15. Accounting and financial statements

Lead-in: Are companies in our country required to publish their financial results? Key words and phrases 1. bookkeeping and accounting – бухгалтерський облік 2. costs and expenses – вартість та витрати 3. tax return – податкова декларація 4. crucial – вирішальний 5. market value – ринкова вартість 6. fixed assets – основні фонди, нерухомість 7. accumulated depreciation charges – нагромаджувальні амортизаційні відрахування 8. stock – акція, облігація, основний капітал 9. inventory – матеріально-виробничі запаси, оборотні фонди 10. profit and loss account – рахунок прибутку та втрат 11. balance sheet – баланс, балансовий звіт 12. statement – фінансовий звіт

Bookkeeping and accounting – the recording of transactions, the elaboration of budgets, the calculating of costs and expenses, the preparation of financial statements and tax returns, and so on – is central to all commercial activity, from the smallest sole-trader or self-proprietorship (one-person business) to the largest international company. Financial control is equally crucial for all non-commercial organizations and institutions.

In accounting, it is always assumed that a business is a ‘going concern’ i.e. that it will continue indefinitely to the future, which means that the current market value of its fixed assets is irrelevant, as they are not for sale. The most common accounting system is historical cost accounting, which records assets at their original purchase price, minus accumulated depreciation charges. In times of inflation, this understates the value of appreciating assets such as land, but overstates profits, as it does not record the replacement cost of plant or stock or inventory.

The value of a business’s assets under historical cost accounting – purchase price minus depreciation – is known as its net book value. Countries with persistently high inflation often prefer to use current cost or replacement cost accounting, which values assets (and related expenses like depreciation) at the price that would have to be paid to replace them (or to buy a more modern equipment) today.

Company law specifies that shareholders or stockholders must be given certain financial information. Companies generally include three financial statements in their annual reports: the profit and loss account (GB) or income statement (US), the balance sheet, and the third one, which has various names, including the source and application of funds statement, and the statement of changes in financial position.

Comprehension:

1. What is included in the concept of ‘financial control’?

2. What is the most common accounting system?

3. Why do countries with high inflation prefer to use replacement cost accounting?

4. What must shareholders and stockholders be informed of?

5. What financial statements should be included in financial reports?