English
for
Accounting
Material Selection & Organisation
Evangelia Koutsoyanni
Athens 2011
1
Contents
Fields of Accountancy
3
Accounting Principles
7
The Accounting Cycle
10
The Balance Sheet
13
The Cash Flow Statement
20
Depreciation
25
Types of Companies
28
Financial Institutions
33
Taxation
35
Auditing
40
Managerial Accounting
41
Financial Ratios
44
Accounting Basics –Quiz
Numbers
47
48
_____________________________________________
Οι σημειώσεις είναι μέρος της διδακτέας ύλης του μαθήματος
ΑΓΓΛΙΚΗ ΟΡΟΛΟΓΙΑ του Τμήματος Λογιστικής ΤΕΙ Πειραιά.
2
Accountancy
Accountancy is the process of communicating financial information about a business entity to
users such as shareholders and managers. The communication is generally in the form of
financial statements that show in money terms the economic resources under the control of
management; the art lies in selecting the information that is relevant to the user and is reliable.
Accountancy is a branch of mathematical science that is useful in discovering the causes of
success and failure in business.The principles of accountancy are applied to business entities
in three divisions of practical art, named accounting, bookkeeping, and auditing.
Accounting is defined by the American Institute of Certified Public Accountants (AICPA) as
"the art of recording, classifying, and summarizing in a significant manner and in terms of
money, transactions and events which are, in part at least, of financial character, and
interpreting the results thereof."
Accounting is thousands of years old; the earliest accounting records, which date back more
than 7,000 years, were found in the Middle East. The people of that time relied on primitive
accounting methods to record the growth of crops and herds. Accounting evolved, improving
over the years and advancing as business advanced.
Early accounts served mainly to assist the memory of the businessperson and the audience for
the account was the proprietor or record keeper alone. Cruder forms of accounting were
inadequate for the problems created by a business entity involving multiple investors, so
double-entry bookkeeping first emerged in northern Italy in the 14th century, where trading
ventures began to require more capital than a single individual was able to invest. The
development of joint stock companies created wider audiences for accounts, as investors
without firsthand knowledge of their operations relied on accounts to provide the requisite
information. This development resulted in a split of accounting systems for internal (i.e.
management accounting) and external (i.e. financial accounting) purposes, and subsequently
also in accounting and disclosure regulations and a growing need for independent attestation of
external accounts by auditors.
Today, accounting is called "the language of business" because it is the vehicle for reporting
financial information about a business entity to many different groups of people. Accounting
that concentrates on reporting to people inside the business entity is called management
accounting and is used to provide information to employees, managers, owner-managers and
auditors. Management accounting is concerned primarily with providing a basis for making
management or operating decisions. Accounting that provides information to people outside the
business entity is called financial accounting and provides information to present and potential
shareholders, creditors such as banks or vendors, financial analysts, economists, and
government agencies. Because these users have different needs, the presentation of financial
accounts is very structured and subject to many more rules than management accounting.
3
Exercises
A. Match the terms with their definitions.
auditing, tax accounting, managerial accounting, financial accounting, bookkeeping,
cost accounting, creative accounting
1. Calculating an individual’s or a company’s liability for tax _________________
2. Writing down the details of transactions (debits and credits)________________
3. Keeping financial records, recording income and expenditure, valuing assets and
liabilities, and so on. ________________________
4. Preparing budgets and other financial reports necessary for management
____________________
5. Inspection and evaluation of accounts by a second body of accountants. ___________
6. Using all available accounting procedures and tricks to disguise the true financial
position of a company. _______________________
7. Working out the unit cost of products, including materials, labour, and all other
expenses. ________________________
B.Complete the text using the given words.
credits, debits, journals, transactions, ledger, transferred, double-entry, posted, invoice, receipt,
trial-balance, vouchers
Bookkeeping
Bookkeepers record every purchase and sale that a business makes, in the order that take
place, in ____________________ . At a later date, these temporary records are entered in or
_______________________ to the relevant account book or ___________________ . Of
course the “books” these days are likely to be computer files. At the end of the accounting
period, all the relevant totals are ___________________ to the profit and loss account.
_________________________ bookkeeping records the dual effect of every transaction.
Payments made or ________________ are entered on the left-hand (debtor) side of an
account, and payments received or _________________ on the left-hand side. Bookkeepers
will periodically do a _____________________ to test whether both sides of an account book
match. In most business ___________________________ , the seller of goods or services
sends the buyer a bill or _______________________ , and later a __________________
acknowledging payment. Businesses are obliged to retain the documents, known as
____________________, that support or prove an item in an account, and make them
available to the internal and external auditors who check the accounts. Accountants, unlike
bookkeepers, analyse financial records , and decide how to present them.
4
C. Fill in the gaps in the texts below with only one word.
(a) Double-entry and the Accrual Basis of Accounting
At the heart of financial accounting is the system known _________________ double-entry
bookkeeping. Each financial ____________________ that a company makes is recorded
_____________________ using this system.
The term double-entry means that every transaction _________________ at least two
accounts. For example, ____________________ a company borrows $50000 from its bank,
the company’s Cash account increases, and the company’s Notes Payable account increases.
Double-entry also __________________ that one of the accounts must have an amount
entered as debit , and one of the accounts must have an amount entered as credit. For
___________________ given transaction, the debit amount must __________________ the
credit amount.
The advantage of double-entry accounting is this: at any given _________________, the
balance of a company’s assets accounts will equal the balance of its liability and stockholders’
or owners’ equity accounts.
Financial accounting ________________ required to follow the accrual basis of accounting.
According ________________ the accrual basis, revenues are reported when they are earned,
not when money ________________ received. _________________ , expenses are reported
when they are incurred, not when they are paid. For example, ________________ a magazine
publisher receives a $24 check from a customer for an annual subscription, the publisher
reports ____________________ revenue a monthly amount of $2 _one twelfth of the annual
subscription amount. In the same _________________ , the property tax expense is reported
each month as one-twelfth of the annual property tax bill.
By following the accrual basis of accounting, a company’s profitability, assets, liabilities, and
other financial information is more in line ________________ economic reality.
(b) Differences between the cash and the accrual basis of accounting
Under the cash basis of accounting, revenues _________________ reported on the income
statement in the period in _____________ the cash is received ______________ customers.
Expenses are reported on the income statement when the cash is ____________ out.
Under the accrual basis of accounting, revenues are __________________ on the income
statement when ________________ are earned- which often occurs before the cash
________________ received from the customers. Expenses are reported on the income
statement in the period when they incur or when they expire- which is often a period different
__________________ when the payment is _________________ .
The accrual basis of accounting provides a better picture of a company’s profits during
_____________ accounting period. The reason is that the income statement prepared
___________________ the accrual basis will report all of the revenues actually earned during
the period and all of the expenses incurred in _________________ to earn the revenues.
5
Chart of Accounts
A chart of accounts is a listing of the names of the accounts that a company has identified and
made available for recording transactions in its general ledger. A company has the flexibility to
tailor its chart of accounts to best suit its needs, including adding accounts as needed.
Within the chart of accounts you will find that the accounts are typically listed in the following
order:
Balance sheet accounts
Assets
Liabilities
Owner's (Stockholders') Equity
Income statement accounts
Operating Revenues
Operating Expenses
Non-operating Revenues and Gains
Non-operating Expenses and Losses
Within the categories of operating revenues and operating expenses, accounts might be further
organized by business function (such as producing, selling, administrative, financing) and/or by
company divisions, product lines, etc.
A company's organization chart can serve as the outline for its accounting chart of accounts.
For example, if a company divides its business into ten departments (production, marketing,
human resources, etc.), each department will likely be accountable for its own expenses
(salaries, supplies, phone, etc.). Each department will have its own phone expense account, its
own salaries expense, etc.
A chart of accounts will likely be as large and as complex as the company itself. An
international corporation with several divisions may need thousands of accounts, whereas a
small local retailer may need as few as one hundred accounts.
Answer the questions
1. The chart of accounts is a listing of the accounts presently having balances in the
general ledger.
True or False
2. The accounts shown in the chart of accounts can be broadly classified into two
categories: balance sheet accounts and ______________ _______________
accounts.
3. Every transaction will affect at least __________ accounts.
4. In addition to the standard chart of accounts for a specific industry, you will likely want
to expand and/or modify the chart of accounts to fit your business. One tool that would
be useful in determining the accounts for your company would be your company’s
____________________ chart.
6
Accounting Principles
There are general rules and concepts that govern the field of accounting. These general rules –
referred to as basic accounting principles and guidelines –form the groundwork on which more
detailed , complicated , and legalistic accounting rules are based. For example, the Financial
Accounting Standards Board (FASB) uses the basic accounting principles and guidelines as a
basis for their own detailed and comprehensive set of accounting rules and standards.
In the U.S., Generally Accepted Accounting Principles are accounting rules used to prepare, present, and report
financial statements for a wide variety of entities, including publicly traded and privately held companies, non-profit
organizations, and governments. The term is usually confined to the United States; hence it is commonly
abbreviated as US GAAP or simply GAAP. However, in the theoretical sense, Generally Accepted Accounting
Principles encompass the entire industry of accounting, and not only the United States.
Objectives
Financial reporting should provide information that is:



useful to potential investors and creditors and other users in assessing amounts and making
financial decisions.
helpful in improving the performance of the business
useful in maintaining records
Basic concepts
To achieve basic objectives and implement fundamental qualities GAAP has four basic
assumptions, four basic principles, and four basic constraints.
Assumptions




Accounting Entity: assumes that the business is separate from its owners or other
businesses. Revenue and expense should be kept separate from personal expenses.
Going Concern: assumes that the business will be in operation indefinitely. This
validates the methods of asset capitalization, depreciation, and amortization. Only when
liquidation is certain this assumption is not applicable. The business will continue to exist in
the unforeseeable future.
Monetary Unit principle: assumes a stable currency is going to be the unit of record.
The FASB accepts the nominal value of the US Dollar as the monetary unit of record
unadjusted for inflation.
The Time-period principle implies that the economic activities of an enterprise can be
divided into artificial time periods.
Principles

Historical cost principle requires companies to account and report based on acquisition
costs rather than market value for most assets and liabilities. This principle provides information
that is reliable (removing opportunity to provide subjective and potentially biased market values),
but not very relevant. Thus there is a trend to use fair values. Most debts and securities are now
reported at market values.
7



Revenue recognition principle requires companies to record when revenue is (1) realized or
realizable and (2) earned, not when cash is received. This way of accounting is called accrual
basis accounting.
Matching principle. Expenses have to be matched with revenues as long as it is reasonable
to do so. Expenses are recognized not when the work is performed, or when a product is
produced, but when the work or the product actually makes its contribution to revenue. Only if no
connection with revenue can be established, cost may be charged as expenses to the current
period (e.g. office salaries and other administrative expenses). This principle allows greater
evaluation of actual profitability and performance (shows how much was spent to earn revenue).
Depreciation and Cost of Goods Sold are good examples of application of this principle.
Full Disclosure principle. Financial reporting should include all significant information.
Information disclosed should be enough to make a judgment while keeping costs reasonable.
Information is presented in the main body of financial statements, in the notes or as supplementary
information
Constraints




Objectivity principle: the company financial statements provided by the accountants should
be based on objective evidence.
Materiality principle: the significance of an item should be considered when it is reported. An
item is considered significant when it would affect the decision of a reasonable individual.
Consistency principle: It means that the company uses the same accounting principles and
methods from year to year.
Conservatism principle (prudence): when choosing between two solutions, the one that will
be least likely to overstate assets and income should be picked.
Exercises
A.Which principles/assumptions/constraints do these sentences refer to? (1)
historical cost, monetary, objectivity, consistency, matching, accounting entity
conservatism, revenue, continuity, full disclosure
1. An economic unit is supposed to apply the same accounting methods in order to report
the same accounting events from one period to another. A change in accounting
methods may distort accounting figures and hinder comparability of financial
statements. __________________
2. The recording and presentation in the accounting reports of the elements of a firm (i.e.
assets) is based on their acquisition cost. ____________________
3. There should be a link between the expenses and the revenues which result from
these expenses. The gains resulting from transactions should be set off against the
expenses which are related to these transactions.___________________
4. When a firm can employ more than one accounting methods for reporting one
accounting event, it should adopt this method that has the smaller positive effect on a
firm’s financial position. Thus, the firm should adopt the method which leads to lower
figures for revenues and assets and higher figures for liabilities and expenses.
___________________
5. The affairs of the economic unit are received to be distinct from the personal affairs of
the owner. The economic unit is supposed to be independent from its owners.
_______________________
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6. According to the most common interpretation of this principle, accounting figures and
the results which accrue from them should be unbiased and verifiable. Unbiased are
the accounting figures which are not based on subjective estimations but are
supported by official documents (e.g. invoices) _________________
7. Revenue is realized at the moment when goods are sold or when services are
rendered. ___________________
8. The business will continue indefinitely into the future. _________________
9. Financial reporting must include all significant information. __________________
10. All transactions and other items to be accounted for must be in a single , supposedly
stable monetary unit. ________________
B.Which principles/assumptions/constraints do these sentences refer to?(2)
1. This prevents companies selecting methods according to the inflation rate etc.
_________________
2. The personal assets of the owner of a company will not appear on the company’s
balance sheet . ________
3. This makes it unnecessary to estimate current market values every year. ______
4. This requires multinational companies to convert their consolidated statements into a
single currency. _______________
5. This is why balance sheets often contain an entry for debtors: goods that have been
sold but are not yet paid for. ________________
6. This requires a company’s balance sheet to report its land at the amount the company
paid to acquire the land , even if the land could be sold today at a significantly higher
amount. ___________________
7. It is associated with the assumption that the company will continue on long enough to
carry out its objectives and commitments. _______________
8. This principle directs a company to show all the expenses related to its revenues of a
specified period even if the expenses were not paid in that period. _________
9. When the accountant has to choose between two acceptable alternatives, they should
select the one that will report less profit, less asset amount, or a greater liability
amount.___________________
10. This requires the company’s financial statements to have footnotes containing
information that is important to users of financial statements. _______________
11. A retailer wishes to report its merchandise inventory on its balance sheet at its retail
value. This would violate the ___________________ principle.
12. A large company purchases a $250 digital camera and expenses it immediately
instead of recording it as an asset and depreciating it over its useful life. This practice
may be acceptable because of the ___________________ principle.
C.Fill in the missing words
1. Adjusting entries help to achieve the m__________________ principle.
2. This justifies quarterly financial statements. per _____________
3. Under the a___________ -basis of accounting , revenues are reported on the income
statement in the period in which they are earned.
4. Results in the reporting of contingent losses , but not contingent gains. con_________
5. Permits the immediate expensing of insignificant assets. mat______________
6. The mon _________________ unit assumption means transactions of US companies are
reported in US dollars.
9
The Accounting Process (The Accounting Cycle)
The accounting process is a series of activities that begins with a transaction and ends with the
closing of the books. Because this process is repeated each reporting period, it is referred to as
the accounting cycle and includes the following steps:
1. Identify the transaction or other recognizable event.
2. Prepare the transaction’s source document such as a purchase order or invoice.
3. Analyze and classify the transaction. This step involves quantifying the transaction in
monetary terms (e.g. dollars and cents), identifying the accounts that are affected and
whether these accounts are to be debited or credited.
4. Record the transaction by making entries in the appropriate journal, such as the sales
journal, purchase journal, or the general journal. Such entries are made in
chronological order.
5. Post general journal entries to the ledger accounts.
The above steps are performed throughout the accounting period as transactions occur or in periodic
batch processes. The following steps are performed at the end of the accounting period:
1. Prepare the trial balance to make sure that debits equal credits. The trial balance is a
listing of all of the ledger accounts , with debits in the left column and credits in the
right column. Correct any errors.
2. Prepare adjusting entries to record accrued, deferred, and estimated amounts.
3. Post adjusting entries to the ledger accounts.
4. Prepare the adjusted trial balance, including the adjusting entries.
5. Prepare the financial statements.
– Income statement: prepared from the revenue, expenses , gains and losses.
-Balance sheet: prepared from assets , liabilities, and equity accounts
-Statement of retained earnings: prepared from net income and dividend
information
-Cash flow statement: derived from the other financial statements using either the
direct or indirect method.
6. Prepare closing journal entries that close temporary accounts such as revenues,
expenses, gains and losses. These accounts are closed to a temporary income
10
summary account, from which the balance is transferred to the retained earnings
account (capital). Any dividend or withdrawal accounts also are closed to capital.
7. Post closing entries to the ledger accounts.
8. Prepare the after-closing trial balance to make sure that debits equal credits. At this
point, only the permanent accounts appear since the temporary ones have been
closed. Correct any errors.
9. Prepare reversing journal entries. (optional). Reversing journal entries often are used
when there has been an accrual or deferral that was recorder as an adjusting entry on
the last day of an accounting period. By reversing the adjusting entry, one avoids
double counting the amount when the transaction occurs in the next period. A
reversing journal entry is recorded on the first day of the new period.
Retrieved from http://www.netmba.com/accounting/fin/process
Exercises
A. Fill in the blanks with the appropriate terms.
1. List of financial transactions recorded in chronological order: ________________
2. Transferring information from the journal to the ledger: ______________
3. A detailed and classified listing of all the accounts of an organization, occurring at
regular intervals: ____________________
4. A listing of all account balances in the general ledger: ______________
5. Revenues that have been earned but not received: ________________
6. They provide evidence that an economic event has occurred: _____________
7. _________________________ consists of the procedures used to collect , process
and report the effects of economic events that affect a business during the accounting
period.
11
B. Fill in the missing information in the flow diagram which describes the stages of
the accounting process.
periodic procedures
..............................................................................................
.............................................................
qualify the transaction in monetary terms
classify the accounts (debits/credits)
record to ................................................
post to .....................................................
end-of-period procedures
prepare the trial balance
..........................................................
prepare adjusting entries
prepare the financial statements
............................................................
...........................................................
...........................................................
.............................................................
Prepare the closing journal entries
close temporary accounts
post closing entries to the ledger accounts
...................................................................
(Prepare reversing journal entries)
12
Financial statements
A financial statement (or financial report) is a formal record of the financial activities of a
business, person, or other entity. In British English—including United Kingdom company law—
a financial statement is often referred to as an account, although the term financial statement
is also used, particularly by accountants.
For a business enterprise, all the relevant financial information, presented in a structured
manner and in a form easy to understand, are called the financial statements. They typically
include four basic financial statements, accompanied by a management discussion and
analysis:
1. Balance sheet: also referred to as statement of financial position or condition, reports
on a company's assets, liabilities, and Ownership equity at a given point in time.
2. Income statement: also referred to as Profit and Loss statement (or a "P&L"),
reports on a company's income, expenses, and profits over a period of time. Profit &
Loss account provide information on the operation of the enterprise. These include
sale and the various expenses incurred during the processing state.
3. Statement of retained earnings: explains the changes in a company's retained
earnings over the reporting period.
4. Statement of cash flows: reports on a company's cash flow activities, particularly its
operating, investing and financing activities.
For large corporations, these statements are often complex and may include an extensive set of notes to the
financial statements and management discussion and analysis. The notes typically describe each item on the
balance sheet, income statement and cash flow statement in further detail. Notes to financial statements are
considered an integral part of the financial statements.
The Balance sheet
The balance sheet presents a company's financial position at the end of a specified date. Some
describe the balance sheet as a "snapshot" of the company's financial position at a point (a
moment or an instant) in time. For example, the amounts reported on a balance sheet dated
December 31, 2009 reflect that instant when all the transactions through December 31 have
been recorded.
Because the balance sheet informs the reader of a company's financial position as of one
moment in time, it allows someone—like a creditor—to see what a company owns as well as
what it owes to other parties as of the date indicated in the heading. This is valuable
information to the banker who wants to determine whether or not a company qualifies for
additional credit or loans. Others who would be interested in the balance sheet include current
investors, potential investors, company management, suppliers, some customers, competitors,
government agencies, and labor unions.
We will begin our explanation of the accounting balance sheet with its major components,
elements, or major categories:
Assets
Liabilities
Owner's (Stockholders') Equity
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Assets
Assets are things that the company owns. They are the resources of the company that have
been acquired through transactions, and have future economic value that can be measured
and expressed in a currency. Assets also include costs paid in advance that have not yet
expired, such as prepaid advertising, prepaid insurance, prepaid legal fees, and prepaid rent.
Entries of asset accounts that are reported on a company’s balance sheet include:
Cash/ Petty Cash, Temporary Investments, Accounts Receivable, Inventory,Supplies,
Prepaid Insurance, Land, Land Improvements, Buildings, Equipment, Goodwill, Bond
Issue Costs, etc.
Accountants usually prepare classified balance sheets. Classified means that the balance
sheet accounts are presented in distinct groupings, categories, or classifications. The asset
classifications and their order of appearance on the balance sheet are:
-
Current assets
Investments
Property, Plant, and Equipment
Intangible Assets
Other Assets
Liabilities
Liabilities are obligations of the company; they are amounts owed to creditors for a past
transaction and they usually have the word "payable" in their account title. Along with owner's
equity, liabilities can be thought of as a source of the company's assets. Liabilities also include
amounts received in advance for future services. Since the amount received (recorded as the
asset Cash) has not yet been earned, the company defers the reporting of revenues and
instead reports a liability such as Unearned Revenues or Customer Deposits.
Examples of liability accounts reported on a company's balance sheet include:
Notes Payable, Accounts Payable, Salaries Payable, Wages Payable , Interest
Payable, Other Accrued Expenses Payable, Income Taxes Payable, Customer
Deposits , Warranty Liability, Lawsuits Payable, Unearned Revenues, Bonds
Payable , etc.
The liability classifications and their order of appearance on the balance sheet are:
-Current Liabilities
-Long Term Liabilities
Etc.
.
14
Owner’s Equity
Owner's Equity—along with liabilities—can be thought of as a source of the company's assets.
Owner's equity is sometimes referred to as the book value of the company, because owner's
equity is equal to the reported asset amounts minus the reported liability amounts.
Owner's equity may also be referred to as the residual of assets minus liabilities. These
references make sense if you think of the basic accounting equation:
Assets = Liabilities + Owner's Equity
and just rearrange the terms:
Owner's Equity = Assets – Liabilities
Owner's Equity are the words used on the balance sheet when the company is a sole
proprietorship. If the company is a corporation, the words Stockholders' Equity are used
instead of Owner's Equity. An example of an owner's equity account is Mary Smith, Capital
(where Mary Smith is the owner of the sole proprietorship). Examples of stockholders' equity
accounts include:
Common Stock , Preferred Stock, Paid-in Capital in Excess of Par Value
Paid-in Capital from Treasury Stock, Retained Earnings
Etc.
Both owner's equity and stockholders' equity accounts will normally have credit balances.
The stockholder’s equity section of a corporation’s balance sheet is:
-
Paid-in Capital
Retained earnings
Treasury Stock
15
Sample Balance Sheet:
Example Company
Balance Sheet
December 31, 2010
ASSETS
LIABILITIES
Current Assets
Current Liabilities
Cash
Petty Cash
$ 2,100
100
Notes Payable
Accounts Payable
$ 5,000
35,900
Temporary Investments
10,000
Wages Payable
8,500
Accounts Receivable - net
40,500
Interest Payable
2,900
Inventory
31,000
Taxes Payable
6,100
Supplies
3,800
Warranty Liability
1,100
Prepaid Insurance
1,500
Unearned Revenues
1,500
Total Current Assets
89,000
Total Current Liabilities
61,000
-
Investments
36,000
Property, Plant & Equipment
Land
5,500
Land Improvements
6,500
Long-term Liabilities
Notes Payable
20,000
Bonds Payable
400,000
Total Long-term Liabilities
Buildings
180,000
Equipment
201,000 Total Liabilities
Less: Accum Depreciation
(56,000)
Prop, Plant & Equip - net
420,000
481,000
337,000
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Intangible Assets
STOCKHOLDERS' EQUITY
Goodwill
105,000
Common Stock
110,000
Trade Names
200,000
Retained Earnings
229,000
305,000
Less: Treasury Stock
(50,000)
Total Intangible Assets
Total Stockholders' Equity
Other Assets
289,000
3,000
-
Total Assets
$770,000 Total Liab. & Stockholders' Equity
$770,000
The notes to the sample balance sheet have been omitted.
Exercises
A.Match the terms with their definitions. (1)
contingent, tangible, current , intangible, net, liquid, discounted cash flow,
asset turnover, deprival value
1. Assets which may be consumed (used up) or turned into cash fairly soon in the
ordinary course of a business, e.g. stock-in-trade, raw materials, etc. Syn. circulating
assets, floating assets. _______________________
2. Possessions of a long-lasting and unchanging nature such as land, machinery, trade
investments, etc., not intended for sale or to be turned into cash as long as they are
useful to the business. Syn. capital assets, permanent assets. _____________
3. Assets or gains which have not actually been taken into possession in the accounting
period but which will come into possession upon the happening of an event. ________
4. Assets which have material form and therefore can be turned into cash fairly quickly,
e.g. securities, cash, cheques, etc. __________________
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5. Assets which are valuable in helping the business, but since they have no material
form, are not easily turned into cash, e.g. goodwill, patents, copyrights, trademarks.
__________________
6. Assets which consist of cash in hand, or cash with bankers, and anything which quickly
can be turned into cash, e.g. bills receivable, marketable securities. __________
7. (a) fixed assets plus current assets. (b) fixed assets plus the difference between
current assets and current liabilities. The resulting figure is often called the capital
employed. (c) the excess of assets over liabilities. ________________
8. The value to a business of an asset, expressed as the amount by which the business
would be worse off if it lost the asset. This may be the replacement cost, or a figure
representing the sales it will generate. ___________________
9. The ratio of a company’s sales to its assets. One of the most common ratios in
financial ratio analysis; it is calculated to measure how efficiently the company uses its
assets. __________________________
10. A way of finding out whether or not an investment , e.g. in a new asset , is worth
making. ________________
B.Match the terms with their definitions. (2)
deferred liabilities, depreciation, double-entry, shares, debtors, reserves, trial balance,
retained earnings, balance, accounts payable
1. The decrease of value of assets. ________________________
2. Customers who have received goods but not paid for them yet. _____________
3. This is the name of the difference between the credit and debit side of an account.
_______________
4. This is drawn up to check that the two sides of an account are the same.
________________
5. Money that a company will definitely have to repay in the future, but but not during the
current financial year. ___________________________
6. The term for the entry on a balance sheet that shows how much money a business
owes its suppliers for purchases made on credit. ___________
7. The part of a company’s profit that is retained for future investment, rather than
distributed as dividend. ___________________
18
8. These are bought by people wishing to invest in a company. _____________
9. In a corporation, stockholders’ equity derives from two distinct sources: contributions
by owners, called contributed capital, and earnings that have not been distributed to
stockholders known as _______________
10. Both credits and debits must be recorded in the books of a trader. This is the
__________________ bookkeeping.
C.Fill in the gaps in the paragraph below.
Current vs. Long-term Liabilities
If a company has a loan payable that requires it to make monthly payments for several years,
only the principal due in the next twelve months should be reported on the balance sheet as a
____________________ .The remaining principal amount should be reported as
a_________________. The interest on the loan that pertains to the future is not recorded on
the balance sheet; only unpaid interest up to the date of the balance sheet is reported as a
liability.
D.Choose the correct answer.
1.
Another name for the balance sheet is Statement of Operations/ Statement of Financial
Position
2. The balance sheet heading will specify a period of time / point of time
3. Which of the following is an asset account? Accounts Payable/ Prepaid
Insurance/Unearned Revenue
4. What is the normal balance for an asset account? Debit/Credit
5. What is the normal balance for liability accounts? Debit/Credit
6. Which of the following would not be a current asset? Accounts Receivable/ Land/ Prepaid
Insurance/ Supplies
7. Which of the following would normally be a current liability? Notes Payable due in two
years/ Unearned Revenue
8. Deferred credits will appear on the balance sheet with the assets / liabilities/ stockholder’s
equity.
9. The book value of a corporation is the total amount of stockholders’ equity reported on the
balance sheet. True/ False
10. ABC Co. has current assets of $50000 and total assets of $150000. ABC has current
liabilities of $30000 and total liabilities of $80000. What is the amount of ABC’s owner’s
equity? $20000/ $30000/ $70000/ $ 120000
19
The Cash flow statement
In 1863, the Dowlais Iron Company had recovered from a business slump, but had no cash to invest for a new
blast furnace, despite having made a profit. To explain why there were no funds to invest, the manager made a
new financial statement that was called a comparison balance sheet, which showed that the company was holding
too much inventory. This new financial statement was the genesis of Cash Flow Statement that is used today.
In financial accounting, a cash flow statement, also known as statement of cash flows or funds
flow statement, is a financial statement that shows how changes in balance sheet accounts and
income affect cash and cash equivalents, and breaks the analysis down to operating,
investing, and financing activities. Essentially, the cash flow statement is concerned with the
flow of cash in and cash out of the business. The statement captures both the current operating
results and the accompanying changes in the balance sheet. As an analytical tool, the
statement of cash flows is useful in determining the short-term viability of a company,
particularly its ability to pay bills.
People and groups interested in cash flow statements include:





Accounting personnel, who need to know whether the organization will be able to cover
payroll and other immediate expenses.
Potential lenders or creditors, who want a clear picture of a company's ability to repay
debts.
Potential investors, who need to judge whether the company is financially sound.
Potential employees or contractors, who need to know whether the company will be
able to afford compensation.
Shareholders of the business
Statement of Cash Flow - Simple Example
for the period 01/01/2006 to 12/31/2006
Cash flow from operations
$4,000
Cash flow from investing
$(1,000)
Cash flow from financing
$(2,000)
Net cash flow
$1,000
(Parentheses indicate negative values)
The cash flow statement is intended to
1. provide information on a firm's liquidity and solvency and its ability to change cash
flows in future circumstances
2. provide additional information for evaluating changes in assets, liabilities and equity
3. improve the comparability of different firms' operating performance by eliminating the
effects of different accounting methods
4. indicate the amount, timing and probability of future cash flows
20
Cash flow activities
The cash flow statement is partitioned into three segments, namely: cash flow resulting from
operating activities, cash flow resulting from investing activities, and cash flow resulting from
financing activities.
The money coming into the business is called cash inflow, and money going out from the
business is called cash outflow.
Operating activities
Operating activities include the function, costs, and pricing ( production), sales and delivery of
the company's product as well as collecting payment from its customers. This could include
purchasing raw materials, building inventory, advertising, and shipping the product.
Items which are added back to [or subtracted from, as appropriate] the net income figure
(which is found on the Income Statement) to arrive at cash flows from operations generally
include:




Depreciation (loss of tangible asset value over time)
Deferred tax
Amortization (loss of intangible asset value over time)
Any gains or losses associated with the sale of a non-current asset
Investing activities
Examples of Investing activities are



Purchase or Sale of an asset (assets can be land, building, equipment, marketable
securities, etc.)
Loans made to suppliers or received from customers
Payments related to mergers and acquisitions
Financing activities
Financing activities include the inflow of cash from investors such as banks and shareholders,
as well as the outflow of cash to shareholders as dividends as the company generates income.
Other activities which impact the long-term liabilities and equity of the company are also listed
in the financing activities section of the cash flow statement.
Items under the financing activities section include:




Dividends paid
Sale or repurchase of the company's stock
Net borrowings
Payment of dividend tax
Retrieved from: http://en.wikipedia.org/wiki/cashflow statement
21
Sample cash flows from (used in) operating activities using the direct method
Cash receipts from customers
3,000
Cash paid to suppliers and employees
(2,000)
Cash generated from operations (sum)
7,500
Interest paid
(2,000)
Income taxes paid
(4,000)
Net cash flows from operating activities
2,500
Indirect method
The indirect method uses net-income as a starting point, makes adjustments for all transactions for noncash items, then adjusts from all cash-based transactions. An increase in an asset account is
subtracted for net income, and an increase in a liability account is added back to net income. This
method converts accrual-basis net income (or loss) into cash flow by using a series of additions and
deductions.
Example: cash flow of Citigroup:
Citigroup Cash Flow Statement
(all numbers in millions of US$)
Period ending
Net income
12/31/2007 12/31/2006 12/31/2005
21,538
24,589
17,046
Operating activities, cash flows provided by or used in:
Depreciation and amortization
2,790
2,592
2,747
Adjustments to net income
4,617
621
2,910
12,503
17,236
--
Increase (increase) in liabilities ( taxes payable)
131,622
19,822
37,856
Decrease (increase) in inventories
--
--
--
Decrease (increase) in accounts receivable
Increase (decrease) in other operating activities
Net cash flow from operating activities
(173,057)
(33,061)
(62,963)
13
31,799
(2,404)
22
Exercises
A.There are four parts to the Statement of Cash Flows (or Cash Flow Statement):
1. Operating Activities
2. Investing Activities
3. Financing Activities
4. Supplemental
For each of the following items, indicate which part will be affected.
1.Depreciation expense
2.Proceeds from the sale of equipment used in the business
3.Declaration and payments of dividends on company’s stock
4. Gain on the Sale of Automobile formerly used in business
5. An increase in the balance in Accounts Payable
6. A decrease in the balance of Accounts Receivable
7. An increase in Bonds Payable(a long-term liability)
8. The proceeds from issuing additional common stock
9.The amortization of the cost of an intangible asset
10.Purchase of Treasury Stock (company’s own stock)
B.Complete the sentences using the correct word.
inventory, balance sheet, equation, profit and loss, credit, liquidity, working, receivables
1. The account which describes the trading activities of a business over a (stated) period
of time is the ______________________________ .
2. Money used to operate a business on a day-to-day basis is its ______capital.
3. The greatest sum which debtors are allowed to owe is their _____________ limit.
4. The term __________________ is used to indicate the ease with which an asset can
be converted into cash, and a company’s __________________ provides an indication
of its ability to pay obligations as they become due.
5. _____________________ are equivalent to monetary assets because they represent
claims to receive fixed amounts of cash.
6. In the US the word ________________________ is used instead of stock.
7. The _______________________ is a static statement which presents the financial
position of a company at a specific point of time.
8. The basic accounting ________________, in accordance with the principle of doubleentry bookkeeping , is that Assets= Liabilities+Owner’s Equity.
23
C.Fill in the blanks in the following text with only one word.
Companies are required ______________ law to give their shareholders certain financial
information. Most companies include three financial ___________________ in their annual
_______________ .
The _______________________ shows revenue and expenditure. It gives figures
_________________ total sales or turnover, and for costs and overheads. Part of the profit
_________________ paid to the government in taxation, part is usually distributed to
shareholders ___________________ dividend, and part is retained _______________the
company to finance further growth, to ____________________ debts, to allow for future
losses, and so on.
The __________________________ shows the financial situation of the company on a
particular date, generally the last date _________________ its financial year. It lists the
company’s ________________________, its liabilities, and shareholders’ funds.
The ______________________ statement shows the flow of cash _________________ and
out of the business between balance sheet dates. Sources of funds __________________
trading profits, depreciation provisions, borrowing, the sale of assets, and the issuing of
______________. Applications of funds include the purchase of fixed assets, the payment of
dividends and the repayment of loans, and, _________________ a bad year, trading losses.
D.Insert the following words in the gaps in the text.
insolvent, reputation, liquidity, reserves, net, suppliers, positive, working , credit, sufficient
Cash flow
Cash flow is a company’s ability to earn cash. It is the amount of cash made during a specified
period that a business can use for investment. More technically, it is _________________
profit plus depreciation plus variations in ___________________ . The flow of funds is cash
received and payments made by a company during a specific period. New companies generally
begin with adequate funds or __________________ capital for the introductory stage during
which they make contracts, find customers, and build up sales and a _________________. But
when sales begin to rise, companies often run out of working capital: their cash is all tied up in
work-in-progress, stocks and credit to customers. It is an unfortunate fact of business life that
while __________________ tend to demand quick payment, customers usually insist on
extended _____________________ , so the more you sell, the more cash you need. This
provokes a typical ________________________ crisis: the business does not have enough
cash to pay short-term expenses. A _____________________ cash flow will only reappear
when sales growth slows down and the company stops overtrading. But companies that have
not arranged ____________________ credit will not get this far. They will find themselves
________________________ -unable to meet their liabilities.
24
Depreciation
Business acquire assets for use tn their operations to generate profit. For the acquisition of a long-term
asset, they prepay a cost for the life of the asset. This prepaid cost benefits the current and subsequent
years since it is a necessary cost of the operations and the revenue the assets generate. During each
accounting period (year, quarter, month) a portion of the cost of these assets is being used up. The
portion being used up is reported as Depreciation Expense on the income statement. In effect
depreciation is the tranfer of a portion of the asset’s cost from the balance sheet to the income
statement during each year of the asset’s life. The cost of using the asset is the difference between the
cost of acquiring it and its estimated value at the time the asset will no longer be used in the operations.
This estimated value is referred to as residual or salvage value. Depreciation is not intended to record
the annual decline in the value of the asset but to allocate the cost of an asset to the periods that
benefit from its use.
The calculation and reporting of depreciation is based upon two accounting principles:

The cost principle requires that the Depression Expense reported on the income statement,
and the asset amount that is reported on the balance sheet should be based on the historical
(original ) cost of the asset. The amounts should not be based on the cost to replace the asset,
or on the current market value of the asset.

The matching principle requires that the asset’s cost be allocated to Depreciation Expense
over the life of the asset. In effect, the cost of the asset is divided up with some of the cost
being reported on each of the income statements issued during the life of the asset. By
assigning a portion of the asset’s cost to various income statements, the accountant is
matching a portion of the asset’s cost with each period in which the asset is used. Hopefully
this also means that the asset’s cost is being matched with the revenues earned by using this
asset.
The assets mentioned above are often referred to as fixed assets, plant and equipment. It is important
to note thet the asset land is not depreciated, because it is assumed to last indefinitely.
Amortization is generally known as depreciation of intangible assets (e.g. patent)
Exercises
A.Decide whether the following statements are true or false.
1. The purpose of depreciation is to have the balance sheet report the current
value of an asset.
2. An asset’s useful life is the same as its physical life.
3. One company might depreciate a new computer over three years while
another company might depreciate the same model of computer over five
years………. and both companies are correct.
25
4. Depreciation Expense is shown on the income statement in order to achieve
accounting matching principle.
5. Both land and land improvements will generally be depreciated.
6. The book value of an asset indicates the asset’s fair market value.
B. Fill in the blanks using these words: valuation, system,estimated, tangible,rational
Depreciation accounting is a __________ of accounting which aims to distribute the cost of
__________ capital assets, less salvage, over the ____________ useful life of the unit in a
systematic and ____________ manner. It is a process of allocation, not of ____________ .
C. Complete the text by inserting the correct form of the verbs :
allow
exist
convert
charge
increase
spread
deduct
involve
wear out
encourage
lose
write off
Methods of depreciation
Fixed assets as buildings, plant and machinery gradually ____________________ value,
because they ________________________ or decay, or because more modern and efficient
versions are developed. Consequently, they have to be replaced every so often. The cost of
buying or replacing fixed assets that will be used over many years is not _________________
from a single year’s profits but is accounted for over the several yearsof their use and wearing
out. This accords with the matching principle that costs are identified with related revenues.
The process of _____________________ an asset into an expense is known as depreciation.
Various methods of depreciation ___________________ , but they all __________________
estimating the useful life of the asset, and dividing its estimated cost (e.g. purchase price minus
any scrap or second-hand value at the end of its useful life) by the number of years. The most
usual method of depreciation is the straight line method , which simply spreads the total
expected cost over the number of years of anticipated useful life, and charges an equal sum
each year. The reducing or declining balance method ___________________ smaller
amounts of an asset’s value each year in cases where maintenance costs for the use of an
asset are expected to ____________________ over time. The annuity system of depreciation
__________________ the cost of an asset equally over a number of years and
_________________ this, and an amount representing the interest on the asset’s current
value, each year.
Some tax legislations __________________ accelerated depreciation: writing off large
amounts of the cost of capital investments during the first years of use; this is a measure to
___________________ investment.
26
Costs
A.Match the terms with their definitions.
cost centers, break-even analysis, cost-benefit analysis, overheads, direct
indirect, cost of production , commission, cost accounting ,economic cost
1.
___________ costs vary directly with the production of aproduct, including
development costs and raw materials, and labour.
2. _____________ costs are not directly related to making a product e.g. rent,
administration.
3. ______________ (running costs)are regular costs associated with the day-to-day
running of a company.
4. _____________ (it is atransaction cost) is a percentage of the selling price which is
paid to the seller, usually an agent or distributor
5. ________________ refers to all costs involved in making a product ready for
distribution and sale.
6. ________________ is the keeping of special accounts to record the cost of making
and selling a products of a business and of running it.
7. ______________ is the economist’s view of cost as compared with the accountant’s
view. It is greater because it includes opportunity cost, not taken notice of by the
accountant. The accountant counts up only the actual sums of money spent in
producing a product. If a producer uses his own capital for this, the accountant will not
use interest charges; but the economist would include in his cost interest charge.
8. _____________ is a systematic method of examining and valuing a planned course of
action, esp. in cases of investing large sums of money.
9.
_______________ is a method of studying the profitability of a business or of a single
product by showing at what level of production costs are just covered by income,
neither profit or loss being made; and thus to calculate the effects on profit of changes
in the amount of goods produced, cost of production, and the selling price.
10. To facilitate the accountant in allocating costs, an organization is split up into
_______________. These are areas of activity to which all coasts of a like nature are
gathered.
27
Different Types of Companies
Sole Proprietorship
A sole proprietorship, also known as the sole trader or simply a proprietorship, is a type of business
entity that is owned and run by one individual and in which there is no legal distinction between the
owner and the business. The owner receives all profits (subject to taxation specific to the business) and
has unlimited responsibility for all losses and debts. Every asset of the business is owned by the
proprietor and all debts of the business are the proprietor's. This means that the owner has no less
liability than if they were acting as an individual instead of as a business. It is a "sole" proprietorship in
contrast with partnerships.
A sole proprietor may use a trade name or business name other than his or her legal name. In
many jurisdictions there are rules to enable the true owner of a business name to be
ascertained. In the United States there is generally a requirement to file a doing business as
statement with the local authorities. In the United Kingdom the proprietor's name must be
displayed on business stationery, in business emails and at business premises, and there are
other requirements
Partnership
In civil law a partnership is defined as a nominate contract between individuals who, in a spirit
of cooperation, agree to carry on an enterprise; contribute to it by combining property,
knowledge or activities; and share its profit. Partners may have a partnership agreement, or
declaration of partnership and in some jurisdictions such agreements may be registered and
available for public inspection.
Under common law legal systems, the basic form of partnership is a general partnership, in
which all partners manage the business and are personally liable for its debts. Two other forms
which have developed in most countries are the limited partnership (LP), in which certain
limited partners relinquish their ability to manage the business in exchange for limited liability
for the partnership's debts, and the limited liability partnership (LLP), in which all partners
have some degree of limited liability. The liability of limited partners is limited to their
investment in the partnership.
A silent partner is one who still shares in the profits and losses of the business, but who is
uninvolved in its management, and/or whose association with the business is not publicly
known; these partners usually provide capital.
Corporations
A corporation is created under the laws of a state as a separate legal entity that has
privileges and liabilities that are distinct from those of its members. Early corporations were
established by charter (i.e. by an ad hoc act passed by a parliament or legislature). Most
jurisdictions now allow the creation of new corporations through registration.
An important (but not universal) contemporary feature of a corporation is limited liability. If a
corporation fails, shareholders may lose their investments, and employees may lose their jobs,
but neither will be liable for debts to the corporation's creditors.
28
Despite not being natural persons, corporations are recognized by the law to have rights and
responsibilities like natural persons. Corporations can exercise human rights against real
individuals and the state, and they can themselves be responsible for human rights violations.
Corporations are conceptually immortal but they can "die" when they are "dissolved" either by
statutory operation, order of court, or voluntary action on the part of shareholders. Insolvency
may result in a form of corporate 'death', when creditors force the liquidation and dissolution of
the corporation under court order, but it most often results in a restructuring of corporate
holdings.
Although corporate law varies in different jurisdictions, there are four characteristics of the
business corporation:
Legal personality
Limited liability
Transferable shares
Centralized management under a board structure




There are many different forms of corporations, most of which are used to conduct business. A
corporation can be
 a privately held or close corporation or a less ambiguous term unlisted company,
owned either by non-governmental organizations or by a relatively small number of
shareholders or company members, which does not offer or trade its company stock to
the general public on the stock market but rather its stock is offered, owned, and
traded privately.
 a publicly held or publicly traded corporation which lists its shares on the stock
market, allowing for more diversified ownership as anyone who purchases its stock
becomes a partial owner and is able to receive a portion of its profits.
Limited Liability Company (LLC)
This is a recent type of company. A limited liability company is a mixed type of a business
corporation and a partnership and provides greater flexibility by blending benefits of both.
Advantages of an LLC



Limited Liability- This is a feature that is shared by a corporation as well as an LLC. But
here the advantage is that the owners of LLC are protected for their personal liabilities
as well.
Less Legal Formalities- Reduced legal formalities are always a sign of relief for
business owners. In LLC, it is not necessary for the owners to cope up with the
requirements or to complete the legal formalities involved while setting up a
corporation.
Single Ownership- Unlike in a corporation, you can set up an LLC by remaining the
sole owner of your company.
29


Tax Payments- As the owner of an LLC, you are taxable only for personal income and
not for the income of your LLC. Therefore, you need not pay double income tax.
Long Existence- The LLC will exist forever, irrespective of the owner's death or
retirement.
Cooperative (co-op)
A cooperative is a business organization owned and operated by a group of individuals for
their mutual benefit. A cooperative is defined by the International Cooperative Alliance's
Statement on the Cooperative Identity as "an autonomous association of persons united
voluntarily to meet their common economic, social, and cultural needs and aspirations through
jointly owned and democratically controlled enterprise”. A cooperative may also be defined as
a business owned and controlled equally by the people who use its services or by the people who work
there.
Retrieved from : http://en.wikipedia.org/wiki/corporation
Exercises
A.Complete the texts with the words given.
board of directors
stock exchange
liability
management
dividend
Corporation is a limited ________________ business that has a separate from its members
legal personality. Corporations can be either for-profit or non-profit, government owned or
privately owned. A privately owned for-profit corporation is owned by shareholders who elect a
________________ to direct the corporation and hire its _______________ staff. A privately
owned for-profit corporation can be either privately held or publicly held. The former is owned
and managed by a small group of businesspeople. The latter lists its shares on a public
_______________, where shares of corporations are bought and sold by and to the general
public, allowing for more diversified ownership as anyone who purchases a corporation’s stock
becomes a partial owner and is able to receive a portion of its profits in the form of a
______________.
jurisdictions
obligations entities
rights members
Legal personality is the characteristic of a non-human entity regarded by law to have the
status of a person. A legal person has a legal name and has____________ protections,
privileges, responsibilities, and liabilities under law; a natural person is distinct from an artificial
person. Legal personality allows one or more natural persons to act as a single entity for legal
purposes. In many____________ legal personality allows a business corporation to be
considered under law separately from its individual ____________ or shareholders.
____________ with legal personality may also be subjected to certain legal ____________,
such as the payment of taxes. An entity with legal personality may shield its shareholders from
personal liability.
debts
guarantees co-signing investment
sole proprietors plaintiffs
Limited liability is a concept according to which a person's financial liability is limited to a
30
fixed sum, most commonly the value of a person's investment in a company or partnership
with limited liability. If a company with limited liability is sued, then the ______________ are
suing the company, not its owners or investors. A shareholder in a limited company is not
personally liable for any of the debts of the company, other than for the value of their
____________ in that company. By contrast, _____________ and partners in general
partnerships are each liable for all the _____________ of the business (unlimited liability).
Although a shareholder's liability for the company's actions is limited, the shareholder may still
be liable for its own acts. For example, the directors of small companies (who are frequently
also shareholders) are often required to give personal ____________ of the company's debts
to those lending to the company. They will then be liable for those debts in the event that the
company cannot pay, although the other shareholders will not be so liable. This is known as
_____________.
B. Fill in the blanks in the text using only one word.
The Share market
The act of issuing shares (GB) or stocks (US) for the first time is ___________ as floating a
company. New and small companies trade on “over-the-counter” markets, such __________
the Unlisted Securities Market in London. Successful companies can apply to __________
their shares traded on the major stock exchanges, but in order to ____________ quoted (GB)
or listed (US) there , they have ___________ fulfill a large number of requirements. One of
____________ is to send their shareholders independently-audited annual reports.
Buying a share gives its holder part of the ownership of a company. Shares generally entitle
their owners ____________ vote at company’s General Meetings, to elect company directors,
and to receive proportion of distributed profits in ____________ form of a dividend-or to
receive part of the company’s residual value if ____________ goes into bankruptcy.
Shareholders can sell their shares at any time , but the market ____________ of a share – the
price quoted on the stock exchange, which reflects how ____________ or badly the company
is doing-may differ radically ____________ its nominal, face, or par value. If a company sells
shares at above their par value , this amount is recorded in financial statements
_____________ share premium(GB) or paid-in surplus (US).
There are two different types of stock ______________ a company sells: preferred stock (or
preference shares) and ordinary shares or common stock(US). Preferred stock is sold with a
specific dividend rate. Before any earnings can ____________ distributed to common stock
shareholders, the preferred dividends must be paid.
Add appropriate words from the text to these sentences:
a. Offering shares to the public for the first time is called ________________ a company.
b. The major British companies are ________________ on the London Stock Exchange.
c. It is easier for a company to be quoted on an ____________ _______________
_________ than on a major stock exchange.
d. The value written on a share is its __________________
e. The value listed in the newspapers is its _____________________ .
31
GREEK COMPANIES
“etairia” covers both partnerships and corporations
O.E. (Omorrythmi E.) ~ General Partnership: all partners are liable jointly and separately
for all debts
E.E. (Eterorrythmi E.) ~ Limited Partnership : partners are liable to different degree of
liability (limited to the amount of distribution)
E.Π.E. (etairia periorismenis efthinis)~ Ltd.Co. company with limited liability
small share capital
members: liability up to contribution
company: as a legal entity is unlimitedly
liable for corporate obligations and debts
A.E. (anonymi etairia) S.A. : societe anonyme ~ PLC : company limited by shares
stock corporation -> shareholder’s distribution divided into shares
Synetairismos ~ Cooperatives (e.g. agricultural associations)
Maritime (Shipping ) Copmany mixed type of EΠE and AE
Non-profit Corporation usually do not issue stocks (e.g. educational, religious, charitable
institutions)
Holding Corporations  (cartels,trusts) a company has acquired control of another
company by the purchase of 51% of its voting shares (takeovers, mergers.
subsidiary company is brought within the direct influence
and under control of the parent company
Public Enterprise Sector
 state-owned, governmental corporations e.g. Army, Navy, Air Force etc.
 social amenities (education, cultural institutions, medical care)
 public utilities (gas, electricity, water supply, transport)
Multinational Corporations
32
Financial Institutions and Financial Instruments
In financial economics, a financial institution is an institution that provides financial services for
its clients or members. Probably the most important financial service provided by financial
institutions is acting as financial intermediaries. Most financial institutions are highly regulated
by government.
Broadly speaking, there are three major types of financial institutions:
1. Deposit-taking institutions that accept and manage deposits and make loans, including
banks, building societies, credit unions, trust companies, and mortgage loan
companies
2. Insurance companies and pension funds
3. Brokers, underwriters and investment funds
Exercises
A.Match the terms with their explanations.
central bank
retail banks
building societies
wholesale banks
discount houses
Financial Institutions in the UK
1. ____________________ specialise in providing branch banking facilities to
individuals. They operate current accounts, on most of which overdraft facilities
can be arranged, and deposit accounts, which by offering a higher interest rate are
designed to encourage savers. They also provide personal loan facilities and
financial advice to their customers. Unlike most other financial institutions, they are
involved in operating the payments system: the transmission of money through
cheques, standing orders, direct debits, etc.
2. ___________________ deal primarily in receiving large deposits from and making
large loans to industry and other financial institutions. One category is the
merchant banks. These often act as “brokers” , arranging loans for companies
from a number of different resources. They also offer financial advice to industry
and “accept” bills of exchange. They provide assistance to firms in raising new
capital through the issue of new shares.
3. ___________________ specialize in granting loans (mortgages) for house
purchase. They compete for the savings of the general public through a network of
high street branches. Unlike retail banks they are not public limited companies,
their “shares” being the deposits made by their investors.
4. ____________________ ,unique to the UK, play a central role in the monetary
system. Their specialism is in lending and borrowing for very short periods of time.
Despite their importance they are not household names as they do not deal with
the general public.
5. At the heart of the financial system of a country is the ________________ . Its role
is to oversee and regulate the activities of the different financial institutions. It has
33
the task of ensuring the stability and efficiency of the financial system. It has also
the task of carrying out the government’s monetary policy.
B.Use the following terms to complete the sentences below.
gilt, swap, warrant, mutual fund, off-balance-sheet-transactions, securitization
leverage, blue chips, debenture, leveraged buy-out (LBO)
1. A way of spreading risk is to invest in unit trusts (Britain) or ______________ (US)
organizations that invest small investors’ money in a wide portfolio of securities.
2. Securities in companies that are considered to be without risk are known as
_____________.
3. A _______________ is a bond issued by a company and secured by the company’s
assets.
4. The exchange of one security, currency, etc. for another . _______________
5.
Junk bonds are high-yielding bonds issued by less secure companies and by
companies seeking to finance _______________.
6. ______________ means using a high proportion of borrowed money( getting an
ordinary loan from a bank or selling junk shares) . Leveraged buy-out involves buying a
company with a lot of borrowed money.
7. A bond issued by the British government . ______________
8. A _______________ is sometimes issued with a bond, giving the holder the right to
buy the same company’s shares at a certain price.
9. Debt swaps, letters of credit, etc. are all forms of financial business that need not
registered as loans on the balance sheet. They are consequently known as
________________ .
10. ________________ is the process of selling packages of bank debts to third party
investors a bonds. It shifts the risk of default from the bank to the new owners, and
releases capital with which the bank can make new loans.
34
Taxation
Government intervention in the economy through taxation and government expenditure has a
number of purposes including redistribution, the correction of market distortions and
macroeconomic stabilization.
There are various requirements of a good tax system, including horizontal and vertical equity,
payment according to the amount of benefit received, being cheap to collect, difficult to evade,
convenient to the taxpayer and the government, and having the minimum disincentive effects.
Taxes can be divided into those paid directly to the authorities (direct taxes) and those paid via
a middle person (indirect taxes). Direct taxes are of two types: (a) Taxes on income: these
include personal income tax, tax on company profit and on capital gains. (b)Taxes on wealth:
these include inheritance tax, tax on property and business rates. Indirect taxes include Value
Added Tax (VAT), excise duties ,and customs duties.
Taxes can be categorized as progressive, regressive or proportional. Proportional, when the
average tax rate is the same irrespective of the size of the taxable base, progressive, when the
average tax rate increases with the increase in the taxable base, and regressive , when the
average tax rate falls as the taxable base increases. Progressive taxes have the effect of
reducing inequality. The more steeply progressive they are , the bigger is the reduction in
inequality.
There are various limitations to using taxes to redistribute income. First, they cannot on their
own increase the income of the poor. Cutting taxes, however, can help the poor if the cuts are
carefully targeted. Second, high taxes on the rich may encourage evasion or avoidance. Third,
higher income taxes will probably lead to the employers paying lower gross wages.
Basic tax terms
The taxable base is the magnitude on the basis of which the tax liability is calculated. Such
bases are usually: income, wealth and expenditure , especially consumption expenditure.
The tax unit is the person the characteristics of which (income, wealth, expenditure) are used
for the calculation of tax liability and is responsible to pay the tax to tax authorities.
The tax rate, the amount of tax per unit of taxable base. Average tax rate is the ratio of total tax
revenues paid by a tax unit over its total taxable base. Marginal tax rate is the additional
amount of tax which must be paid for any additional unit of taxable base. Unit tax rate is the tax
rate per unit of output, e.g.2 euros per unit. Ad valorem tax rate is the tax rate as percentage of
price, e.g. 10% of price.
35
Exercises
A.Match the words to their definitions.
tax return, rebate/refund, value-added tax ,
income tax,
indirect,
capital transfer, tax exemption
capital gains, tax relief / allowance, tax assessor/inspector
1. The tax on wages and salaries (and business profits in the US) is called
__________________.In Britain the tax on business profits is called corporation tax.
2. The form used for declaring taxable income . _________________________
3. Property taxes, sales taxes, customs duties on imports, and excise duties on tobacco,
alcoholic drinks, petrol, etc. are called _________________ taxes.
4. Tax ________________ is to return tax already collected.
5. A sales tax collected at each stage of production, excluding the already-taxed costs
from previous stages, is called a ____________________.
6. Profits made from the sale of assets are liable to a _________________ tax.
7. The official determining property tax assessments is called ___________________.
8. _______________________ is the tax-free amount allowed in calculating taxable
income.
9. To relieve a citizen from paying taxes is called _________________ .
10. Gifts and inheritances are usually liable to ________________________ tax.
B. Use the correct form of the verbs in the following sentences.
avoid
levy
evade
pay
be liable
raise
lower
develop
deduct
allocate
1. One important issue in Public Finance is how _______________ taxes among the
private agents so that the allocation of the tax burden is fair.
2. Substantial differences exist between developed and ________________ economies,
since in the former direct taxes dominate, whereas in the latter , indirect taxes bring in
the larger amount of revenues.
3. If you inherit a lot of money, you ____________________ for capital transfer tax.
4. In some countries, employers have _______________ tax from your pay and
_______________ it direct to the tax authorities, so employees have no possibility of
________________ income tax.
5. Some people hire expensive accountants to tell them how _______________ taxeslegally, of course!
6. The government always tries ________________ taxes in the year before elections.
7. The government has a huge deficit and is going to have ________________ either the
rate of VAT or income tax.
8. The government _________________ special taxes on petrol, alcohol and tobacco.
36
The Greek system of taxation
The Greek system of taxation includes a large number of taxes both direct and indirect. Most
taxes are levied on behalf of central government, others are levied on behalf of local
authorities, whereas others are levied on behalf of Social Insurance Funds. The table below
gives a picture of the main taxes levied on behalf of the Central Government in the country, as
well as their contribution to the total tax revenues.
___________________________________________________________________________
TAXES
Amounts in millions %
DIRECT TAXES
18.371
43,6
Taxes on income
14.165
33,6
a. Natural persons
b. Legal persons
c. Special categories of income (e.g. ships)
8.292
4.730
1.143
19,7
11,2
2,7
2. Taxes on wealth
548
1,3
3. Revenues from direct taxes of previous years
2.410
5,7
4. Other
1.248
3,0
23.722
56,4
14.131
2.478
2.564
905
891
705
681
1.367
33,6
5.9
6,1
2,2
2,1
1,7
1,6
3,2
1.
INDIRECT TAXES
1.
2.
3.
4.
5.
6.
7.
8.
Value-Added Tax
Special Tax on fuels
Tax on tobacco products
Tax on property transfers
Tax on vehicle classification
Tax on vehicle circulation
Stamp duties
Other indirect taxes
TOTAL SUM
42.093
100,0
__________________________________________________________________________
Source: Ministry of Finance, The 2007 Budget Introductory Report
Evaluation
The Greek system of taxation has a large number of disadvantages in terms of economic,
political, social, and administrative criteria.
37
(i) It is very complicated, both at the institutional level and especially at the level of
administration.
(ii) It changes very often, making it difficult for both tax officials and taxpayers to follow it.
(iii) Tax evasion is very extensive.
(iv) The system contains many disincentives that severely harm economic activity, and
especially the competitiveness of Greek products.
(v) The distribution of the tax burden is regressive since indirect taxes dominate direct
taxes and the progressiveness of direct taxes are not satisfactory.
Taxation (and how to avoid it!)
The primary function of taxation is to raise revenue to finance government expenditure, but
taxes can also have other purposes. Indirect excise duties, for example, can be designed to
dissuade people from smoking, drinking alcohol, and so on. Governments can also encourage
capital investment by permitting various methods of accelerated depreciation accounting that
allow companies to deduct more of the cost of investments from their profits, and consequently
reduce their tax bills.
There is always a lot of debate as to the fairness of tax systems. Business profits, for example,
are generally taxed twice: companies pay tax on their profits (corporation tax in Britain, income
tax in the USA), and shareholders pay income tax on dividends. Income taxes in most
countries are progressive , and are one of the ways in which governments can redistribute
wealth. The problem with progressive taxes is that the marginal rate-the tax people pay on any
additional income-is always high, which is also a disincentive to both working and investing. On
the other hand, most sales taxes are slightly regressive, because poorer people need to spend
a larger proportion of their income on consumption than the rich.
The higher the tax rates ,the more people are tempted to cheat; there is a substantial “black”
economy nearly in every country. A substantial number of people have undeclared , full-time or
part-time jobs, with small and medium-sized family firms, on which no one pays any tax or
national insurance (i.e. social security contributions).
To reduce income tax liability , some employers give highly-paid employees lots of “perks”
(short for perquisites) instead of taxable money, such as company cars, free health insurance,
and subsidized lunches. Legal ways of avoiding taxes , such as these , are known as loopholes
in tax laws. Life insurance policies, pension plans and other investments by which individuals
can postpone the payment of tax , are known as tax shelters. Donations to charities that can be
subtracted from the income on which tax is calculated are described as tax-deductible.
Companies have a variety of ways of avoiding tax on profits. They can bring forward capital
expenditure (on new machines, premises, and so on) so that at the end of the year all the
profits have been used up; this is known as making a tax loss. Multinational companies often
set up their head offices in countries such as Liechtenstein, Monaco, the Cayman islands, and
the Bahamas, where taxes are low; such countries are known as tax heavens. Criminal
38
organizations , meanwhile, tend to pass money through a series of companies in very
complicated transactions in order to disguise its origin from tax inspectors and the police: this is
known as laundering money.
From English for Business Studies. Cambridge University Press
Exercises
A. According to the text, are the following statements TRUE or FALSE?
1.
2.
3.
4.
5.
6.
Taxes can be designed both to encourage and to discourage spending.
The same amount of money can be taxed more than once.
Progressive taxes may discourage people from working extra hours.
Sales taxes are unfair because poor people spend more than the rich.
“Loopholes” are a common form of tax evasion.
If you pay a lot of your income into a pension fund or a life insurance policy you never
have to pay tax on it.
7. A company that makes an unusually large profit during a tax year might quickly decide
to spend it, for example, on a new factory or equipment.
B.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Find words in the text that mean the following.
reducing the value of a fixed asset, by charging it against profits ______________
something which discourages an action _________________
an adjective describing a tax that is proportionally higher for people with less money
__________________
spending money to buy things, rather than saving it ________________
a tax on income that pays for sickness benefit, unemployment benefit, and old0age
pensions ________________
non-financial benefits or advantages of a job _____________
a way to delay the payment of tax to a later time ____________________
an adjective describing expenditures that can be taken away from taxable income or
profits ________________
a country offering very low tax rates to foreign businesses _________________
Bringing forward capital expenditure so that at the end of the year all the profits have
been used up is known as making a _________________
C. Can you explain the differences between:
tax avoidance (loopholes)/ tax evasion (dodging)
customs duties/excise duties/stamp duty
tax collector/tax consultant
untaxable/tax-free
39
Auditing
Match the following words or expressions with their underlined equivalents in the text.
accuracy
Annual General Meetings
external
checking
board of directors
ratified
deficiencies
determine
shareholders/stockholders
deviations
directives
a synonym
standard operating procedures
implemented
subsidiaries transnational corporations
The traditional definition of auditing is a review and an evaluation of financial records by a
second set of accountants. An internal audit is a control by a company’s own accountants,
checking for completeness, exactness and reliability. Among other things, internal auditors
are looking for departures from a firm’s established methods for recording business
transactions. In most countries, the law requires all firms have their accounts audited by an
outside company. An independent audit is thus a review of financial statements and
accounting records by an accountant not belonging to the firm. The auditors have to judge
whether the accounts give what in Britain is known as “true and fair view” and in the US as
a “fair presentation “ of the company’s financial position. Auditors are appointed by a
company’s most senior executives and advisors whose choice has to be approved by the
owners of the company’s equity at the company’s yearly assembly. Auditors write an
official audit report. They may also address a “management letter” to the directors, outlining
inadequacies and recommending improved operating procedures. This leads to the more
recent use of the word “audit” as an equivalent term for “control”. Multinational companies,
for example, might undertake inventory, marketing and technical audits. Auditing in this
sense means verifying that general management instructions are being executed in
branches, companies which they control, etc.
Add appropriate words to these phrases:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Auditors __________________________ companies’ accounts.
Accounts have to ____________________ a fair presentation.
Auditors write a _________________ .
It’s the directors who ____________________ the auditors.
Auditors sometimes _________________ better accounting procedures.
Using external auditors is a ________________ requirement.
If the entries in the accounts are not clear, the auditor can ____________ the original
invoices.
Mistakes may be ______________ the wrong steps in the original accounting process.
The auditor must check that the purchase invoices _______________ the entries in
the Purchase Journal.
A statutory audit __________________ by law.
A compliance test checks that controls _________________ effectively.
The Memorandum of Association ______________ the internal rules of the company.
40
MANAGERIAL ACCOUNTING
1. Fill in the blanks in the text below with the words given.
objective
responsibilities
finance
decision-making
resources
expenditures
combination acquisition
determine
revenues
Managers working for a multinational corporation or a local factory have an important common
______________. They must make good decisions to obtain and use their organizations’
______________ -including people, money, inventory, real estate, investments, technology,
and equipment- in the best possible way. Every organization’s resources are in limited supply,
but the demand for them is unlimited. This is true for a merchandising business, a
manufacturer, a service firm, a government agency, a utility, or a not-for-profit organization.
The resource decisions of most businesses are made with the primary goal of earning a
satisfactory profit as an important measure of financial success. Even not-for-profit
organizations must be certain that their _______________ do not exceed their
_______________ for an extended period.
Management decisions concerning the _______________ and use of resources provide
answers to such questions as :
What products or services should be sold?
Where should they be sold?
What are the _______________ of each management position?
Who should be hired to fill these positions?
How much does it cost to produce a product or offer a service?
What is the most profitable _______________ of products or services?
What will happen to profits if selling prices are increased or decreased?
How much operating capacity is needed in terms of people, funds, inventory, and
fixed assets?
o How should the organization _______________ its various activities?
o
o
o
o
o
o
o
o
Good management _______________ is highly dependent on good information. Where does
this information come from in a typical organization? Managerial accounting is an important
branch of accounting that provides information needed by managers to _______________ how
resources should be obtained and used in any type of business, large or small.
2. Match these words with the definitions below.
stock (GB) or inventory (US)
revenue or earnings or income
overheads(GB) or overhead (US)
creditors (GB) or accounts payable (US)
debtors (GB) or accounts receivable (US)
turnover
41
1.
2.
3.
4.
5.
all the money received by a company during a given period _____________
the amount of business done by a company over a year _______________
sums of money owed by customers for goods or purchases on credit _____________
sums of money owed to suppliers for purchases made on credit _______________
the various expenses of operating a business that cannot be charged to any one
product, process, or department ___________________
6. the value of ) raw materials, work in progress, and finished products stored ready for
sale ________________
DIFFERENCES BETWEEN MANAGERIAL AND FINANCIAL ACCOUNTING
Read the text that follows and choose the most suitable heading (A-G) for each part of
the text (1-7).
A.
B.
C.
D.
User Orientation
Reporting Frequency
Accounting Entity
Freedom of Choice
E. Restrictive Standards
F. Degree of Precision
G. Time Frame
1. Managers need more comprehensive and detailed information than that contained in
the general purpose financial statements reported to external parties. The detailed
accounting information needed by management would be meaningless to external
parties such as stockholders who do not actively participate in the company’s daily
affairs.
2. Financial accounting must be performed to satisfy requirements of various external
parties such as the Securities and Exchange Commission (SEC) and the Internal
Revenue Service (IRS). In contrast, management alone must decide how much and
what kind of information it requires. The benefits of management reports must be
compared continually with their costs to assure that they are cost- effective.
3. The emphasis of managerial accounting is on the future, whereas financial accounting
is concerned primarily with reporting what happened in the past. In managerial
accounting applications, past performance evaluations are mainly used as benchmarks
for predicting the future.
4. Managerial accounting is more flexible than financial accounting; external reporting
with financial accounting must be restricted by tight accounting standards because of
the typical separation of management and ownership. Generally Accepted Accounting
Principles (GAAP) dictate what can be done in financial accounting to protect the
interests of external parties who do not have access to a firm’s accounting records.
Managerial accounting focuses on usefulness to managers and may involve deviations
from conventional GAAP methods of accounting, such as inventory costing, income
determination, and cost allocation.
42
5. Managerial accounting generally divides the total firm’s operation into well defined
segments. It does not follow the accounting entity concept used in external reporting
for the firm as a whole. Performance reports are prepared for such segments as
departments, divisions, offices, plants, product lines, and sales territories. Although
many large companies must report externally on the summarized financial
performance of their major lines of business, the reports prepared for internal purposes
are much more detailed and are personalized to the managers who are responsible for
the operating results.
6. The reporting frequency with managerial accounting also is subject to management’s
choice in contrast to the time period assumption of financial accounting. Special
reports on an infrequent basis as needed or frequently prepared reports covering short
time periods (e.g. daily) may be used. For management purposes, the need for
information is the key factor.
7. Objectivity or verifiability is a major consideration in financial accounting to assure that
the information is free from any personal bias on the part of the persons responsible for
financial statements. Since managerial accounting is concerned more with the future
than the past and does not affect external parties, objectivity is not as important as it is
with financial accounting. Many management decisions have to be made quickly, so
managers cannot wait until complete and verifiable information is available. They must
act on the basis of good estimates and projections instead of waiting for better
information. For example, a sales manager who has to price a product for a new
customer today will base the price on projections of the costs required to produce the
product, instead of waiting for the accounting department to perform a more
sophisticated study of historical cost data for similar products, a procedure that would
take a week; otherwise, the sale may be lost.
Use the information in the table, and the comparison method of development, to write a
paragraph on the two types of accounting.
Comparison based on:
Financial Accounting
User orientation
External users
Internal users
Freedom of choice
Mandatory
Complete freedom
Main time focus
Historical
Restrictive standards
Accounting entity
Generally Accepted Accounting Principles
Mainly whole firm
Managerial Accounting
Futuristic
None
Mainly firm’s segments
Reporting frequency
Well-defined schedule
Whenever needed
Degree of precision
Objectivity principle
More subjective
43
Financial Ratios
A financial ratio (or accounting ratio) is a relative magnitude of two selected numerical values
taken from an enterprise's financial statements. Often used in accounting, there are many
standard ratios used to try to evaluate the overall financial condition of a corporation or other
organization. Financial ratios may be used by managers within a firm, by current and potential
shareholders (owners) of a firm, and by a firm's creditors. Security analysts use financial ratios
to compare the strengths and weaknesses in various companies. If shares in a company are
traded in a financial market, the market price of the shares is used in certain financial ratios.
Values used in calculating financial ratios are taken from the balance sheet, income statement,
statement of cash flows or (sometimes) the statement of retained earnings. These comprise the
firm's accounting statements or financial statements. The statements' data is based on the
accounting method and accounting standards used by the organization.
Purpose and types of ratios
Financial ratios quantify many aspects of a business and are an integral part of financial
statement analysis. Financial ratios are categorized according to the financial aspect of the
business which the ratio measures. Liquidity ratios measure the availability of cash to pay
debt. Activity ratios measure how quickly a firm converts non-cash assets to cash assets.
Debt ratios measure the firm's ability to repay long-term debt. Profitability ratios measure the
firm's use of its assets and control of its expenses to generate an acceptable rate of return.
Market ratios measure investor response to owning a company's stock and also the cost of
issuing stock.
Ratios generally hold no meaning unless they are benchmarked against something else, like
past performance or another company. Financial ratios allow for comparisons




between companies
between industries
between different time periods for one company
between a single company and its industry average
Abbreviations and terminology
Various abbreviations may be used in financial statements, especially financial statements summarized on the
Internet. Sales reported by a firm are usually net sales, which deduct returns, allowances, and early payment
discounts from the charge on an invoice. Net income is always the amount after taxes, depreciation, amortization,
and interest, unless otherwise stated. Otherwise, the amount would be EBIT, or EBITDA .
Note that Shareholder's Equity and Owner's Equity are not the same thing, Shareholder's Equity represents the
total number of shares in the company multiplied by each share's book value; Owner's Equity represents the total
number of shares that an individual shareholder owns (usually the owner with controlling interest), multiplied by
each share's book value. It is important to make this distinction when calculating ratios.




COGS = Cost of goods sold, or cost of sales.
EBIT = Earnings before interest and taxes
EBITDA = Earnings before interest, taxes, depreciation, and amortization
EPS = Earnings per share
44
Profitability ratios
A company’s gross profit margin is the ratio of a company’s gross income to gross sales.
Operating margin or Return on Sales measures the profitability of ventures after accounting
for all costs.
Return on equity (ROE) shows how well a company uses investment funds to generate
earning growth.
Return on total Assets (ROA) shows how profitable a company’s assets are in generating
revenues.
Liquidity ratios
The current ratio or working capital measures liquidity-having enough cash to meet shortterm obligations. It shows if a business can pay its most urgent debts.
The acid test ratio (quick ratio) provides a more accurate picture of short-term solvency by
considering completely liquid assets.
Activity ratios measure the effectiveness of the firms to use resources.
Asset turnover is the ratio of a company’s sales to its assets.
Debt ratios (leveraging ratios)
A company’s debt/equity ratio, or leveraging (BrE gearing)compares the amount of debt to
the firm’s own capital.
Interest cover or times interest earned shows whether funds are available to pay long-term
debt costs.
Market ratios
Earnings per share relates the company’s profits to the number of ordinary shares it has
issued.
Dividend cover or the dividend payout ratio shows the percentage of income paid out to
shareholders (or the number of times the net profits available for distribution exceed the
dividend actually paid).
A company’s market/book ratio is current stock market value divided by the amount invested
by shareholders. (This equals the return on equity multiplied by the price/earnings ratio.)
The price/earnings ratio (PER) reflects the market’s opinion of a company’s revenues,
earnings and dividends: the higher it is, the more investors are optimistic about the company’s
future prospects.
45
Exercise
What are the names of these ratios?
1. commom stock dividend
net income
2. current assets
current liabilities
3.
net earnings
number of shares
4. liquid assets
current liabilities
5. long-term debt
share holders’ equity
6. market price per share
diluted EPS
7. market value X number of shares
nominal value X number of shares
8. net income
interest charges
9. gross profit
sales
10. operating income
net sales
11. net income
total assets
12.
net sales
total assets
13.
net income
average shareholder’s eqyity
46
Quiz-Accounting basics
1. Financial accounting is focused on the ____________ financial statements of a
company.
2. Corporations whose stock is publicly traded must have their financial statements
________________________ by independent certified public accountants.
3. Every transaction will have one account being credited and one account being
___________________ .
4. The accounting equation is Assets=_______________________+ Stockholder’s (or
Owner’s) Equity.
5. The profitability of a company for a specified period of time is reported on the
______________________ statement.
6. The main components or elements of the income statement are _________________ ,
expenses , gains, and losses.
7. GAAP is the acronym for ________________ ____________ ___________ ________.
8. ____________ entry bookkeeping will result in at least two accounts being involved in
every transaction.
9. The financial statement that reports the assets , liabilities, and stockholder’s (or
owner’s) equity at a specific date is the __________________________
10. Under the _________________ basis of accounting , revenues are reported when they
are earned, not when cash is received.
11. The listing of all the accounts available for use in a company’s accounting system is
known as ____________ ______ _____________ .
12. __________________ accounting provides managers with information useful in
planning and controlling business activities.
13. The term __________________ is used to indicate the ease with which an asset can
be converted into cash, and a company’s __________________ provides an indication
of its ability to pay obligations as they become due.
14. The reduction in value of a fixed asset during the years it is in e.___________
15. This is the name of the difference between the credit and debit side of an account.
_______________
16. The statement of ____________ _____________ reports on a company's cash flow
activities, particularly its operating, investing and financing activities.
17. Assets which consist of cash in hand, or cash with bankers, and anything which quickly
can be turned into cash, e.g. bills receivable, marketable securities. __________
18. These are bought by people wishing to invest in a company. _____________
19. This requires multinational companies convert their consolidated statements into a
single currency. _______________ principle.
20. _____________ costs are the permanent costs which do not vary with output
(production).
47
Numbers
Zero, oh and nought
For the number 0 on its own , say zero .
Before a decimal point we say either zero or nought:
0.5
zero point five or nought point five
After a decimal point we say oh:
0.01
nought point oh oh oh
We also say oh in telephone numbers, years, hotel rooms, bus numbers, etc.
210-5381006 My telephone number is two one oh, five three eight one oh oh six (or double oh
six)
1907 The novelist was born in nineteen oh seven
Points and commas
In English use a point (.) and not a comma (,) for decimals. Use commas when writing numbers
greater than 999.
15.001 fifteen point oh oh one
15,001 fifteen thousand and one
Decimals
In English, read all the numbers (digits) after a decimal point separately, especially if there are
more than two decimal places:
0.125
nought point one two five
2.44
two point four four
0.001
nought point oh oh one or 10 -3 ten to the power minus three
If the number after a decimal point represents a unit (of money, etc. ) it is read like a normal
number:
$ 1.50 one dollar fifty
2m18 two meters eighteen
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Hundreds, thousands, millions
100 a hundred
200 two hundred (not two hundreds)
1,000 a thousand
100,000 a hundred thousand
1,000,000 a million
1,000,000,000 a billion
123,456 a hundred and twenty-three thousand, four hundred and fifty-six (GB)
A hundred twenty –three thousand, four hundred fifty six (US)
In the singular, the words hundred, thousand, or million are preceded by a or one. In precise
numbers, or after several and a few, hundred, thousand or million do not take a plural:
We hired a hundred new workers.
There are over one million potential customers.
To be precise, we have sold eight thousand four hundred and twenty.
We expect to sell a few hundred a week from now on.
In imprecise numbers, hundreds, thousands, or millions take a plural:
We’re selling thousands a month.
We’re earning millions of pounds.
Square, cube and root
10 2 ten squared
10 3 ten cubed
the square root of five
Fractions
Apart from ½ (a half), ¼ (a quarter) and ¾ (three quarters, sometimes three-fourths in the
US), fractions are mostly like ordinary numbers (fifth, sixth, twety-first, forty-second, etc.):
3½
three and a half
2¾
two and three quarters
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Calculating
10+ 6 = 16 ten plus six equals/ is sixteen
10-6= 4
ten minus six equals four (-s in equals is pronounced /z/)
10x 6=60
ten times/ multiplied by six is sixty
10÷6 =1.666 ten divided by six is one point six recurring
The verbs are to add, subtract, (or deduct, but not deduce), multiply ,divide.
Other ways of saying divide are per:
Fr/$ francs per dollar ,8% p.a. eight per cent per annum
and over
(x-y) /z
x-minus-y, over z
x- y/z
x minus y-over-z
Numbers as adjectives
When a number is used before a noun, like an adjective, it is always singular:
a fifty-minute lesson
a thirteen-week term
a ninety-five dollar price cut
a ten thousand euro car
a twenty degree fall in temperature a one and a half litre bottle
Exercise
Say the following:
1
2
3
4
5
6
7
8
9
10
11
12
In my first job, in 1986, I earned $ 38 a week, which was exactly $1,976 a year.
Today they’re buying dollars at 1.3952 and selling them at 1. 3957.
It’s either 0.431 or 1.031 , I can’t remember.
$1,000,000? No! It’s over $ 1,560,000.
No, it’s 12,231 not 12.231!
You can fax them on 066-22 27 47.
For further information, call 0171 3585 544.
Jude is 2m 11 tall, like a basketball player.
It only cost $ 13.99.
It’s somewhere between 2 2/3 and 2 ¾.
27x365 is 9,855, plus 7 for leap years, plus 2x31, and 2x30, plus 16 days- I’m 10,000
days old today!
The equation is x2 - y3 = z.
50
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