Value added statement

The value added statement indicates the difference between the cost of bought in goods and services and the sales revenue of the business. It is the value added to these things by the effort of the business.

2. Comprehension check

Working in pairs, answer the questions.

1. What is the profit and loss account?

2. What is the difference between the balance sheet and the profit and loss account?

3. What does a funds flow statement present?

4. What is the main difference between the balance sheet and the funds flow statement?

3. Read the text once again. Find words in the text that mean the same as the following.

a. revenue b. damage c. bill d. included e. selling f. expenses, charges g. per cent h. bonus i. levy

j. price k. supplementary costs l. cover m. wear n. publicity campaign o. to allocate p. dispensed q. stockholders r. remitted

s. retention t. movement u. utilized v. resemblances w. to concern x. current assets y. alterations z. attempt

Vocabulary

Do you know the meanings of the following words? Try to match up each of them to its Ukrainian equivalent. Use your dictionary if necessary.

life span to appear low declared profit to write off depreciation to save up replacement book value straight line depreciation declining balance depreciation residual value	straightforward calculation return fixed percentage to apportion to subtract running costs maintenance costs earning power susceptible obsolescence
а) накопичувати ( гроші) б) балансова вартість в) рівномірне нарахування зносу г) прибуток, надходження д) виявитися низьким е) вираховувати, відраховувати є) експлуатаційні витрати, виробничі витрати ж) тривалість життя з) метод дегресивної амортизації и) зниження вартості і) заміна ї)стабільний процент	й) експлуатаційні витрати, витрати на технічне обслуговування та поточний ремонт к) списувати суму л) здібність давати прибуток м) підвержений чомусь, сприйнятливий до н) моральне застаріння о) рівномірно розподіляти п) пряма калькуляція р) остаточна вартість с) декларований прибуток

Pre-reading task

Work in small groups.

Now you are going to read about the valuation of fixed assets. In what way does it relate to depreciation?

Preface each answer with one of the following according to what is true for you:

I consider that… Speaking of… As far as I know…

I am not completely certain that… If I make no mistake…

Reading

1. Read text 11. How much of the information did your group already know?

TEXT 11

Valuation of assets

The only sure way of knowing what an asset is worth to a business is by offering it for sale. Fixed assets such as machinery and vehicles have a limited life span, although at times it can run into decades. So far we have referred to the “life” of a machine as if this was a fixed period of time. The life span of a machine can vary according to the situation in which the business finds itself. Museums contain many examples of working machines that are obviously still in existence but whose usefulness is over. Throughout its life an asset's value is falling. If this change in value is ignored the profit declared by a business can appear low compared with the amount of capital employed. It is usual, therefore, to write off some of the value of the machine each year. This appears as a charge on the profit and loss account before tax is paid. This charge is called depreciation.

By depreciating its fixed assets a business saves on tax and increases profit. However, depreciation itself is not a method of saving up for replacement machinery. That is a decision taken separately by the business when deciding how to use its profit. Depreciation reduces the book value of an asset, i.e. its value after depreciation has been charged. The book value does not reflect the market value of the asset and in itself depends on the method of depreciation used.

The two most common methods of depreciation are straight line depreciation and declining balance depreciation.

1. The straight line method of depreciating assets reduces the book value of the asset by the same amount for each year of its life. An asset which cost £12 000 with an expected life of ten years and a residual value (that is the amount the business expects to sell the machine for at the end of its working life) of £2000 would be depreciated by £1000 per year:

(Cost of asset - Residual value)/ Life of asset

Figure 1 Straight line depreciation Figure 2 Declining balance depreciation

Book value Book value

12 12

10 10

8 8

6 6

4 4

22

1 Residual value 1 Residual value

01 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10

Time (years) Time (years)

Straight line depreciation is a simple and straightforward calculation. It gives a higher level of profit to the business in the first years of the life of the machine and is particularly useful when the business is expecting constant returns over the life of the asset. This is shown in Figure l.

2. The declining balance method of depreciation reduces the book value of the asset by a fixed percentage calculated to apportion the value of the machine after residual value has been subtracted from initial cost over the expected life of the machine. This means that depreciation is highest in the early years of the life of the machine. The use of the declining balance method takes into account that as the machine grows older its running and maintenance costs are likely to increase and its earning power will decrease. As a machine gets older it is more susceptible to obsolescence and may be more difficult to sell. Figure 2 shows declining balance depreciation using the data from Figure 1.

2. Comprehension check.

Read the text again more carefully. Choose the correct answer from a, b, c.

1. To become aware of an assets value means:

b) to see it

c) to buy it

d) to change it

2. Fixed assets are:

a) petrol and oil

b) machinery and vehicles

c) stock and debtors

3. During a life span an asset’s value:

a) does not change

b) decreases

c) increases

4. Some of value of fixed assets is necessary:

a) to charge each year

b) to write off in a year

c) to write off each year

5. Writing off some of value is:

a) a charge on the profit and loss account after tax is paid

b) a charge on the profit and loss account before tax is paid

c) a charge on the profit and loss account

6. Deprecation of fixed assets means:

a) to economize on tax and increase profit

b) to economize on tax and decrease profit

c) to understate taxes and increase profit

7. To depreciate the book value of an asset is:

a) to reduce the book value of an asset

b) to increase the book value of an asset

c) to control the book value of an asset

8. The book value does not reflect:

a) historical value of an asset

b) cost value of an asset

c) market value of an asset

9. How many methods of depreciation exist?

a) one

b) four

c) two

10. What method of depreciation does not exist?

a) the straight line method

b) the declining balance depreciation

c) the progressive balance depreciation

11. The straight line method of depreciating assets:

a) reduces the book value by the fixed amount for each year of its life

b) reduces the book value by the same amount for each year of its life

c) reduces the book value by the amount increasing each year

12. The declining balance method indicates that:

a) deprecation is lowest in the early years of the life of an asset

b) deprecation is highest in the early years of the life of an asset

c) deprecation is the same each year of the life of an asset

13. The use of the declining balance method takes into account that as an asset grows older:

a) its running and maintenance costs increase

b) its production and distribution costs increase

c) its running and maintenance costs increase

3. Read the text once again. Find words in the text that mean the opposite of the following.

to be of little value to reject purchase to raise stability taken into account hidden, concealed saved, economized increase in a book cost of fixed assets loss installation, setting up

historical, purchase value partial value, price curve line variable added final cost grow younger desolation, neglect unprofitability

4. Solve the problem. An assets cost £20000. Its residual value is expected to be £2000 and its life span is six years. The business concerned uses the straight line method of depreciation. By how much will it reduce the book value of machine each year?

*Review²

1. A machine costs £30 000 and has a useful life of five years. At the end of that time it will have a residual value of £5000. The business decides to use the declining balance method of depreciation. The figures are as follows:

Year Depreciation provision Net book value

1. 9035 20965

2. 6314 14651

3. 4412 10239

4. 3084 7155

5. 2155 5000

a. What is meant by the terms:

І residual value?

ІІ depreciation?

ІІІ net book value?

b. From the data given and using the same axes draw graphs to show the effect on the book value of using:

i the straight line method of depreciation,

ii the declining balance method.

c. Give one reason why the business might have decided to use the declining balance method of depreciation.

d. State and explain three factors which influence the life of an asset.

2. The information given below is a summary of the transactions of a small business during its first year of trading.

	£		€
Cash received	Cash paid
Proprietor's funds	15000	For stock	25000
Loan from bank	5000	For rent of premises	3000
Sales revenue	40000	For fixtures & fittings	15000
		For rates	1500
		For administration	500
		Owner's drawings	5000
		Heating & lighting	1000

The following information is also available at the end of the accounting period:

• the business is owed £2000 by its customers.

• there is a stock of goods worth £5000.

• cash and bank balances total £1000.

• the business owes suppliers £4000.

• cost of lease £10 000.

1. Draw up the profit and loss account for the firm at the end of the first year of trading.

2. Draw up the balance sheet of the business at the end of the first year of trading,

3. What other information would you need in order to estimate the business’s chances of survival?

1. Щоб оволодіти лексичними одиницями, необхідними для розкриття сутності витрат у бізнесі, виконайте вправу 1 (Оцінюється в 2 бали).

Exercise 1. Do you know the meaning of the following words? Try to match up each of them to its Ukrainian equivalent. Use your dictionary if necessary.

cost (s) to incur corresponding costs to attach to fixed costs to tend to be unaffected output to meet the costs capacity to operate at less than full capacity average fixed cost when setting prices variable costs to consume to assume a bulk discount semi – variable costs marriage direct costs direct labour direct materials indirect costs	indirect materials stores lubricants indirect labour supervision costs marginal costs imputed (implicit) costs monetary value opportunity cost to lay off labour costs production costs advertising costs distribution costs storage costs selling costs administrative costs cost price manufacturing cost operating costs cost analysis cost of sales
витрати виробництва припиняти роботу (підприємства); звільняти (робітників) витрати на робочу силу непрямі матеріали обігові витрати труд підcобних робітників тісний союз витрати на реалізацію мастильні матеріали аналіз витрат	припускати, вважати граничні витрати середні витрати на одиницю продукції продуктивність, випуск продукції терпіти (збитки), нести (збитки) експлуатаційні витрати пов’язувати з чим – небудь торгові витрати при призначенні цін витрати на зберігання жива праця, основна робота
заводська собівартість, виробничі витрати відповідні витрати витрати на рекламу мати тенденцію не змінюватися адміністративні, управлінські витрати постійні витрати працювати при неповному завантаженні потужностей витрати на контроль виробнича ціна, собівартість продукції собівартість, витрати споживати	матеріально – виробничі запаси знижка на великий обсяг замовлення непрямі витрати покривати вартість прямі витрати грошова оцінка вмінені витрати обсяг, здатність; потужність, продуктивність перемінні витрати основні виробничі матеріали напівперемінні витрати витрати в результаті прийнятного альтернативного курсу

2. Постарайтесь дати відповіді на запитання, використовуючи фрази:

As for this problem… I am afraid that I don’t know…

It may be assumed that… I am not quite sure that…

It is essential for…

Do you have any idea about fixed and variable costs?

Do you know anything about them?

3. Прочитайте швидко (за 2-3 хвилини) текст 12 і скажіть, чи підтвердилися ваші припущення.

Reading

1. Read text 12. How much of the information did your group already know?

Text 12

Costs

Costs are incurred by all the activities a business undertakes. Every decision, no matter how small, involves a corresponding cost. The importance which should be attached to cost in any business enterprise cannot be surprising when it is remembered that:

Profit = Revenue - Costs

Some basic cost definitions are given in this text.

Fixed costs

Fixed costs are those costs which, over a given period of time, tend to be unaffected by changes in output. For example, a factory capable of producing 100000 engineering parts in a certain period of time might have fixed costs in terms of rent, heating, lighting and the cost of machinery of £100 000 in that time. If the factory only produces 80 000 units it will still have to meet the costs associated with 100 000 units.

The total number of goods and services a business is capable of producing is known as its capacity. You should realise that businesses offering services will also have a limit to the total amount they can provide for their customers. A hairdressing salon has a given number of seats, sinks, dryers and stylists. A restaurant is limited in the number of meals it can supply by its kitchen capacity, by seating accommodation, the number of staff, and on the number of meals they can serve. The TV engineer is limited by level of skill and the time spent on the number of repairs possible in one day.

When a business produces less than the amount of which it is capable we say it is operating at less than full capacity. This is usually expressed as a percentage of full capacity:

(Number of units produced x 100) / Capacity of business

In the example given above this would be:

(80000 x 100) / 100000 = 80 per cent

Figure 1 Fixed costs Figure 2 Avarege fixed costs declining as output increases

Costs Costs

300 5

200 3

Fixed cost

100 1 Average fixed costs

010 20 30 40 50 60 70 80 90 100 0 10 20 30 40 50 60 70 80 90 100

Output Output

Figure1 shows the position of a business with a capacity of 100 000 at a fixed cost of £100 000 in a given period of time.

Average fixed cost is the proportion of total fixed costs carried by each item produced and is calculated by dividing total fixed cost by output. When the business described above is producing at full capacity then the average fixed cost will be £1. When it is operating at 80 per cent capacity the average fixed cost will be £1.20.

Try the same calculation for different levels of output for the above business. You should find that the lower the level of output the higher the average fixed cost. This fact has a significance for businesses when setting prices and deciding whether or not to accept a particular order. Figure 2 shows average fixed costs decreasing as output increases.