Finance

Companies and individuals often borrow money, and it is important to find a favorable interest rate. Rates are variable, and can rise or fall depending on the market. Many investors, (people who use their money to earn more money), ehoose foreign or offshore bank accounts because they are tax-free. Anyone can buy shares in a public company and become a shareholder. All public companies in the UK are obliged by law to publish their financial results at the end of the tax vear Thev do this in their annual reports to shareholders. Annual reports include profit and loss accounts which show turnover, or the total sum of money which is coming into the company.

There are three main kinds of financial statement which are used in business: the profit and the loss account; the balance sheet and the cash flow statemeiit.

A balance sheet shows what a company owns (its assets) and what it owes (its liabilities) on a particular day - normally the last day of the financial year. Assets can be a) fixed - items of value which are not easily changed into cash but which the business needs - such as land buildings, plant or equipment. They also include investments m other companies.

b) current - cash items or items that can easilv be changed into cash for the

1. Stocks (goods which a business intends to sell to its customer), a) Finished Goods (the goods made but not yet sold)

Ki Work irs progress ( the products being inside now)

2. Debtors - the amount of money owed to a firm from sales.

3. Cash and Bank i the money the linn has in bank).

Some Balance Sheets have mo types uf liabilities. cuiiem habui«<-.-> unu capita; and reserves.

1. Current iiainiiiiev iiicat uiu amounts owed by a hm. They must be paid on demand or short notice. They include:

• Bank Overdrafts and Loans- money borrowed from the bank,

• Trade creditors- money the company owes its suppliers;

• Accrued expenses- money the company has spent but hasn't handed over yet;

• Other Creditors including taxation- other money owed to institutions such as

• Dividend payable - the money paid to the shareholders out of profit.

  2. Capital and Reserves: This is money shareholders have supplied (Share Capital) and profit made and put back into business (Profit and Loss Account).

(P & L) The Profit and Loss Account (Br.E) or Income Statement (Am.E)

shows the success of the normal operating activities of a business over a given period of time - often a year. It does this by comparing revenue over the period with the cost of lire goods and other expenses. If a company makes money from its non-operating activities (e.g. by selling a piece of land), this will appear as an "extraordinary item". P & L is a statement of the cash available to a company t

o

continue its operation. It's information to the managers in helping them make their decisions in running the company. It's also an important information to the shareholders who are the owners of a public company - it tells them how well the company is performing and how well their investment in that company is working for them.

So 'looking at the particular profit and loss account, managers would be interested in the following figures:

Turnover It shows managers the total amount of sales, the total sum of money coming into the company and if a company is generating more or less cash year on year. Turnover is not the same as profit.

Profit is the money left over when the costs are subtracted from the income. (When it is a negative figure - it's a loss')

Gross Profit - profit minus the costs associated with preparing the goods for sale. Trading (Operating) profit shows how much money the company is making after paying for its production costs. It gives managers the idea on how efficiently they're running the company Trading profit is the gross profit minus the cost of overheads (= money that you pay regularly as the costs of operating a business or organization).

Net Profit — the total profit without subtracting costs and overheads.

Shareholders have to know the following information: a) They are the true owners of the company.

1>) Investment — money that are used in a way that may earn you more, for

some risk It may go down as well as up It's important vou make sure that von gel a good return on your investment, c) Dividend is the share of profit that the share holders receive, d) Earnings per share - shows shareholders how much they are earning on their investment.

Creative accounting

Companies sometimes make the i.iguros> tu liiuiucml uoouiiiciji» ::»« .lUrac-u•«. than they really arc. They can do this by:

. . . r : . . . 1 . j -.

til JiiVOlUUl^, lUVCUUGa liuili ov »J 1'Hi 1! v- > t i 'Ј< L U\>i 1 .

2. not including debts of subsidiaries and acquisitions

3. hiding debts on the books of subsidiaries

4. overstating current profits by including possible future earnings.

Huge losses experienced by investors and employees due to mismanagement and irregularities in financial reporting have led to a demand for stricter corporate governance.

Exercises:

1) What you know about:

1. what a "profit and loss account'' is. f

2. why managers are interested in it.

3. why shareholders are interested in it.

4. turnover, operation profit, earnings per share.

   1. 2) These three verbs are often contused. Learn and remember their correct meaning.Raise (raised, raised)

   2. Arise (arose, arisen)

   3. Rise (rose, risen) to put up or make higher

to occur, appear or become evident

to increase, go up or reach a higher leve

l

3) Select the correct sentence fijpm each group.

1. a Interest rates raised by I %.

b The bank might raise the interest rate, c The interest rate will raise.

2. a A problem arose with the account, b It arose a problem.

c It will not arise this problem again.

3. a The bank will rise the prices soon, b Prices rose by 3% iasi year.

c Our supplier rose their prices last year.

4. a The bank is going to raise our credit level,

b Their prices raised in April. •

c The prices might raise.

5. a It arises a problem.

b He arised a problem at the meeting, c The same problem might arise on the new account.

6. a This rises a problem.

b The rate of inflation is rising steadily,

4. Choose the correct verb and tense from exercise II to complete the sentences.

   1. The company's turnover dramatically last year.

   2. That's a good point, I 'll it at the next sales meeting.

   3. Several difficulties >.vher: ->e tried to install the ue» «<>fh.*»!<.•

   4. Interest rates last year.

   5. The government interest rates last month

   6. i hope the problem oi laic payment will noi. again.

5. Choose the best word to fill each gap in the sentences below.

   1. . Sales aire a good way for to get rid of surplus stock.

a) retailer b) sellers c) dealers d) wholesalers

2. . The company was in fact seriously even though they claimed to be

making a profit

a) at a loss b) in debt c) in the black d) broken

3. Some companies their earnings to drive up share prices.

a) overdo b) overflow c) overstate d) oversee

3. The Financial Services Authority was set up in the UK to deal with

such as fraud and insider trading .

a) issues b) ideas c) reasons d) purposes

3. When you buy in bulk you can obtain or rebates.

a) discounts b) sales c) decreases d) interest

6. Shareholders lost money when the company declared itself .

a) redundant b) sold out c) broken down d) bankrupt

6. When they heard about our financial difficulties our asked to pay

111 advance,

a) service b) deliveries c) suppliers d) orders

6. They didn't lie - they simply tried to the truth.

a) conceal b) prevent c) reduce d) warm