V. Language study

Translate the sentences.

1. Надходячи фонди збільшили резерв нашої компанії. 2. Облігації акціонерного товариства нашого підприємства та інші довгострокові займи дозволили уникнути фінансового краху. 3. Вливання фондів на довгостроковій основі дозволяють здійснити інвестування у створення підрядних компаній. 4. До вирахування всіх податків за допомогою метода альтернативної калькуляції вона змогла підрахувати приблизний прибуток. 5. Хоча фонди з різних джерел можуть бути використані для фінансування різноманітних потреб компанії, це є необачним вживати короткострокові надходження для придбання основних активів.

Зміст

Передмова................................................................................................3

Unit1.An accounting overview…………………………………………………..4

Unit2.The balance sheet……………………………….…………………...…….8

Unit3.Acquisition of capital …………………….…………………….….11

Unit4.An annual report……………...………………………………………..…15

Unit5.Overheads and their recovery…………………………………………….18

Unit6.The auditing framework……………………………………………….….22

Unit7.Methods of depreciation…………………………………………………..26

Unit8.Funds: inflow and outflow……………………………..………...……….29

Reading

Read the text and answer the questions that follow it. Study new terms.

An accounting overview

Accounting is frequently called the “language of business” because of its ability to communicate financial information about an organization. Various interesting parties, such as managers, potential investors, creditors, and the government, depend on the company’s accounting system to help them make informed financial decisions. An effective accounting system, therefore, must include accurate collecting, recording, classifying, summarizing, interpreting and reporting information on the financial status of an organization.

In order to achieve a standardized system, the accounting process follows accounting principles and rules. Regardless of the type of business or the amount of money involved, common procedures for handling ant presenting financial information are used. Incoming money (revenues) and outgoing money (expenditures) are carefully monitored, and transactions are summarized in financial statements, which reflect the major financial activities of an organization.

Two common financial statements are the balance sheet and the income statement. The balance sheet shows the financial position of a company at one point in time, while the income statement shows the financial performance of a company over a period of time. Financial statements allow interested parties to compare one organization to another and/or to compare accounting periods within one organization. For example, an investor may compare the most recent income statements of two corporations in order to find out which one would be a better investment.

People who specialize in the field of accounting are known as accountants. In the United States, accountants are usually classified as public, private, or governmental. Public accountants work independently and provide services such as auditing and tax computation to companies and individuals. Public accountants may earn the title of CPA (Certified Public Accountant) by fulfilling rigorous requirements. Private accountants work solely for private companies or corporations that hire them to maintain financial records, and governmental accountants work for governmental agencies or bureaus. Both private and governmental accountants are paid on a salary basis, whereas public accountants receive fees for their services.

Through effective applications of commonly accepted accounting systems, private, public, and governmental accountants provide accurate and timely financial information that is necessary for organizational decision-making.

Reading

Read the text and answer the questions that follow it. Study new terms.

A balance sheet

Financial statements are the final product of the accounting process. They provide information of the financial condition of the company. The balance sheet, one type of financial statement, provides a summary of what a company owns and what owes on one particular day.

Assets represent everything of value that is owned by a business, such as property, equipment, and accounts receivable. On the other hand, liabilities are the debts that a company owes – for example, to suppliers and the banks. If liabilities are subtracted from assets (assets – liabilities), the amount remaining is the owners’ share of a business. This is known as owners’ or stockholders’ equity.

One key to understanding the accounting transactions of a business is to understand the relationship of its assets, liabilities, and owners equity. This is often represented by the fundamental accounting equation: assets equal liabilities plus owners’ equity.

ASSETS = LIABILITIES + OWNERS’ EQUITY

These three factors are expressed in monetary terms and therefore are limited to items that can be given a monetary value. The accounting equation always remains in balance; in other words, one side must equal the other.

The balance sheet expands the accounting equation by providing more information about the assets, liabilities, and owners’ equity of a company at a specific time (for example, on December 31, 1993). It is made up of two parts. The first part lists the company’s assets, and the second part details liabilities and owners’ equity. Assets are divided into current and fixed assets. Cash, accounts receivable, and inventories are all current assets. Property, buildings, and equipment make up the fixed assets of a company. The liabilities section of the balance sheet is often divided into current liabilities (such as accounts payable and income taxes payable) and long term liabilities (such as bonds and long term notes).

The balance sheet provides a financial picture of accompany on a particular date, and for this reason it is useful in two important areas. Internally, the balance sheet provides managers with financial information for company decision-making. Externally, it gives potential investors data for evaluation the company’s financial position.

Reading

Read the text and answer the questions that follow it. Study new terms.

Acquisition of capital

A corporation needs capital in order to start up, operate, and expand its business. The process of acquiring this capital is known as financing. A corporation uses two basic types of financing: equity financing and debt financing. Equity financing refers to funds that are invested by owners of the corporation. Debt financing, on the other hand, refers to funds that are borrowed from sources outside the corporation.

Equity financing (obtaining owner funds) can be exemplified by the sale of corporate stock. In this type of transaction, the corporation sells units of ownership known as shares of stock. Each share entitles the purchaser to a certain amount of ownership. For example, if someone buys 100 shares of stock from Ford Motor Company, that person has purchased 100 shares worth of Ford’s resources, materials, plants, production, and profits. The person who purchases shares of stock is known as a stockholder or shareholder.

All corporations, regardless of their size, receive their starting capital from issuing and selling shares of stock. The initial sales involve some risk on the part of the buyers because the corporation has no record of performance. If the corporation is successful, the stockholder may profit through increased valuation of the shares of stock, as well as by receiving dividends. Dividends are proportional amounts of profit usually paid quarterly to stockholders. However, if the corporation is not successful, the stockholder may take a severe loss on the initial stock investment.

Often equity financing does not provide the corporation with enough capital and it must turn to debt financing, or borrowing funds. One example of debt financing is the sale of corporate bonds. In this type of agreement, the corporation borrows money from an investor in return for a bond. The bond has maturity date, a deadline when the corporation must repay all of the money it has borrowed. The corporation must also make periodic interest payments to the bondholder during the time the money is borrowed. If these obligations are not met, the corporations can be forced to sell its assets in order to make payments to the bondholders.

All businesses need financial support. Equity financing (as in the sale of stock) and debt financing (as in the sale of bonds) provide important means by which a corporation may obtain its capital.

Reading

Read the text and answer the questions that follow it. Study new terms.

An annual report

Annual report – a report issued annually by a corporation to its stockholders. It contains basic financial statements, as well as management’s opinion of the past year’s operations and the firm’s future prospects.

Two types of information are given in this report. First, there is a verbal section, often presented as a letter from the chairman that describes the firm’s operating results during the past year and then discusses new developments that will affect future operations. Second, the annual report presents basic financial statements – the balance sheet, the income statement, and the statement of the cash flows. Taken together, these statements give an accounting picture of the firm’s operations and financial position.

The quantitative and verbal information is equally important. The financial statements report what has actually happened to earnings and dividends whereas the verbal statements attempt to explain why things turned out the way they did.

The information contained in an annual report is used by investors to form expectations about future earnings and dividends. Therefore, the annual report is obviously of great interest to investors.

Reading

Read the text and answer the questions that follow it. Study new terms.

Overheads and their recovery

The cots of a business are of two types – direct and indirect. The direct costs vary directly with production. If one additional unit of production is made, there will be a measurable decrease in direct cost. When one unit less is made, there will be similar measurable decrease in direct cost. Direct or raw material is normally the largest component in direct cost. It includes all items of material that are of sufficient size to warrant the effort of charging directly to the job. Small items, such as glue, paint and small quantities of nails, screws, and rivets, do not merit the clerical effort involved in charging directly to the job, and would be recovered as an overhead.

Direct wages will vary directly with productions where remuneration is based upon piecework only. This means that a specific amount is paid when a production operation is successfully finished. If it is not finished, no payment is made. In this book it is assumed that direct labor is of this nature. Many organizations remunerate labor on the basis of a large basic wage, topped up with a productivity bonus. The basic element is paid regardless of the level of production. In such cases wages will not vary directly with production, and fall into the category of an indirect cost or overhead.

Cost centers

To help in this task, the organization is split up into cost centers. These are areas of activity to which are gathered all costs of a like nature. A maintenance department, canteen and stores are example of cost centers. Normally centers will identify with physical areas of the organization. A store center is a physical area in which materials are kept, while awaiting issue to production. A center will gather together all the costs of raising finance for the business, other than from owners or shareholders. It is a function of the administration department, and cannot be identified with a physical area of the business.

Where a cost center has a product which is being manufactured, it is known as a product center. Examples are a machine shop which is machining parts for assembly into the saleable product in an assembly shop. Where a center has a product that is saleable, thus giving rise to an income, it is also known as a profit center. It is capable of showing a profit or loss on its overall activities.

Cost location

The management accountant’s task is to allocate the many diverse overheads onto the cost of each product manufactured. It is a major task requiring the use of many different bases allocation. The allocation of direct cost to a product can be precise. In the case of overhead allocation an element of logical guesstimate enters. There is a two-fold process, firstly to collect all overhead costs onto the product or profit centers; and secondly to load the overheads onto each product passing the center.

Reading

Read the text and answer the questions that follow it. Study new terms.

The auditing framework

When the independent auditor begins an audit assignment, he assumes that (1) the internal control system of the enterprise is appropriate and effective; (2) generally accepted accounting principles have been applied in all accounting processes underlying the financial statements; (3) the generally accepted accounting principles utilized have been applied consistently between the current and the prior periods; and (4) there is an adequate amount of informative financial disclosure in the financial statements and footnotes. Evidence gathering and its evaluation enable the auditors to reject or confirm these a priori assumptions. We are thus in a position to define auditing.

Auditing. The analytical process of gathering sufficient evidential matter on a test or sampling basis to enable a component professional to express an opinion as to whether a given set of financial statements meets established standards of financial reporting.

Now we can enumerate the major steps of the auditing process: (1) become acquainted with the firm – its environment ant its accounting, personnel, production, marketing, and other systems; (2) review and evaluate the management and the accounting control system in operation; (3) gather evidential matter on the integrity of the system; (4) gather further evidence related to the representations made in the financial statements; and (5) formulate a judgment opinion on the basis of the evidence available.

Getting acquainted

Auditing is an analytical process applied to everyday business situations. Hence it is closely related to existing business practices. Without firsthand knowledge of the nature of these practices and their larger setting, the auditor would have to rely exclusively on available financial data.

Control system review

The auditor’s evaluation of the control system operating within the enterprise has a direct influence on the scope of the examination he undertakes and the nature of the tests he conducts. However, even though preliminary evaluation of control systems is an essential ingredient of planning the audit scope, we must remember that eventually both the system and the data it produces are covered by the audit process.

Evidential matter

Evidential matter supporting financial statements consists of the underlying accounting data and all corroborating information available to the auditor. The auditor tests underlying accounting data by analysis and review, retracing some of the procedural steps followed in the original accounting process and reconciling the events with the information reported.

Reading

Read the text and answer the questions that follow it. Study new terms.

Methods of depreciation

By definition, fixed assets are those which will provide services over a number of years and the matching convention tells us that we should recognize the expense in the same period as we recognize the associated revenue. Thus we must not write off, or expense, the whole cost of the asset in the period in which the asset is acquired, but should instead convert the asset into an expense over its life. This gradual conversion is known as depreciation.

How should we compute the depreciation charge over each year? An obvious way would be to compare the current value of an asset at the end of the year with its value at the start of the year and say that the difference is depreciation. But as we have already emphasized, traditional accounting practice is based on historic cost and not current values; consequently that method is generally not acceptable. The traditional approach is to estimate the total expenditure to be written off, i.e. the cost of the asset less its estimated scrap value, and then to write off that expenditure over the estimated life of the asset by using one of the methods that we shall describe.

The life of the asset is usually measured in time, but in some instances may be measured on the basis of actual usage.

Depreciation on the basis of ‘actual usage’ is rare.

In order to consider the difficulties inherent in estimated life of an asset we should think about the reasons why most fixed assets, other than land, have a limited life. These reasons may be classified as physical wear and tear, and obsolescence. Obsolescence may be of the asset itself, e.g. a new machine may make the use of the original asset, an older machine, uneconomic, because the new machine is faster or requires less labor. Obsolescence may also be caused by the object produced by the asset, if, for example, it goes out of fashion. In the latter case, the degree of obsolescence will depend on the specific nature of the asset; some assets may be easily adapted to alternative uses while others may have only one use, the original.

Deciding how much should be written off and over what period is not the only problem, for there are a number of depreciation methods from which to choose. A firm’s management must decide which one to employ, and a user of financial statements who wishes to compare the financial performance of a number of companies must appreciate the effects of the various methods.

In practice we find two main methods of depreciation – the straight-line basis and accelerated depreciation. There is another method, the annuity method which takes account of the interest costs involved in investing in a long-live asset; this method has many theoretical attractions but is rarely used.

Reading

Read the text and answer the questions that follow it. Study new terms.

Funds: inflow and out flow

Sources and uses of funds

Sources:

5. funds generated by trading operations; cash received from sales net of cash paid out for expenses ( the term cash flow is sometimes given to this amount);

6. funds injected into the business on a long-term basis; issues of shares plus any premium received on issue; debentures and other long-term loans;

7. funds released from long-term applications for use elsewhere in the business; sales of fixed assets such as land, buildings, plants and vehicles; loans to subsidiary companies repaid by them;

8. funds lent to the business on a short-term basis; trade creditors; bank loans and overdrafts; amounts payable to the Inland Revenue; bills of exchange payable.

Uses

6. funds lost in trading operations, i.e. when the payment of expenses exceeds receipts from sales;

7. funds used to acquire permanent assets such as land, buildings, plants, vehicles, fixtures and fittings and long-term investments;

8. funds paid away outside the business to repay debentures and loan stock, or to redeem share capital;

9. funds invested outside the business in loans made to subsidiary companies;

10. funds used to acquire assets of a short-term nature, stocks of material, work in progress and finish goods; trade credit allowed to debtors who have no paid yet for goods sold to them; short-term investments as a temporary repository of idle funds; bills of exchange receivable.

Not that already, with this simple analysis shown above items concerning funds moved into and out of the business on a long-term basis, they are being mixed in with short- term movements, and the source of application of funds from changes in the asset structure.

The funds generated by trading operations can be computed as in sources above, but an alternative method of calculating the same figure is to take the net profit before tax and add back all non-cash costs that have been deducted in the profit calculations. A good example of a cost which has not caused an outflow of cash during the year is depreciation. It is a means of spreading over a period of years the cash spent when a fixed asset was originally purchased. The term cash flow is often used for net profit plus depreciation and any other non-cash costs identified during the year.

If sources exceed uses there will be a balance of cash representing funds provided but not yet put to use in the business.

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