Dialogue 1

ARTURO Mr Flynn? Good morning. I'm Arturo Foscatelli.

PATRICK Hello, Mr Foscatelli! Come on in, do sit down.

ARTURO Thank you. As I explained on the phone, I make a point of visiting new members of our organisation at least once during their first year of operation. In your case, it seems that things are going well: lots of contracts, and morale is high.

PATRICK Well, yes, as long as you don't mind working sixteen hours a day!

ARTURO Yes, indeed! Now, I wonder if we can put sonic figures on the performance so far. You've completed your first three months' trading. Do you have any idea what your turnover was, roughly?

PATRICK Er – yes – getting on for thirteen thousand pounds.

ARTURO Mm. That's well on target. Now, how about the outgoings, especially the overheads? That's always something we have to watch in a new business.

PATRICK I must say, Mr Foscatelli, I think this is where I probably need your advice. I've been recording all my transactions very carefully on the computer, and everything seems to be OK. But I don't really understand this idea of 'double entry'.

ARTURO Don't the figures balance?

PATRICK Oh, yes, they balance, but I don't understand what they mean. Look. This is the trial balance I printed out for the first quarter.

Dialogue 2

ARTURO Yes, that seems reasonable. What's the problem?

PATRICK I know I did a training course on this, but I never really got the hang of it. Which side is which?

ARTURO Well, briefly, the left-hand column shows you the debits – that's where the money went to. The right-hand column is the credits – where the money came from. Or we can say that the right-hand side represents the sources of funds, and the left-hand side the uses of funds.

PATRICK But I thought debit meant that you owed money to somebody?

ARTURO It depends who 'you' are, doesn't it? Look at these four people here – Midland Furniture, Goodies, Wonder-Bar and Smith and Sons. They owe you money, right? They are your debtors. Metro-Polo and All-Clean Supplies, on the other hand, are your creditors – you owe money to them.

PATRICK But that's money going out, so why is it on the right-hand side, with sales, which is money coming in?

ARTURO Because creditors are people you haven't paid yet! As long as you don't pay them, All-Clean and the others are lending money to your business. In effect, they are giving you free use of their money. So you benefit, just as you do from sales.

PATRICK Ah! So Midland Furniture and Goodies and the other debtors – they're doing business with my money?

ARTURO Well, until they pay you, yes.

PATRICK I'll get on to them right away!

UNIT 5

LISTENING

Good morning, everyone. I hope you’ve all had a good holiday, and are feeling well rested. But also, that you’ve done that reading I suggested. I shall assume that you have, and have understood what an income statement is. Assuming that, let’s proceed, because of course an income statement is not the only document to consider. The income statement shows the flow of money during a given year. But we also describe the position the firm has reached as a result of its past trading operations. We call this document the balance sheet. The balance sheet.

Now, essentially, the balance sheet lists the assets the firm owns. It also lists its liabilities. What? L-I-A-B-I-L-I-T-I-E-S. OK? Good. Now by doing this the balance sheet provides us with a picture of the firm at a particular point of time, for example at the end of a year. I’ll now go through a balance sheet with you, so take a moment to look at this. It’s the balance sheet for Snark International on 31st December, ___7.

Let’s start with assets. Assets are what the firm owns. These assets are listed on the left, as you can see. Snark, this firm, has some cash in the bank. That’s one asset. It’s also owed some money by its customers, who haven’t paid yet. This money is shown as accounts receivable. That’s another asset. Yet another asset is the large inventories it has in its warehouses. Not only that, but it also owns a factory. This factory originally cost a quarter of a million, but notice that, because of depreciation, it’s now only worth two hundred thousand. Of course, it also has other equipment – desks, perhaps, or machinery – which originally cost Snark three hundred thousand. Again because of depreciation, this equipment is now worth a hundred and eighty thousand. So we can say, after adding all these assets up, that Snark is worth five hundred and ninety thousand.

Now let’s take a look at liabilities. Liabilities are what the firm owes. These liabilities are shown on the right of the balance sheet, as you can see, starting with accounts payable. These are bills that Snark owes but has not yet paid. It also hasn’t yet paid some salaries, some fifty thousand pounds’ worth. That’s also a liability. Then, there is a mortgage on the factory of a hundred and fifty thousand which it has negotiated with an insurance company. Finally, there is a bank loan. That’s for shorter-term cash needs. Adding all that up, we can see that Snark has liabilities, or debts of three hundred and fifty thousand. So we can say that the net worth of Snark, note that term ‘net worth’, is two hundred and forty thousand. That’s the excess of its assets over its liabilities.

Some of you may be wondering why Snark’s net worth is shown as a liability rather than an asset. The reason is simply because the firm is owned by its shareholders. So the net worth is really owed to them. It is a liability of the firm to the shareholders.

Now let’s imagine you have lots of money and you want to buy Snark. To make what we call a take-over bid, in fact. How much do you think you should offer? Eh? Well, you might think of offering two hundred and forty thousand, which is, after all, the net worth of the company. But I think probably not. Why no? Well, Snark is a live company. It’s got good prospects for future growth. It’s got a proven record. You have to remember you’re not just bidding for its physical and financial assets, less of course its liabilities. You’re actually bidding for the firm as a going concern. You will also get its reputation. Its customer loyalty. And a great many other things, all intangible. All these intangibles, like reputation and customer loyalty, we economists call goodwill. One word; goodwill. Right, before I go on, are there any questions?