CHAPTER 4.
ACCOUNTING AND
FINANCIAL STATEMENTS
1. Types of Accounting
Task 1a. Vocabulary
Match up the terms on the left with the definitions on the right
1) bookkeeping A. calculating an individual’s or a company’s
liability for
2) accounting tax
B. writing down the details of transactions
3) managerial (debits and credits)
accounting C. keeping financial records, recording
income and expenditure, valuing assets
and liabilities, and so on
4) cost accounting D. preparing budgets and other
financial reports necessary for
5) tax accounting management
E. inspection and evaluation of accounts
6) auditing by a second set of accountants
F. using all available accounting
7) creative accounting procedures and tricks to disguise the
true financial position of a company
G. working out the unit costs of products,
including materials, labour and all
other expenses
Answer
1. B
2. C
3. D
4. G
5. A
6. E
7. F
Task 1b. Discussion
What particular skills do you think different kinds of accountans need?
Do you think you possess these skills? (what are your
assets and liabilities?) If you have yet to choose a career,
do you think it could be accountancy?
Answer :
The qualities required for bookkeeping are probably accuracy and
concentration, and mathematical (or at least arithmetical) ability.
Managerial and cost accounting require analytical ability and
mathematical competence. Tax accounting probably requires a thorough
knowledge of tax laws and accounting combined with a desire to help
one's clients reduce their tax liabilities. Auditing presumably requires
strong analytical and svnthetic skills, and honesty; creative accounting
presumably requires the same, with the substitution of dishonesty for
honesty.
Yes i think i have that skills
Yes I think I will choose accounting as my future career
2. Company Accounts
Task 2a. Vocabulary
These are some of the most common terms in accounting. Match them up with
the definitions below.
assets liabilities turnover
depreciation (GB) or
amortization (US)
creditors (GB) or accounts
payable (US) debtors (GB) or
accounts receivable (US)
overheads (GB) or overhead (US) earnings or income
shareholders (GB) or stockholders (US) stock (GB) or inventory (US)
1) A company’s owner
2) The revenues received by a company during a given period, minus the cost
of sales, operating expenses, and taxes
3) All the money that a company will have to pay to someone else in the future,
including taxes, debts, and interest and mortgage payments
4) The amount of business done by a company over a year
5) Anything owned by a business (cash investment, buildings, machines, and so
on) that can be used to produce goods or pay liabilities.
6) The reduction in value of a fixed asset during the years it is in use (charged
againts profits)
7) Sums of money owed by customers for goods or services purchased on credit
8) Sums of money owed to suppliers for purchases made on credit.
9) (the value of) raw materials, work in progress, and finished products stored
ready for sale.
10) The various expenses of operating a business that cannot be charged to
anyone product, process or department.
Answer :
1. Shareholders or stockholders
2. Earnings or income
3. Liabilities
4. Turnover
5. Assets
6. Depreciation or amortization
7. Debtors or acoounts receivable
8. Creditors or accounts payable
9. Stock or inventory
[Link] o overhead
Task 2b. Reading
Insert the words in the box in 2a in the gaps in the text.
ACCOUNTING AND FINANCIAL STATEMENTS
In accounting, it is always assumed that a business is a “going concern”, i.e.
that it will continue indefinitely into the future, which means that the current
market value of its fixed assets is irrelevant, as they are not for sale. Consequently,
the most common accounting system is historical cost accounting, which records
(1)................................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 (2)…
...................................................................................The value of a business’s
assets under
historical cost accounting – purchase price minus (3) … - is known as its net
book value.
Company law specifies that (4)...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) shows (5)
.....................................................................................................and
expenditure.
It usually gives figures for total sales or (6) …………………, and costs, expenses
and (7)...................................................................................................................The
first figure should obviously be the highest, i.e. there should be a profit. Part of the
profit goes to the government in taxation, part is usually distributed to shareholders
as a dividend and part is retained by the company.
The balance sheet shows a company’s financial situation on a particular
date, generally the last day of the financial year. It lists the company’s assets, its
long-term and short-term (8)
................................................................................................................................
and
shareholders’ (stockholders’) funds. A business’s assets include (9) as it is assumed
that these
will be paid. Liabilities include (10) , as these will have to be paid. Long-term
liabilities are usually
loans and bonds; short-term liabilities include accrued or accumulated expenses
that have not yet been paid such as taxes and interest. Negative items on financial
statements, such as creditors, taxation and dividends paid are usually enclosed in
brackets or preceded by a minus sign.
In accordance with the principle of double-entry bookkeeping (that all
transactions are entered as a credit in one account and as a debit in another), the
basic accounting equation is:
Assets = Liabilities +
Owners’ Equity This can be rewritten as:
Assets – Liabilities = Owners’ Equity or Net Assets
This includes share capital (money received from the issue of shares), share
premium (GB) or paid-in surplus (US) (any money realized by selling shares at
above their nominal value) and the company’s reserves including retained profits
from previous years. Shareholders’ equity or net assets are generally less that a
company’s market capitalization (the total value of its shares at any given
moment, i.e. the number of shares times their market price), because net assets do
not record items such as goodwill.
The third financial statement has various names, including the funds flow
statements, source and application of funds statement (GB) and the statement
of changes in financial position (US). This shows the flow of cash in and out of
the business between balance sheet dates. Companies often distinguish between
operating activities, and financing and investment activities. Sources of funds
include trading profits, depreciation provisions, sales of assets, borrowing and the
issuing of shares. Application of funds includes purchases of fixed or financial
assets, payment of dividends, repayment of loans, and –in a bad year- trading
losses.
Answer :
1. Assets
2. Stock or inventory
3. Depreciation or amortization
4. Shareholders or stockholders
5. Earnings or income
6. Turnover
7. Overheads or overhead
8. Liabilities
9. Debtors or acoounts receivable
[Link] or accounts payable
Task 2c. Summarizing
Complete the following sentences.
1) Companies record their fixed assets at historical cost because...............
2) Historical cost accounting usually underestimates......
3) Countries with a regularly high rate of ...........
4) Company profits are usually split ......
5) Double-entry bookkeeping requires that.....
6) A company’s net assets consist of.........
7) A company’s stock market capitalization.....
8) Flows of cash both in and out of the company .......
Answer :
1. they do not need to know their real value; if the company is a going concern
they are not for sale.
2. the value of assets that appreciate (gain value), such as land and buildings
(US: real estate)
3. inflation generally use a system of current cost or replacement cost
accounting, which records assets at the price that would have to be paid to
replace them.
4. three ways; into tax (corporation tax in Britain, income tax in the US),
dividens, and retained earnings.
5. every transactions is recorded in one account as a sum received and another
as a sum paid.
6. its assets minus liabilities.
7. is usually more than the value of its net assets, because this figure does not
include intangible elements such as goodwill.
8. are recorded in the source and application of funds statement.
3. Financial Statements
Answer :
1. Costs and expenses
2. Income tax
3. Net profit
4. Intangible assets
5. Inventories
6. Retained earnings
7. Long-term liabilities
8. Accruied expenses
9. Net cash from operating activities
[Link] and cash equivalents at beginning of period
