Company finance, ownership and management

Lead- in: How do companies raise money for their operations? Key words and phrases 1. to raise money –дiставати гроші 2. ordinary shares (equity) –простi акцiї 3. advertising –реклама, рекламна справа 4. to run a business –керувати, управляти пiдприємством, вести дiло 5. savings and profits –заощадження та прибуток 6. stocks of raw materials –запас сировини 7. fixed capital –основний капітал 8. bank overdraft –банкiвськiй овердрафт 9. managerial skills –талант, здiбностi управлiння 10. sole trader –одноосiбний торговець 12. limitless liabilities –необмежена юридична вiдповiдальнiсьть 13. small-scale enterprise –малий бiзнес (пiдприємство)

Companies raise the money they need for their operations from internal and external sources. Profits are the major source of internal finance; they may also be an important condition for raising external finance from borrowing of various kinds. External funds consist mainly of bank borrowings and raising loans from other sources, in both the short and long term. Another source of external funds is from the issue of ordinary shares, often called equity (known as common stock in the United Nationals). The way in which a company finances itself, sometimes known as capital structure, has a profound effect upon the ownership and style of management of the company. Picture a small-scale manufacturer of toys, mainly hand-made and using the minimum amount of equipment. The toys would probably only be sold locally through market stalls or small shops. There would be little or no advertising. Such a business may well be run by only one man – a sole trader – who finances the business entirely from his own savings and profits. If the toys are particularly good and the business prospers, he may require extra finance. This may be needed for working capital – additional stocks of raw materials and components or additional labour to meet rising demand. Alternatively additional funds may be needed for fixed capital – extra equipment or an extension to the workshop.

At this point the extra finance may be beyond the internal resources of our one-man firm. Short-term funds such as a bank advance or overdraft may be sought. These are short-term because they may be repaid at notice from the bank or over a short period. A further source of short-term finance might be trade credit. Practically every firm both gives and receives a certain amount of finance in the form of trade debts. This form of finance may be rather expensive. Although short-term finance is fairly flexible and not too difficult to arrange, it has clear disadvantages.

In addition to the problem of finding a more stable source of finance than short-term loans, the owner may find that he has other difficulties such as, for example, additional managerial skills to cope with the increased workloads. Extra managerial skills might be needed on the buying or selling side of the business, which becomes more important as trade grows. One way of solving both these problems is to form a partnership. The legal form of Sole Trader and Partnerships varies between countries but they frequently have unlimited liability. The owners are liable for any debts of the business, even if it means selling their homes and family possessions to meet these obligations. If one or more of the partners cannot pay their part of the debt then the others will be liable.

This arrangement is both a source of strength and of weakness. It ensures that the owners pay the closest attention to the running of the business. On the other hand, because the mistakes of one partner may involve the others in limitless liabilities, there may be a great reluctance to enter such a business. So long as each of the partners knows his colleague well and understands what is going on in all parts of the firm this need not be a problem, which explains why partnerships are usually restricted to small-scale enterprise. Some countries set a legal limit on the number of partners. In the UK the maximum, with certain exceptions, is twenty.

Ø Comprehension:

1. What are the sources companies raise money from?

2. What do we call short-term funds?

3. What is a characteristic feature of a partnership?

4. Could you name strengths and weaknesses of a partnership?

5. What is the maximum number of partners in the UK in Ukraine?

 

Ø Summarizing.

Complete the following sentences to summarize the text above:

1. Companies raise money for their operations from…

2. The major source of internal finance is…

3. External finance consists of…

4. People form partnerships when…

5. Partnerships have both advantages and…

6. The advantages of a partnership are…

7. The legal limit on the number of partners is usually…

Ø Viewpoint:

Is partnership an attractive form of business in terms of management?

 

 

BONDS

 

Lead-in: What institutions can issue bonds and what for? Key words and phrases 1. cash flow –приплив готiвки 2. to issue bonds –випускати облiгації 3. financial performance –фінансовий стан 4. bearer certificates –свідоцтво на пред’явника 5. secondary bond market –вторинний облігаційний ринок 6. to mature –наставати (про строк сплачування) 7. liquidity –ліквідність 8. interest rate –відсоткова ставка 9. below or above par –нижче або вище номінальної вартості 10. bond’s yield –прибуток з облігації 11. tax-deductible –той, що підлягає оподаткуванню 12. to issue equities –випускати звичайні акції 13. income tax –прибутковий податок 14. VAT (value added tax) –податок на додану вартість 15. gilt-edged securities –першокласні цінні папери 16. to withdraw cash –вилучати готівку

Companies finance most of their activities by way of internally generated cash flows. If they need more money they can either sell shares or borrow, usually by issuing bonds. More and more companies now issue their own bonds, because this is often cheaper.

Bond-issuing companies are rated by private ratings companies such as Moody’s and Standard & Poors, and given an ‘investment grade’ according to their financial situation and performance. Obviously, the higher the rating, the lower the interest rate at which a company can borrow.

Most bonds are bearer certificates, so after being issued they can be traded on the secondary bond market until they mature. Bonds are therefore liquid, although their price on the secondary market fluctuates according to changes in interest rates. Consequently, the majority of bonds on the secondary market are traded below or above par. A bond’s yield at any particular time is thus its coupon (the amount of interest it pays) expressed as a percentage of its price on the secondary market.

Bond interest is tax-deductible, i e. a company deducts its interest payments from its profits before paying tax, whereas dividends are paid out of already-taxed profits. One should remember that increasing debt increases financial risk: bond interest has to be paid, even in a year without any profits from which to deduct it.

Governments, of course, unlike companies, do not have the option of issuing equities. Consequently they issue bonds when pubic spending exceeds receipts from income tax, VAT, and so on. Long-term government bonds are known as gilt-edged securities, or simply gilts, in Britain, and Treasury bonds in the US. The British and American central banks also sell and buy short-term Treasury Bills as a way of regulating the money supply. To reduce the money supply, they sell these bills to commercial banks, and withdraw the cash received from the calculation; to increase the money supply they put them back.

 

Ø Comprehension:

1. How do companies finance most of their activities?

2. When do they sell shares or borrow?

3. Is issuing their own bonds cheaper for companies?

4. What is Moody’s and Standard & Poors?

5. How are bonds traded on the secondary market?

6. Is bond interest tax-deductible?

7. What kind of bonds do governments issue?

8. Is there any difference between guilt-edged securities and Treasury Bills?

9. How do the British and American central banks regulate the money supply?

 

Ø Summarizing.

Complete the following sentences to summarize the text above:

1. Most of their activities companies finance by ….

2. If they need more money they ….

3. Bond-issuing companies are rated by private companies such as ….

4. Bonds are traded on the secondary market and their price fluctuates according to ….

5. A company deducts bond interest payments … paying tax, whereas dividends are paid ….

6. Governments issue bonds when public spending ….

7. As a way of regulating money supply the British and American central banks ….

Ø True-false questions:

1. Companies finance most of their activities by way of internally generated cash flows.	
2. Companies do not issue their own bonds, because it is expensive.	
3. Bond-issuing companies are rated according to their financial situation and performance.	
4. The majority of bonds on the secondary market are traded below or above par.	
5. Governments also have the option of issuing equities.	
6. Long-term government bonds are known as gilt-edged securities.	

Ø Viewpoint:

Why do governments issue bonds?

FUTURES, OPTIONS AND SWAPS

 

Lead-in: Have you heard of any derivative instruments? Key words and phrases 1. current price –поточна ціна 2. spot market –ринок реального товару 3. futures market –ф’ючерсний ринок 4. financial assets –фінансовий капітал 5. over-the-counter deals –позабіржові операції 6. forward contract –форвардний контракт 7. financial derivatives –фінансові похідни 8. to hedge, hedging –хеджирування 9. exchange rate and interest rate –валютний курс та процентна ставка 10. currency futures market –валютний ф’ючерсний ринок 11. stock and share market –фондова біржа, ринок акцій 12. a call option –опціон ‘кол’(право купити акції за фіксованою ціною) 13. a put option –опціон ‘пут’ (право продати акції за фіксованою ціною) 14. equity investments –інвестування в акції 15. currency swap –валютний своп 16. interest rate savings –заощадження норми відсотка

Every weekday, enormous amounts of commodities, currencies and financial securities are traded for immediate delivery at their current price on spot markets. There are also futures markets on which contracts can be made to buy and sell commodities, currencies, and various financial assets, at a future date (three, six, or nine months ahead), but with the price fixed at the time of the deal. Standardized deals for fixed quantities and time period (e.g. 25 tons of copper to be delivered next June 30) are called futures; individual, non-standard, “over-the-counter” deals between two parties (e.g. 1.7 billion yen to be exchanged for dollars on September 15, at a rate set today) are called forward contracts.

Futures, options and other derivatives exist in order that companies and individuals may attempt to diminish the effects of future changes in commodity and asset prices, exchange rates, interest rates, and so on. For example the prices of foodstuffs such as wheat, cocoa, coffee, tea and orange juice are frequently effected by drought, floods and other extreme weather conditions.

Consequently many producers and buyers of raw materials want to hedge, in order to guarantee next seasons prices. When commodity prices are expected to rise, future prices are obviously higher than spot prices; when they are expected to fall, they are at a discount on spot prices.

In recent years, exchange rates and interest rates have fluctuated wildly. Many businesses, therefore, want to buy or sell currencies at a guaranteed future price. Speculators, anticipating currency appreciations or depreciations, or interest rate movements, are also active in currency futures markets, such as the London International Financial Futures Exchange (LIFFE, pronounced ‘life’)

As well as currencies and commodities, there is now a huge futures market in stocks and shares. One can buy options giving the right – but not the obligation – to buy and sell securities at a fixed price in the future. A call option gives the right to buy securities (or a currency, or a commodity) at a certain price during a certain period of time. A put option gives the right to sell an asset at a certain price during a certain period of time. These options allow organizations to hedge their equity investments.

For example, if you think a share worth 100 will rise, you can buy a call option giving the right to buy at 100, hoping to sell this option, or to buy and resell the share at a profit.

On the contrary, if you expect the value of a share that you own to fall below its current price of 100, you can buy a put option at 100 or higher: if the price falls, you can still sell shares at this price.

Options are merely one type of derivative instrument. Many companies nowadays also arrange currency swaps and interest rate swaps with other companies or financial institutions. Such currency swaps, designed to achieve interest rate savings, are of course open to the risk of exchange rate fluctuations. Whether they save or lose money will depend on the movement of interest rates.

Ø Comprehension:

1. What is traded on spot markets?

2. On what markets can contracts be made?

3. What is a forward contract?

4. What is the purpose of futures, options and other derivatives?

5. What is the difference between a call option and a put option?

6. Are there any more derivative instruments?

 

Ø Summarizing.

Complete the following sentences to summarize the text above:

1. Spot markets trade in commodities, currencies and ….

2. Future markets make contracts to buy commodities, currencies at a … date.

3. With the help of futures, contracts and other derivatives companies and individuals may diminish ….

4. Although exchange rates and interest rates fluctuate, many businesses want to buy or sell currencies at a ….

5. Options, which are bought at the market of stocks and shares, allow organizations to hedge ….

6. Besides options many companies nowadays arrange ….

 

Ø Text organization.

The Nationalments below express the main ideas of the text. Number them so that they are in the same order as the ideas in the text. The first one is given for you:

	Nationalment	Order
a.	Every weekday, enormous amounts of commodities, currencies and financial securities are traded on spot markets.
b.	Options are merely one type of derivative instrument.
c.	As well as currencies and commodities, there is now a huge futures market in stocks andshares.
d.	Many producers and buyers of raw materials want to hedge, in order to guarantee next seasons prices.
e.	Futures, options and other derivatives exist in order to diminish the effects of future changes in prices, exchange rates, interest rates, and so on.
f.	Many companies nowadays also arrange currency swaps and interest rate swaps with other companies or financial institutions.

Ø Viewpoint:

How popular are the above-mentioned derivative instruments in our country?

BUYOUTS

Lead-in: Discuss when, in your opinion, buyouts take place. Key words and phrases 1. takeover –злиття, поглинання підприємства 2. synergy (synergism) – синергізм (явище, коли результат перевершує суму окремих ефектів) 3. stockholder value – (економічна) вартість акціонера 4. raider (бірж.) –скупник акцій 5. to make a loss –зазнати витрат (збитків) 6. buyout – викупактивів, акцій діючого підприємства 7. cash reserves –резерв грошової готівкі 8. leverage buyouts –викуп контрольного пакету акцій за рахунок кредиту 9. challenge –складна задача, виклик 10. hostile takeovers and buyouts –поглинання підприємств без згоди керівництва 11. to lay-off workers –звільняти працівників

“You can’t buy a company merely by buying its shares”

(Sir James Goldsmith (1933-1997), Anglo-French financier

In the 1960s, a big wave of takeovers in the US created conglomerates – collections of unrelated businesses combined into a single structure. Many of these conglomerates consisted of too many companies and not enough synergy. After the recession of the 1980s, there were many large companies on the US stock market with good earnings but low stock prices.

Such conglomerates were not maximizing stockholder value. The individual companies might have been more efficient if liberated from central management.

Conventional financial theories argue that stock markets are efficient. Raiders in the 1980s discovered that it was untrue. Although the market could understand data concerning companies’ earnings, it was highly inefficient in valuing assets, including land, buildings and pension funds.

Theoretically, there was little risk of making a loss with a buyout. The ideal targets for buyouts were companies with huge cash reserves that enabled the buyer to pay the interest on the debt, or companies with successful subsidiaries, or companies that are not sensitive to a recession, such as food and tobacco.

Takeovers using borrowed money are called ‘leverage buyouts’ or ‘LBOs’. Leverage means having a large proportion of debt compared to equity capital. If a company is bought by its existing managers, we talk of a management buyout or MBO.

Raiders and their supporters argue that the permanent threat of takeovers is a challenge to company managers and directors to do their job better and that well-run businesses are at little risk. The threat of raids forces companies to put their capital to productive use. Fat or lazy companies that fail to do this will be taken over by raiders who will use assets more efficiently.

LBOs, however, seem to be largely an American phenomenon. German and Japanese managers and financiers, for example, seem to consider companies as places where people work, rather than assets to be bought and sold. Hostile takeovers and buyouts are almost unknown in these two countries, where business tends to concentrate on long-term goals rather than seek instant stock market profits. Workers in these companies are considered to be as important as shareholders. The idea of a Japanese manager restructuring a company, laying off a large number of workers (as frequently happens in the US and Britain), is unthinkable. Lay-offs in Japan are instead a cause for shame for which managers are expected to apologize.

 

Ø Comprehension:

1. What is a conglomerate?

2. What are stock markets inefficient in?

3. Are companies with huge cash reserves the ideal targets for buyouts?

4. Is there any difference between ‘LBO’ and ‘MBO’?

5. The permanent threat of takeovers is a challenge to a company, isn’t it?

6. Why do you think LBO is a typically American phenomenon?

7. What is the status of workers in German and Japanese companies?

 

Ø Summarizing.

Complete the following sentences to summarize the text above:

1. Takeovers in the USA created ….

2. After the recession of the 1980s many companies had good earnings but low ….

3. In the 1980s raiders discovered that stock markets were ….

4. Theoretically, with a buyout there is little risk of ….

5. If takeovers use borrowed money, they are called ….

6. We talk of a management buyout when a company is bought by ….

7. Hostile takeovers and buyouts seem to be typically… phenomenon.

 

Ø Viewpoint:

Are hostile takeovers and buyouts known in Ukraine?

 

 

PRINCIPLES OF TAXATION

Lead-in: What is the main purpose of taxation? Key words and phrases 1. taxation – оподаткування 2. tax revenues –податкові надходження 3. to provide medical care –забезпечувати медичною допомогою 4. to charge fees –вимагати, призначати плату 5. gross domestic product –внутрішній валовий продукт 6. to raise money –діставати гроші 7. the ability-to-pay principle –принцип платоспроможності 8. the benefits principle –принцип пільг 9. income and wealth –дохід і багатство 10. horizontal (vertical) equity –горизонтальна (вертикальна) справедливість 11. taxable income –оподаткований дохід 12. tax brackets –ступінь податкової шкали 13. tax rates –податкова ставка

Taxation is a system of raising money 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 use tax revenues to pay soldiers and police, to operate schools and hospitals, to provide food to the poor and medical care to the elderly, and for hundreds of other purposes. Without taxes government could not exist.

Taxation is the most important source of revenues for modern governments, typically accounting for 90 per cent or more of their income. The remainder of government revenue comes from borrowing and from charging fees for services. Countries differ considerably in the amount of taxes they collect. In the United Nationals, about 28 per cent of the gross domestic product, a measure of economic output, goes for tax payments. In Canada about 36 per cent of the country's gross domestic product goes for taxes. In France the figure is 44 per cent, and in Sweden it is 51 per cent.

In addition to using taxation to raise money, governments may raise or lower taxes to achieve social and economic objectives, or to achieve political popularity with certain groups. Also, some economists consider taxation an important tool for maintaining the stability of a country's economy.

Most economists believe that a tax system should follow two main principles: fairness and efficiency. Economists consider two principles of fairness: the ability-to-pay principle and the benefits principle.

The ability-to-pay principle holds that people's taxes should be based upon their ability to pay, usually as measured by income or wealth. One implication of this principle is horizontal equity, which Nationals that people in equal positions should pay the same amount of tax.

A second requirement of the ability-to-pay principle is vertical equity, the idea that a tax system should distribute the burden fairly across people with different abilities to pay. This idea implies that a person with higher income should pay more in taxes than one with less income. But how much more?

Taxes may be proportional, progressive, or regressive. A proportional tax takes the same percentage of income from all people. A progressive tax takes a higher percentage of income as income rises. A regressive tax takes a smaller percentage of in­come: as income rises, poor people pay a larger fraction of their in­comes in taxes than rich people. Which is fairest: a proportional, progressive, or regressive system?

A progressive, proportional, or even slightly regressive system all can achieve vertical equity's requirement that a richer person should pay more in taxes than a poorer person. Most industrialized nations have progressive income tax systems, which impose a heavier tax burden as one's income increases. In the United Nationals, the individual income tax system divides taxable income into different tax brackets – ranges of income with different tax rates.

In addition to being fair, a good tax system should be efficient.

Three measures of efficiency are administration costs, compliance costs, and excess burden.

Each society must find the best trade off between fairness and efficiency.

 

Ø Comprehension:

1. What is taxation?

2. In what way do governments use tax revenues?

3. Is taxation the most important source of revenues for modern govern­ments?

4. Countries differ considerably in the amount of taxes they collect, don’t they?

5. How many principles should a tax system follow?

6. What are the requirements of the ability-to-pay principle of taxation?

7. What tax systems do most industrialized nations have?

8. Name three measures of tax efficiency.

Ø True-false questions:

1. Taxation is the most important source of revenues for govern­ments.	
2. Taxation is an important tool for maintaining the stability of a country's economy.	
3. Most industrialized nations have regressive income tax systems.	
4. No tax system is perfectly efficient.	
5. Each society must find the best trade off between fairness and efficiency.	

 

Ø Viewpoint:

Is it possible to make the system of taxation perfect?

TYPES OF TAXES

Lead-in: What types of taxes do you know? Key words and phrases 1. to impose taxes – оподатковувати 2. income tax –прибутковий податок 3. payroll tax –податок на заробітну плату 4. consumption tax –податок на споживання 5. property tax –податок на прибуток від нерухомого майна 6. eNational tax –податок на спадщину 7. revenue system –структура державного доходу 8. medicare –безплатна медична допомога 9. to earn an interest –приносити процент 10. savings accounts –ощадні рахунки 11. royalty –авторский гонорар 12. capital gains– доходи від приросту капіталу 13. income tax return –декларація про прибутковий податок 14. tax liability –заборгованість з податкових рахунків 15. to withhold taxes –відраховувати податки 16. general sales tax –податок на всі види продажу 17. excise tax –акциз, акцизний збір 18. value-added tax (VAT) –податок на додану вартість 19. licence tax –ліцензійний збір 20. customs duties –митний збір 21. inheritance tax –податок на спадщину 22. gift tax –податок на дарчу, даровизну 23. charitable organizations –благодійні організації 24. tax-exempt –звільнений від сплати податків

Governments impose many types of taxes. In most developed countries, individuals pay income taxes, payroll taxes, consumption taxes, property taxes, and in some cases National taxes. Taxes on people’s incomes play critical roles in the revenue system of all developed countries. Payroll taxes, which are used to finance social programmes such as security and medicare, account for more than a third of federal revenues. An individual income tax, also called a personal income tax, is a tax on a person's income. Income includes wages, salaries, and other earnings, interest earned by savings accounts; rents, royalties. Income also includes capital gains, which are profits from the sale of stock, real eNational, or other investments. The national governments of the United Nationals, Canada, and many other countries require citizens to file an individual income tax return each year. Each taxpayer must compute his or her tax liability – the amount of money he or she owes the government.

All corporations in the United Nationals and Canada must pay tax on their net income (profits) to the federal government and also to most National or provincial governments. A payroll tax applies only to wages and salaries. Employers automatically withhold payroll taxes from employees' wages and forward them to the government. Payroll taxes are the main sources of funding for various social insurance programmes, such as those that provide benefits to the poor, elderly, unemployed, and disabled.

A consumption tax is a tax levied on sales of goods or services. The most important kinds of consumption taxes are general sales taxes, excise taxes, value-added taxes (VAT), and tariffs. In the United Nationals, consumption taxes account for only 17 per cent of all tax revenues. This is lower than in most other countries.

In Canada, the figure is 27 per cent, and in the United Kingdom it is 35 per cent.

Another type of excise tax is the license tax. Most Nationals require people to buy licences to engage in certain activities, such as hunting and fishing, operating a motor vehicle, owning a business, and selling alcoholic beverages.

In Canada and Europe the favoured form of consumption taxation is a value-added tax. The seller pays the government a percentage of the value added to goods or services at each stage of production. Tariffs, also called duties or customs duties, are taxes on imported or exported goods. A property tax is a tax on an individual's wealth – the value of all of the person's assets, both financial (such as stocks and bonds) and real (such as houses, cars, and artwork). In the United Nationals, National and local governments generally levy property taxes on buildings – such as homes, office buildings, and factories – and on land.

When a person dies, the property that he or she leaves for others may be subject to tax. An eNational tax is a tax on the deceased person's eNational, which includes everything the person owned at the time of death – money, real eNational, stock, bonds, proceeds from insurance policies, and material possessions. An inheritance tax also taxes the value of the deceased person's eNational, but after the eNational passes to heirs. The inheritors pay the tax. ENational and inheritance taxes are sometimes collectively called death taxes.

A gift tax is a federal tax on transfers of property by gift. Gifts to charitable organizations, schools, churches, government bodies, are exempt. A gift of any amount used to pay medical expenses or tuition at an educational institution is also exempt from taxation.

Ø Comprehension:

1. What types of taxes do governments impose?

2. What taxes are the main sources of funding for various social insurance programmes?

3. What is an individual income tax?

4. What does a person’s income include?

5. Does a payroll tax apply to a person’s income or only to wages and salaries?

6. What is a consumption tax levied on?

7. What gifts are tax-exempt?

Ø Text organization:

The Nationalments below express the main ideas of the text. Number them so that they are in the same order as the ideas in the text. The first one is given for you:

	Nationalment	Order
a.	An individual income tax is a tax on a person’s income.
b.	A consumption tax is levied on sales of goods and services.
c.	Payroll taxes are the main sources of funding for social programmes.
d.	Governments impose many types of taxes.
e.	Tariffs are taxes on imported or exported goods.
f.	Gifts to charitable organizations,schools, churches, government bodies, are tax- exempt.

 

Ø Viewpoint:

Do you think it is fair to impose a tax on gifts?

FOREIGN DIRECT INVESTMENT

Lead-in: Discuss in pairs if foreign investments are favourable for our country. Key words and phrases 1. portfolio investments –портфельні iнвестицiї 2. stocks and bonds –акцiї та облігації 3. direct investment –пряме інвестування 4. to transfer capital –перевести капітал 5. to gain equity –здобувати власний капітал 6. return on investments –прибуток з інвестицій 7. interest rate –процентна ставка 8. assets –актив, засоби

Foreign direct investment may be divided into two components: portfolio investment, which is the purchase of stocks and bonds, and direct investment, by which the investors participate in the management of the firm in addition to receiving a return on their money.

Foreign direct investment (FDI) is a complex form of international business. It involves ownership and control of a company in a foreign country by an organization based in another country.

Contrary to portfolio investments, foreign direct investments mean a long-term commitment where capital funds will be tied up for a long time.

Although a direct investment usually is required by transferring capital from one country to another, capital is not the only contribution made by the investor or the only means of gaining equity. The investment firm may supply technology, personnel and markets in exchange for an investment for an interest in a firm located abroad.

Companies engage in direct investment abroad for the same reasons they pursue international trade: 1. To expand markets by selling abroad. 2. To acquire foreign resources (e.g. raw materials, production efficiency and knowledge).

Financial considerations are also the most important and sometimes decisive factors. What is the expected return on an investment? What are interest rates? What are the sources of working capital?

When governments are involved in direct investment, an additional motive may be to attain some political advantage. One more explanation for a direct investment is that investors perceive a monopoly advantage over similar companies in the countries to which they go. The advantage is due to the ownership of some resource that is unavailable at the same price or terms to the local firm. The resource may be in the form of assets to markets, patents, management skills, or the like.

In many countries there is resistance to foreign direct investment.

Some strategic industries (such as food, computers, nuclear reactors and energy) will find it increasingly difficult to expand abroad. But direct investment is likely to continue its course in many areas. The economic integration of the US, Europe and Japan will stimulate its development. Because of the greater costs of transferring resources abroad and the greater risk of operating in a different environment, the firm will not move unless it expects a higher return than at home.

 

Ø Comprehension:

1. Name two components of foreign direct investment.

2. What is the main difference between portfolio investments and direct investment?

3. Say if the following Nationalment is true or false according to the text: “Financial considerations are one of the most important reasons for investors”.

4. Do investors perceive a monopoly advantage over similar companies in the countries they go to?

5. Why is there resistance to foreign investment in some countries?

 

Ø Summarizing:

Complete the following sentences to summarize the text above:

1. There are two components in foreign ….

2. Foreign direct investment involves ….

3. In case of … investment stocks and bonds are purchased.

4. The main reasons for investment abroad are ….

5. Economic integration of the leading countries of the world … foreign investment.

Ø Viewpoint:

Are there any examples of foreign direct investments in the economy of our region?

 

 

ACCOUNTING AND BOOKKEEPING

Lead-in: Why is accounting so important in any business? Key words and phrases 1. accounting –бухгалтерська справа, облік 2. resource allocation –розподіл ресурсів 3. to lend money –позичати гроші 4. to pay tax –сплачувати податки 5. buy or sell shares –купувати або продавати акції 6. ‘mixed’ economy –змішана економіка 7. profit or loss –прибуток або збиток 8. claims –вимоги, претензії 9. balance sheet –балансовий звіт 10. assets –майно, активи 11. equity –звичайна акція, частка акціонера в капіталі підприємства 12. liabilities –пасиви, зобов’язання 13. taxes and cash flow –податки та приплив капіталу 14. sales and purchases –продаж, збут та купівля 15. receipts and disbursements –грошові надходження та витрати 16. Ledger –головна книга, гросбух 17. expenditures and earnings –витрати та дохід, надходження 18. Trial Balance –пробний баланс

Accounting contains elements of science and art. It is very difficult to find the right definition but we can say that accounting is concerned with the provision of information in financial terms concerning resource allocation, and the preparation of reports in financial terms describing the effects of the past resource allocation decisions.

Examples of resource allocation decisions are: should a bank manager lend money to a firm? How much tax should a company pay? Should an investor buy or sell shares? As you can see, accounting is needed in any society requiring resource allocation and its usefulness is not confined to ‘capitalist’ or ‘ mixed’ economies.

An accountant is concerned with the provision and interpretation of financial information. He does not, as an accountant, make decisions. When accountants are directly involved in decision-making, they perform a different function. Accounting is also concerned with reporting on the effects of the past decisions. Knowledge of the past is relevant only if it can be used to help in making current and future decisions. Although accounting is at least the second oldest profession in the world, it took tax collectors and merchants thousands of years to find a satisfactory general method of keeping a record of their affairs. Any business may be pictured as a box. As the business buys and sells goods or services, the value of the contents of the box can decrease or increase, depending on whether the business makes a profit or loss. These changes in the value of contents must be equalled by changes in the value of claims on contents.

Such a list of contents (on the left) balanced by a list of claims (on the right) constitutes a simple balance sheet. Restating the original theory, with the picture of the business as a box, we can write in accounting terms: ASSETS = EQUITY + LIABILITIES where assets are simply what is held in business, equity is the claim of owners, and liabilities are the claims of third parties. Bookkeepers usually deal with taxes and cash flow, which reflects business transactions of a company, such as sales and purchases, receipts and disbursements.

Bookkeepers first record figures in the books orJournals, which are nowadays computer files. At the end of each period bookkeepers put the totals of each book into the Ledger, which shows all the expenditures and the earnings of the company. On the basis of all the totals of each account in the Ledger, bookkeepers prepare a Trial Balance, which is drawn up every quarter. Is there any difference between bookkeepers and accountants? As we have already said, bookkeepers are specialists who record business transactions and see if both sides of an account book match and accountants are specialists that keep, audit, and inspect the financial records of individuals or businesses and prepare financial and tax reports.

 

Ø Comprehension:

1. What is accounting concerned with?

2. Give some examples of resource allocation decisions.

3. Do accountants make decisions or do they only provide and interpret financial information?

4. What do bookkeepers usually deal with?

5. What is the main difference between bookkeepers and accountants?

 

Ø Text organization:

The Nationalments below express the main ideas of the text. Number them so that they are in the same order as the ideas in the text. The first one is given for you:

	Nationalment	Order
a.	Accounting is concerned with the provision of information in financial terms.
b.	Bookkeepers usually deal with taxes and cash flow.
c.	Accounting is needed in any society requiring resource allocation.
d.	Accountingcontains elements of science and art.

Ø True-false questions:

1. Accountingcontains elements of science and art.	
2. Accounting is needed in any society requiring resource allocation.	
3. Any accountant is involved in the process of decision-making.	
4. Bookkeepers usually deal with taxes and cash flow.	
5. There is no difference between bookkeepers and accountants.	

Ø Viewpoint:

Do you agree that accountancy is equally important for all types of economic systems?