Key components of financial statements

  What are the key components of financial statements?

Assets are defined as future economic benefits owned or controlled by a particular entity as a result of past transactions or events. Assets are things of value used by the business in its operations. Thus, they are the economic resources used in carrying out such activities as production, consumption, and exchange. The common characteristics possessed by all assets is "service potential" or "future economic benefits", that is, the capacity to provide future services or benefits to the entities that use them. In a business enterprise, that service potential or future economic benefit eventually results in cash inflows to the enterprise.

Liabilities are obligations arising from past transactions of the entity to transfer assets or services to other entities or individuals in the future. To put it more simply, liabilities are existing debts and obligations.

Owner's Equity

The assets of a business are supplied or claims by either creditors or owners. Liabilities are creditors' claims whereas owner's ownership claim on total assets is known as owner's equity; it is equal to total assets minus total liabilities. The equity is the owner's claim on the assets of the business.

Capital

Capital is the term used to describe the owner's permanent investment in the business. When an investment is made in the business, capital is increased. It follows that owner's equity increases as well.

Drawings

An owner can withdraw cash or other assets during the accounting period for personal use. These withdrawals could directly decrease capital. However, it is generally considered preferable to use a separate classification referred to as drawings to determine the total withdrawals for the accounting period. Drawings decrease total owner's equity.

Revenues

Revenues are the gross increase in owner's equity resulting from business activities entered into for the purpose of earning income. Revenues result from the sale of merchandise, the performance of service; the rental of property, and the lending of money. Revenues may take the form of an increase in an asset of a decrease in a liability, may arise from different sources, and are identified by various names depending on the nature of the business.

Expenses are the cost of assets or services used in the process of earning revenue. Expenses are the decreases in owner's equity that results from operating the business. Expenses represent actual or expected cash outflows. Expenses take many forms and are identified by various names depending on the type of asset consumed or service used.

 

Notes to the text:

permanent investment - долгосрочная инвестиция, довгострокова інвестиція

actual and expected cash outflow - действительный и ожидаемый отлив наличности, дійсний та очікуваний готівковий відплив

benefits owned or controlled – собственная и контролируемая прибыль, прибуток, яким володіють та контролюють

 

2.Answer the questions:

1. What are the key components that form the content of the financial                                                  statements?

2. What are assets?

3. What are liabilities?

4. What do drawings determine?

5. What are tangible assets?

6. What do intangible assets represent?

7. What do drawings determine?

3.Make up questions of your own to find out as much information as possible about:

1. Expenses

2. Revenues

3. Capital

 

TEXT 1 2

 

1. Read and translate the text:

 

AUDITING AND ACCOUNTS

 

Every year accounts of a limited company must be approved by auditors. They act on behalf of the shareholders. Their duty is to ensure that the directors are reporting correctly on the state of affairs of the company. They do not judge whether the directors are managing the company efficiently or not. That is something the shareholders must judge for themselves.

The Company Secretary is responsible for seeing that the books and records for the period in question are ready for checking. It could make a bad impression if the accounts department was not able to supply immediately any information wanted by the auditors.

What precisely do the auditors check? They have to be satisfied that everything which goes into making up the Profit Statement, the Balance Sheet and the Directors' Report is correct. The Profit Statement (sometimes called a Trading and Profit and Loss Account) shows how the profit for the year is arrived at. It starts with net sales or income, and deducts the cost of materials, work and overhead charges. This leaves a trading surplus, from which charges, such as depreciation on plant and buildings, auditors' fees, and administration and selling costs must be deducted to produce the net profit (or loss). The Balance Sheet is a summarized statement showing the amount of funds employed in the business and the sources from which these funds are derived. On one side is listed the capital employed, which usually consists of the issued share capital (акционерный капитал) plus reserves and retained earnings (нераспределенная прибыль). This starts with the total cost of its fixed assets (land, buildings, and machinery) and any trade investments (interests in other companies), followed by a break down of net current assets (that is, cash and stocks, plus what the firm is owed by its customers, less its liabilities, or what it owes to others). The totals on the two sides of the Balance Sheet must agree; that is, come to the same figure. The total dividend to be paid for the year is a current liability, and is therefore an item in the compilation of net current assets.

One of the most difficult jobs in preparing accounts is stock evaluation; that is, putting a value on all goods in the hands of the company. It may seem easy, as goods could be counted, and then the price paid for them could be checked against the suppliers' invoices. But the value of commodities often fluctuates. Furthermore, much of a company's stock will consist of work in progress or finished stock, and the volume of all stock is changing daily, if not hourly. The rule for stock valuation is that it should be taken at cost price or market price, whichever is the lower.

 

Notes to the text:

the profit statement – отчет о доходах, звіт про прибутки

overhead charges - накладные расходы, накладні витрати

trading surplus - торговые излишки, торговий надлишок

share capital - акционерный капитал, акціонерний капітал

reserved and retained earnings - сохраненная и нераспределенная прибыль, збережений та нерозподілений прибуток

current liabilities – текущие обязательства, короткострокові забов’язання

2.Answer the questions:

1. Whom must year accounts of a limited company be approved by?
2. What is the company secretary responsible for?
3. What do auditors check?
4. What does the profit statement show?
5. What is one of the most difficult jobs in preparing accounts.

TEXT 13

1. Read and translate the text:

SPECIAL TERMS

 

Audit: A review and evaluation of financial records by experts (au­ditors) who check the accuracy of the entries and the procedures fol­lowed by the accountants who originally compiled the records.

Internal Control: A system that includes the plan of organization and all the related methods and measures adopted within a business to safe­guard its assets, check the accuracy and reliability of its accounting date, promote operational efficiency, and encourage adherence to prescribed managerial policies.

Voucher: A business paper indicating receipt of a payment. Vouchers used for internal control include petty cash vouchers, showing payments from small cash funds that most companies keep for sums too small for writing checks, and expense account vouchers for expenses paid by personnel in connection with travel, entertainment, and so on.

Internal Audit: A review and evaluation of company's financial records by employees of the same company.

Standard Operating Procedures: Organization's established methods of carrying out its operating and recording functions.

Independent Audit: An audit performed by someone from outside the organization. Most independent auditors are CPAs (certified public accountants).

Fairness: A term used to describe financial records' state of accuracy, authenticity, and completeness.

Scope Paragraph: A paragraph in a letter sent to a client by an independent auditor upon completion of an audit. It gives the scope, or extent, of the audit and the standards that have been applied.

General Ledger: The financial record in which the accounts that appear on the statements of financial position, owner's equity, and income arc kept.

Field Work: In auditing, the accounting activities of an independent auditor who examines company's records.

Opinion Paragraph: The part of an auditor's letter to his client that gives his opinion, or judgement, on the financial statements.

 

Notes to the text:

related methods and measures – соответствующие методы и меры, пов’язані методи та виміри

petty cash voucher – денежный оправдательный документ на небольшую сумму, грошовий виправдувальний документ на невеличку суму

expense account voucher - оправдательный документ о произведенных расходах, виправдувальний документ о призведених витратах

standard operating procedures – стандартные методы работы, стандартні методи роботи

 

2. Answer the questions:

 

1. What is audit?
2. What is internal control?
3. What is an internal audit?
4. What is an independent audit?
5. What is voucher?
6. What are standard operating procedures?

 

TEXT 14

 

 STANDARDS OF AUDITING

1.Read and translate the text:

These standards are as follows:

  General standards:

ü The examination is to be performed by a person or persons having adequate technical training and proficiency as an auditor.

ü In all matters relating to the assignment, an independence in mental attitude is to be maintained by the auditor or auditors.

ü Due professional care is to be exercised in the performance of the examination and the preparation of the report.

Standards of Field Work

ü The work is to be adequately planned, and assistants, if any, are to be properly supervised.

ü A sufficient understanding of the internal control structure is to be obtained to plan the audit and to determine the nature, timing, and extent of tests to be performed.

ü Sufficient, competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable basis for an opinion regarding the financial statements under examination.

   Standards of Reporting

ü The report shall state whether the financial statements are presented in accordance with generally accepted accounting principles.

ü The report shall identify those circumstances in which such principles have not been consistently observed in the current period in relation to the preceding period.

ü Informative disclosures in the financial statements are to be regarded as reasonably adequate unless otherwise stated in the report.

ü The report shall either contain an expression of opinion regarding the financial statements, taken as a whole, or as an assertion to the effect that an opinion cannot be expressed. When an overall opinion cannot be expressed, the reasons therefore should be stated. In all cases where an auditor’s name is associated with financial statements, the report should contain a clear-cut indication of the character of the auditor’s work and the degree of responsibility, if any, the auditor is taking.

 

Notes to the text:

due professional care – соответствующее профессиональное обслуживание, відповідне професійне обслуговування

adequate technical (academic) training – соответствующая техническая (академическая) подготовка, відповідна технична (академічна) підготовка

2. Answer the following questions:

 

1. What do general standards relate to?
2. What is meant by ‘adequate technical training’?
3. What is meant by ‘adequate academic training’?
4. Why should an auditor be independent?
5. What is meant by ‘due professional care’?
6. What does due care require?

 

TEXT 15

 

1. Read and translate the text:

 

GENERAL STANDARDS

 

  General standards relate to the qualifications of the auditor and the characteristics he or she should possess. General standards require that the auditor be trained and proficient, be independent in fact and appearance, and exhibit due professional care during the audit. These standards are discussed below.

1. The examination is to be performed by a person or persons having adequate technical training and proficiency as an auditor.

Auditors are expected to have adequate academic training in accounting, taxation, auditing, and other areas that relate to their profession. In addition, they should receive further training, both formal and informal, throughout their careers. This standard has several long-range implications for accountants who whish to grow professionally. They should pass the CPA examination. They should stay abreast of current developments in accounting, auditing, and tax matters. In fact, an increasing number of Jurisdictions now require CPAs to engage in continuing education to maintain their right to practice. In addition, firms that join the AICPA’s Division for CPA Firms are required, as previously noted, to provide their employees with a certain amount of continuing education. Finally, the CPA should be willing to acquire technical knowledge in new subject areas.         

To ensure that individuals performing the audit examination have    technical proficiency, firms implement quality control standards.

1. In all matters relating to the assignment, an independence in mental attitude is to be maintained by the auditor or auditors.

The importance of the auditor’s independence is further reflected in Rule 101 of the Code of Professional Conduct which states:

a member in public practice shall be independent in the performance of    professional services as required by standards promulgated by the Council.

Auditors must be independent in both fact and appearance. To be independent in fact, auditors must be intellectually honest; to be recognized as independent, however, they must have no financial interest in the entity they are auditing. Other factors are also important. For example, auditors should not have a close relative in an important position within the entity they are auditing. Because it is impossible to provide rules for every situation in which independence may be an issue, auditors are expected to exercise judgment and use common sense at all times.

Firms implement quality control standards to enhance the independence of their personnel.

1. Due professional care is to be exercised in the performance of the examination and the preparation of the report.

“Due professional care” requires several important things of auditors. First, and most obvious, they should understand what they are doing and why they are doing it. If they are uncertain about any phase of the assignment, it is their responsibility to seek the guidance of their superior. Due care requires that auditors prepare working papers that are both accurate and complete. Working papers prepared in a careless and incomplete fashion bring into question the evidential matter that the auditor has gathered.

That typical audit involves the use of tests and samples. Thus, each item selected for testing must be carefully examined to ensure that due professional care has been followed.

 

Notes to the text:

 

stay abreast of – идти в ногу, не отставать, не відставати

promulgation - распространение, розповсюдження

to seek the guidance - обращаться за рекомендациями, звертатися за рекомендаціями

 

2. Answer the questions:

 

1. What do general standards refer to?

2. What do general standards require?

3. What are general standards?

4. What are auditors expected to have?

5. Why should auditors be independent in the performance of their professional services?

6. Why do firms implement quality control standards?

Speak about:

ü Education of auditors;

ü The importance of auditors independence;

ü ‘Due professional care’.

 

 

LITERATURE

 

1. Дубинина Г.А., Драчинская И.Ф., Английский язык, Практикум для развития навыков профессионально ориентированного речевого общения, Москва: Экзамен, 2002. – 192 с.

2. Латигіна А.Г., “Basic English of Economics”, Київ, 2004. -320с.

3. Gertrude Williams, The Economics of Everyday Life, London,2002.-280 с.

4. V.T. Ushakova, N.M. Sinitsyna, Business English for Economists, Part 3 Questions of Accounting, КНЕУ, Київ, 2004. – 308 с.

5. Л,в, Бедрицкая, Английский для экономистов, «Книжный дом», Минск, 2004. – 236 с.

6. Graham Bannock, Dictionary on Economics, N.Y., 2004. – 540с.

7. Англо-русский экономический словарь, «Русский язык», Москва, 1998. – 875 с.

 

МЕТОДИЧНІ ВКАЗІВКИ

та навчальні завдання для самостійної роботи з

професійно-спрямованими текстами з англійської мови для студентів І,ІІ курсів заочного відділення спеціальності

«Облік і аудит»

 

Укладач:

 

 Ірина Петрівна Вітренко

 

Редактор                    Міквабія Е.Г.

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