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20. Key terms in measuring financial performance

The phrases on the left are commonly used in considerations of the financial strength of a company. Match each one to an appropriate explanation on the right. Use the grid below.

1.

company accounts

a)

The description of income and expenditure in a specific accounting period.

2.

profit and loss

account

b)

Items of value which are not easily changed into cash but which the business needs.

3.

balance sheet

c)

Documents showing income, expenditure, assets and liabilities, sales records, etc.

4.

opening balance

d)

Major spending on large items necessary for the business, such as property or equipment.

5.

closing balance

e)

Cash items, or items that can easily be changed into cash for the present financial year.

6.

capital expenditure

f)

The amount of money held in cash or near cash at the end of the accounting period.

7.

fixed assets

g)

The cost of borrowing from a bank.

8.

current assets

h)

Money made by the company, less all costs, but before tax has been paid.

9.

net sales

i)

The amount of money held in cash or near cash at the start of the accounting period.

10.

pre-tax profit

j)

The overall picture of assets and liabilities.

11.

interest paid

k)

The profit from sales after direct costs have been deducted.

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2

3

4

5

6

7

8

9

10

11

c

Note the verbs to borrow and to lend. A bank lends money. That is a loan. A borrower borrows a loan. But, there is also the less common verb to loan. This is a more formal word, meaning the same as to make a loan or to lend. Example: The bank loaned the company $500,000.

21. The balance sheet

Match the words or phrases on the left with the correct definition (a-i). Use the grid below.

1.

intangible assets

a)

The money paid to shareholders out of profits.

2.

fixed assets

b)

Regular costs and money owed.

3.

liquidity

c)

Any investments, cheques, bank deposits, stock or work-in-progress that can easily be converted into cash.

4.

depreciation

d)

Assets which can be used to make immediate payments.

5.

current assets

e)

Property, land and equipment which is not normally intended for immediate sale.

6.

dividend

f)

Brand names, patents, rights, trade marks and licences which may be the major part of a company’s wealth.

7.

liabilities

g)

The total amount borrowed from a bank.

8.

liquid assets

h)

The ability of a company to pay suppliers, employees, shareholders, tax authorities, etc.

9.

overdraft

i)

The notional fall in value of equipment over time.

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2

3

4

5

6

7

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9

f

Depreciation is calculated by dividing the purchase price of an item of capital expenditure (usually a machine or vehicle, for example) by the useful life of the item, for example four years. Then that 25% of the purchase cost is treated as an expenditure in each of four years in the company accounts.