Профессиональный английский язык для экономистов. Учебное пособие

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Text I. The Three Main Financial Statements, P&L

It is important for any business manager to be aware of and understand the financial statements that are used in evaluating the performance of a business. These financial statements are the Profit and Loss statement (P&L), the Balance sheet, the statement of cash flow.

These financial statements are applied in many different ways in describing and evaluating the operations and financial strength of a business. Each of these statements or reports measures a specific aspect of the operation of a business.

Profit and Loss statement

The Profit and Loss (P&L) statement measures the operating success and profitability of a business. It is also known as the Income Statement. This is the main financial report that describes and measures the profitability of the daily operations of a business. Key characteristics of the P&L Statement are as follows:

it covers a specific time period, for example, monthly, quarterly, or annually;

it reports the actual financial results for a business for the specific time period;

it compares the actual performance to other measures such as budget, the previous year, previous months, or previous periods;

it includes a summary or a consolidated P&L statement and supporting department P&L Statements;

consolidated P&L statements summarize revenues and expenses by departments;

department P&L statements report in detail revenues, expenses, and profit for specific departments.

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A new P&L statement is started each month or period and records information for the current month and year-to-date (YTD). Managers are expected to analyze or critique their monthly P&L Statements to explain variations from the budget or from the previous year, both positive and negative.

The P&L statement is the most important financial report for a manager to understand and work with on a daily basis. This is because managers work with and can affect revenues or they can control most of the costs and expenses. Their daily activities in operating the business produce the numbers reported on the P&L. Consequently, a manager who knows and understands the P&L will provide accurate and timely information that is used in preparing the P&L statement and that gives it credibility. It will be an accurate report that measures the financial profitability of a business. A manager who does not understand the P&L statement might omit important information, provide the wrong information, or miss deadlines that prevent information that should be reported from being included in the proper time frame.

Text II. Balance sheet

The Balance sheet measures the value or worth of a business. It is also known as the Asset and Liability (A&L) statement. This is the main financial report that measures what a company is worth. Key characteristics of the Balance Sheet are as follows.

1. It measures the value or worth of a company at a specific point in time. For example, the Balance Sheet for December 31, 2013, is a snapshot of accounts at that specific point in time and identifies what a company owns (assets), what it owes (liabilities), and how it is owned (owner equity).

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2.The fundamental account equation describes the A&L: Assets = Liabilities + Owner Equity.

3.It is made up of accounts organized by asset, liability, or owner equity.

4.These accounts are divided into current accounts (under one-year obligations), also referred to as working capital, and long-term accounts (over one-year obligations), which are referred to as capitalization.

5.Each account has a beginning balance, monthly activity, and an ending balance.

6. Unlike the P&L statement, managers are not expected to provide critiques of monthly balance sheet activity. This is done by the accounting department.

7.Accounting managers balance monthly the accounts of a balance sheet.

8.It is important for managers to understand the Balance sheet because they use the current asset and liability accounts (working capital) in the daily operations of their business.

Text III. Statement of Cash flows, cash budget and trial balance

The Statement of cash flows measures the liquidity and the flow of cash of a business. Specifically, it is the activity of the cash account of a business. Sales are recorded as cash inflows through point of sale (POS) systems and expenses are recorded as cash outflows through accounts payable or electronic transfers. It is important for a manager to know how much cash is available in the company’s cash account to pay expenses and to plan for future operating obligations. If a business does not have sufficient cash in its cash bank account, it will not be able to pay expenses. It is an important responsibility of any manager to understand the business’s working capital accounts and to be able to use them efficiently. The increases and decreases in account balances of balance sheet accounts also affect cash

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flow. Referred to as the source and use of funds statement, this report describes how cash flows in and out of the different accounts in the Balance sheet. This also reflects the cash strength or liquidity of a business. Liquidity is the ability of a business to pay its short-term obligations and the amount it has in current assets, specifically cash and cash equivalents. It is important for every manager to understand that a business can be profitable from month to month and still go out of business.

If managers simply do not have enough money in their cash account to pay expenses; therefore, they go out of business even though they show profits on their P&L Statement and have a fairly good balance sheet. If you cannot pay your expenses, you cannot stay in business. Therefore, understanding the basics of managing cash flow is critical to the success of both managers and a business.

Key characteristics of the statement of cash flows

Key characteristics of the Statement of cash flows are as follows:

1.It involves the cash account of the Balance sheet.

2.It has beginning and ending balances.

3.It shows how money is used in the daily operations of the business.

4.It measures liquidity.

5.It is a fundamental component of working capital.

6.It reflects the increases and decreases in Balance sheet accounts.

The purpose of a statement of cash flows is to provide information about the cash receipts and cash payments of the entity, and how they relate to the entity's operating, investing, and financing activities. Readers of financial statements use this information to assess the solvency of a business and to evaluate its ability to generate positive cash flows in future periods, pay dividends, and finance growth.

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These cash flows are computed by converting the income statement amounts for revenue, cost of goods sold, and expenses from the accrual basis to the cash basis. This is done by adjusting the income statement amounts for changes occurring over the period in related balance sheet accounts.

Cash budget

Most businesses do not have equal inflows and outflows of cash. In the Hospitality industry it is not unusual to have peak seasons with high occupancy when hotels charge the highest rates and off-seasons with low occupancy and the lowest rates. During the peak periods hotels have great inflow of cash and they need to meet current financial obligations.

If a business is to be prepared to deal successfully with such dramatic changes in the inflows and outflows of cash, it is obvious that planning must take place. For this purpose cash budget is prepared. It is a financial statement which predicts the sources and uses of funds for the period covered. Cash budgets are normally prepared for one year in advance.

Trial balance

The trial balance can be prepared at any time, but is most often prepared at the end of the period. It is prepared after all of the day-to-day journal entries have been recorded, and all of these entries have been posted to the general ledger. For the trial balance, all of the balances from all T-accounts are taken and summarized.

Vocabulary test

1. Main accounting documents reveal how a company … money.

a) retains; b) remains; c) reflects; d) responds.

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10. The company’s directors are … to the company’s shareholders.

a) accountable; b) answerable; c) reporting; d) fiscal.

Multiple Choice Questions

1. Another term for a positive financial return or net income is:

a)revenue;

b)profit;

c)credit;

d)margin.

2. Depreciation is:

a)the amount of money spent;

b)the fixed asset;

c)the part of the cost of the asset consumed during its period of use;

d)the amount of money spent to pay debts.

3. The physical examination of financial records to determine accuracy is called:

a)inventory;

b)inspection;

c)auditing;

d)investigation.

4. The financial statement which shows cash activity (receipts ) during the accounting period is called a(n):

a)bank statement;

b)statement of cash flows;

c)income statement;

d)bank reconciliation.

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5. Which of the following is a record of all the account balances at the year end, and is used to prepare the final accounts?

a)a trial balance;

b)a statement of financial position;

c)a statement of cash flows;

d)an income statement.

6.The balance sheet item that represents the resources invested by the owner is: a) accounts receivable;

b) cash;

c) note payable; d) owner’s equity.

7.Suppliers and creditors of a firm are interested in:

a)profitability position;

b)liquidity position;

c)market share position;

d)debt position.

8. A firm’s liquidity shows:

a)its profit level;

b)the amount of sales it makes;

c)how much VAT it pays;

d)its ability to pay debts.

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Defining the terms

Writing

1.Is the process of analyzing the company’s financial statements essential for the profitability of business? To what extent? And why must all statements be checked by auditors?

2.Explain why truthful information is vital for all financial players and how lack of information can affect distress of investors and solvency of the company.

3.Why do many people consider that accountancy is a great career choice? Identify their reasons.

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Financial and Economic Vocabulary

1.Abilities are general capacities related to performing a set of tasks

2.Account is a statement of money paid or owed

3.Accountability is a state of being responsible to someone for some actions (company directors are accountable to the company’s shareholders)

4.Accounting is keeping financial records

5. Accounting equation is fundamental identity of the balance sheet: Assets = Liabilities + Owner’s Equity

6.Accrual is a gradual or automatic increase in an amount of money or interest

7.Adjusting entries is the term used to describe the set of bookkeeping entries that need to be made in order to update some accounts prior to the preparation of the accounting year-end P&L statement and balance sheet

8.Advertising is paid promotion used to promote products and services as well as to generate ideas and educate the public

9.Amortization is the process of repaying debt installments; in company accounts the systematic write-off of costs incurred to acquire an asset

10.Average rate of return (ARR) is a method of measuring the value of a longterm investment. The equation is net annual saving divided by average investment

11.Assets are anything of value owned by a business that can be used to produce goods or pay liabilities

12.Assignment is a task or piece of work that you are given to do, especially as part of your job or studies

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