday needs such «s food, clothes and public anspor bills: requests for the payment of mortey owed for services such as electricity, gas and telephone connections rent: the money paid for the use of a house or flat a mortgage: repaymemts of money borrowed to buy a house o7 flat health insurance: financial protection againse medical expenses for sickness or accidental injuries wm tax: money paid to finance government spending, A financial plan, showing bow much money a person or | BrE: soctal security; AmE: welfare ‘organization expects to carn and spend is called a budget. | BrE: flat; AmE: apartment [Breistehmbanartinen) Planned monthly budget for next year (©) | Income ‘Outgoings { Salary (after deductions) | 3,250 | Rent goo} | Commission (average) | 600 | Bills 250] | Living expenses 1200, | | Health insurance | 130) | Tax soo) | Total 3,850 | Total 3,280 | \ 8 Professional Engish in Use FinanceWl 12 Complete the sentences with words from che bos. Look ar A and B opposite tn help you. commission brnus. currency, wan morgage tax overtime pension rent salacy social security: Mter Tlost my job, Twas living on because the amount was much lower than the for three months. This was difficule, J had before. Tused to work as a salesperson, bur { wasn’e very successful, sof didn’ much If the company makes 1% more than last yeas, we'll all get a arthe end of the year I'l eake me at least 25 years co eepay the Joo, ot my house, Many European ecuntries now have the same My wages aren't very good, so Ido a lot of Nearly 40% of everything J carn goes to the government as The owner has just increased the on our flat by 15%. When I retire, my 1. Will be 60% of my final sala aire the following starements tue oF false? Find reasons for your answers ia A and B apposire. 1 Bank deposits are noc classified as money. 2 People earning wages get paid more often than people eaming a salacy. 3 People working on commission always get paid the same amount. 4 When you swop working st the end of your career, you receive a pension, 5 Most people pay a rent and a mortgage. coer Do you know what the average income is in your couatry, and in your job, or the one you See Reed ee eo eee eae sia Professional Engi in Use FinanceM4 business finance MES Capital ‘When people wane to sct up or start 2 company, they need money, ealled capital Companies can borrow this money, called a loan, from banks. The loan must be paid hack with interest: the amount paid to borrow the money. Capital can also come from issuing shares or equities ~ certificates represetiting units of ownership uf a company. (See Unit 29) The people who invest money in shares are called shareholders and they own part of the company. The money they provide is known ais share eapital. Individuals and financial institutions, called investors, can also lend money to companies by buying bonds —foans that pay imerest and are repaid at a fixed futore Wate, (See Unit 33) Money that is owed ~ thar will have to be paid — co otter people cir businesses is a debt. In accounting, companies’ debts are usually called liabilities. Long-term liabilities include bonds; short-term Habilities include debes to Suppliers who provide goals or services on credit ~ thar will be paid for lates The money that a business uses for everyday expenses or has available for spending is called working capital or funds, | Bre: shares; Ame: stocks BrE: shareholder; Am: stockholder HEED venue All the money coming into a company during a given period is revenue. Revenue minus the cost of sales and operating expenses, such as rent and salaries, is known as profit, eamings or net income. ‘The pact of its prufit that a company pays ro its shareholders is a dividend. Companics pay a proportion of their profits to the government as tax, to finance government spending, They also retain, or keep, some of their earnings for Future use. share capital revenue clividends aaa] 7 company |—>»] profits |» tax 1 ee Y debt (bonds and loans) expenses HG Financ Companies give information ahoue cheir financial sirnation in financial statements, The balance sheet shows the company’s assets ~ the things it owns; its liabilities ~ the money it ‘owes; and its capital. The profit and loss account shows the company’s revenues and expenses during a particular period, such as shree months or a year. capital | statements BrE: profit and logs account; AmE: ineome stalernent lo Professional English Use Finance21 Complete the crossword. Look A, Band C opposite to help you ELL Eo Across 3 Small companies often try to get bank loans when they nced to money. (6) 5 We don't have sufficient vo build a completely new facrory. (3) 7 and 6 down Details of a company’s liabilities aze shown on the (7 8 We're going to raise mare money by selling new shares to our existing, (12) 12 We had to raise £50,000 in order to sratt the business. {7) 13 We're going to pay back some of the people who lent us money, and reduce our a) 14 I decided ro buy a $10,000 instead of shares, as i's probably safer. (4) 16 Another term for prafit is net +16) 18 L think this is a good investment: it pays 8% (8) 20 When they saw our financial statements, the bank refused to us any more money. (4) 21 Proficis the diffecence between revenue and (8) Down 1 The profit anc account shows if a company is receiving more money than it’s spending. (4) 2 I you don't like taking risks, you should only... in very suceesshil companies. (6) 4A company’s retained carnings belong to its (6) 6 Sev 7 acruss 9 Anything a company uses to produce goods or services is PRoFITS| an 215) 10 The company made such a big: profit, l expected a higher Ve ne 11. We sold a lot more lase year, so our went up. (7) is We our suppliers $100,000 for goods bought on y credit. (31 47 Everyone who bays a share part of the company, (4) 19 Thirty per cent of our profits goes straight to the government in ) “Its been 2 great year— let's hope we can keep the shareholders irom finding out." SO ene en a Ce So Ee ea RO a eed eae es rd Profesional English in Use Finonce "3 PRE Accounting and accountancy Accounting Accounting involves recording and summarizing an organization's transactions or bouisiness deals, such as purchases and sales, and reposting them in the foram of Bnancial statements. (See Units 11-14) In many couneries, the accounting or accountancy profession has professional organizations which operate their own training and examination systems, and make technical and ethical rules: these relate to accepted ways of doing things. wm Bookkeeping is the day-to-day recarding of ceansactions, mm Financial accounting includes bookkeeping. and preparing financial starements for sharcholders and creditors (people or organizations who have lent money co a company) Management accounting involves the use of accounting data by managers, for making plans and decisions Auditing Anditing means examining « company’s systems of contcol and the accuracy or exactness of its records, looking for errors or possible Fraud: where the company may have deliberately given false information. WS An internal andit is earricd our by 9 company’s own accountants or internal auditors. mm An external audit is done by independent auditors: auditors who are nor employees of the company. The external audit examines the truth and fairness of finatscial statements. It tries 10 prevent what is called “creative accounting’, which means recording transactions and values in a way thar produces a false resulr— usually an arsificially high profi There is always more than one way of presenting accounts, The accounts of British companies have to give a true and fair view of their financial situarion. This means that the fisancial atements must give a correct and reasonable picture of the company’s current condition. Laws, rules and standards In most continental European countries, and in Japan, there are laws relating to accounting, escablished by the government. In the US, companies whose stocks are traded on public stock exchanges have 0 follow rales set by the Securities and Exchange Commission (SEC), a government agency, In Britain, the rules, which are called standards, have been established by independent organizations such as the Accounting Standards Board (ASB), and by the accountancy prafession itself. Companies are expected to apply or use chese standards in their annual accounts in order to give a true and Lair view Companies in most English-speaking countries are largely funded by shareholders, both individals and financial mnscitucions, In these countries, the financial statements are prepared for shareholders. However, in many continental European councries businesses are largely funded by banks, so accounting and financial statements are prepared for cxeditors and the tax authorities Professional English in Use Finance34 3.2 3.3 What type of work does each person do, and what is the name of each fob? Look at A and B opposite to help you. 1 1 record all the purchases and sales made by this deparcment. “This month, I'm examining the accounts of a large manufacturing company. | Tanalyse the sales figures from the different departments and make decisions about our farure activities. J ain responsible for preparing ouc annual halance sheet. *(ermettiemorererema rie) ‘When the accounts are complete I check them before they are presented to the excemal auditors. Maich che two parts of the sentetices. Look at © opposire co help you. 1 fn Britain 2 In mow of continental Europe aud Japan 3 In the USA. 4 In Britain and the USA 5 In much of continental Europe a accounting cules are established by 2 goverameat agency, b companies are mainly funded by shareholders or srackholders. ¢ accounting rules are ser by an independent organization, the major saurce of corparate finance is banks. © accounting rules are ser by the government. Find verbs in A, B and G apposite that can be used 20 make word combinations with the nouns below. (ea oo) a Is accounting in your country based on standards, rules, laws, or @ mixture of these? What aceounting system do international companies in your country use? Profcsonol Engl Use Fence 13Bookkeeping Double-entry bookkeeping Zaheer Younis works in the accounting department of x tradi “Lbegan my career asa bookkeeper. Bookkeepers record the compony’s daily transactions: sites, purchases, ders expenses, sind so on. Each type of transaction is recorded ace account ~ the eash account, the liabilities account, and so on, Double-entry bookkeeping is a system that records two aspeers of every cransaetion. Every wction is both a dehit ~ a deduction ~ in one account and a coccespanding credit ~ an addition ~ in anacher, For example, fa company buys some raw materials — the substances and components used ro make products ~ that it will pay for a month later, it debits its purchases account and credits the suppher's account. fF the company sells any item on credit, ic credits the sales account, and debits the customer's account, As this means the level of the Company's stock ~ goods ready for sale ~ is reduced, ir debits the stock account, There is a corresponding increase in its debtors ~ customers who owe money for goods or services purchased — and the debtors or accounts payable account is credited. Each aecount records debits om the left and credits on the right. 1 the bookkeepers da their work correctly, the total debits always equal the cotal credirs. Ea AE RG | Bre ereitos Ame: acount payable BE: Sto Ame: inventory Day books and ledgers “For accounts with a larg number of transactions, like purchases and sales, companics often record the transactions in day books or journals, and then put a daily or weekly summary in the main doublet ry records, In Bricain, they call the main books af account nominal ledgers. Creditors ~ supplicts to whom the le sompany orves money for purchases made on credit —are recorded in a bought gr, They still use these names, even though these cays all the information is on a computer.” Note: In Britain the terms debtors and creditors can refer to people or companies that owe or are ‘owed money, oF to the sums of money in an account or balance sheet. Balancing the books “Ar the end of an accounting period, for example a year, bookkeepers prepare a trial balance which transfers the debit and credie balances of different accounts onto one page. As always, the toral debits should equal the roral credits. The accountants can then use these halances to prepare the organization’s financial statcments. Professional Englsh in Use Finance4d 4.2 Match the words in the box wich the definitions below. Look ar A and B opposite to help you. debi credit led creditors stad debtors 1 an amounr entered on the left-hand side of an account, recording money paid out 2 a book of accounts 3 customers who owe money for goods or services nat yer paid for 4-an amount entered on the right-hand side of an account, recording a payment received 5 goods stored ready for sale & suppliers who are owed money for purchases not yet paid for Complete the sentences, Look at A, Band C opposite to help you. 1 shows where money comes from and where it goest it is akways transfereed from one to another one, Every event is entered twice — once as a credit and once aga 2 Most businesses record very frequent or numerous rransactions in on 3 The main account hooks are called and the book relating co creditors is called the : 4 Tnorder to prepare financia) statements, companies 0 a... which copies all the debit and credit balances of different accounts onto a single pag Complete the sentences using ‘debit? or Scredir" Look at A opposite to help you. 1 TF you buy new assets, you 0.02. the cash or capital account. 2 Af you pay some bills, you the liabilities account, 3 If you buy materials irons a supplier on 60 days uredit, you the purchases acount and the supplies’ account 4 If you sell something to a customer who will pay 30 days later, you the sales account and the customer's account. ol T aro} vl What qualities does a good bookkeeper need? Would you like to work as a bookkeeper? If not, which type of accounting do you think is the most interesting, and why? Professional Englsh in Use Finance 15Company law 1 Partnerships 4 partnership is a business arcangement in which several people work together, and share the risks and profits. In Britain and the US, parmnerships do srot have limited liahiliry for debts, 50 the partnets are fully liable ur responsible for any debrs the business has. Furthermore, partnerships are not legal entities, 90 in case of a legal action, ir is the individual partners and not the partnership thar is taken to court, In most continental Furopean countries there are various kinds of partnership which are legal entities A sole trader business ~ an enterprise owned and operated by a single person ~ also has unlinited liabiliry for debts. Limited liability A company is.a business thar is a fegal emity. In ovher words, it has @ separate legal existence fron its owners, the shareholders, It cam enter into contracts, and can be sued or taken to court if it breaks a contract. A company can fin theory) continue for ever, even if all the staff and owners change. Most companies have limited liability, which means that the owners are not fully’ liable for — or respnnsible for — the business's debts. These companies are known as fimited companies. The tiabilisy is hhmited aw the value of their share eapital: che amaunr of cash that the shareholders have contributed co the compart. This limication of liability encourages investors to risk their money to become parc owners of companies, while leaving rhe management of these companies to qualified managers and senior managers, known as directors. These managers and full-time executive directors run the company for its owners. There are standard procedures of corporate governance ~ the way a company is run by the management for the shareholders, and how the managers are accouncable to the shareholders. These include separating the job of chairman {rom thar of managing director, and having several non-executive directors on the board of directors who do not work full-time for the company but can offer it expert advice. Non-executive directors are often more objective: les influenced by their opinions and beliefs. There is also an audit committee, containing several non-executive directors, (0 which the auditors report BrE: chairman; AmE: president ] BrE: managing director; Ane: chiet executive officer (CEOS | Founding companies ‘When people found or seart companies, they draw up or prepare Actieles of Association and a Memorandums of Association. The Articles of Association state: am the cights and duties of the shareholdess and directors mi the relationships among different classes of shareholder (See Unit 29) mm the relationships beoween shareholders and the company and its directors. The Memorandum of Association states: m the company's name m the location of the company’s registered office ~ where 10 send official documents the company’s purpose ~ its aims or objectives m= the authorized share capital ~ the maximum share capital it can have, Br£: Articles of Association: AmE: Bylaws Bré: Memorandum of Association AmE: Certificate of Incorporation | Professional English in Use Finance9 5.2 Are the following statements true or false? Find reasons for your answers in A and B opposite. In case of a legal dispute, people can cake a company’s shareholders to court. The owners of limited companics have to pay all the company’s debts. Many companies are not owned by their managers Excernal directors can usually give more objective advice than full-time directors. Partners in British and American businesses are not liable for the partnership’ debts, In case of a dispute, peaple can take British companies and partnerships cv court, Make word combinations using a word from each box. Then match the word combinations to the definitions helow. Look at & apposite to help you, corporate committee audit directors limited governance ron-exccutive capital share liability 1 a group of dircetors to whom the external auditors present their report members of a board of directors who are nor full-time managers of the company 3 . _ owners’ money invested in a company 4 responsibility fir debts up to the value of the company’s share capital 5 the way a company is managed for its owners Complete the document. Look at C opposite to help you (@)___ of Association 1. ‘The name of the Company is Language Services Pty Limited. | The (b)___ othe Company will be in Australia. / 3. The(@__ tor whieh the Company is established is to provide j translation and interpreting services to international companies 4. The (d) _ of the company is made up of ordinary shares divided into five thousand (5,000) shares of AS1,00 par value vach with on for each share vote / \ Do partnerships have limited liability in your country? If not, who would you trust enough to start a partnership with? Professionel English n Use France 7Company law 2 Private and public companies Private companies usually have ‘Limited’ or ‘Lad’ at the end of their name. They are not allowed 10 sell their stocks or shares on an apen market. Mose companies are privates there are about one million private companies in Britain, compared to around 2,000 public limited companies (PLCs). These companies have ‘ple’ at che end of theie name, and their shares are publicly taded on the London Stack Exchange, A stock exchange is a market where anyone can buy stocks and shares, The US equivalent of a PLC is a company oF corporation registered with the Securities and Exchange Commission (SEC). SEC-registered companies, also known as listed companies, have to make quarterly reports (ie. every three months). They report an: tm sales revenue o turnover ~ the maney received by the company in that period from selling gowdls or services gross profit ~ turnover less cost of sales tm net profit — gross profit less administrative expenses and raw: Conapanies on the London Stock xchange, known as quoted companics, have to produce a half-yearly interim ceport which informs shareholders about the company’s progress. These reports are not audited. All companies with shareholders or stockholders have uw send them an Annual Report each financial year. ‘This contains a review of the year’s activiey, and an examination and explanation of the company’s financial position and results. ‘There statements and nores (see Units 11-14), and the auditors’ report on the financial starements. e also financial ARCLAYS PLC interim Report 2004 Group performance was very strong: All businesses had higher profits, = profit before tax up 23% to £2.41 1m clemonstrating goad progress across — earnings per share up 25% al 26. the whole portiolio, dividend per share up 17% 10 8.25 Income growth was pasticularly return on equity of 20.4% Strong, up 14%, with good broad based contributions by business and by income type AGMs Public companies have to hold an Annual General Meeting |AGM), and most private ones do 100, At chis meeting the shareholders can question directors about the content of the Annual Report and the financial statements, vote to accept or reject the dividend secommended by the directors, and vote on replavements for retir gy members of the board, The meeting can also carry out any other business stated in the company’s Memorandum of Association ot Certificate of Incorporation, and Articles of Association or Bylaws, If there is a crisis, the direetors or the shareholders can request to hold an E: General Meeting (EGM] to discuss the situation. For example, if there are c misconduct by the directors, where they have behaved illegally, cheze could be an EGM. | Bre: Annual General Meeting (AGM); AME: Annual Meeting of Stockholders BrE: Extraordinary General Meeting (EGM]; Ame: Special Meeting Professional English in Use Finonce6.4 Complete the table, Look at A and & opposite to help you, n't sell shares on the | in the UK in the US | | @ m are called public m ate called SEC- @) compar registered companies | of) or (6) | companies companies, m produce (5) m produce (7) | reports. | mm publish an (8) Find words in A and 8 opposite wich the following meanings 1 behaviour that breaks the law 2 sales revenue minus the cost of sales, before deductions for administration expenses, interest charges, ete 3 sales revenue minus the cost of making and selling the goods, and deductions for adiiinistration expenses, interest charg 4 the total amount of money a compa eceives from selling goods cir services Match the nwo paris of the sentences. Look at A and B opposite help you. 1 Only quoted or listed companies 2 American corporations publish details 3. Companies’ financial starements, an 4 Quarterly and six-monthly reports 5 6 auditor's report. Shareholders can ask company direcors questions ‘Companies can hold an emergency general meeting a about cheir sales and profits every chree months; b are contained in cheir annual reports, © are nov checked hy external auditors d if there is a crisis. € can have their shares traded on a stack exchange. f aran annual meetin, or Ta reo) Us Have you ever been to an AGM? Was there any disagreement between the shareholders and the directors? Who do you think is usually more powerful ~ the shareholders or the dir Professional English in Use Finance 920 Accounting policies and standards Valuation and measurement Investors in companies want to know how much the companies are worth, so companies regularly have to publish the value of their assets and liabilities. Companies also have to caleulate their profits or lasses: their managers need this information, and so do shareholders, bondholders and the tax authorities. Companies can choose their accounting, policies ~ cheir way of doing their accounts. There are 2 range of methods af valuation — deciding how much sornething is words ~ and measurement ~ determining how hig something is ~ that are accepted by law or by official accounting standards. Th che USA, the cepted Accounting Principles (GAAP). In most of the rest of the world there are International Financial Reporting Standards (IFRS), set by the International Accounting Standards Board. These are technical rules or conventions ~ accepted ways of doing things that are not writer down ina law. are Generally Although businesses can choose among different accouncing policies, they have to be consistent, which means using the same methods every year, unless there is a good reason to change a policy: this is known as the consistency principle. The policies also have to be disclosed or revealed to che shareholders: the Annual Report will contain a ‘Scatement of Accounting Policies’ that mentions any changes that have been made. ‘This enables shareholders to compare profits and values with those of previous years. Areas in which the choice of policies can make a big difference to the final profit figure include depreciation — reducing the value of assers in the company’s accounts (sce Unit 9), the valuation of stock or inventory, and the making of provisions — amounts of money deducted from profits ~ for fucure pension payments As there is always more than one way of presenting accounts, the accounts of British, companies have to give a true and fair view of their financial situation ~ meaning there are various possibilities ~ rather than she erue and fair view ~ meaning only one is possible BrL: depreciation; AmE: depreciation, amortization BrE: a true and fair view; AmE: a fair presentation Historical cost and inflation accounting The aim of accounting standards (see Unit 3) is to provide shareholders with the information that will allow them to make financial decisions. This is one reason why in many councries accounting follows the historical cost principle: companies record the original purchase price of assets, and not their (estimated) current selling price or replacement cost. This is more objective, and the current value is not important if the hhusiness is a going concern ~ a successful company that will continue to do business ~ as its assets are not going to be sold, or do not currently need to be replaced. However, some countries with regula: high inflation, e.g. in South America, use inflation accounting systems thar take account of changing prices. One system used is replacement cost accounting, which values all assets at cheir current replacement cost ~ the amount that would have to be paid to replace them now. Professional English in Use Financea 72 73 Match the two parts of the sentences. Look at A and B opposite to help you, 1 Companies’ managers, investors, creditors and the tax authorities alll 2 There art different ways of doing accounting bur companies have to be consistent, ‘3. Companies have to disclose or make known 4 The historical cost principle is chat the price paid ro buy assets, 5 A going concern usually doesn’t a and noc their curcenr value, is recorded in accounts. bb need to know the eurrent market value of its assets. © need to know about the size of profits or losses. @ which accounting methods they are using © which means regalarly using the same methods, Are the following statements trie oF false? Find reasons for your answers in A and B opposite 1 Companies are told whieh accounting policies to use. 2 Companies can change cheie accounting policies whenever they like, as lang. 2s they disclose this in their Annual Report 3. Companies could produce several profit fgares, depending on how they depreciated their assets, valued thir inventory, ete 4 There is only one correct interpretation of a companty’s financial position, and company accounts roust show this, 5 Ina lot of countries, companies do nor record the current value of thei assets 6 In countries with high inflation, companies value their asscts at their current replacement cost Complete the table with words from A and B opposite and related forms. Pur a stress mark in front of the stressed syllable in each word. The first one has been done for you, = Lconsiscent |] | & conventional measure (oJ an ceo Which ate the most important accounting standards or rules in your country ~ GAAP, IFRS, IAS, or something else? Profescional English in Use Finance 21Accounting assumptions and principles Assumptions When writing accounts and financial stacements, accountants have to follow a number of assumptions, principles and conventions. An assumption is somerhing, that is genceslly accepted as being true, The following are the main assumptions used by accountants: mm The separate entity or business entity assumption is that a business is an accounting unit separate from its owners, creditors and managers, and their assets. These people can all cha . but the business continues as before. tm The time-period assumption states that the economic life of the business can be divided into jartiicial) time periods such as the financial year, or a quazter of it. m The continuity oF going concern assumption says that a business will continue ineo the future, so the current marker value of its assets is not important. (See Unit 7) m2 The unit-of-measure assumption is thac all financial transactions are in a single monecary unit oF currency. Companies with subsidiaries ~ that is, other companies that they own — in different countries have to convert their results into one currency in consolidated financial statements for the whole group of companies. rE: financial year; ‘Amé: fiscal year Principles The following are the most important accounting, principles (as well as the consistency principle and the historical cost principle, mentioned in Unit 7): The full-disclosnre principle states that financial reporting, most include all significant information: anything that makes a difference to the users of financial stavements. The principle of materiality, however, says that very small and onimportanc amounts do, not need to be shown, The principle of conservatism is thar where different accounting methods are possible, you choose the one that is leat likely to overstate or overestimate assets or income. The objectivity principle says that accounts should he hased on facts and not on personal opinions or feelings, Accounts, therefore, should he verifiable: it should be possible for internal and external auditors to show that they are truc. This isn’t always possible, however: dep nocessarily subjective ~ based on opinions. scion oc amortization, and provisions for bad debts, for example, ane The revenue recognition principle is that revenue is recogssized in the accounting period in which itis earned. This means the revenue is recorded when a service is provided or goods delivered, mot when they are paid for. m The matching principle, which is related to revenue recognition, stares that each cost or expense related 10 revenue earned must he recorded in the same accounting period as the revenue it helped to earn. “New from accounting, sir Tivo and two is four again” Professional English in Use Finance8.1 Match the accounting assumptions and principles (1~6) 1o the activities they prevent (a-f|. Look at A and B opposite to help you, 1 conservatism principle 2 matching principle 4 separate entity assumption 4 revenue recognition principle 5 time-period assumption G unitof-measure assumption a showing a profit divided into US dollars, euros, Swiss ranesy ete b publishing financial statcments far a 15-month period, hecause this will show better profits ¢ waiting until coscomers pay before recording revenue 4 waiting until customers pay before recording expenses € listing the owners’ personal assers in a company’s financial statements F valuing assers and estimating future revenue at the highest possible figures Complete the sentences, Look ar A and B opposite to help you. 1 A company’s does not have ro begin on I January, like the calendar year. 2 IFan American company owns 9 company in Britain, this isa 3. Multinationals, with comp sec of 4 Every entry in a company’s accounts must be there must he a document available showing that ic is true icy in lots of different countries, combine all their results in one mark, Complete the rable with words fron A, 18 and C opposite and related forms, Pur a str in front of the stressed syllable in each word. The first one has heen done for you. Then complete the sentences below with words from the rable. Uisclos - abjestivy | | ' oe ______, tification | + Roth the internal and the external auditors have to, the accounts, 2 Companies have to all relevant financial information in cheve annual reports 3 Despite the paineiple, accountants have to make some subjective judgements. 4 Even if company is going through a bad period, for accounting purposes we its a going concern, Over to you % Fee eR ee ee ets se a ee ec cccierd Professional English n Use Finance 23i) Depreciation and amortization WY) Fixed assets A company’s assets are usually divided inte current assets like cash and stock or in swhich will be used or converted into buildings and equipment, which will continue to he used by the business for many years. Bur fixed assets wear out — become unusable, or become obsolete — out of date, and eventually have little or no value. Consequently fixed assets are depreciated: their value on a balance shecr is reduced each year by a charge against profits on the profit and loss account. Ln other words, part of the cost of the asser is deducted from the profits each year tory, ish in less than a year, and fixed assets such as ‘The accounting rechnique of depreciation makes it unnecessary co charge the whole cost of a fixed asser against profits in the year i is purchased, Instead it can be charged during, all the years itis used. This is an example of the matching principle. (See Unit §) BrE; fixed assets; AmE: property, plant and equipment HEELY vatustion Assets such as buildings, machinery and vehicles are grouped together uncler fixed assers. Land is usually not depreciaced hecause it tends to appreciate, or gain in value, British companies occasionally revalue ~ calculate a new value for ~ appreciating fixed asscts like Jand and buildings in their balance sheets. The revaluation is at either current replacement cost — howr much it would cost to buy nevy ones, or at net realizable value (NRV) — how much they cookd he sold for. This is not allowed in the USA. Apart from this exception, appreciation is only recorded in countries that use inflation accounting systems. (See Unit 7) Companies in countries which use historical cost accounting ~ recording only the original purchase price of assets ~ do nor usually record an estimated mariet value — the price at which something could he sold coday. ‘The conservatism and objectivity principles support this; ond where the company is a going, concem, the market value of fixed assets is not important. (See Units 7 and 8 Depreciation systems The most common system of depreciation for fixed assets is the straightline method, ich means charging equal annual amounts against profit during the lifetime of the asset . deducting 10% of the cost of an asset's value from profits every year for 10 years). Many continental European countries allow accelerated depreciation: businesses can deduct the whole cost of anv asset in a sboce time, Accelerated depreciation allowances are an incentive to investment: a way ro encourage it. For example, iF a company deducts tiie cntire cost of an asset in a single year, ie reduces its profits, and therefore the amount of tax ic has t pay. Consequi tly new assets, including huge buildings, can be valued at zero on balan sheets. In Britain, this would mot be considered a true and fair view of the company’s assets. “Let's se, it says here that you've had a Lot of corporate accounting experience ... 24 Professional Englsh in Use Fironcea4 9.2 March the words in she box wish hie definicions below, Look ar A and B opposice 0 help you. appreciate ccarrene assers fixed assets obsolete revalue weat cut 1 to record something at a different price 2 assers thar will no Tonger be in the company in 12. months’ Gime 3 to increase rather than decrease in value 4 our of date, needing to be replaced by something newer 5 assers thar will remain in the company for several years 5 to become used and damaged Match the nouns in the box wizh the verbs below to make word combinations, Then use some of the word combinations to complete the sentences below. Look at A, B and C opposite to belp you. cost fixed assets market value a a see | 1 Because the = we don't have worry about the market value of fixed assets 2 To depreciate swe part of their from profits cach year 43 Because land usually appreciates, companies do nor gen! the balance sheet. March the two parts of the sentences. Look ar Band € opposite eo help you All Fixed assets can appreciate if there is high inflation Accelerated depreciacion allows compa 1 2 nies 10 2 Fixed assets generally Lose value, except for land, 4 The straight-line method of depreciation 5 a Accelerated depreciacion reduces companies’ tax bills, which usually appreciates. b charges equal amounts apainse profits every year. ¢ remove some extremely valuable assets from their balance sheets. d which encou © bur historical cose accounting ignores this. cs them fo invest in new factories, etc eee o} ‘Are companies in your country allowed to record huge assets, such as their headquarters, as having zero value on their balance sheets? Is this a goad idea? Professional Engl in Use Finance 2510] Auditing Internal auditing After bookkeepers complete their accounts, and accountants prepare their financial skasements, these are checked by internal auditors. An internal audit is an examination of J compatiy’s accounts by its own internal auditors or controllers. They evaluate the acenracy or correctness of the accounts, and check for errors. They make sure that che accounts comply with, or follow, established policies, procedures, standards, laws and regulations, (See Unies 7 and 8) The internal auditors also check the company’s systems of control, related to recording transactions, valuing assets and so on. They check to see that chese are adequate or sufficient and, if necessary, recommend changes to existing policies and procedures, MED External auditing Public companies have to submit rheir financial statements to external auditors ~ independent audirors who do nor work for the company. The auditors have to give an opinion about whether the financial statements represont a true and fair view of the company’s financial situmtion and results. (See Unie 3) During the audit, the external auditors examine the company’s systems of internal control, to see whether transactions have been recorded correctly. They chock whether the assets mentioned on the balance sheet actually esiet, and whether their valuation is correct, For example, they usually check that some of the debtors recorded on the balance sheee are genuine. They also check the annital stoek take ~ the eount of all the goods held ready for sale, They always look for any unusual items in the compa account books cor statements Until recency; the big auditing firms also offered consulting services co the companies whose accounts they audited, giving them advice about business planning, strategy and restructuring, Hue alter a number of big financial scandals, most accounting, fees audor wb Nao gene pid wale aces cms loger [BE TORE alk ace ind ‘AmE: count of the inventory coxally independent MED sregutarities Yes _—» J Audios | Auditors produce a - prean | qualified report, | adie report. | stacing that the systems ] ae financial stareanents adequate, _ * | do not give an according to No = auditors find My entirely teuc and external iregularities systems | fair view and there auditors! Have | are not adequate, Ls are some problems, accounting principles been applied correctly? been applied correctly or consistently principles have mot v Auditors write a — ‘management letter to directors or senior managers explaining what needs eo be changed Does the company follow the advice given in the management letter? 26 Professional English in Use Fnance10.1 10.2 10.3 Match the job titles (1) with the descriptions {a-¢). Look at A and B opposite to help you. 1 bookkeepers a company emplayces wha check rhe financial statements 2 accounrants b expert accountants working for independent firms who review companies’ financial statements and accounting records 3 inteenal auditors ¢ people who prepare Financial statements 4 external auditors d_peaple who prepace a company’s day-to-day accounts March the nouns in the bux with the verhs below to make word combinations, Some swords can be used pice. Look at A and 8 opposite to help you. accounts procedures: opinions } systems of conerot regulations policies [ sroak take advice laws Complete the table with words from A, B and C opposite and related forms. Put a stress mark in front of the stressed syllable in each word. The first one has been done for you. Then complete the sentences below with the correct forms of words from che table. | | accurate . compliance - | recommend _ { examinari = 1 I'm an internal auditor. T the company’s accounts, to make sure that they are and that they with company policies and general accounting principles, 2 IF the contro] systems aren’t adequate, | make concerning changes. 3 The external auditors check to see if transactions are being correctly ea oy ol Would you like to work as an external auditor? Do you think they get a very friendly welcome at the companies whose accounts they audit? If not, why not? Professional Engh n Use Finance aai The balance sheet 1 MED sets, liabilities and capital 28 Balance Sheet, 31 December 20__ ($’000) Current asseis 3,500 Liabilities 6,000 Fixed assets 6,500 Shareholders’ equity 4,000 Total assets 10,000. Total liabilities and Sharchalders’ equity 10,000 Company law in Bricain, and che Securities and Exchange Commission in the US, require companies to publish annual balance sheets: statements for shareholders and creditors ‘The balance sheet is a docoment which has cwo halves, The torals of both halves are always the same, so they balance, One half shows a business's assets, which are things owned by the company, stich as factories and machines, thar will bring future economic benefits. ‘The other hall shows she company’s liabilities, and ies capital or shareholders’ equity (see below). Liabilities are obligations to pay other organizations or people: manvy thar the company owes, or will owe ar a farure dase, These often include loans, taxes that will son have co be paid, future pension payments to employees, and bills from suppliers: companies which provide raw materials or parts. IF the suppliers have given the buyer a period of time before chey have to pay for the goods, this is known as geanting credit, Since assers are shown as debits {as the cash of capital account was debited to ul with the total sum of the evedits ~ that is tics plus capital (or A=L + C) purchase them), and rhe toral must correspe the liabilities and capiral — assets equal lil American and continental European companies usually put assers on the left and capital and fiabilivies on the right. fn Britain, this was traditionally the other way cound, bur now: most British companies use a vertical formar, with assets at the top, and liabilicies and capital below. BrE: balance sheet; AmE: balance sheet or statement of Financial position BrE: shareholders’ equity; AmE: stackholders’ equity Shareholders’ equity Shareholders’ equity eansists of all the money belonging t0 shareholders, Pare of this is share capital — che money the company raised by selling its shares. Bur shareholders’ equity also includes retained earnings: profits trom previous years that have not been. distributed ~ paid our to sharcholders — as dividends. Shareholders’ equity is the same as che company’s net assets, o¢ assets minus liabiliies A balance sheer does not show huw much money a company has spent or reveived luring a year, This information is given in other financial statements: the profit and loss account and the cash flow statement. (See Unit 14) Professional English in Use FinanceU1 Ate the following statements true or fale? Find ceasons for your answers iny A and Bapposie 1 British and American balance sheets show the same information, but arranged differently 2 The revenue of the company in the past year is shown oo the balance sheet 3 The two sides or halves of « bakince sheer always have the same toca, 4 The balance sheet gives information on how much money the company has received from sles of shares 5 The assets total is always the sarne as the abilities total. 6 ‘The balance sheet tells you how much money the company owes. 14.2 Complete the sentences. Look at A and B opposite to help you. are companies thar provide other companies with materials, components, et are profits shat the company has not distributed to shareholders. 3 are things a company owns and uses in its business 4 consist of everything 2 company owes. 5 consists of money belonging to a company’s owners. 11.3 Make word combinations using a word from each box, Then use che word combinations to complete the sentences below. Look at A and B opposite to help you. distribute liabilities grant money owe profits pay earnings retain credit 1 We a lor of our hecause we don't any of our to the shareholders. 2. Most businesses have customers who « because they them 30 or 60) clays? 3 We have a fot of that welll have to lover this year "Ym afeaid our accountants are being investigated for fraud — on the brighter side, our financial statements have made the New York Times best-seller fiction list." Over to you gu FO eS sub-divisions of these categories: assets, liabilities, and shareholders’ equity? Professional English in Use Finance 2930 The balance sheet 2: assets Fixed and current assets eA CIM Galance Sheet 31 December 20__ (s'009) Current assets Cash and equivalents 3.415 Accounts receivable 8.568 Inventory 5,629 Other current assets 5.562 Total current assets 23,244 Non-curront assets Property. plant and equipment 4,800 Goodwill 950 Long-ierm investments 6.265 Total non-current assets 44,715 Total assets 34,959 In accounting, assets are generally divided inco fixed and current assets, Fixed assets (or non-current assets) and investments, suc as huildings and equipment, will continue to he ised by the business for a Jong rime. Current assets are things thar sill prohably he used by the business in the near furnre. They include cash ~ money available to spend) immediately, debtors — companivs ar people who owe money they will have to pay in the ar future, and sta Ifa company thinks a debr will not be paid, it has to anticipate the loss ~ rake aetion in preparation for the loss happening, according to the conservatism principle. {See Unit 7) fe will ‘write off, or abandon, the sum asa bad debt, and make provisions by charging a corresponding amonne against profits: rhac is, deducting the amount of the debe from the year’s profits Valuation ‘Manufacturing companies generally have a stock of raw matorials, work-in-progress — partially maoufactured products — and products ready for sale. There are various ways of valuing stock or inyentory, but generally ehey are valued a the lower of cost or market, which means whichever figure is lower: their cose — the purchase price plus the yaluz of any work lone on the items ~ or che current market price. This is another example of conservatism: even if the stock is expected to be sold at a profit, you should not anticipate profits. Tangible and intangible assets Assets can also be classified as cangible and intangible. ‘Tangible assets are assors with a physical existence - things you can touch ~ such as property, plant and equipment. ‘Tangible assers are generally recorded at their historical cost (see Unir 7) less accumulace depreciation charg the amount of their cost that has already been deducted trom profits, This gives their net book value. Intangible assets include brand names — legally protected names for a company’s products, patents — exclusive rights to produce a particular new produce for a fixed period, and trade marks — names or symbols that are put on products and cannot he used by other companies. Networks of contacts, loyal customers, reputation, trained staff oc “human, apical’, and skilled management can also be considered as intangible assets, Because it is difficult to give an aecurate value for any of these things, companies normally only eecord tangible assets, For this reason, a going concern should be worth more on the stock exchange chan simply its net worth or net assets: assers minus liabilities, If a company buys another one at above its net worth — because ofits intangible assets ~ the difference in price is recorded under assets in the balance sheet as goodwill Professional English in Use Finance12.1 12.2 123 Find words and expressions io A, 1 and C vppusite with the following, meanings. an amount of money that is owed bur probably won't be paid the accounting vale of 2 company (assets minus liabilities} a lega) right 10 produce und sell a newly invented prodnot for a certain period of rime the historical cose of an asset minus depreciation charges the amount a company pays for another one, in excess of the net value of its assers a legally protected word, phrase, symbol or design used to identify a product to accept that a debt will rot be paid to deduct money from profirs because of debrs that will ave he paid products that are nor complote or ready For sole the amount of money owed by customers who have bought goods but not yet paid for them Searvousen- i Match the two parts of the sentences. Look at A, B and C apposite to help you. 1A company’s value on the stock exchange is nearly always 2 Brand names, trade marks, parents, customers, and qualified seaff 3 Cash, money owed by customers, and inventory 4 Companies record inventory ar the cost of buying or making the items, ' Companies write off bad debs, and make provisions: 6 Land, buildings, factories ancl equipment a are current assets. b are examples of intangible assers © are examples of sangible, fixed assets. 4 by deducting the amount from profits. © higher than the value of its ner asects. f or che current marker price, whichever is lower Sort the following, incu current, fixed and intangible assets. Look at A and C opposite to help you. buildings cash in the bank debtors, goodwill human capital investments land reputation Eixed assets Intangible assets Think about the company you work for, or your place of study, What are its most valuable See ean ee ced Professional English ie Use Finance uMmK} The balance sheet 3: liabilities pam Liabilities Liabilities are amouines of money chat a company owes, and are generally divided into two types — long-term and current, Long-term liabilities or non-current liabi bonds, (See Unit 33) ‘Current liabilities are expected to be paid within a year of the date of the balance sheet They includes mm creditors ~ largely suppliers of goods or services to the business who are not paid at the time of purchase mm planned dividends Wm deferred taxes ~ money that will have to be paid as tax in the future, although the payment does not have to be made now. Current Shortierm debt 1,855 Accounts payable 5,049 Accrued expenses 8,590 Total current liabilities 18.197 Non-current liabilities Deferred income taxes 950 Long-term debt 3.402 ‘Other non-current abitlies 3,201 Total non-current liabilities, 5,553 Total liabilities 20,760 Shareholders’ equity Common stock 10,309 Retained earnings 3,900 Toial 14,208 Tolal liabilities and Shareholders’ equity 34,959 HE Accruca expenses Because of the marching prineiple, under which transactions and other events are reported in the periods to which they relate and not wisen cash is received or paid, balance sheets uasvally imclne acerged expenses. ‘These are expenses that have aceanmaated pr bnilt wp during the accounting year bur will nor be paic! until the following year, ater the date of the balance sheet. So acerued expenses are charged against income that is, deducted from profits ~ even though che bills have nor yet been received or the cash paid. Accrued expenses could include taxes and wilicy hills, for example electricity and water Shareholders’ equity on the balance sheet Shareholders’ equity is recorded on the same part of the balance sheet as liabilities, thecanse itis money belonging, to the shareholders and not the compan. Shareholders’ equity includes: the original share capital money from stocks ar shares issued by the company: see Units 29-30) mm share premium: money made if the company sells shares at above their face value ~ the value written on them mm retained earings: profits fom previous years thar have nor been distributed 10 shareholders mm resorves: funds set aside from share capital and earnings, retained | ByE: share premium: for emergencies or other furure needs Ame: paid-in surplus 32 Professional English in Use Finance13.1 13.3 Are the followin opposite statements true or false? Find reasons for your answers in A, B and C 1 A current liability wil] be paid before the date of the balance sheet. 2 A liability that must be paid in L3 months time is classitied as long-term. 3 A company’s accrued expenses are like money an individual saves zo pay bills in the fueure 4 Shareholders’ equity consists of the money paid for shares, and retained earnings. 5 If companies retain part oF their profits, this money no longer belongs to the owners. & Companies can sell shares ata higher valve than the ene stated on them. Find words in A, Band © opposite with the following meanings. 1 money that will be paid i less than 12 months from the balance sheer date 2 the moncy that investors have paid to buy newly issued shares, minus the shares* face value 3 delayed, put off or postponed until a later time 4 built up or increased over a period af rime Sort the following into assets and liabilities. Look at A and B opposite to help you, You may need to look at Unit 12. | Accounts payable Land and buildings Accrued expenses Investments Dividends Cash and equivalents Taventory Deferred taxes Accounts reveivable Long-term debe Asseis Liabilicies “Oh, that three billion dollars. Teese er) Look at the last two annual reports and balance sheets of your company or one you would like to work for. What differences do you notice in the balance sheets and what reasons Rd Profesional English in Use Finance 33mr The other financial statements Ez The profit and loss account Companies’ annual reports contain profit Searby PLC and loss account. This is a Hnancial statement Annual Profit and Loss Account, 1/20_ which shows the difference between the "" oss Account 1/20_— teyenues and expensés of a period. Non- (000) profit (or not-for-profit) organizations such as__-Saleés Revenue 48,762 charities, public universities and museums. Cost of Sales 33,496 geacrally produce an income and expenditure Gross Profit 15,286 account. [f they have more income than Selling. General end expenditure this is called a surplus rather Administrative Expenses 10.029 Eamings before Interest, 12%, Depreciation and Amortization 5,257 than a protic At the top of these statements is total sales revenue or turnover: the toral amount of Bopreciation and Amortization lose teen Earnings before Interest and Tax 3,889 money received during a specific period. Next interest expenses 257 is the cost of sales, also known as cost of goods sold (COGS): rhe costs associated with eee ues . Net Profit 2.568 making the products that hare been sold, such as ray materials, Iabou, anc! factory expenses, The difference between the sales cnuc and the cast of sales ts gross profit. There are many other costs or expenses that have to be deducted from gross profit, such as ren, electricity and office salaries. These are often grouped together as selling, general and administrative expenses (SG The statement also usually shows EBITDA (carnings before interest, tax, depreciation and amortization) and EBIT (earnings before insezest and tax). The first figure is more objective because depreciation and amortization expenses can vary depending on which system a company uses. After all the expenses and deductions isthe net profit, afen called the bottom line, This profit can be distributed as dividends (unless the eompany has to cover past losses), or transferred to reserves. ecount: Am: income statement GRD The cash flow statement British and American companies also produce a cask flow statement. This gives details of cash flows ~ money coming into and leaving the business, relating to fm operations ~ day-to-day activities | me investing — buying or selling property, plant and equipment fm financing — issuing, or repaying debt, or issuing shares. e cash flow starement shows how effectively 2 company generates and manages cash. r names are somerimes used for it, including funds flow statement and source and application of funds statement. British companies also have to prodince a statement of total recognized gains and losses (STRGL), shawing anw gains and lasses chat are not included in the profit and loss account, suet as the eevaluation of fixed assets, 34 Professional English n Use Finance14.1 14.2 14.3 Which figure in each of the Following pairs is higher for a profitable company? Look at A opposite to he! you. 1 cost of sales / sales revenue 4 net profit / pre-tax incom 2 gross profit [net profit © income tax / net profi 3 EBET / EBITDA Complete the text wich words from che box, You will need 10 use each word more than once, Look at B opposite to help yon. [ Financin investing operations —_| a) means making, money hy selling goods andl services, (2) is spending cash, for the business's future geawth, including cash acquired by selling. assets. (3 inyolves raising money by issuing stocks and bonds (and also paying slividends and ioterest and repaying bonds). It is herr for the company if ie ean pay for furare growth our of money from (4) » Without having to use S) So a “healthy” cash flow means that the amount of cash provided by (6) is greater chan the cash used for (7) Would the following appear as operating, financing, or investing activities on a cash flow: statement? Look at the example below co help you. Changes in operating assets and liabilities Dividends paid Purchase of plant and equipment Net income Issnance of stock Payments to repurchase stock Sale of properny Depreciation and amortization expenses Income taxes payable Repayment of debr Cash flow statement ($1000) Earnings Amortization Other adjustments to Eamings Net cash provided from operations Proceeds from issuing new stock Stock dividends paid Net cash provided from financing Additions to property, plant and equipment Net cash used for inves! Change in cash and equivalents during year Cash and equivalents, beginning of year Cash and equivalents, end of year Over +0 you 0k at cash flow statements in company annual reports, and at the share prices of those ra ee a ne eee ‘more cash than they spent, and what happened to those that spent more than they generated? Professienai Enghsh in Use Finance 35Financial ratios 1 Types of financial ratio Financial ratios express the relationships besween two or more items on financial statements, They allow investors and creditors to compare a company’s present situation and performance with its past performance, and with other companies, Ratios measure: 1 Fiquidity: how easily a company can turn some of its assets into cash mi solvency: whether a company has enough cash to pay short-term debts, of whether it could go bankrupt ~ have its assets sold to repay creditors, me cfficiency: how well a company uses its resources, Liquidity and solvency ratios CUrreNT assets: This is the current ratio, which is a calculation of current asscts divided by currenc liabilities. Ie measures liquidity and shows how mach of a company’s assets nil have to be converted ini cash in the next year to pay debts. The higher the ratio, the more chance creditors have of being paid. For example, if MacKenzie Inc (see Units 12-13) has current assets of $23,244,000 and current liabilities of $15,197,000, its current vatio is 1.53, which is acceptable. It is often argued that the current ratio of a healthy company shoold be closer 10 2.0 than 1.0, meaning chat it has yy nwiee as many assets as liabilities current Tiabilities Suppliers granting short-term credit to a company prefer the cusrent ratio to he high because this ceduces theic risk, Yor sharcholders usually prefer it to be lov, because this means that the company’ has invested its assets for the forure. HL assets This is the quick ratio or acid test, which is a calculation of liquid assets divided by curcent liabilities, ke measures short-term solvency. Lignidl assevs are current nssers minus stocks or inventory, as these might be difficult to sell. MacKenzie Inc's quick ratio is L.1S. «liabilities Earnings and dividends Sharcholders are interested in ratios relating 1o a company’s share price, ¢arnings, and dividend payments, oral careinys for the year This is earnings per share (EPS). Iv tells investors how much of the company’s profit belongs to each share, Tt a company makes a post-cax profit of €1.5 million, and ir has issued 2 million shares, E98 = €0.75: the number of ordinary shares 0 ordinary sha ‘This is the price/earnings ratio or P/E ratio, It a shows how expensive the share is. IF a company EPS Y has EPS of 0.75 and the share is selling for €9.00, the PVE ratio is 12 (€9 per shage divided by €U.75 earnings per share = 12 P/E.) A high P/F. ratio shows thar investors are prepared to pay a high rmultiple of the earnings for a share, because they expect it ro do well in the future, the market price of the past y ordinary share dividend! This is dividend cover or times dividend covered, which a shows how many times the company’s roral annual dividends could have been paid ut of its available annual carnings, If a company has EPS of 75 cents and it pays ont a dividend of 30 cents, the dividend cover is 7 130 = 2.5, A high dividend cover shows chat the company has a lot of money, but that it is not being very generous to its shareholders, A ratio of 2.0 or higher is gererally considered safe (ic means that dhe company can easily afford the dividend), but anything below 1.5 is risky. A low dividend cover ~ below 1.0 ~ means the company is paying out retained surpluses from previous years. ne profit Professional English i Use Finance15.1 15.2 15.3 Find words in A opposite with the following meanings. 1 the 2 ho 2 the relationship berween wo figures 4 how easily a business cam pay bills or debrs when they are due lity to sell an asset for cash a business uses its assets Make word combinarions using a ward from each box. One word can be used twice. Then use word combinations to complete the sentences below, Look at i and C oppasite to help you acid assets current cover dividend ratio liquid test quick 1 consist of eash and chings thar can be easily sold and converted to cash. 2 Abigh shoves that the company is recaining a lot of money belonging, ¢0 its shareholders. a the or doesn’t count stock or inventory because this might be difficule or itspossible to yarn ince cash 4 The shows a company’s ability to pay its short-term debts, Match she two parts of the Sentences. Look ar Band C opposite to help you. 1 Ifa company pays out retained surpluses from past years 2 Some investors are weirried chat the new stack issue 3 A high current ratio indicates short-term financial sirengch but 4 Wall Streer is on a historic price-earnings ratio oF around 35, which a it does nor measure how efficiently the company is utilizing its resources. b its dividend cover will fall below 1.0. ¢ makes the market very expensive, as che long-term average is 14.45. 4 will dilure the company’s camings per 3 ON eee i Look at a company's financial statements. Which of the financial ratios mentioned in this Peete Cs eS ered RC hcunieen contd Pm Cee SET CEC Professional Engfsh in Use Finance 3738 There are various profitability ratios that allow investors to compare a company’s profic with its sales, its assets or its capital. Financial analysts usually include them in their reports on companics. gross profic (sales — cost af goods sold) This fs che gross profit margin. Ie is the money sales company has lef after it pays for the cost af the goods tr services it has sold. A company with a higher gross profit margin than competitors in its industry is more it, and should be able to make a profit in the net profit ‘This is return on assets. It measures how efficiently the firm's assets are being used woul assers net provi, shareholders’ equity Leverage debr shareholders’ equity EDIT (see Unit 14) interest charges Citigroup Inc Key Ratios, 2005 Average Average Growth Rates % Sales Us 294 107 EPS 32 22 2 Price Ratio BIE Ratio 139 145 206 Profit Margins Pro-Tax Margin 218 BT 413 Net Prove Margin 15.5 163 76 Financial Condition DebuEquity Ratio 19 1.32 ut Inerest Cover 2.0 21 34 Investment Returns % Return On Equity \s7 82 145 Return On Assets 12 10 25 te generate profits, “This is return on equity (ROE). Ie sbows how big # company’s profi is (after interest and tax} compared with the shareholders’ equity or funds. This is gearing or leverage, often expressed as a percmtage. Te shows how far a company is funded by loans rather than its own capital. A highly geared or highly leveraged company is one thac has a lor of debe compared 10 equity This is interest cover or times interest earned, It compares a business's ‘annual inzerest payments with is eacnings before inrerest and tax, ancl shows how easily the company can pay long-term debt costs. A low interest cover (eg, below 1.0) shows that a business is having difficulties nerating, the cash necessary for irs interest payments. [Bre gearing: | AmE: leverage Giigroup Banking Industry SBP 500 Professional English in Use finance16.1 16.2 Match the nv parts of the sentences. Look acA and B opposite ro help vou. 1 Alter borrowing saillions ts finance the rakeover of a rival firm, the cornpamy’s 2 Although sales fell 5%, the company’s 3 Like profi growth, retucn on equity is a measure of 4 Wich just 24% geating, the compeny can afford gross profit margin cose 9% from a year ago, so serine management isn’t worried. 'b how good a company is at making money. ¢ intetest cover is the lowest it has ever been. 4 ro acquire ies Fival, which would help co increase lus stesdy growth Reaul the text and answer the questions below, You may need to look at Unies 1-14. Predicting insolvency: the Altman Z-Score The Z-Seore was created by Edward Aliman in the 1960s. It combines 2 set of 5 financia| ratios and a weighting system to pradiet a company's probability of fallure using 8 variables from iis financial statements. The ratios ere multiplied by their weights, and the results ara added together, ‘The 5 finaniciat ratios and their welght factors are: A EBIT / Total Assets 433 B Net Sales / Totel Assets 0.999 C Market Value of Equity / Tolal abilities «0.6 D Working Capital / Total Assets KAZ E Retained Earnings / Total Assets ave ‘Therafora the ZScore=Ax3.3+8x0,009+Cx08+Dx12+Ex 14 Interpreting the 2-Score > 3.0 ~ based on these financial figures, the company is safe 2.72.99 — insolvency is possible 1.8-2,7 - there is 2 900d chance of tho compeny going bankrupt within 2 years < 1.80 - there is very high probability of the company going bankrupt -rerarrteesetanataeuunnnntnane Pere rereCOttaeenenpinennemnettnertrentttRRReeeerTentnrnnnmevenen ‘Which ratio in the Z Score takes into eccount: 1 money used for everyday expenses? 2 undistributed profits belonging to the sharehcilders? 3 income or carnings before interest and tax ere deducted? 4 the currenc share price? © the ammount of money received from selling goods or services? ler ama co Me a9 pl Coe Re Ae eed Ree ee eR ree eat Profesional Engish H Use Fisence 3940 Cost accounting Direct and indirect costs Cost accounting involves calculating the costs of different products or services, so that company managers can know what price to charge for particular products and services and which ate the most profitable. Direct costs ~ those that ean be directly related to the ‘production of particular units of a product are quite casy to calculate, Examples inchude manufacturing materials and manofaccuing wages. But there are also indirect costs or overheads — costs and expenses that cannot be identified with particular manufacturing processes oF units of production, Examples include rent o¢ property taxes for the company’ offices and factories, electricity for lighting and heating, the maintenance department, she factory canteen or restaurant, managers’ salaries, and so On. Costs such as these ate often grouped together on the profit and loss account SE Overneags or income statement as Selling, General and Administrative Expenses. mes overeat Fixed and variable costs Companies also differentiate herween Fixed costs and variable costs. Fixed costs are those that do not change in the short term, even if the produetion level changes, such as rent and intetest payments. Variable costs are those that change in proportion to the volume of production, such as components and raw materials, and overtime payments Manufacturing companies have to find a way of allocating fixed and variable costs t0 the varions products they make: that is, they divide up the costs and charge them to the different products. Absorption costing attempts to charge all direer costs ancl all production costs, and sometimes all indirect costs such as administrative expenses, to cach of rhe company’s products or services. Activity-hased costing, calculates all the costs connected with a particular activity (e.g. product design, manufacturing, distribution, customer servicel, even if they are carried out by different departments in the company Most companies have departments or functions that do not generate any profit but only incur costs (e.g, accounting and legal departments}. For accounting purposes, companies often make these departments into cost centres, and allocate or charve all the costs relared co them separately. Br: cust centre; AmE: cost center Breakeven analysis When deciding whether it would be profitable ro produce a product, of offer a service, companies do a breakeven analysis. This compares expected sales of the new product with expected costs ~ hoth direct and indirect — at various produetion levels. The breakeven point is the sales volume ~ the number of units sold ~ at which the company’ covers its costs ~ pays all its expenses. To snake a protic, eis necessary to sell more shan chis, Although cost accounting allows companies to calculace production costs, pricing decisions also depend om: mm the level of demand the prices of competitors’ produess the company’s financial situation the company’s objectives — the goals o7 aims it wants to accomplish the company’s marketing policies ~ whether itis interested in maw maximizing peolt. zing sales or Professional English in Use FinanceWa 17.2 17.3 March the words in the box with the definitions below. Lok ar A, 8 and © opposite 10 help you ‘breakeven point ‘cost cones fixed cose | | overheads variable costs profitable | 1 expenses that are not clearly related ro production or manufacturing 2-0 mir of activity in an organization for which costs are calenlared separately 3 costs thar depend on the amount produced 4 adjective meaning providing income for a company 5 costs thar do not change according, ro the production volume 6 the sales volume at which a company doesn't make a loss, but doesn’t make a profit Sort the fallowing inte dircc, indirect fixed and sarinble costs, Look at A and B opposite ro help you. (ites Wines Advertisi ad debrs Components v { 7 | Electricity to run machines | Electricity for hea | Equipment repairs os + fay a tn es | Raw marerials | . | Propen Fax Rent | I Which of the following statemencs describes: 1 absorption costing? 2 activity-based costing? ci Inbour — we allocate pare As well as direct manufacturing costs ~ materials of our fixed and variable manufacturing overheads to the cost of every product. SX | We identify all the diffecene functions within che company, and assign casts &0 | products and services accarding to how much these functions are inyolved in the process of providing the products and services. ON erode) RE La Dea two other products you bought Ce cs ce eae A Professional English in Use Finance 4lan Pricing WEY Vanufacturcrs’ pricing strategies These are a student's notes from a lecture abour pricing Companies’ prices ate influenced by production and disttioution costs, both direct and indirect. = Mark-up or cost-plus pricing: some firs just calculate the unit cast and add a percentage. = Most companies consider other factors, like demand, 2 competitors’ prices, sales targets and profit targets. Market penetration pricing: some companies lauch products ata price that only aives them a very small profit, because they want a big market share. This allows them to make profits later because of economies of scale, eg. Bic pens lighters and razors: Dell PCS. = Market skimming: some customers will pay almost any price, 8g. for a new hi-tech produ so the company can charge a really high price, then lower it to reach other market segments, e.g Intel with new microchips. = if company has a higher demand for its products than it’s able to supaly it can raise its prices. This is often 2 done by monopolists = Prestige pricing or image pricing: products positioned | price: the target customers probably won't buy them if they think the price is too fow, eg. BMY, Rolex ™ Going-rate pricing: if a product is almost identical to Competitors’ products, companies might charge the same price HEED Retail pricing strategies = Lossleader pricing: retailers (e.g. supermarkets) often offer some items at a vory low price that isn't profitable, to attract customers who then buy more products which tre profitable. "= Odd pricing or odd-even pricing: many producers and retailers believe a customer sees a price of € 2995 as in the € 20 price range rather than the € 30 one, Elasticity: demand is elastic if sales rascond cirectly to price variations ~ eg. ifthe price is cut, sales increase. if sales emain the same after a change in price, demand is inelastic, 42 Professional English in Use Finance unit costs at the luxury end of a market need to have a high rot markets shave wey econonties of scale: target custowers -enles eavget/prefit trrges18.1 18.2 Find five verbs in A and B opposite that can be used to make word comtbinauions with ‘prices’. Them use the verbs to complete the senrences below. prices) 1 Economists say thar if sales inerease when YOu |... ......000 4 Price, demand is elastic, 2 Lf we have more customers than products available, we generally our prices 3 Luxury goods companies make luge peofics, because ther customers are prepared co really high prices 4 Our product’ really the same as our competitors’ so we'll probably the same price: § Afcer we've skimmed the marker, we ean the price to get more customers. Match the pricing strategies in the box with che statements below. Look at A and B opposite 1 help you Tgoing-rate pricing loss-leader pricing market penetration marker skimming [markup pring odd pricing __puestige pricing ] 1/ 5 \ Becawse of wor famons brand name} Demand isn't very clastic, so-we charge and our reputation for gualiry, we {the same price as our main competitor can charge a very high price Re ma —=—A X >——_—___—__ 27 ——— We actually sell a few products at We never use whole aumbers like breakeven priea, but this beings in $10 oF $20, Our prices always estomers who ako buy a lot of (in 95 0F 99 conts |. other things. J oS LA & 36. a as We launch our products at high \ { We charge a really low price at first. prices, and chen reduce them a few because we want to sell as many months later fo get more customers, (units of the produce as possible ar i We just yet ch scoumtants to work out how much it costs to make (the product, and add our profit, (oleae et nee Se eLearn oa eL ce ee sg SR ey Professional English in Use Frnance aGD Corcent accounts A current account is an account which allows customers to take out or withdraw money, with no restrictions. Money in the account does nor uscally earn a high race of interest: the hank does not pay much for ‘borrowing’ your money. However, many people also have a savings account or deposit account which pays more interest but has restrictions on when you can withdraw your money. Banks usually send monchly statements listing recent sums of money going out, called debits, and sums of money coming in, called credits. Nearly all customers have a debit card allowing them co make withdrawals and dis other rransacticins at cash dispensers, Most costomers have a credit eard which can be used for buying goods and scrvices as well as for borrowing money. In some countries, people pay bills with cheques. In other councries, banks dott issue chequebooks and people pay bills by bank transfer. These include standing orders, which are used to pay regular Fixed sums ‘of money, and direct debits, which arc used when the amoune and payment date waties. BrE: current account; AmE: checking aeeount BrE: cash dispenser, cash machine: AME: ATM (Automated Teller Machine) | BrE: cheque; AmE: check HRD Benking products and services Commercial banks offer loans — fixed sums of money thar are lent for a fixed period (e-g. two years}. They also offer overdrafts, which allow customers to overdraw an account ~ they can have a debt, up 0 an agrecd limit, on which interest is ealeulated daily. This is cheaper than a loan if, for example, you only need to overdraw for a short period, Banks also offer mortgages to people who want to buy a place to live. These are long-term loans on which the property aets as collateral or a guarantee for the bank. Hf the borrower cloesn’t repy the mortgage, the bank can repossess the house or flat ~ the bank takes it hack from the buyer, and sells it. Banks exchange foreign curreney for people going absoad, and sell traveller's cheques which are protected against loss or theft. They also offer advice about investments and private pension plans — saving money for when you retire from work, Increasingly, banks also try xo sell insurance products ¢0 their customers. Br: traveltey’s cheque; AmE: traveler's check WS) banking In the 1990s, many commercial banks thoughe the future would be in telephone banking and internet banking or ebanking, Bur they discovered thar most Of their eustomers preferted co go to branches — local | Bsn vfices of the bank ~ especially ones that had longer or) Was pening hours, and which were conveniently sicuatedl in shopping centres. Fecannala manga RENN 44 Professional English in Use Finance