CHAPTER 4.

ACCOUNTING AND FINANCIAL STATEMENTS

1. Types of Accounting
Task 1a. Vocabulary
Match up the terms on the left with the definitions on the right
1) bookkeeping
2) accounting
3) managerial accounting
4) cost accounting
5) tax accounting
6) auditing
7) creative accounting
Answer:
A. Calculating an individual’s or a company’s liability fortax
B. Writing down the details of transactions (debits and credits)
C. Keeping financial records, recording income and expenditure, valuing assets and
liabilities, and so on
D. Preparing budgets and other financial reports
E. necessary for management
F. Inspection and evaluation of accounts by a second set of accountants
G. Using all available accounting procedures and tricks to disguise the true financial
position of a company
H. Working out the unit costs of products, including materials, labour and all other
expenses

1) bookkeeping B. writing down the details of transactions

(debits and credits)
2) accounting C. keeping financial records, recording
income and expenditure, valuing assets and
liabilities, and so on
3) managerial accounting D. preparing budgets and other financial
reports necessary for management
4) cost accounting G. working out the unit costs of products,
including materials, labour and all other
expenses
5) tax accounting A. calculating an individual’s or a
company’s liability fortax
 6) auditing E. inspection and evaluation of accounts by
a second set of accountants
7) creative accounting F. using all available accounting procedures
and tricks to disguise the true financial
position of a company

Task 1b. Discussion

What particular skills do you think different kinds of accountans need?
Do you think you possess these skills? (what are your assets and liabilities?)
If you have yet to choose a career, do you think it could be accountancy?
Answer:
• The qualities needed for bookkeeping might be accuracy and concentration, and
math (or at least arithmetic) skills. language and analytical skills and mathematical
competence. Tax accounting may require a thorough knowledge of tax law and
accounting combined with a desire to help one's clients reduce their tax obligations.
Auditing may require strong analytical and psychological skills, and honesty,
requires the same, replacing dishonesty with honesty.
• Yes I think I have those skills
• My opinion in accounting is the field of science that studies finance

2. Company Accounts
Task 2a. Vocabulary
These are some of the most common terms in accounting. Match them up with the
definitions below.
assets liabilities turnover
depreciation (GB) or amortization (US)
creditors (GB) or accounts payable (US)
debtors (GB) or accounts receivable (US)
overheads (GB) or overhead (US) earnings or income
shareholders (GB) or stockholders (US) stock (GB) or inventory (US)
1) A company’s owner
2) The revenues received by a company during a given period, minus the cost of sales,
operating
expenses, and taxes
 3) All the money that a company will have to pay to someone else in the future,
including taxes,
debts, and interest and mortgage payments
4) The amount of business done by a company over a year
5) Anything owned by a business (cash investment, buildings, machines, and so on) that
can be used to produce goods or pay liabilities.
6) The reduction in value of a fixed asset during the years it is in use (charged againts
profits)
7) Sums of money owed by customers for goods or services purchased on credit
8) Sums of money owed to suppliers for purchases made on credit.
9) (the value of) raw materials, work in progress, and finished products stored ready for
sale.
10) The various expenses of operating a business that cannot be charged to anyone
product, process or department.

Answer:
1. Shareholders or stockholders
2. Earnings or income
3. Liabilities
4. Turnover
5. Assets
6. Depreciation or amortization
7. Debtors or accounts receivable
8. Creditors or accounts payable
9. Stock or inventory
10. Overheads or overhead

Task 2b. Reading

Insert the words in the box in 2a in the gaps in the text.
ACCOUNTING AND FINANCIAL STATEMENTS
In accounting, it is always assumed that a business is a “going concern”, i.e. that it
will continue indefinitely into the future, which means that the current market value of its
fixed assets is irrelevant, as they are not for sale. Consequently, the most common
accounting system is historical cost accounting, which records (1) ……………… at their
original purchase price, minus accumulated depreciation charges. In times of inflation,
this understates the value of appreciating assets such as land, but overstates profits as it
does not record the replacement cost of plant or (2) …………… The value of a
business’s assets under historical cost accounting – purchase price minus (3)
………………… - is known as its net book value.
 Company law specifies that (4) ……………… must be given certain financial
information. Companies generally include three financial statements in their annual
reports.
The profit and loss account (GB) or income statement (US) shows (5)
……………… and expenditure. It usually gives figures for total sales or (6)
…………………, and costs, expenses and (7) …………………. The first figure should
obviously be the highest, i.e. there should be a profit. Part of the profit goes to the
government in taxation, part is usually distributed to shareholders as a dividend and part
is retained by the company.
The balance sheet shows a company’s financial situation on a particular date,
generally the last day of the financial year. It lists the company’s assets, its long-term and
short-term (8) ……………… and shareholders’ (stockholders’) funds. A business’s
assets include (9) …………… as it is assumed that these will be paid. Liabilities include
(10) ……………, as these will have to be paid. Long-term liabilities are usually loans
and bonds; short-term liabilities include accrued or accumulated expenses that have not
yet been paid such as taxes and interest. Negative items on financial statements, such as
creditors, taxation anddividends paid are usually enclosed in brackets or preceded by a
minus sign.
In accordance with the principle of double-entry bookkeeping (that all
transactions are entered as a credit in one account and as a debit in another), the basic
accounting equation is:
Assets = Liabilities + Owners’ Equity
This can be rewritten as:
Assets – Liabilities = Owners’ Equity or Net Assets
This includes share capital (money received from the issue of shares), share premium
(GB) or paid-in surplus (US) (any money realized by selling shares at above their
nominal value) and the company’s reserves including retained profits from previous
years. Shareholders’ equity or net assets are generally less that a company’s market
capitalization (the total value of its shares at any given moment, i.e. the number of shares
times their market price), because net assets do not record items such as goodwill.
The third financial statement has various names, including the funds flow
statements, source and application of funds statement (GB) and the statement of changes
in financial position (US). This shows the flow of cash in and out of the business between
balance sheet dates. Companies often distinguish between operating activities, and
financing and investment activities. Sources of funds include trading profits, depreciation
provisions, sales of assets, borrowing and the issuing of shares. Application of funds
includes purchases of fixed or financial assets, payment of dividends, repayment of loans,
and –in a bad year- trading losses.
Answer:
1. Assets
2. Stock or inventory
3. Depreciation or amortization
4. Sharcholders or stockholders
5. Carnings or income
6. Turnover
7. Overheads or overhead
8. Liabilities
9. Debtors or accounts receivable
10. Creditors or accounts payable

Task 2c. Summarizing

Complete the following sentences.
1) Companies record their fixed assets at historical cost because...............
2) Historical cost accounting usually underestimates......
3) Countries with a regularly high rate of ...........
4) Company profits are usually split ......
5) Double-entry bookkeeping requires that ..........
6) A company’s net assets consist of.........
7) A company’s stock market capitalization ………
8) Flows of cash both in and out of the company .......
Answer:
1. Companies record their fixed assets at historical cost because they do not need to
know their value: if the company is a going concern they are not for sale.
2. Historical cost accounting usually underestimates the value of assets that
appreciate (gain value), such as land and buildings (US: real estate).
3. Countries with a regularly high rate of inflation generally use a system of current
cost or replacement cost accounting, which records assets at the price that would
have to be paid replace them.
4. Company profits are usually split three ways into tax (corporation tax in Britain,
income tax in the US), dividends, and retained earnings
5. Double-entry bookkeeping requires that every transaction is recorded in one
account as a sun received and another as a sum paid.
6. A company’s net assets consist of its assets minus liabilities
7. A company's stock market capitalization is usually more than the value of its net
assets, because this figure does not include intangible elements such as goodwill.
8. Flows of cash both in and out of the company are recorded in the source and
application of funds statement.
3. Financial Statements
These are the 2000 consolidated financial statements of Nokia, the Finnish mobile
telephone manufacturer, established according to International Accounting Standards
(IAS). (Consolidated
means that these statements combine the individual figures of all Nokia group
companies). Nokia’s net sales increased by over 50% in 2000 compared to 1999, as
the global mobile phone market continued to grow.
The statement printed here are slighty shortened, and include some material from the
notes that
accompany the statements in Nokia’s Annual Report.
There are ten gaps in the three statements below. According to the information is the
text in 2b,
decide where the following headings should appear:
Accrued expenses Long-term liabilities
Cash and cash equivalents at beginning of period Cost and expenses
Net cash from operating activities Income tax Net profit
Intangible assets Inventories Retamed earnings

Answer:
1. Costs and expenses
2. Inceme tax
3. Net profit
4. Intangible assets
5. lnventories
6. Retained earnings
7. Long-term liabilities
8. Accrued expenses
9. Net cash from operating activities
10. Cash and cash equivalents at beginning of period