IV. The following sentences are a summary of paragraph 1, but all its statements are in a mess. Put them into a logical order.

1. It would be right to say that they are, in effect, a sort of models of the business enterprise.

2. There are four major financial statements, each of them dealing with a particular aspect of financial conditions.

3. As is known, accounting information is communicated to users by means of financial statements.

4. And as is true of all models, financial statements are not perfect pictures of business activity.

5. They are often referred to as a central feature of accounting.

6. Perhaps they would rather show the accountant's effort to represent what is real.

V. Re-read paragraphs 3 and 4. Then look through the following statements to say which of them is correct.

1. The cash flow statement shows the financial position of a business on a certain date.

2. The balance sheet summarises the amount of revenues earned and expenses incurred by a business over a period of time.

3. Each statement should be headed differently and, what is more important, it should not identify the name of the company.

4. Creditors and investors are external users of financial statements.

5. All the users of accounting information fall into five categories.

6. Management is the main internal user.

7. All the users are interested in reliable accounting information to make decisions.

VI. Answer the following questions.

1. What is a central feature of accounting and why?

2. Why is it helpful to think of financial statements as models of business?

3. Are financial statements perfect pictures of the state of things at a business?

4. How many financial statements are there in accounting?

5. What is the cash flow statement?

6. What is the major deficiency of the cash flow statements?

7. What does the income statement show?

8. What is the purpose of the balance sheet?

9. Why do many people consider the income statement is the most important financial report in accounting?

10. How many categories of users are there?

11. Who is the main internal user?

12. Who are the main external users?

Financial statements analysis

I. Practice in reading these words and word-combinations:

a number of techniques, highlighting, achieving, assessment, profitability, liquidity, associated, manufacturer, granted.

I. Read the text to find out why the past and present information is important for future decisions.

There are a number of techniques intended to aid in decision-making by highlighting important relationships in the financial statements. This is called financial statement analysis. The importance of financial statement analysis cannot be overestimated. Suffice it to mention that effective decision-making calls for the ability to sort out relevant information from a great many facts and to make adjustments for changing conditions. Very often, financial statements in a company's annual report run ten or more pages, including footnotes. If these statements are to be useful in making decisions, decision-makers must be able to find information that shows important relationships and helps them make comparisons from year to year and from company to company. This goal is accomplished by financial statement analysis.

Different individuals may use the tools of financial analysis in different ways. For example, creditors and investors use financial statement analysis in two general ways: to judge past performance and current position; and to judge future potential and the risk connected with possible investments.

It should be pointed out that past performance is often a good indicator of future performance. Therefore, an investor or creditor is interested in the trends of past sales, expenses, net income, cash flow, and return investment. These trends offer a means for judging the management's past performance and are a possible indicator of future performance. In addition, an analysis of current position will tell where the business stands today. For example, it will tell what assets the business owns and what liabilities must be paid. It will tell you what the cash position is, how much debt the company has in relation to equity, and how reasonable the inventories and receivables are. Knowing a company's past performance and current position is often important in achieving the second general objective of financial analysis: assessment of future potential and related risk.

The past and present information is useful only to the extent that it effects future decisions. An investor judges the potential earning ability of a company because that will affect the value of the investment (market price of the company's stock) and the amount of dividends the company will pay. A creditor judges the potential debt-paying ability of the company. The potential of some companies are easier to predict than others' and so there is less risk associated with them. The risk of the investment or loan depends on how easy it is to predict future profitability or liquidity. For example, the potential associated with an investment in an established electric utility is relatively easy to predict. On the contrary, the potential associated with a small minicomputer manufacturer may be much harder to predict. For this reason, the investment or loan to the electric utility is less risky than the investment or loan to the small computer company, which will be reflected in the interest rates on loans granted by a bank.

Comments

highlighting – висвітлення, висування на перший план

suffice [sfas] it to mention – достатньо згадати

to make adjustments – впорядковувати, вносити поправки

a company's annual report – річний звіт компанії

a footnote – примітка

to accomplish a goal – досягати цілі

the trend – курс, напрямок, тенденція

expenses – витрати

net income – чистий прибуток

cash flow – рух готівки

return investment – повернення інвестицій

assessment of future potential and related risk – оцінка майбутніх можливостей та пов’язаного з цим ризику

profitability – прибутковість

liquidity – ліквідність

the electric utility – електрична компанія загального призначення

the interest rates on loans granted by a bank – відсоткова ставка на кредити, надані банком

II. Re-read the text to find out which paragraph deals with:

1) the importance of financial statement analysis;

2) the general ways of using financial statement analysis;

3) n indicator of future performance;

4) the analysis of current position;

5) the reason why an investor judges the potential earning ability of a company;

6) the reason why the potentials of some companies are easier to predict.