Standard accounting practice

 

Publicly-traded companies are required to follow certain accounting rules when presenting financial statements so that the readers of the statements can easily compare different companies. Private companies are also often required by banks and shareholders, for example, to present information according to their specified rules.

Usually, countries practicing civil law system write standards into law and countries with English common law systems have private organizations to set the rules.

Some commonly used accounting standards include:

· Generally accepted accounting principles (United States)

· Generally accepted accounting principles (United Kingdom)

· Chinese Accounting Standards (China)

· International Accounting Standards (international)

The lack of transparent accounting standards in some nations has been cited as increasing the difficulty of doing business in them. In particular. the Asian financial meltdown in the late 1990s has been partially attributed due to the lack of detailed accounting standards.

Giant firms in some Asian countries were able to take advantage of their poorly devised accounting standards to cover up immense debts and losses, which yielded a collective effect that eventually led the whole region into financial crisis.

The accounting scandals of the early 21st century, which affected companies such as Worldcom and Enron, have shown the limitations of accounting standards in the United States.

5. Translate the information above and explain the words and expressions in bold.

6. Provide information on the Generally Accepted Accounting Principles (US & UK), Chinese Accounting Standards, International Accounting Standards.

7. Provide information on the 1990s Asian financial crisis.

8. Provide information on the Worldcom and Enron accounting scandals.

Read the information on the balance sheet.

 

 

Balance sheet

 

In formal bookkeeping and accounting, a balance sheet is a statement of the book value of all of the assets and liabilities (including equity) of a business or other organization or person at a particular date, such as the end of a "fiscal year." It is known as a balance sheet because it reflects an accounting identity: the components of the balance sheet must (by definition) be equal, or in balance; in the most basic formulation, assets must equal liabilities, or assets must equal debt plus equity.

A balance sheet is often described as a "snapshot" of the company's financial condition on a given date. Of the four basic financial statements, the balance sheet is the only statement which applies to a single point in time, instead of a period of time.

A simple business operating entirely in cash could measure its profits by simply withdrawing the entire bank balance at the end of the period, plus any cash in hand. However, real businesses are not paid immediately; they build up inventories of goods to sell and they acquire buildings and equipment. In other words: businesses have assets and so they could not, even if they wanted to, immediately turn these into cash at the end of each period. Real businesses also owe money to suppliers and to tax authorities, and the proprietors do not withdraw all their original capital and profits at the end of each period. In other words businesses also have liabilities.

A modern balance sheet usually has three parts: assets, liabilities and shareholders' equity. The main categories of assets are usually listed first and are followed by the liabilities. The difference between the assets and the liabilities is known as the 'net assets' or the 'net worth' of the company.

The net assets shown by the balance sheet equals the third part of the balance sheet, which is known as the shareholders' equity. Formally, shareholders' equity is part of the company's liabilities: they are funds "owing" to shareholders (after payment of all other liabilities); usually, however, "liabilities" is used in the more restrictive sense of liabilities excluding shareholders' equity. The balance of assets and liabilities (including shareholders' equity) is not a coincidence. Records of the values of each account in the balance sheet are maintained using a system of accounting known as double-entry bookkeeping. In this sense, shareholders' equity by construction must equal assets minus liabilities, and are a residual.

 

Balance sheet structure

 

The following balance sheet structure is just an example. It does not show all possible kinds of assets, equity and liabilities, but it shows the most usual ones. Because it shows Goodwill it could be a consolidated balance sheet.

 

Balance Sheet of XYZ, Ltd. as of 31 December 2010 ASSETS Current Assets Cash and cash equivalentsMarketable SecuritiesAccounts receivableInventoriesPrepaid ExpensesInvestments held for tradingOther current assets Total current assets Fixed assets (Non-Current Assets) Property, plant and equipment Less: Accumulated DepreciationGoodwill Other intangible fixed assetsInvestments in associatesDeferred tax assets Total fixed assetsTotal assets LIABILITIES and EQUITY Current liabilities Accounts payableCurrent income tax liabilitiesCurrent portion of bank loans payableShort-term provisionsOther current liabilities Total current liabilities Long term Liabilities (Fixed Liabilities) Bank loansIssued debt securitiesDeferred tax liabilityProvisionsMinority interest Total long term liabilities Equity Share capitalCapital reservesRevaluation reserveTranslation reserveRetained earnings Total equity Total liabilities and equity

Equity valuation

 

The real value to a purchaser of the business or a shareholder may be different from the net assets shown by the balance sheet. This is because factors that affect the value of a business may not be recorded yet. For example, a purchaser will be interested in the future earnings of the business, whether assets such as property have been revalued recently, and whether there are potential liabilities in the future such as lawsuits. The value of the assets in the balance has also been based on the assumption that the business is a going concern, otherwise the break-up value of the assets may be far less than the value in the balance sheet.

 

10. Translate and explain the words and expressions in bold.

11. Do sight translation of the information.

12. Read the following information.