Get Ready for the Postgraduate Entrance English Exam. Working with Texts. Часть 1. Учебное пособие

The principle of consistency states that, although there is considerable choice among methods, companies should choose a set of methods and use them from one period to the next. Its primary economic rationale is that consistency helps investors, creditors, and other interested parties to compare measures of performance and financial position across time periods. Presumably, if a company does not change its accounting methods, outside parties can more easily identify trends across time. In addition, management rarely wishes to change accounting methods; it had reasons for choosing the existing methods in the first place, and changing from one method to another could be viewed by outsiders as an attempt to manipulate the financial statements, reducing their credibility.

II. Vocabulary Items

accounts receivable – дебиторы по расчетам benefits n – прибыль

cash inflow – приток денежных средств cash outflow – отток денежных средств cost n – стоимость, издержки, затраты entry n – бухгалтерская проводка equipment n – оборудование

expenses n – затраты, издержки

fixed assets – основной капитал, основные средства, основные фонды

input n – вклад, затраты interest rate – процентная ставка

inventories n – материально-производственные запасы, оборотные фонды

liability n – обязательство, задолженность, пассив net income – чистый доход

performance n – выполнение purchase n – покупка

recognition n – осознание, утверждение revenue n – доход

security n – ценная бумага value n – цена, стоимость wages n – заработная плата

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III. Exercises

1.Read the text.

2.Learn the vocabulary items by heart.

3.Translate the text in written form.

4.Retell the text using the following expressions and terms: the principle of objectivity, the principles of matching and revenue recognition, the principle of consistency, interest rates, the financial accounting measures of operating performance, net cash flow, cash inflows, cash outflows, net income, to generate benefits in the form of revenues, income statement, adjusting journal entry, fixed asset, accounting period, straight-line depreciation.

IV. Test IV (2)

1. Read the text again and decide which statements are true.

1.The most important and pervasive principle of accounting measurement, states that financial accounting information must be verifiable and reliable.

2.Present value can not be the goal of financial accounting measurement.

3.In certain cases a method of depreciation that recognizes large amounts of depreciation in early periods and smaller amounts later may be a better way to match revenues and expenses.

4.The principle of objectivity states that, although there is considerable choice among methods, companies should choose a set of methods and use them from one period to the next.

2. Match the words given in the left column with the words in the

Unit 3

I. Information for study

Cost accounting

Cost accounting is the process of tracking, recording and analyzing costs associated with the activity of an organization, where cost is defined as ‘required time or resources’. Costs are measured in units of currency by convention.

There are now at least three approaches: standard costing, activi- ty-based costing (discussed here), and throughput accounting.

Origins

Costs were originally considered fixed (the term comes from a Latin root meaning “constant”). In larger organizations, some costs tend to remain the same even during busy periods, while others rise and fall with volume of work. A more convenient way of categorizing these costs is to define them as either fixed or variable. Fixed costs were associated with the business administration, and did not change during quiet or busy times. Variable costs were associated with productive work, and naturally rose and fell with business activity.

In the early twentieth century, as organizations began getting more complex, managers needed a simple way to make decisions about products and pricing. Since most costs at the time were variable, managers could simply total the variable costs for a product and use this as a rough guide for decision-making.

Standard costing

Standard costing took the idea further, by dividing the fixed costs by the number of items produced, and treating the result as if it were a variable cost. This enabled managers to effectively ignore the fixed costs, simplifying the decision process even more.

For example: if the railway coach company produced 40 coaches per month, and the fixed costs were still $1000/month, then each coach could be said to incur an overhead of $25 ($1000/40). Adding this to the variable costs of $300 per coach produced a unit cost of $325 per coach.

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This method tended to slightly distort the resulting unit cost, but in mass-production industries that made one product line, and where the fixed costs were relatively low, the distortion was very minor.

For example: if the railway coach company made 100 coaches one month, then the unit cost would become $310 per coach ($300 + ($1000/100)). If the next month the company made 10 coaches, then the unit cost = $400 per coach ($300 + ($1000/10)), a relatively minor difference.

Evolution of standard costing

•As time went on, the practice of paying workers on a ‘setpiece’ basis changed in favor of paying on an hourly rate.

•Organizations with a wide range of products or services have many tasks common to several finished items, making set-piece impractical.

•Costs of materials may vary over time.

•Equipment has become more complex and specialized and may be a significant variable in overhead costs.

•Modern companies tend to have relatively low truly variable costs (primarily raw material, commissions or casual workers) and very high fixed costs (interest payments, salaries, insurance).

As a result, the terms “direct costs” and “indirect costs” often replace the variable/fixed terminology, to better reflect the way allocation of overhead is actually calculated. Indirect costs (often large) are usually allocated in proportion to either direct costs, or some physical resource utilization.

One effect of the above is that the practice of allocating fixed costs has a far more distorting impact on unit cost figures than it ever used to have.

For example: say the railway coach company paid its workforce a fixed monthly rate of $8000 (total) and its other fixed costs had risen to $2600/month making the total fixed costs = $10600/month. The unit cost to make 40 coaches per month is still $325 per coach ($60 material + (10600/40)), while 100 coaches would have a unit cost of $166 per coach ($60 + ($10600/100)), and 10 coaches would ‘cost’ $1120 each. Managers using the unit cost figure based on 20 coaches per month would likely reject an order for 100 coaches if the selling price was only $300 per unit. If they used the original fixed/variable cost distinction, they would see clear-

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ly that this order contributes to the fixed costs by $240 per coach ($300- $60 materials) and would result in a net profit of over $10,000.

Activity-based costing

Activity-based costing (ABC) is costing by activities. In this case, activities are those regular actions performed inside a company. “Talking with customer regarding invoice questions” is an example of an activity performed inside most companies.

Accountants assign 100% of each employees time to the different activities performed inside a company (many will use surveys to have the workers themselves assign their time to the different activities). The accountant then can determine the total cost spent on each activity by summing up the percentage of each worker’s salary spent on that activity.

Each product or service is produced and delivered via the activities performed in the company. The accountant can then assign the different activities to the different products using an appropriate allocation method.

A company can use the resulting activity cost data to determine where to focus their operational improvement efforts. For example, a job based manufacturer may find that a high percentage of their workers are spending their time trying to figure out a hastily written customer order. Via ABC, the accountants now have a dollar amount that will be associated with the activity of “Researching Customer Work Order Specifications”. Senior management can now decide how much focus or money to budget for the resolutions of this process deficiency. The use of activitybased costing to manage a business is called activity-based management.

Other costing methods

In recent years, more varieties of costing methods have been proposed in order to tailor for different aspects of the business. Some of the uprising ones include inventory costing method, process costing method, average costing method, target costing method.

Still the standard methods and normal costing methods are the best established methods in the accounting world.

II. Vocabulary Items

activity n – деятельность analyze v – анализировать

casual worker – временный рабочий

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commission n – комиссионное вознаграждение currency n – деньги, валюта

data n – данные

employee n – рабочий, служащий, работающий по найму finished item – готовое изделие

fixed costs – фиксированные расходы insurance n – страхование

interest payment – уплата процентов

invoice n – счет-фактура, (товарная) накладная percentage n – процент, процентное отношение pricing n – ценообразование, политика цен product line – товарный ряд, ассортимент

raw material – сырье

recording n – регистрация, запись

resources n – (материальные) запасы, ресурсы salary n – оклад, заработная плата служащего tracking n – отслеживание

utilization n – использование, утилизация variable costs – переменные расходы

III. Exercises

1.Read the text.

2.Learn the vocabulary items by heart.

3.Translate the text in written form.

4.Retell the text using the following expressions and terms: standard costing, activity-based costing, throughput accounting, fixed costs, variable costs, a guide for decision-making, product line, to pay workers on a “set-piece’ basis, paying on an hourly rate, finished items, raw material, casual workers, interest payments, direct costs, indirect costs, physical resource utilization, net profit, the resulting activity cost data, activity-based management, inventory costing methods, process costing method, average costing method, target costing method.

IV. Test IV (3)

1. Read the text again and decide which statements are true.

1.In larger organizations, some costs tend to remain the same even during busy periods, while others rise and fall with volume of work.

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2.Fixed costs were associated with productive work.

3.Direct costs (often large) are usually allocated in proportion to either indirect costs, or some physical resource utilization.

4.A company can use the resulting activity cost data to determine where to focus their operational improvement efforts.

2. Match the words given in the left column with the words in the right column.

Unit 4

I. Information for study

Depreciation

Depreciation is an estimate of the decrease in the value of an asset, caused by “wear and tear”, obsolescence, or impairment. The use of depreciation affects a company’s (or an individual’s) financial statements, and, in some countries, their taxes.

In economics, depreciation is the decrease in value of the capital stock (physical depreciation). Depreciation is caused mainly by deterioration, or wear and tear of equipment, and obsolescence. If capital stock is C0 at the beginning of a period, investment is I and depreciation D, the capital stock at the end of the period, C1, is C0 + I – D.

Accounting

A company needs to report depreciation accurately in its financial statements in order to achieve two main objectives. Firstly, to match its

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expenses with the income generated by means of those expenses. Secondly, to ensure that the asset values in the balance sheet are not overstated: an asset acquired in Year 1 is unlikely to be worth the same amount in Year 5.

It is important to understand that depreciation is an average or expected view of the decline in value of an asset. For example, an entity may depreciate its equipment by 15% per year. This rate should be reasonable in aggregate (such as when a manufacturing company is looking at all of its machinery), but there is no expectation that each individual item declines in value by the same amount.

Accounting standards bodies have detailed rules on which methods of depreciation are acceptable, and auditors will express a view if they believe the assumptions underlying the estimates do not give a true and fair view.

Write-down

A write-down is a form of depreciation. It’s a partial write off. Only part of the value of the asset is removed from the balance sheet. The reason may be that the accounted value of the fixed asset diverges from the market value.

Recording depreciation

For historical cost purposes, assets are recorded on the balance sheet at their original cost. Depreciation is not taken out of these assets directly. It is instead recorded in a contra asset account: an asset account with a normal credit balance, typically called “accumulated depreciation”. Balancing an asset account with its corresponding accumulated depreciation account will result in the net book value. The net book value will never fall below the salvage value, meaning that once an asset is fully depreciated, no further expenses will be taken during its life. Companies have no obligation to dispose of depreciated assets, of course, and many depreciated assets continue to generate income.

Recording a depreciation expense will involve a credit to an accumulated depreciation account. The corresponding debit will involve either an expense account or an asset account which represents a future expense, such as work in process. Depreciation is recorded as an adjusting journal entry.

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Methods

There are several methods for calculating depreciation, generally based on either the passage of time or the level of activity (or use) of the asset.

Straight-line depreciation

Straight-line depreciation is the simplest and most often used technique, in which the company estimates the “salvage value” of the asset after the length of time over which it is depreciated, and assumes the drop in the asset’s value is in equal, yearly increments over that amount of time. The salvage value is an estimate of the value of the asset at the time it will be sold or disposed of; it may be zero. For example, a vehicle that depreciates over 5 years, is purchased at a cost of US$17,000, and will have a “salvage value” of US$2000 will depreciate at US$3,000 per year.

If the vehicle was to be sold and the sales price exceeded the depreciated value (net book value) then the excess depreciation would be considered as income by the tax office.

If a company chooses to depreciate an asset at a different rate from that used by the tax office then this generates a timing difference in the income statement due to the difference (at a point in time) between the taxation department’s and company’s view of the profit.

Declining-balance

The declining-balance method is a type of accelerated depreciation, because it recognizes a higher depreciation cost earlier in an asset’s lifetime. This may be a more realistic reflection of an asset’s actual resale value, as well as the expected benefit from the use of the asset: many assets are most useful when they are new. In the U.S., a form of decliningbalance depreciation, MACRS, is used for tax purposes.

In declining-balance depreciation, each period’s depreciation is based on the previous year’s net book value, the estimated useful life, and a factor. The factor is commonly two; this is known as double decliningbalance. Each period we calculate depreciation:

Depreciation expense = Previous period’s NBV × factorN

For the double-declining balance method, using the vehicle example from above, we compute the depreciation after the first year:

Previous period’s NBV × factorN = $1700 × 52 = $6800

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We subtract $6800 from our previous year’s net book value to obtain our new net book value: NBV1 = $17000 – $6800 = $10200. For the second year, we use this new value to calculate depreciation. Notice that it is significantly lower than the first year:

$10200 × 52

This process continues until we reach the salvage value or the end of the asset’s useful life. Since declining-balance depreciation doesn’t always depreciate an asset fully by its end of life, some methods also compute a straight-line depreciation each year, and apply the greater of the two. This has the effect of converting from declining-balance depreciation to straight-line depreciation at a midpoint in the asset’s life.

Activity

Activity methods are not based on time, but on a level of activity. This could be miles driven for a vehicle, or a cycle count for a machine. When the asset is acquired, we estimate its life in terms of this level of activity. Assume the vehicle above is estimated to go 50,000 miles in its lifetime. We calculate a per-mile depreciation rate: ($17,000 cost – $2,000 salvage) / 50,000 miles = $0.30 per mile. Each year, we then calculate the depreciation expense by multiplying the rate by the actual activity level.

Taxes

When a company spends money for a service or anything else that isn’t a tangible asset, this expenditure is usually immediately tax deductible, and the company enjoys an immediate tax benefit.

However, when a company buys some physical asset that will last longer than one year, like a computer, car, or building, the company cannot immediately deduct the cost and enjoy an immediate tax benefit. Instead, the company must depreciate the cost over the useful life of the asset, taking a tax deduction for a part of the cost each year. Eventually the company does get to deduct the full cost of the asset, but this happens over several years; the number of years depends on an estimate of how long it typically takes that type of asset to become effectively useless, and require a replacement. A computer may depreciate completely over five years; a factory building, over 30 years. The maximum allowable useful life estimate under U.S. income tax regulations is 40 years. Other countries have other systems, many of which remove the choice of depreciation rate and method from the company altogether. In these jurisdictions

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