Professional _—- English in Use | lan MacKenzie = CAMBRIDGE iv UNIVERSITY PRESSia Contents INTRODUCTION 6 BASIC TERMS GD Money and income 8 A Gaurtency 8 Personal finance Br A Capital B Revenue ess finance 10 © Financial searements ACCOUNTING GB Accounting and accountancy 12 A. Accounting B Avdliting € ta rules and standards @B Bookkeeping 14 & Doubloenmy hookkeoping, B Day books and ledgers © Balancing the books GB Company taw 7 16 A. Pacenershis B_ Limited liability © Founding companies (GB Company law 2 18 A. Prisate and public companies BAGMs Accounting policies and standards 20 A Valuation B Historical cose andl i BD Accounting assumptions and principles 22 A Assumptions 5 Principles GD Depreciation and amortization 24 A Feed 9 B Valuation sets © Depreciation systerns OB Auditing 26 A Jnternad auditing B External audicing © Irregulaciues The balance sheet 1 28 Assets abilities and capital B_Sharcholclers’ equity The balance sheet 2: assets 30 A. Fixed and current assets B Valuation © Tangible anc incangible assets BD) ihe balance sheet 3 liabilities 32 A. Liablities B_ Accrued expenses © Shareholders" equity en the balance sheet The other financial Statements 34 A. The profit and lose accoune B_ The cash flow searoiment @B Financial ratios 1 36 A Types of financial ratio B Liquidity anel solvency ratios Fariings and dividencls GB Financial ratios 2 38 A Profitabilie B Leverage Cost accounting 40 A Dineet and indireer costs B. Fixed and variable costs © Breakeven analysis Pricing 42 A. Manufacturers’ pricing stateyies B Rewil pricing serategies Professional English in Use FinanceBANKING @D Personal banking aa A. Corrent accounts B Banking, products and services © E-banking. Commercial and retail banking 46 A Gemmercial and retail hanks: 3 Credit © Loans and risks Financial institutions 48 A Types of financial vtinution B Detegul rion © Specialized tanks @ tovestment banking 50 A Raising capital B Mergers and acquisitions © Consulting and research BX3 Central bankin 52 'g. A The Functions of central Banks B The central hank and the couuuercial hanks © Gontral hanks and exchange rates Interest rates 54 A Interest rates and monetary poliey B Different interest rates Money markets 56 A ‘The money markers & Common money marker instrunients © Repos 3 Islamic banking 58 A Interetfree banking B Tepes uf accuunts © Leasing and shore-rerm loans Money supply and control 60 A” Measueing money 8 Changing the money supply © Monerarisns Professional English in Use Fiance CORPORATE FINANCE BB Venture capital Aalsing cajpeal 8 Remon eapia EB) Stocks and shares 1 A. Stocks shares and esiities B Going public © Ordinary and preference shares EBD Stocks anu shares 2 A. Buying 2nd selling sans 8 New share inues © Cangories of sticks antl shares Shareholders 4 Trvest 8 Dividends ask! capital gains © Speenlacows EBD Share prices A nfhiences om shane prices B Preticring peices © Types of risks Bonds 4A. Government and corporate bonds B Prices and yicids © Other eypos of bonds Futures A Commodity faraces B Linancial h Derivatives A Options B In-the-money acd oneof-the-money © Warranis and soraps EB 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 52 4 66 68 70 72 74 76 78 80Describing charts and graphs 82 A Increase and dee ® Rave of change © High points, low points, and staying the Mergers and takeovers 84 A Mergers, takeovers and joine ventures B Hostile oF friendly? © otepeation Leveraged buyouts 86 A B Raid splomerates GBD Financial planning 88 A Financing new investments 8 Discounted cash flows © Comparing investment retucts Financial regulation and supervision 90 A. Government regulation 8 Anternal controls © Sarbanes-Oxley ECONOMICS AND TRADE International trade 92 ‘Trade B Balance of payments © Protecsonisn Exchange rates 94 A Why exchange rates change B Fined and! floating rates © Government ingervention EB Financing international wade 96 A Documentary credits 8 ills of exchange © Export documents @B Incoterms 98 A. Transport and additional costs B The E and F terms © The Cand D terns Insurance 100 A Tnsoring against risks B 1ifeinsurance and saving © Insurance companies GB) The business eyele 102 ‘A Expansion and contraction B_ Fiscal poliey © Moneiary policy Taxation 104 A Diner raves ayment of ra Business plans 106 A. Marker opportunities B_ The compans, the procluer anil che marker © ‘The financial analysis Language reference 108 Market idioms Numbers Word suzess Ich and American vocabulary Answer key 114 Index 132 Acknowledgements 140 Professional English in Use Finence5 oney and income BEY curren Then money used in a country ~ eurns, dollars, yen, ete. 18 ity currency, Money in notes thanknotes) and coins is called cash. Most money, however, consists uf bank accounts, Most of this is on paper ~ existing in theory only ~ and nly about ED deposits: money that people and organizasions have in hank | Bre: note or banknote Am 1 ten per cent of it exists in the form of eash in che bank: | Am: bil ‘onal finance All the money a persion receives or earns as payment is his or her income, This can include: pensi Amo 2 Ain organization expects to carn and spend is called a budget. a salary: money paid monthly by an employer, or wages: money paid hy che day or the hour, usually received weekly overtime: money received for working extra hours commission: money paid co salespeople and agents ~ a certain percentage of the income the employee generates a bonus: extra money given for meeting a target or for good Rnancial results fees: money paid to professional people such as lawyers aud atchizects social security: money paid by the government to unemployed and sick people a pension: money paid by a company tir the government to a retired person, cs and wages are often paid after deductions such as soetal security charges and on contributions. nts of money thar poople have to spend regularly are ouigoings, These often include: living expenses: money spent on everyday needs such s food, clothes and public transport 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: repaymeras of money borrowed to buy a house or flat health insurance: financial protection againse medical expenses for sickness or accidental injuries tax: money paid e0 finance government spending, ancial plan, showing how much money a person or | BrE: social security; Ame: welfare | Br flat; AmE: apartment Planned monthly budget for next year (€) Income ‘Outgoings Salary (after deductions) [3,250 | Rent Commission (average) | 600 | Bilis Living expenses Health insurance Tax Total 3,850 | Total a 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 want t0 set up or stare a company, they need money, called capital Companies can borrow this money, called a loaa, irom banks. The loan must be paid hack with interest: the amount paid to boseow the money. Capital can also come from issuing shares or equities — certificates represeuting units of ownership uli 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 as share capital. Individuals andl financial institutions, called investors, can also lend money to companies by buving bonds = looms that pay interest and are repaid ara fixed hatore date, (See Vinit 33) Money that is owed ~ that will have to be paid ~ co other people «ir businesses is a debt. In accounting, companies’ debts are usually called liabilities. Long-term liabilities include bonds; shore-term Bahiliries include debts ro: suppliers who provide gouds ar services on credit ~ that will be paid for lasee. The money that 2 business uses for everyday expenses or has available for spending is called working capital or funds, | Bre: shares; Ame: stocks BrE: shareholder; Ame: stockholder Revenue All the money’ coming into a company during a given period is revenue. Revenue minns the cost of sales and nperating expenses, such as rent and salaries, is known as profit, eamings or net income. ‘The pact of its profit that a company pays ro its shareholders is a dividend. Companies pay a proportion of their profits to the government a tax, to finance government spending. They also retain, or keep, some of their exrnings for Furure use, share capical revenue dlividends TT 4 capital company | —>] profits | —> tax - 1 Y hg debt [bonds and loans) expenses retained earnings Financial statements Companies give information showe their financial sinmation in Oinancial 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 an expenses during a particular period, such as three months ora year BrE: profit and logs account; AmE: income statement Professional English m Use Finance2.1. Complete che crossword. Look. pposite to help vou eal “le Across 3. Small companies often try to get bank loans when they aced to money. 6) 5 We don't have sufficient to build a completely new factory: (5) 7 and 6 down Details of a company’s liabilities aze shown on the 8 We're going to raise mare money by selling new shares to our existing 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 =) 14 Idevided ro buy 2 $10,000 instead of shares, as i's probably safer. (4) 16 Another term for profit is net 216) 18 [think this is a good invesument: it pays 8% (s) 20 When they saw our financial statements, the bank refused to us any more money. (4) 21 Profic is the diffecence between revenue and (8) Down 1 The profit and account shows if a company is receiving more money than it’s spending. (4) 2 Uyou don't like taking rieks, you should only in very successful companies, (6) 4 A company’s retained carnings belong to its (6) 6 See 7 acpuss 9 Anything a company uses t produce goods or services is PRoFITS| 10: HERG rales ea, memes? 11 We sold i lase year, so our went up. (7) oo By * we am suppliers $100,000 for goods bought on FO __ Ie Ta erecta eae Oe government in @) “Its been 2 great year— let's hope we can keep the shareholders irom finding out." See en a eC on ORC PO eed es ee rd Professiono! English in Use Finance "3 RE Accounting and accountancy Accounting m Accounting involves recording and summarizing an organization's transactions or bbuisiness deals, such as parchasss and sales, and reposting shem in the fnsin of Boancial statements. (See Units 11-14) In many’ counzries, the accounting or accountancy profession has professional organizations which operate their ow training and examination systems, and make technical and echical rules: these relate to accepted ways of doing things. wm Bookkeeping is the day-to-day reciirding of ceansactions, mm Financial accounting includes bookkeeping, and preparing financial starements for sharcholders and creditors (people or organizations who have lene money to 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 conttol and the accutacy or exactness of its records, looking for errors or possible Fraud: where the company may have deliberately given false information. An intemal audit is carried oot by 9 company’s own accountants OF internal auditors, mm An external audit is done by independent auditors: auditors who are not employees of che company. The external audit examines the trurh and fairness of financial statements. It tries to prevent what is called ‘creative accounting’, which means recording transactions and values ina Way thar produces a false result — usually an arcificially high prof, There is always more than one way of presenting accounts, The accounts of British companies, have to give true and fair view of their financial situarion. This means that the fisancial atements Must give a cortect «ind reasonable picture af the company’s current condition. Laws, rules and standards In most continental European countries, and in Japan, there are laws relating to accounting, established hy the governments. In the US, companies whose stocks are traded on public stock exchanges have to follow rules set by the Securities anc Exchange Commission (SEC), a government agency. In Brirain, the rules, which are called standards, have been established by independent organizations such as the Accounting Standards Board (ASB), and by the accountancy profession ftselE. Companies are expected to apply or use these standards in theit annual accounts in order te give a true and fair view. Companies in mos: English-speaking countries are largely funded by sharebolders, both individals and financial mscitucions, In these countries, the financial statements are prepared for shareholders. However i many continental Furopean countries businesses ace largely funded by banks, so accounting and financial statements are prepared for creditors 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 a tradi company: “L began my career as.a bookkeeper. Bookkeepers record the company’s daily transactions: sales, purchases, debrs. expenses, and so on, Each type of transaction is recorded inva Separate account ~ the cash account, the liabiliies account, and so on, Double-entry bookkeeping is system that records two aspeers of every cransaetion. Every uansaction is both a dehit ~ a deduction ~ in one account and a eocresponding credit — an addition ~ in anoches, For example, fa company buys some raw materials ~ the substances and components used ro make producers — thar it will pay for a month later, it debits its purchases account cond! credits the supplier's account. IF the company sells an item on credit, ic credits the sales account, and debies the customer's account, As this means the level af the company's stock ~ goods ready fr sale ~ is reduced, ir debits che stock account, There is a corresponding increase in ies debtors ~ customers who owe money for goods or services purchased — and the debtors or aceounts payable account i credited. Each account records debits on the loft and eredies on the right. 1 the book keepers da their work correctly, the total debits always equal the cotal credies BrE: debtors; AmE: accounts receivable Br: creditors; AmE: accounts payable BrE: stock; Ame: inventory Day books and ledgers ‘Toc achants wit a lrgenunibenot manscions ike purclascsacd sales companies often record the transactions in day books or journals, and then put a daily or weekly summary in the main double-eatry records, In Britain, they call the main books of account nominal ledgers. Creditors ~ suppliers to svhom the company eves money for purchases made on credit —are recorded in a bought ledger, They still use these names, ever though these days all the information is on a computer’ Note: In Britain the terms debtors and creditors can refer to people or comps owed money, DF to the sums of money in an aeeaunt or balance sheet. Balancing the books “Ac the end of an aecounting period, for example a year, bookkeepers prepace a trial balance which transfers the debit and credit balances of different accounts onto one ps As always, the total debits should equal the total credits, The accountants can then use these balances to prepare the org ge nization’s financial staccments Frofessional English in Use Finarce44 42 Match the words in the box with the definitions below. Look ar A and B opposice to help you. credit decay debe creditors sto debtors ed on the left-hand side of an account, recording money paid oue 1 an amour ente 2 a book of accounts 3 customers who owe money fir goods or services not 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 6 suppliers who are owed money for purchases nor yet paid for Complete the sentences. Look at A, Band C opposite to help yu. 1 _. shows where money comes from and where it goes: it is always transiereed 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 fratisactions in or 3 The main account books are called aod the book relating co creditors is called the : 4 Inorder to prepare financia) statemenss, companies do a sue Which copies all the debit and credit balances of uifferent accounts onto a single page. Complete the sentences using ‘debit? or Sredir’ Look at A opposite co help you. 1 IF you buy new assets, you _. the cash or capital account. 2 If you pay some bills, you the liabilities account, 3 If you buy materials frory a supplier on 60 day: credit, you the purchases accounr and the supplier’ account 4 If you sell something to a customer who will pay 30 days later, you the sales account and the customer's aceount. oT Taree oy a What qualities does a good bookkeeper need? Would you like to work as a bookkeeper? ich type of accounting do you think is the most interesting, and why? Professional Engksh in Use Finance 15Company law 1 Partnerships A partnership is a business arcangement in which several people work together, and share the risks and profits. In Britain and the US, parenerships do srof have limited liabiliry for debts, 50 the partnets are fully fiable ur responsible for any debrs the business has. Furthermore, partnerships are not legal entities, wo 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 unlimited liabiliry for debts. Limited liability A company iy a business that isa Sepal emity. In other words, it has @ separate legal existence from its owners, the shareholders, It cat enter into contracts, and can be sued ‘or taken to court if it breaks a contract. A company can tin theery) 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. Their habiliry is hhmnued aw the value of their share capital: the amount of cash that the shareholders have contributed ¢ the companty. This limitation of lability encourages investors to risk their money te become parc owners of companies, while leaving the 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 yovernance ~ 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 jab of chairman {rom thac of managing director, and having several non-executive directors on the board oF directors who do nat work full-time for the company but can offer it expert advice. Non-exceutive directors are often more objective: less influenced by their opinions and beliefs. There is also an audit committee, containing several non-executive directors, (0 which the auditors report Bré: chairman; Am resident ] BrE: managing director; AmE: chief executive officer (CES | Founding companies When people found or seart companies, they draw up or prepare Actieles of Association and a Memorandums of Association. The Articks of Association state: am the rights and duties of the shareholders and directors m the relationships among different classes of sharzholder (See Unit 29) m_ the relacionships beoween shareholders and the company and ies directors. The Memorandum of Association siatest mm the company’s name mm the location of the company’s registered office ~ where to send official documents the company's purpose ~ its aims or objecsives 7- the authorized share capital ~ the maximum share capital it ean have, Bré: Articles of Association: AmE: Bylaws Bré: Memorandum of Association; AmE: Certificate of Incorporation | Professional English in Use Finance5&1 5.2 Are the following statements true or false? Find reasons for your answers in A and B. copposice, 1 Incase of a legal dispute, people can cake a company’s shareholders to court The owners of limited companies have to pay all the company’s debts. Many companies are not owned by their managers, Partners in British ancl American businesses are not liable for the partnership’ debts. In case of a dispure, peaple can take British companies and partnerships eo court, 2 3 4 Excernal directors can ueually give more objective advice shan full-time directors. 5 6 Make word combinations using a word from each box. Then match the word combinations to the definitions helow. Look ac. opposite t0 help you, corporate committee audit directors limited governance ron-exccutive capital snare liability 1 a group of dircctors to whom the external auditors present sheir report ~ members of a board of direerors who are not full-time managers bof the company 3 - _; owners’ money invested in a company 4 responsibility or debts up tu the value of the company’s share capital 5 the way a company is managed for its owners Camplete the document. Look at C opposice to help you. @______ of Association | 1. ‘The name of the Company is Language Services Piy Limited. i The(y) othe Company wil he i Australia 3. Theo ‘or whieh the Company is established ito 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 A$1.00 par value vach with one vote for each share. ola roy ot Do partnerships have limited liability in your country? If not, who would you trust enough to start a partnership with? Professional English in Use Finance 7ar 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 siocks oF 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 the end of their name, and their shares are publicly traded on the London Stock Exchange, A stock exchange is a market where anyone can buy stocks and shares. The US equivalent of a PLC isa company or corporation registered with the Securities and Exchange Commission (SEC). SEC-rexistered companies, also known as listed companies, have to make quarterly reports (ie. every three months). They report on: tm sales sevenue or turnover ~ the maney received by the company in that period from selling, gowds or services _sr055 profit ~ turnover less cost of sales net profit — gross profic less administrative expenses and ras Conapanies on the London Stock Exchange, 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 u» send them an Annual Report each financial year. This contains a review of the year’s activiey, and an examination and explanation af the company’s financial position and results, ‘There are also financial statements and mores (see Units 11-14), and the auditors’ report on the financial starements BARCLAYS PLC interim Report 2004 Group performance was very strong: All businesses had higher profits, = profit helore tax up 23% to £2.41 1m ——_clemonstrating goad progress across — earnings per share up 25% ai 26.79 the whole portiolio. dividend per share up 17% {0 8.25p * income growth was particularly return on equity 0f 20.4% Strong, up 14%, with good broad based contributions by business and by income type | | | | os ae Public companies have to hold an Annual General Meeting (AGM), and most privare ones do 00, At chis encering the shareholders can question ditectors about the content of the Annual Repost and the financial statements, vote to accept or reject the dividend recommencled by the directors, and vore on replacements lor setiring members of the board, The meeting can also carry out any other business stated in the company’s Memorandum of Association or Certificate of Incorporation, and Articles of Association or Bylaws, raordinary sof If there is a crisis, the directors or the shareholders can request to hold an E: General Meeting (EGM] to discuss the situation. For example, if chere are misconduct by the directors, where they have behaved illegally, chere could be an EGM. Miecting (AGM); AME: Annual Meeting of Stockhalders ary General Meeting (EGMl; AmE: Special Meeting Ig Professional English i Use Finonce6.4 Complete the table, Look at A and B opposite to help yon. | im can't sell shareson the | in the UK in the US @ m are called public lled SEC- | @ companies registered compan or (a) ‘or (6) companies. companies m produce (5) m™ produce (7) mm publish an (8) and hold an (9) Find words in A and 8 opposite wich che following meanings 1 behavioue that breaks the law 2 sakes revenue minus the cost of sales, hefore deductions for administration expenses, interest charges, ete 3 sales revenue minus the cost of making and selling the goods, and deductions for adhninistration expenses, interest charg 4 the coral amount of money a compa’ eceives from selling goods cir services Match the two parts of the sentences. Look at A and B opposite «9 help you 1 Only quoted or listed companies 2 Atmerican corporations publish details 3 Companies™ 4 Quarterly and sis-monthly reports 5. Shareholders can ask company directors questions Financial starements, and che auditor’s report. 6 Companies ean hold an emergency general meeting a abour cheir sales and profits every chree months, b are contained in cheir annual reports, © are not checked hy external auditors d if there is a criss, € can have their shares traded on a stack exchange. f ran annual meeting. Have you ever been to an AGM? Was there any disagreement between the shareholders and fe cea OAR eR cet ee ee etd Professional English in Use Finance 9Accounting policies and standards LY Valuation and measurement 20 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 calculate their profits or losses: their managers need this information, and so do shareholders, bondholders and the ca authorities Companies can choose their accounting policies ~ their way of doing their accounts. There are a range of methods of valuation — decicling how much something is wert — and measurement ~ determining how big something is - that are accepted by law or by official accounting standards. In che USA, there are Generally Accepted Accounting Principles (GAAP). In most of the rest of the world there are International Fivancial Reporting Standards (IFRS), set by the International Accounting Standards Board. These are technical rules or conventions ~ accepted ways of doing things that are not written down ina law. Although businesses can choose aniong different accounting 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 10 the shareholders: the Annual Report will contain a “Statement of Accounting Policies’ char mentions any chanyes 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 ro che final profic figure include depreciation — reducing the value of assets in the company’s accounts (see Unit 9), the valuation of stock or inventory, and the making of provisions — amounts of money deducted from profits ~ for furure pension payments As there is alwvays more than one way of presenting accounts, the accounts of British companies have ro give a tue and fair view of their finane | situation ~ meaning there ate various possibilities ~ rather than zhe true and fair view ~ meaning only «ne is possible jeckation; AmE: depreciation, amortization true and fair view; AmE: a fair presentation Historical cost and inffation accounting The aim of accounting standards (see Unit 3) is 40 provide shareholders with the information that will sllow them ro make financial decisions. This is one reason why in many countries accounting follows the historical cost principle: companies record the original purchase price of assets, and not their (estimated) current selling price or repluicemenc cost. This is more objective, and the current value is oc imporcant if the business is a going concer —a successful company that will continue to do business ~ as its assers are not going to be sold, or do not currently need to be replaced. Bre: Bre: However, some countries with regular high inflation, e.g. in South America, tse inflation accounting systems that take account of changing prices. One system used is replacement cost accounting, which values all assets at cheir current replacemene cost ~ the amount that would have to be paid to replace them now. Professional English in Use Financea wa 7.3 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 all 2 There ace different ways of doing, accounting, but companies have to be consistent, 2. Companits have to disclose or make known 4 The historical cost principle is chat the price paid ro buy assets & A going concern usually doesn’s and not their current value, is recorded in accounts. bo need ca know che current market value of its a ¢ need to know ahout the size of profits or losses. sets which accounting methods they are using, € which means regularly using the same methods, Are the following, statements true or false? Find reasons For your answers in A and B opposite, we told which accounting policigs to use. 2 Companies can change their accounting policies whenever ehey like, a6 long as they disclose this in their Annual Report 3 Companies could produce several profir Sgares, depending on how they depreciated their assets, valued their inventory, ete, 4 There is only one coreeet interpretation of a company’s financial posirion, and company accounts must show this. 5 Ina fot of countries, companies da nor record the current value of their assers 6 In countries with high inflacion, companies value their assets at their current replacement cost. Complete the table with words from A and Bb opposite and related forms. Dut a stress mark in front of the stressed syllable in each word. ‘The first one has been done for you. caleu'lation - z conventional | or Tae vo OL Pe a ae ern enn Ra ene eee mee ee IAS, or something else? Profescional English in Use Finance 212 Accounting assumptions and principles Assumptions When writing accounts and financial starements, accountants have to follow a number of assumptions, principles and conventions. An assumption is something thar is generally accupted as being rue. 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 . but the business continues as before, mm The time-period assumption stares that the economic life of the business can be divided into (artiGcial) time periods such as che financial year, or a quater of it mt The continuity oF going concern assumption says that a business will continue into the furure, so the current marker value of its assets is not important. (See Unit 7) The univof-measure »ssumption is thae all finaneia| transactions are in a single monerary unit oF currency. Companies with subsidiaries ~ that is, other companies that they own — in different countries have to convert cheir results into one currency in consolidated financial statements for the whole group of companies. rE: financial year; ‘Ame: fiscal year Principles The following are the most important accounting principles (as well as the consistency principle and che historical cost principle, mentianed in Unir 7) The full-disclosure principle states that financial reporting myst include all significant information: anything that makes a difference to the usees of financial statements The principle of materiality, however, not nevd to be shown. that very small and onimportant amounts do am The principle of conservatism is char where dif you choose the on ent accounting methods are possible, thar is Teast likely to overstate or overe rimate assets or income, am The objectivity principle says that accounts should he based on facts and not on personal opinions or feclings. Accounts, therefore, shoukl be verifiable: it should be possible for inecnal and external auditors to show thet they are true. This isn’t always possible, however: depreciation or amortization, and provisions for bad debts, for example, are necessarily subjective ~ based on opinions am The revenue recognition principle is thar revenue is recognized in the accounting period in which ir is earned. This means the revenuc is recorded when a service is provided or goods delivered, nor when they are paid for m The matching principle, which is related to revenue recognition, states that each cost or expense related to revenue earned must he recorded in the same accounting, perind as the revenue it helped to earn. ‘New from accounting, sin Tivo and two is four again” Professional English in Use Finance8.1 Match the accounting assumptions and principles (1-6) to dhe activities they: prevent (af), Look at A and B opposite to help you 1 conservatism principle 2 matching principle J separate entity assumption 4 revenue recognition principle 5 time-period assumption 6 unit-of- measure assumption a showing a profit divided into US dollars, euros, Swiss francs ete b publishing nancial statcments fora 1S-month period, hecanse this will show better profits © waiting until costomers 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 assors and estimating future revenue at the highest possible figures Complete the sentences, Look ar A and Bopposie 10 help you. 1 A company’s does nor have ro bepi on 1 January, ke calendac year 2 Tan American company cwns 8 company in Britain, this isa 3 Multinationals, with companies in lots of different countries, combine all their results in one sec of 4 Every entry int a company’s accounts must be there must be a document available jt i is true, mark, plete the rable with words fron A, Band C opposite and related forms, Put a str “front nf the stressed syllable in each word, The first nne has heen done for you, Then complete the sentences below with words from the rable. abjectivity | | - . subjectiviry jo sebiecriviy’§ Of tification | 4 Roth the internal and the external auditors have to, the accounes, 2 Companies have to all relevant financial information in chew annual reports. 3 Despite the principle, accountants have to make some subjective judgements 4 Even ifa company is going through a bad period, for accounting purposes wwe its a going concern, Deed ee ee ee ec a eer) iples described here are mentioned in the notes to the financial statements? Professional English in Use Finance 23Zz) Depreciation and amortization WY) Fixed assets 24 A company’s assets are usually divided into current assers like cash and stock or inventory, Sshich will be used or converted into cash in less than a. year, and fixed assets suich as buildings and equipment, which will conrinue 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 litte 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. In other words, part of the cost of the asser is deducted from the profits each year ‘The accounting rechnigue’ oF depreciation makes it unnecessary’ to charge the whole cost of a fixed asser against profits in the year itis purchased, Instead it can be charged during ail the years it is used. This is an example of the matching principle. (See Unit 8) BrE: fixed assets; AmE: property, plani and equipment Valuation Assets such as buildings, machinery and vehicles are grouped together uncer fixed assets Land is usually not depreciaced hecause it tends to appreciate, or gain in value, Brirish companies occasionally revalue ~ ealcalate a new value for ~ appreciating fixed assets like land and buildings in their balance sheets. The revaluation is at either current replacement cost — howr much it would cost to buy nev ones, or at net realizable value (NRV) — how mnch they cook 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 not usually record an estimated marker value — the pric which something could he sold coday. The conseevatism and objectivity principles support this; and where the company is a going, concern, 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 straight-line method, which means charging equal annual amounts against profit during the hiletime of the asset {e.g. 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 deduce the whole cost of ar asset in-a shore rime, Accelerated depreciation allowances are an incentive fo investment: a way ro encourage it. For example, iF a company deducts the entire cost of an asser in a single year, ic reduces its profits, and therefore the amount of tax it has t© pay. Consequently new assets, including huge buildings, ean be valued at zero on balance sheets. In Britain, this would mot be considered a true and fair view of the company’s assers, “Lets see, it says here that you've had a lot of corporate accounting experience .., Professional English in Use Financea4 9.2 March dhe words in the box wich the definitions below, Look at A.and B opposice to help you. appecciate tearrene assers fixed assets | obsolete revalue wea cut to record something at a different price assers thar will no Tanger be in the company in 12. months" time to increase rather thas decrease in value our of date, needing, to be replaced by something newer assets thar will remain the company for several years to become used and darnag. Match the nouns in the box wieh the vetbs below eo 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, costs fixed assets profs value C depreciate » 1 Because we the owe don't have worry about the marker value of fixed assets. 2 To depreciate cach year 9 Recause land usually appreciates, companies de nor wert the balance sheet. eee WE part of their From profits March the two parts of the sentences. Look arB and € opposite eo help you 1 All Fixed assets can appreciate if there i high inflation, 2 Accelerated depreciacion allows companies 10 3 Fixed assers generally love value, except for land, 4 The straight-line method! of depreciation 5 Accelerated depteciacion reduces companies’ tax bills, 4 which usually appreciaces changes equal amounts against profits every year ¢ remove some extremely valuable assets from their balance sheets. d which encourages them to invest in new factori but historical cose accounting ignores this. eta o OL ‘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 qood idea? Professional Engi in 2526 Auditing Internal auditing After bookkeepers complete cheir agcowits, and accountants prepare their financial skarememss, these are checked by internal auditors, An internal audit is an examination of a company’s accounts by its own internal auditors or controllers. They evaluate the accuracy oF correctness of the accounts, and check for errors. They make sure that the accounts comply with, or follow, established policies, procedures, standaeds, laws and regulations, (See Unies 7 and 8) The interval auditors also check che company’s systems of control, related co recording transactions, valuing, assets and so on. ‘They check to see that scheve are adequate oF suificient and, if necessary, recommend changes to existing policies and procedures, External auditing Public companies have to submit rheir financial statements to external auditors — independent suditors who do nor work for the company. The auditors have to give an opinion about whether the financial statements represent a true and fair view of the company’s financial situation and results, ‘See Unie 3) During the audit, the external auditors examine the company’s systems of internal contro], £0 see whether transactions have becn recorded correctly. ‘They check whether the assets mentioned on the balance sheet actually exist, and whether sheir valuation is correct, For example. they usually check that some of the debtors recorded on the balance shee are genuine, They also check the sintual stoek take ~ the count of all the goods held ready for sale. They always look for any unusual irems in the company’s account books or statements, Until recency, the big auditing firms also offered consulting services to the companies whose accounts they audited, giving them advice about business planning, strategy and restructoring, Bur alter a number of big financial scandals, most accounting fietos separated their anditing and consulting divisions, because an Uindesuis — auditor who is also geting paid to advise achent iso longer [AUER TONG orally independent, ‘mE: caunt af the inventory Irregularities —* Auditors produce an Auditors produce a | qualified report, audic report stating that the systems: | financial stacemencs: adequate, %, | do not give an seen to No = auditors find My | entirely true and external irregulacViessystems | fir view and there auditors? Have are not adequate, [Yes are some problems, accounting principles been applied correctly? principles have not bees applied correctly pr consistently: Does the company follow the advice given in the ‘management letter? - ——1 Anditors write a ‘management letter to directors 01 senior ‘managers explaining what needs eo be changed. Professional English n Use Fnance10.1 10.2 10.3 ‘Maven the job titles (1) with the descriptions {a-d). Look at A ond 8 opposite to help you. 1 bookkeepers company emplayces who check the financial statements 2 accouniants b expert accountants working for independent firms who review companies’ financial staements and accounting records 3 internal auditors © people who prepare financial statements 4 external auditors d people who prepace a company’s day-to-day accounts March the nouns in che box with the verhs below to make word combinations. Some words can be used pvice. Look: ar A and oppesite wo help you. accounts procedures opinions systems of contro regulaticns policies [ stock take advice laws - ( examine >) Complete the table with words from A, Band C opposite ancl related forms. Put a stress mark in front of the stressed syllable in each word, The first one has been dove for you. Then complete the sentences below with the correct forms of words from the table. Acad ie -- Se compliance - mn [i ommend ee 1 Lm an interr ue and that they with company policies and general the company’s accounts, to make sure that they accounting principles 2 IF the contro] systems aren't adequate, | make concetning changes. 3. The external auditors check co see iF transactions are being correctly. ena eo 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? Profesional English in Use Finance Ww28 The balance sheet 1 Assets, liabilities and capital 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 Sharcholders” 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 2 document which has ewo halves. The tocals of both halves are always the same, so they halance, One half shows a business's assets, which are things owned by the company, such as factories and machines, thar will bring future conome hhenefirs. The other hall shows dhe company’s liabilities, and ies capital or shareholders’ equity (see below), Liabilities axe obligations to pay other organizations of people: money thar the company owes, or will nwe ar a firure dare, These olen include loans, raxes that will soon 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 they have ro pay for the goods, this is known as geamting credit, Since assers are shown as debits /as the cash of capital account was debited to uf with the total sum of the credits ~ thac is tics plus capital (or A=L + C| purchase them), and the toral must corresp: the liabilities and capiral — agsers equal Tal Arnerican and continental European companies ustally put assets on the lefe and eapital and iabilivies on the right. fn Britain, this was traditionally the other way round, bur now: most British companies use a vertical formar, with assets at the top, and liabilities and. capital below, BrE: balance sheet; AmE: balance sheet or statement of Financial position BrE: shareholders’ equity: AE: stockholders’ equity Shareholders’ equity Shareholders’ equity consists of all the money belonging te shareholders, Pare of tis is share capical —che money the company raised by selling its shares, Bur shareholders’ equity also includes retained earnings: profits from previous years that have not been distilauted ~ paid our to shareholders ~ as ividencls. Shareholders’ equity is the same as che company’s net assets, o¢ assets minus Habiliies, A balance sheer dives not show how mach money’a company has spent or eeveived dhuring a year. This information is given in other financial statements: the profit and loss account and the cash flowy starement. (See Unit 14) Professional Englis in Use FinanceTAA Ate the following statements true or fale? Find reasons for your answers ity A and. B opposiee 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 on the halance sheet. 3 The nwo sides or halves of a balance sheer always have che same toma, 4 The balance sheet gives information on how much money the company has received from sales of shares, 5 The assets toral is always the same as the liabilities total 6 The balance sheet tells you bow much money the company owes. 11.2 Complere the sentences. Look ar A and b opposite to help you. are companies thar provide other companies with materials, components, ec are profits shat the company has not distributed to shareholders. are things a company owns and uses in its business consist af everything a company owes. oe Ree Nee 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 profils pay earnings retain credit 1 We a lor of our heeause we don’ any of our to the shareholders, 2. Most businesses have customers who « because they them 30 or 60 days? 3. We have a for of that we'll have to ater this year, "Y'm afeaid our accountants are being investigated for fraud — on the brighter side, om financial statements have made the New York Times best-seller fiction list." ory Aa ele fe] “a Fe es eee 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 pA ACLS Balance Shest 31 ecember 20__ (s'000} Current assets Gash and equivalents 3415 Accounts receivable 8.568 Inventary 5.629 Other current assets 5562 Total current assots 2a.244 Non-current assets Propery. plant ard equipment 4.800 Goodwill 980 Long-term investments 6.265 Toial non-current assets 41715, Total assets 34.959 In accounting, assets are generally divided inco fixed and current assets, Fixed assets (or non-current assets) and investments, such as buildings and eqoipmenr, will continue to be ised by: the business for a Jong rime. Current assets are things thar ssill prehably be used by the business in the near furure. They include cash ~ money available to spend immediately, debtors ~ campanics ar people who owe money they will have ro pay it the near future, and stock, Ifa company thinks a debt will not be paid, it has to anticipate the loss — take action in preparation for the loss happening, according ro the conservatism principle. {See Unie 7) fr will ‘write off, or abandon, the sum a5 a bad debt, and make provisions by charging a corresporiding amoune against profits: rhar is, deducting the amount of the debe from the year's profits Valuation ‘Manpfacturing companies generally have 2 stock of raw materials, work-in-progress ~ partially manufactured products ~and products ready for sale. ‘There are various ways of valuing, stock or inventory, but gencrally chey art valued at the lower of cost or marker, which means whichever figure is lower: their cost — the purchase price plus the value of any Work: done on the items ~ or che current market price. This is another example of conservatism: even if the scock is expected to he sold at a profit, you should nota ticipate profits. Tangible and intangible asscts Assets can also he classified as cangible and intangible. Tangible assets are assets with a physical existence things you can toueh ~ such as property, plant and equipment. “Tangible assers are generally recorded at their historieal cost (see Unix 7) less accurmulace depreciation charges ~ the amount «if their cost that has already been deducted from profirs, This gives cheir net book value. Intangible assets include brand names — legally protected names for a.company’s products, patents — exclusive rights to produce a parcicular new produce for a fixed period, and trade marks — names or symbols that are put on products and cantor he used by other companies. Networks of contacts, loyal customers, reputation, trained staff or “human apical and skilled managemenc can also be considered as intangible assets, Because it is difficult to give an accurate value for any of thes things, companies normally only record tangible assets, Far this reason, a going concern should be worth more on the stock exchange chan simply igs net worth or net assets: assers minus liabilities, If a company buys another one at above its net worth ~ because of its intangible assets ~ the diffe price is recorded under assets in the balance sheer as goodwill nee in 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} 32 The balance sheet 3: liabilities Liabilities Liabilitics are amounts of money chat a company owes, and are generally divided into wo types ~ long-term and current. Long-term liabilities or non-current liabilities include bonds, (See Unit 33) ‘Coren liabitities are expected io be paid within a year of the dare of the balance sheet. They includes creditors — largely suppliers of goods or services to the business who are not paid at the time of purchase mm planned dividends mm deferred taxes ~ money thae will have to be paid as tax in the future, alshough che payment does not have to be made now. Curront liabiltios Short-term debt 1,855 Accounts payable 5,049 Accrued expenses 8593 otal current liabilities 18.197 Non-current liabilities Deferred income taxes 950 Long-term debt 402 Other non-current iabitties 4201 otal non-curtent lebilities 5553 Total liabilities 20,750 Shareholders’ equity Gommon stock 10,309 Retained earings 3,900 ‘otal 1.208 Total liabilities and Shareholders’ equity 24,959 Accrued expenses. Bacause of the matching principle, under which transactions and other events are reported! in the periods to which they relare and not wen cash is received or paid. balance sheets usually include acersed expenses, ‘These are expenses that have aceannulated ov baile sp during the accounting year but will nor be paid uot the following year, after the date of the fuilance sheet, So accrued expenses are charged against income ~ that is, decineted from profits ~ even though the bills have not yet been received or the cash paid. Accrued expenses could include taxes and wilicy hills, for example electricity aud water Shareholders’ equity on the balance sheet Sharcholders? equity is recorded on the same part of the balance sheet as liabilities, ‘becanse it is money belonging to the shareholders and nox the company Shareholders” equity includes: am the original share capiral (money from stocks or shares issued by the company: see Units 29-30) m share premium: money made if the company sells shares at above their fave value ~ the value written on them mm rciained earings: profits fam previous years thar have nor been distributed 10 shareholders reserves: funds set aside from share capital and earnings, retained | By£: share premium: for emergencies ar other fusure needs. ‘Ame: paid-in surplus Professional English in Use Finance13.1 13.2 13.3 Are the following starements true or false? Find reasons for youe answers in A, Band C opposite 1 Acurcent habilicy will be paid befoze che date of the halance sheet. 2 liability that must be paid in 13 months time is classified as long-term, 3A company’s accrued expenses are like money an individual saves to gay hills in the furure 4 Shareholders’ equity consists of the money paid for shares, and retained earnings. § IF companies retain part of their profits, this money no longer belongs to the owners, 8 Companies can sell shares ar a higher value dhan the one stared om them. Find words in A, B and © opposite with the following meanings. 1 money that will be paid ia less than 12 months from the balance sheet date 2 the money that investors have paid to huy 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 of time Sort the following into assers and liabilities, Look at A and B opposite to help yon, You may need to look at Unit 12. [ Accounts payable Land and buildings | Accrued expenses Investments | Dividends Cash and equivalents Inventory Deferred raxes coum receivable Longterm debe} Assets Liabilices ol eo er Pe Se UU eee ace er aa Le COR CLE like to work for. What differences do you notice in the balance sheets and what reasons can you find for these? Professionol 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 nancial siatenient Annual Profit and Loss Account, 1/20. which shows the difference between the " oss 20 revenues and expenses of a period. Non- (E000) profit (or not-for-profit) organizations such as Sales 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 @ pre At the top of these statements is total sales revenue or turnover: the toral amount of speciation and Amuniztion ieee al att Earrings before Interest and Tax 3,869 money received during a specific petiod, Next interest expenses 237 is the cost of Sales, also known as cost of goods sold (COGS): the costs associated with Ipeoine Tax Leet Net Profit 2.568 making the products that have heen sold, such as raye materials, Iabou, anc! factory expenses, The difference between the sales revenue and the cast of sales is 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 (SGR The statement also usvally shows ERTTDA (carnings before interest, tax, depreciction and. amortization) and EBIT (earnings hefore interest and tax). The first figure is more objective because depreciation and amortization expenss can vary depending on which system a con After all the expenses and deductions is the net profit, often called the bottom line. This profit can be disitibured as dividends (unless the company has to cover past losses|, or transferred 10 reserves, | rE: net profit, AmE: net income | Be: profit ard loss account; Am: income statement BED The cash flow statement British and American companies also produce a cash flow statement, This gives details of cash flows ~ money coming into and leaving the business, telating to operations ~ day-to-day activities \ me itivesding — buying or Selling propery, plant and equipment fm financing ~ issuing or repaying debt, or issuing shares. -ash flow starement shows how effectively a company generates and maneses cash. Other names are somerimes used for it, including funds flow statement and source and application of funds statement. British companies also have to prosluce a starement of total recognized gains and losses (STRGL), sawing, anw gains and losses thar are nor included in the profit and loss account, such as the revaluation af 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 ‘opposice to help you. 1 cost of sales! sales re 2 toss profit / 3 EBUT / EBITDA 4 net profit / pre-tax income profir § income tax. / net profit Complete dhe text wich words from the box, You will need 10 use each word more than once, Look at B opposite to help von. Financing, investing operations a means making. money by selling goods and services. (2) is spending cash, for the business's future growth, 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 beter for the company if ir ean pay for furnre growth our of money from (4 _-.y Without having fo use 6) So a ‘healthy’ cash flow means that the amount of eash provided by 6) sso fs 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 to help you. Changes in operating assets and liabilities Payments to repurchase stock Dividends paid Sale of property Purchase of plant and equipment Depreciation and amortization expenses Net income Income taxes payable Issnance of stock Repayment of debr Cash flow statement ($'000) 2m Earnings 4,011 121% Amortization 924 683 Other adjustments to Eamings 6 Net cash provided from operations 4,951 Proceeds from Issuing new stock BA 167 Stock dividends paid 14 Net cash provided from financing 0 887 Additions to property, plant and equipment 2361 1,755 Net cash used for inves! 2,351 1,755 Change in cash and equivalents during year 356 7 Cash and equivalents, beginning of year 2450 2014 Cash and equivalents, end of year 2508 2,111 ole goo) Fee ee eu ae ees ee Ce ee eee ce Re ee ec ‘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 berween two or more items on financial statements, They allow investors and crediturs to compare a company’s present situation and perfossnance with its past performance, and with other companies, Ratios measure, liquidity: how easily @ company can mtn some of its assets into cash mm solvency: whether a compady has enough cash to pay short-term debts, ar whether it could go bankrupt — have its assets sold to repay creditors am fficieney: how well a company uses its resources Liquidity and solvency ratios current assets This is the eutfent ratio, which is a calculation of current assets divided by current liabilities. It measures liquidity and shows how souch of a company’s assets ssl hase to be conversed into cash is the next year to pay debts. ‘The higher the ratio, the more chance creditors have of being paid. Mor example, if MacKenzie Inc (sce Units 12-13) has current assets of $23,244,000 and current Habilicies of $15,197,000, its currenc ratio is (13. svhich is acceptable. (cf often argued that the current ratio of a healthy company should be closer to 2.0 than 1,0, meaning that it has nearly nwice as many: assets as liabilitis. current liabilities Suppliers granting shore-terns credit to a company prefer the cusrent ratio to he high because this reduces their risk. Yer shareholders usually prefer it to he how, because this means that the company has invested its assets for the furure. - This is the quick ratio or acid rest, which is a calculation of liquid assets divided by cuccent liabilities. It measures short-term solvency. Liguid assets are current assets minus stocks or inventory, as these might be difficult to sell. MacKenzie Ine’s quick ratio is 1.15 liquid as cucrent liabilities Earnings and dividends Shareholders are interested in ratios relating to a company’s shase price, earnings, and dividend payments, total earnings for the year ‘This is earnings per share EPS), 1 tells investors how ouch of the company’s profit belongs to each share, If a. company makes a post-cax profit of € 1.5 million, and ir has issued 2 smillion shares, BPS = €0.75. ‘the number of ordinary shares the market price of a0 ordinary share This is the price/carnings ratio or P/E ratio, It he past years EDS shows how expensive the share is, Ifa company has EPS of £0.75 and the share is selling for €9.00, the PIE ratio is 12 (€9 per shate divided by £0.75 earnings per share = 12 PE.) A high P/F ratio shows thac investors are prepared to pay a high multiple of the earnings for a share, because they expect it to do well in the future. ordinary shate dividend This is dividend cover or times dividend covered, which a shows how many times the company’s roral annual dividends net profit esnld have been paid want eavalablewnawal amines IEa company has EPS of 75 cents and it pats out a dividend of 30 cents, the dividend cover is 75 {30 = 2.5, A high dividend cover shows that the company has a lot of money, bur that i is not being very generuius tu its sharcholders. A ratio of 2.0 or higher is generally considered safe (ie means thae ehe company can easily afford the dividend), but anyching below LS is risky. A low dividend cover ~ below 1.0 means the company is paying out retained surpluses from previous years Professional English in Use Finance15. 1 Find words in A opposite with the following meanings 1 che ability to sell an asset for cash 2 how well a business uses its assets 2 the relationship between two figares 4 how casily a business can pay bills or debts when they are due ake word combiriations using a word from each box. One word can be used twice. Then tise word combinations to complete the sentences below, | ak at (8 and © oppasite to help you. acid assets current cover dividend ratio liquid test quick 1 . consis oF cash and chings thar can be easily sold and converted to cash. 2 A bioh shows that the company is reraining: a lov al money belonging go its shareholders. 3 The or doesn’t count stock or inventory because this might be difficule or irspossible to urn inte cash 4 The ows a. company’s ability to pay its short-term debts, March rhe avo parts of the semences, Look ae B and C opposite ta help you. 1 Ea company pays out retained surpluses from past years 2 Some investors are warrried chat the new stack issue 3 A high corrent ratio indicates short-term financial strengeh but 4 Wall Streer is on a historic price-carnings ratio oF around 35, which it does nor measure how efficiently the company is utilizing its resources, a easu b its dividend cover will fall below 1.0, € a makes the market very expensive, as che long-term average is 14.45. will dilure the company’s earings per share. ol Sanco eo Look at a company's financial statements. Which of the financial ratios mentioned in this Pee tice sea. Se enc Duh cum cecnc ont PA ee eo Td Professional Engst in Use Finance 738 There arc various proficabiliry ratios ebar allow investors to compate a company’s profie with its sales, its assets or its capital, Financial analysts usually include them in their reports on companies, {grass profic (sales ~ cost of goods sold! This is che gross profit margin, Iris the money a SCC company fet 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 sales efficient, and should be able to make a profit in the farure inet profit ‘This is return on assets. [t measures how efficiently the fiem’s assets are being used Jotalawers tf? generate profits fet profit This is return on equity (ROE). Ie shows how big a company’s profit is sharcholders’ equity {after interes aud tax) compared with the shareholders’ equity or funds, Leverage debe ‘This is gearing or leverage, often expressed as a percentage. Ir shows how fara company is furided by Tans highly geared or highly leveraged com: compared to equity cher than its own capital. A Sharcholders’ equi ™“ any is one that has a lor of debe EBIT (see Unit 14) This is interest cover or times interest earned. Ir compares a business's = nese annual interest payments with its earnings before interest and tax, and shows how easily the company ean pay long-term debt costs. A low interest cover (24g. below 1.0) shows chat a business is having difficulties generating the cash nocessary for its interest payments. interest charges j [Bre gcarina; | Citigroup Inc Key Ratios, 2005 YT aes levanage Civgroup Banking Induscry — SRP500. | a _ e Growth Rates % { Sales ls 294 tor | eso 212 ua | Price Ratio | PIE Ratio 139 14S 206 | Profit Margins Y Pre-Tax Margin 218 a7 aa | Net Profit Margin __ 15S 163 | Financial Condition } DebuEquity Ratio 19 132 Li | Interest Cover 20 zi Investment Returns % 1 Return On Equity 157 B21 4 Return On Assats 12 1.0 ) Professional Engh in Use finance