What financial components does the balance sheet contain?

Обязательствами

 

STARTER АСTIVITIES

TASK 1. Read the passage through quickly. Then answer the questions:

7. Why is the balance sheet considered to be a "still financial picture" of a business?

What financial components does the balance sheet contain?

The balance sheet and the profit and loss statements are considered to be the two most important financial statements. The difference between the two is explained by comparing the balance sheet to a "still picture" while the profit and

loss statement is regarded as a "moving picture". The balance sheet presents a financial picture of the business (its assets, liabilities, and ownership) on a given date. It is usually prepared as of the close of the last day of a month and answers the question how the business stood financially at that time. The profit and loss statement (also called the income statement) measures costs and expenses against sales revenues over a definite period of time, such as a month or a year, to show the net profit or loss of the business for the entire period.

 

VOCABULARY FOCUS

TASK 1. Match the English phrases with the Russian ones. Make up sentences with the English word-combinations.

 

 

1) notes receivable

2) accounts receivable

3) inventory

4) equipment

5) securities

6) convert

7) supply

8) claims

9) fixtures

a) принадлежности

b) ценные бумаги

c) требование, претензия, иск, рекламация

d) векселя полученные, векселя к получению

e) запасы, сырье и материалы

j) конвертировать, обменивать, обращать

g) счета к получению, дебиторская задолженность

h) оборудование,

i) запас, резерв, инвентаризация, опись

TASK 2. Read the following words and word combinations and their definitions. Give their Russian equivalents and try to remember them.

 

Balance: amount to be put in one of the columns of an account to take the total debits and credits equal.

Balance sheet: statement of the financial position of a company at a particular time, such as the end of the financial year or the end of a quarter, showing the company's assets and liabilities. The balance sheet shows the state of the company's finances at the certain date. The profit

 

and loss account shows the movements, which have taken place since the last balance sheet.

Book value: value of an asset as recorded in the company's balance sheet.

Capital assets or fixed assets: property or machinery which a company owns and uses, but which the company does not buy or sell as part of its

regular trade.

Current assets: assets used by a company in its ordinary work (such as materials, finished goods, cash, and monies due).

Goodwill: good reputation of a business, which can be calculated as part of a company's asset value, though separate from its tangible asset value (the goodwill can include the trading reputation, the patents, the trade names used, the value of a "good site", etc., and is very difficult to establish accurately).

Inventory: The sum of tangible property held for sale, in production, or held for use in the production of goods or services to be sold. The term inventory is also used for the process of determining the number of the various items on hand in the inventory.

Intangible assets: assets which have a value, but which cannot be seen (such as goodwill, or a patent, or a trademark).

Overdraft: amount of money which a company or person can withdraw from a bank account with the bank's permission, and which is more than there is in the account.

Profit and loss statement or income statement: accounts for a company, which shows expenditure and sales, balanced to give a final profit or loss.

Share: one of many equal parts into which a company's capital is divided (the owners of shares are shareholders or, more formally, "members".

Share premium: amount to be paid above the nominal value of a share in order to buy it.

Tangible assets: assets, which are solid (such as furniture, jewels or cash). Working capital: capital in cash and stocks needed for a company to be needed to work.

 

TASK 3. Choose the appropriate word to fill in the blanks.

The balance sheet is a statement of what a company owns (its____1____) and what it owes (its____2____) at a particular time. It____3____of three major sections: assets, liabilities and____4____.

These three sections are arranged____5____from country to country. In the USA and many European countries, the assets_6_on the left-hand side of____7___and the liabilities on the right. In England, the three sections

mentioned above are___8____vertically.

 

Equity consists differently arranged The page assets appear liabilities

 

 

TASK 4. Match the words with the correct meanings. Use them to speak
about company's assets.
1) amount	a) to form, to order, to organize
2) arrange	b) what a company owns
3) assets	c) to make a total of
4) breakdown	d) cost
5) defer	e) to split into
6) enter into	f) pay back
7) liabilities Щ	g) what a company owes
8) outstanding payment	h) to postpone
9) pay off	i) to lower
10) reduce	j) to write information into account ledger
11) valuation	k) not yet paid or completed, obligatory to
	pay in the future

 

 

TASK 5. Make up word-combinations, using the words from the left and
right hand columns. Use them in sentences of your own.
1) profit and loss	a) figures
2) to present	b) financially
3) on a given	c) statement
4) to stand	d) date
5) entire	e) costs and expenses
6) to measure	f) by side
7) side	g) against the assets
8) the claims	h) period

 

 

TASK 6. Choose the best definition of the following word combinations.

Opening inventory

a) the value of raw materials, components, spare parts, work in progress and fuel at the beginning of an accounting period;

b) all the supplies, goods and raw materials that are used to set up a business;

c) unsold goods left over from previous financial years;

d) the value of raw materials, components, spare parts, finished products, work in progress and ftiel at the beginning of an accounting period.

 

Factory overheads

a) cost of fuel, raw materials and components;

b) other costs not directly connected with production;

c) costs of water, electricity and fuel used in factory buildings;

d) depreciation on all machinery, equipment and stock;

e) a)+c)

f) costs of transport from the factory;

g) b)+c)+d)

Interest costs

costs of

a) marketing;

b) sales;

c) advertising;

d) borrowing.

 

Cost of sales

a) cost of making a product;

b) business costs, which do not rise with the quantity of the product made;

c) cost of hourly paid worker employed to make a product;

d) all the costs of the product sold, including manufacturing costs and the staff costs of the production department.

 

TASK 7. Build new words with the help of the prefix ` re-`.Give their Russian translation. Make up sentences of your own with the English words.

payment present

adjust

mark

value

arrange

act

build
call

conceal

consider

cover

cord

creation

fine

comment

TASK 8. Match antonyms.

a) outstanding payments

b) wealth

c) fixed assets

d) appear

e) intangible assets

f) retain

a) tangible assets

b) current assets

c) distribute

d) poverty

e) disappear

f) paid off

TASK 9. Write down the expressions with the terms" assets”, "account", "liabilities. Find new ones using a dictionary. Translate them and use in sentences.

Cash receivables

 

Assets LIADILITIES

Business

1. Red and Co

2. Black and Co

3. Green and Co

4. Blue and Co
Capital $

10,000

 

12,000

Liabilities $

5,000

16,000

 

60,000

Assets $

30,000

37,000

50,000

 

The fourth calculation is sure to present a problem and requires a little more thought. The business concerned has been so unsuccessful that its assets are not sufficient to pay off all its liabilities. Thus if the assets were sold for $50,000 some of the creditors of the business would not receive the money that was due to them. $10,000 would be left unpaid and the owner of the business would be responsible for meeting these extra debts himself. The 'negative' capital is called a deficiency of capital. A firm which has liabilities greater than its assets is said to be insolvent. Naturally this sort of position would not be allowed to continue for very long. The firm becomes bankrupt.

TASK 1. A. Find in the text sentences with the following words and word combinations and translate them. B. Use this vocabulary in sentences of your own. Ask your partner about financial items you find on a balance sheet statement.

1) to make an equivalent amount;

2) resources for use;

3) to relate to;

4) to obtain smth. from smb.;

5) to contain smth.;

6) to show smth. as;

7) to list smth.;

8) to supply resources;

9) side by side;

10) to represent the claims;

11) to oppose to smth.;

12) to relate to.

 

 

LISTENING

TASK 1. Listen to the dialogue and say what troubles the Managing Director of Proteus Group PLC which produces electrical equipment for street lightning, public buildings and sports studiums. (F.Radice, J. Elliott. English for Accountancy. Unit I.

 

TASK 2. Listen to the conversation between the managing director of Proteus explaining the situation to the new accountant and fill in the table (the points discussed about the financial picture of the company between the managing director and the accountant).

name	location	quoted on	turnover	net profit	gross margin

 

 

TASK 5. Agree or disagree.

1. It is impossible to have an increase in turnover when profits usually rise.

2. Subsidiary is money paid by the government to help a company or industry.

3. Overall gross profit is the income of a business after the deduction of all the production costs (e.g. raw materials, fuel, finished and unfinished goods in store, overheads, factory and direct labour costs).

4. The Managing Director noticed with alarm that his gross margin has fallen.

5. He was pleased with the quality of his main product.

6. He has increased turnover despite increasing the price of his main product.

7. His overall gross profit has increased to 29%.

 

WRITING

2.000 2,000

9 May Negotiated a loan of $500 with his bank manager which was paid into his bank account.

10 May Purchased a motor vehicle for $34,000 from Mercedes. He paid 15,000 by cheque and agreed to pay the balance within 4 months.

11 May Withdrew $ 150 from the bank for use as cash.

12 May Purchased $450 worth of fixtures, paying for them by cheque.

13 May On his first day of selling he received $1,350 cash for the sale of computers.

 

 

GRAMMAR PAGE

 

CASE STUDY

TEST YOURSELF

UNIT 2

The Income Statements

 

Objectives:

After studying this Unit you should be able to:

• Give the definition of the profit and loss statement

• Analyze its structure

• Understand and explain different presentations of the income statement

• Make up a profit and loss statement

Vocabulary

adequate ad удовлетворительный, достаточный

adjustment n регулирование, приспособление, установка, пригонка

bad debt expenses затраты на безнадежные долги

beginning/ending inventory начальные/конечные товарно-материальные запасы

(в начале/конце периода)

complete v заканчивать, завершать, комплектовать

compliance, in compliance согласие, в соответствии

cost of goods manufactured стоимость производства товаров

cost of goods sold себестоимость реализованной продукции

create v создавать, творить, производить

decision-making принятие решения

depreciation expense амортизационные расходы

direct labour прямые (непосредственные) трудовые ресурсы

earmark v клеймить, откладывать, предназначать

 

evaluate v	оценивать, определять количество, выражать в цифрах
exceed v	превышать, переходить границы, превосходить
factory overhead	общезаводские накладные расходы
formal ad	официальный, номинальный, правильный
general expenses	общие расходы
go on v	продолжать, идти дальше
gross margin/profit/income	валовая прибыль, брутто-прибыль
insurance agency	страховое агентство
inventory n	запасы, резерв, инвентаризация, опись
markup n	торговая надбавка
miscellaneous	разное (о статье в балансе)
net profit before /after tax	прибыль перед/после уплаты государственного подоходного налога
net sales	выручка от реализации продукции, чистый объем продаж
omit v	пропускать, не включать, пренебрегать
operating expenses	эксплуатационные расходы
other manufacturing overhead	другие производственные накладные расходы
out of date	устаревший
owner's net worth account	счет собственного капитала
performance n	выполнение, исполнение, работа, производительность, результат деятельности
pro forma targets	цели, поставленные при определенных обстоятельствах
purchases n	приобретения
remainder n	напоминание
retained profit	нераспределенная прибыль
return on investment	возврат на инвестиции
sales returns and allowances	резерв на покрытие возвратов проданного
selling and administrative expenses	торговые и управленческие расходы
set n	набор
simplify v	упрощать
stockouts n	дефицит
target = goal n	цель
taxation authority	налоговое управление
utilities n	акции, облигации

STARTER ACTIVITIES

TASK 1. Read the passage through quickly. Then answer the questions:

1. When is a business considered to operate with profit?

2. What does a business need to manufacture goods or produce services?

When a business operates, resources are used up to produce products or services, which are sold to customers. There are four sets of resources: people's skills, services, materials and facilities, to create products or services which customers need.

The value of the products or services sold is the sales figure, the cost of the resources used up is the costs figure. The business is operating profitably, if sales exceed costs and wealth is created.

The profit and loss account, also known as the income statement, summarises the profitability of the company by balancing revenue against expenses.

Revenue (sometimes called turnover) represents any increase in the owner's equity resulting from the operation of the business. Expenses are costs incurred in connection with the earning of revenue.

 

Revenue (turnover)

a) total value of production in one year;

b) complete change of production methods;

c) total value of sales in period of time;

d) change from making a big loss to making a profit

 

Gross margin

a) the difference between selling price and cost of manufacture, minus factory overheads;

b) a large-scale production method used in some countries;

c) the same as gross profit;

d) the total value of goods remaining unsold at the end of the year

 

Overall gross profit

a) money remaining after all costs including tax have been deducted;

b) same as net profit;

c) same as gross profit;

d) excess profit over previously estimated figure

Sales

a) act of selling;

b) money received for selling smth.;

c) offering smth. for sale;

d) examining the repots to see why items have or not sold well costs

a) money paid for doing smth. in the course of business, but not for manufacturing a product or for purchasing stock;

b) amounts of money spent;

c) amount of money which has to be paid for something;

d) money spent

Expenses

a) money paid for doing smth. in the course of business, but not for manufacturing a product or for purchasing stock;

b) amounts of money spent;

c) amount of money which has to be paid for something;

d) money used by a company, provided by shareholders

Expenditure

a) money paid for doing smth.in the course of business, but not for manufacturing a product or for purchasing stock;

b) amounts of money spent;

c) amount of money which has to be paid for something;

d) money used by a company, provided by shareholders

 

VOCABULARY FOCUS

TASK 1. Match the phrase on the left with the definition on the right.

	1)profit	a)	the difference between sales revenue and the costs of the
			goods which were sold
	2)gross profit	b)	the final profit after adding any other revenues and
			deducting any other expenses
3)	net profit	c)	total value of production in one year
4)	turnover	d)	same as gross profit
5)	overall gross	e)	the difference between the revenue earned by a business
	profit		and the expenses consumed in earning that revenue

 

TASK 2. Give your versions to finish the sentences below.

1. Auditors are supposed to make sure that companies follow their stated____.

2. Companies can choose from a variety of ___but they are not allowed to change them too often.

3. Lots of money obtained in dubious or illegal ways is deposited in __

____in Swiss banks.

4. The basic ____is Assets = Liabilities + Owners' Equity.

5. The ____at the London Stock Exchange usually lasts two weeks. It is

followed by an ____on which all bills must be settled.

6. The ______ is one of the three basic financial statements.

 

 

7. ___ consist of money that is expected to be received. The contrary,___consist of money that is owed to other people.

8. The role of____is to provide figures and statements that will aid decision-making.

 

TASK. 3. Classify the words in the box into four groups, according to the headings below.

Accounts payable	Net profit	Amortization	Posting
Annuity system	Prudence	Below the line	Reducing balance
Income-statement	Reserves	Deferred	Straight line
		liabilities	method
Double-entry	Separate-entry	Going-concern	Scrap value
Consistency	Trial balance	Journal	Unit-of-measure
Ledger	Writing off	Matching	Voucher
Bookkeeping	Accounting Principles	Depreciation	Financial Statements

 

 

READING AND DISCUSSION

TASK 1. Read the text and write out the main items of the profit and loss statement mentioned in it Answer the questions:

1. What is the difference between the income statements of trade and service firms?

2 What is the difference between the terms `costs<sup>`</sup> and 'expenses?

3. How are usually income and expense statements prepared?

 

 

THE INCOME STATEMENT

 

The profit and loss (income) statement should really be called the income and expense statement because it shows both of these categories for a period of time. These statements are always prepared as formal statements for a whole year; many firms prepare them monthly, quarterly, or even weekly.

 

 

The income statement is necessary for the decision-making process because it tells the owner how the business is meeting its income and expense goals. The analysis of how the firm is operating makes it possible to take adjustments by reducing expenses or increasing income. And business income begins with sales.

The profit and loss account is basically a statement of sales and costs. A firm cannot survive without income from the sale of the products or services it is in business to provide. The most attractive product in the world is of no value to the firm unless someone pays for it. Once this money is brought into the business, the gross margin (gross profit) can be calculated by subtracting the cost of the goods sold from sales income. The lowest possible output at which a business can operate without loosing money and without getting profit is called the break-even point.

There isn't a standardized profit and loss account for managers in all types of business. The content will entirely depend on what is felt to be both useful to the reader and economical to produce. And they will be often different prepared for external publication and for taxation authorities or for management. The basis for the first two purposes is compliance with the appropriate legal requirements.

The profit and loss statement for firms that sell a product from inventory can be prepared using the following five basic steps:

 

Step 1. List the sales income (revenues) received.

Step 2. Subtract the cost of goods sold.

Step 3. The result is the gross margin.

Step 4. Subtract the operating expenses.

Step 5.The result is the net profit for the period measured.

The costs of the goods sold are deducted from the sales value of the goods sold to produce the gross profit. The gross profit is reduced by the cost of running administration, marketing and other departments to produce the net profit before tax. The account then goes on to show how much of the net profit before tax is earmarked for taxation obligations; how much of the net profit after tax is for the shareholders by way of dividends; the remainder being retained in the business as an additional source of finance.

 

The income statement for service firms such as banks, laundries, insurance agencies, ticket agents, hair stylists, and repair services that do not sell products from inventory usually does not include Step 2 above. Instead of it, the formula is:

Step 1.List the sales income (revenues) received.

Step 2. Subtract the operating expenses.

Step 3. The result is the net profit for the period measured.

Without inventory to sell the cost of goods entry is omitted and operating expense is subtracted from sales income to produce a net profit figure.

To prepare the profit and loss statement, all the accounts that record income and expenses are summarized for the fiscal period being studied. When the formal income statement is prepared, the accounts are closed as of the date of the statement, and the resulting profit and loss is then transferred to the owner's net worth account on the balance sheet.

The income statement is truly a valuable document when a manager is deciding how to improve his business income or reduce expenses. He should consider the following questions:

 

1. Is the business markup high or low compared to that of successful firms in the same business?

2. Is the cost of goods sold high or low?

3. Is the inventory adequate for the volume of sales?

4. Were sales lost because of stockouts (not having products customers wanted)?

5. Is the inventory on hand still salable, or is it out of date?

6. Are the firm's operating costs similar to those of efficient firms selling the same products?

These or other important questions can be answered by comparing the firm's operations to the operations of similar businesses.

 

COMPREHENSION

FURTHER SPEECH PRACTICE

PLANNING FOR CASH FLOW

Cash flow can be used not only to determine how cash can flow though the business but also as an aid to determine the excess or shortage of cash. Suppose your analysis of cash flow forecasts a potential cash deficiency. You may then do a number of things, such as:

• increase borrowings: loans, stock issuance, etc.

• reduce current asset accounts: reduce receivables, inventory, etc.

• reduce non-current assets: postpone expanding the facility, sell off some fixed assets, etc.

By using a cash flow statement you can determine if sufficient funds are available from financing activities, show funds generated from all sources, and show how these funds were applied. Using and adjusting the information gained from this cash flow analysis will help you to know in advance if there will be enough cash to pay:

• suppliers' bills

• bank loans

• interest

• Dividends.

Careful planning will insure a sufficient amount of cash to meet future obligations on schedule which is essential for the "successful" business.

 

 

TASK 7. Translate from Russian into English.

По требованию наличных средств бухгалтер может помочь определить количество наличных, необходимых для работы фирмы в течение определенного периода времени, например: на три месяца, на шесть или год.

Бухгалтер выясняет, сколько наличных потребуется для того, чтобы оплатить дебиторские счета, пополнить запасы, оплатить текущие расходы, купить оборудование и выплатить ссуды. К тому же бухгалтер может определить, сколько наличных придет от поступления счетов к получению и сколько средств следует занять.

Разрабатывая требование наличных, бухгалтер может заметить и обратить ваше внимание (to call attention) на опасные места на предприятии, такие как просроченные счета. Например, одна из фирм позволила покупателю отложить выплату 25000 долларов. Когда он разорился, фирма потеряла 22000 долларов - почти всю свою годовую прибыль.

В дополнение к анализу отчета о прибылях и убытках и указанию на места, которые требуют контроля, бухгалтер может дать рекомендации по требованию наличных средств, по бюджетному прогнозу, кредитам, организации предприятия и налогам.

 

LISTENING

 

CASE STUDY

GRAMMAR FOCUS

TEST YOURSELF

 

Vocabulary

acid test /liquid ratio	коэффициент быстроты покрытия ликвидными активами, коэффициент ликвидности, отношение ликвидности фирмы к сумме долговых обязательств
allocate v	ассигновать; назначать (to); размещать, локализовать; располагать в определенном месте
appreciation n	оценка
assess v	оценивать
assessment n	оценка, определение ценности, определение стоимости
attempt v	пытаться, стараться, стремиться, прилагать усилия, пробовать, делать попытку

 

 

Centre for Interfirm Comparison	Цетр Межфирменного сравнительного анализа
clue n	ключ к разгадке чего-либо;
comparison n	сличение, сопоставление, сравнение
compile v	выбирать информацию, собирать материал (из разных источников), составлять
comply v	делать уступки, выполнять, осуществлять, исполнять (просьбу, приказание и т.д.)
crunch v	кризисная ситуация
current ratio	коэффициент ликвидности, коэффициент покрытия (в анализе баланса)
debentures n	1) долговое обязательство, долговая расписка
- debenture bond - debenture stock	2) облигация акционерного общества, компании
debtor collection period	период инкассации; период погашения покупательской задолженности (при продаже товаров в кредит); срок между предъявлением счета и его оплатой должником
designate v	указывать, обозначать; показывать; определять
disguise v	искажать; представлять в ложном свете (о фактах, событиях, информации и т.д.), утаивать, скрывать (with)
dividend yield	доходность акции (отношение суммы дивидендов по акции за год к ее текущей рыночной стоимости)
efficiency n	производительность
gearing = leverage n	использование кредита для каких-либо финансовых сделок
grasp n	способность быстрого восприятия; понимание
gross profit margin	минимум, нижняя грань валовой прибыли
highlight v	выделять, отводить главное место; выдвигать на первый план

 

 

interest cover	обеспеченность процентов, обеспечение выплаты процентов
jot down v	кратко записать; бегло набросать
liquidity n	ликвидность
make sense of	иметь смысл
margin n	минимально допустимый или необходимый запас, резерв (времени, денег, средств и т. п.)
mark-up on cost	повышение цены (на товар),) надбавка к издержкам; наценка
net profit margin	минимум, нижняя грань чистой прибыли
outdated	устаревший
overall performance	1) общая характеристика 2) общий результат деятельности (фирм) или работы (предприятий), эффективность работы
overdraft n	превышение кредита
performance n	исполнение, выполнение; свершение
productivity n	продуктивность
profitability n	доходность, рентабельность
ratio n	отношение, пропорция; коэффициент
retained profit	нераспределенные прибыли
return on capital employed	доход на используемый капитал; прибыль на используемый капитал прибыль на собственный акционерный капитал; доходность капитала (акционеров)
split into v	разбивать на части
stock turnover	оборот акций; движение запасов
Syn: inventory turnover, merchandise turnover	оборачиваемость товарных запасов
tackle on v	пытаться переубедить
turnover n	оборот
vulnerability n	1) уязвимость 2) слабые места в системе

 

STARTER ACTIVITIES

So far we have concentrated on the mechanics of accounting — the way in which accounts are prepared and presented.

It is vital that the information contained in accounts is understood and used. There is little point in preparing them otherwise. We will consider the various groups of people who may use a company's accounts and the tools of analysis used to help them make sense of the figures in those accounts. It is very important to show how accounts are used in the business world and to understand what they mean.

Two ratios of financial statements, the balance sheet and the profit-and-loss statement, are necessary - and useful. But they are only a start toward understanding where you stand, where you 're going, and how you 're going to get there. If you are to get your money's worth out of them, you should study various relations between some figures they present.

Group Areas of interest

Employees Profitability - as basis for wage bargaining; it also may be of interest for job security.

Efficiency and productivity — the figures reflect employees efforts.'. Liquidity — can the company meet its debts and therefore are our jobs secure?

Shareholders Level of profits and dividend - has the company made sufficient profits to maintain or increase the dividend? Is the dividend a sufficient return for the shareholders' investment? Liquidity - has the company sufficient cash to pay the proposed dividend ?

Management Everything, because the accounts reflect the performance of the management during the year. Specifically, the accounts may highlight areas of weakness in the company, which the management will need to tackle.

Registrar of Companies

Do the accounts comply with the Companies Acts? They are then filed and available for anyone to see them, e.g. journalists, credit agency, the police, an accountancy student etc.

Long-term lenders, e.g. banks, debenture holders

Accounts are often used to assess whether or not a loan should be given in the first place. They are then used to see if the loan should be continued. Areas looked at are: Profitability - does the profit performance mean that the company will continue trading? Liquidity -does it have the cash to pay interest and make loan repayments? Assets — what assets are available as security for loans, debentures, overdrafts?

Trade and expense

Liquidity - what current assets are available to meet current liabilities? creditors What do the current assets consist of? Will they realise their balance

sheet values?

Potential investors

As for shareholders (but with the question) - is this company worth and their advisers investing in?

Lots of people can benefit from the preparation of a company's accounts if they can understand them.

The accountant needs the ability to assess whether a given ratio is good or bad. An aid to this is the use of comparisons. These may be of two types:

(a) Internal - comparisons with previous results of the business, or with expected results.

(b) External - comparisons with other businesses, particularly those in similar types of business.

 

VOCABULARY FOCUS

 

Fig. 1. Table of ratios

Ratio	Method of calculation
Overall performance
1. Return on capital employed (%)	Net profit before tax and interest x 100
	Capita! employed
2. Return on owners' equity (%)	Net profit after tax x 100
	Owners' equity
Profitability
	Gross profit x 100
3. (a) Gross profit margin (%)	Sales
(b)Mark-up on cost (%)	Gross profit x 100
	Cost of goods sold
4. Net profit margin (%)	Net profit x 100
	Sales
Productivity	Sales
5. Sales per employee ($)	Number of employees
	Sales
6. Assets turnover (times)	Total assets- Current liabilities
	Cost of goods sold
7. Stock turnover (times)	Average stock
	Sales

8. (a) Debtor turnover (times) Debtors (b) Debtor calculation period (days) Debtors Liquidity Average sales per day 9. Current ratio Current assets: Current liabilities 10. Acid test or liquid ratio Current assets - Stock: Current liabilities Investment 11. Dividend yield (%) Gross dividend per share x 100Market price per share Capital structure 12. Gearing ratio (%) Long-term loans x 100Capital employed 13. Interest cover (times) Profit before interest charge Interest charge

 

READING AND DISCUSSION

Positive Average Negative

________ ________ ________

________ ________ ________

________ ________ ________

________ ________ ________

________ ________ ________

REVIEW OF ACCOUNTING RATIOS

Overall performance ratio

1. Return on capital employed (ROCE). This is the кeУ (отношение, коэффициент) as it relates the profit earned to (количество) of long-term capital invested in the business. (Рабочий капитал) in this calculation means (собственный капитал) plus any (долгосрочные обязательства).

 

 

2. Return on owners' equity. This gives the (фактический возврат) to the shareholders only, as (выплата процентов) to long-term lenders has been (вычитается).

What should these ratios be? It is difficult to give a set figure but they could (соотноситься) to (возможный возврат) from investment with a bank or building society.

 

Profitability ratios

a) gross profit margin	b) overall	c) profitability	d) sales
e) the cost of goods	f) in order to	g) reduction	h) a fall
i) assessing	j) profit	k) percentages	1) ratios

 

Here you are___1___the amount of___2___that has been or can be made on___3___The other factor in determining___4___profit will be volume of sales

- the productivity of the business.

 

____5___ /mark-up. These ratios are used to analyse the trading___6___of the business. They are very similar__7__which express the cost + gross profit = sales relationship in different ways.

Acceptable gross profit_8_vary from one type of business to another as can be seen from the survey examples.

 

Cash trade classification	Mark-up on cost (%)	Gross profit on sales (%)
Antique dealer
Bakers
Builders' merchants
Builders' and decorators
Butchers
Coal merchants
Confectioners and tobacconists
Chemists
Cycle and motorcycle dealers
Dentists
Driving instructors
Fish and chip shops
Florists
Footwear retailers
Grocers
Greengrocers
Jobbing plumbers
Milk retailers
Off licences
Opticians
Public houses
Restaurants
Radio and electrical retailers

As the ratios are based o n ___ 9 __, labour intensive businesses such as plumbers and driving instructors will have much higher gross profit margins.

___10___below expectations may be the result of number of factors such as:

• ___11___in selling prices

• poor buying

• poor stock control

All these are areas, which the management could look into _12

improve the performance of the business.

 

Case study 2. A business finds that its gross profit percentage has fallen from 25% to 22% in the current year. Define which of the following factors might have accounted for the decrease.

(a) fewer items had been purchased during the year;

(b) selling price were reduced during the year;

(c) pilferage of stock was high;

(d) fewer items were sold during the year;

(e) increased costs of purchases which were not passed on in selling price.

Productivity ratios

This is the other factor, which determines overall profit. It can be regarded as the level of sales obtained from the assets employed by the business - obviously the higher this is the better from the viewpoint of the business.

Sales per employee is used to measure the productivity of the employee of the business. The effective use of labour is one of the key tasks of the management of the business, so this is an important ratio. It is also relevant to employees as it does reflect their efforts during the accounting period.

Assets turnover expresses the number of times the value of assets utilised by the business have been covered by sales.

Stock turnover is an important measure of the effective use of stock by the business. The adequacy of the ratio will depend upon the type of industry. For example, a supermarket is likely to turn over or sell its stock much more quickly than an engineering company carrying a wide range of components. If the turnover is declining them the reasons should be investigated. Possible factors would include:

 

• a lager amount of slow-moving or obsolete stock

• higher levels of stocks being held

• lack of control over purchasing

• a wider range of products being stocked

Note that the average stock is usually calculated as the total of the opening stock plus the closing stock divided by two.

Debtor turnover/debtor collection period assess the speed with which a business collects amounts owing from customers. The higher the turnover rate or the lower the collection period the more effective is this control of credit. The average day's sales is usually calculated by dividing sales by 365, the number of days in the year. Most firms operate on a normal credit period to customers of thirty days. An acceptable debtor collection period might therefore be something like fifty days. Very high collection periods would indicate that the credit control system needs to be improved and that either incentive should be given to customers or effective sanctions applied against slow payers.

 

St year 2nd year

(a) Sales per employee $3,500 $5,000

(b) Asset turnover 4Times 3,9times

(c) Stock turnover 12 times 13,2 times

(d) Debtor Collection period 64 days 62 days

 

Liquidity ratio

Способность предприятия оплатить свои долги текущими резервами показывают два коэффициента.

Коэффициент ликвидности показывает отношение всех оборотных активов к краткосрочным обязательствам и указывает на то, может ли

 

предприятие выполнить свои обязательства. Для нормальной работы предприятия требуется отношение 1,8: 1. Более высокий коэффициент предполагает вложение слишком больших средств в оборотные активы, в то время как низкий коэффициент является показателем опасности банкротства в случае необходимости быстрого платежа.

Запасы исключаются из оборотных активов для определения коэффициента срочной ликвидности. Это необходимо, так как на некоторых предприятиях продажа запасов может занять продолжительное время. Приемлемым является отношение 0,8:1.

 

 

Investment ratio

The shareholder or prospective investor will be very interested in the return he is obtaining from his purchase of shares in a business. This is calculated by dividend yield. This relates the income from shares, the dividend, to the value of the investment in the business. Consequently, the result can be compared with interest rates from other types of investment. Another factor, which would also be considered, would be any increase in share price as this represents a capital gain to the shareholder.

 

Capital structure ratio

The long-term finance of a business will be provided by its shareholders and long-term lenders.

Gearing ratio is an assessment of the extent to which a firm is financed by long-term loans. It is a very important ratio for prospective lenders as many like to

 

see the owners/shareholders providing at least half the overall capital of a business. They may not be prepared to lend if further lending would push the gearing ratio too high.

An important factor affecting lending decisions is the ability of a business to satisfactory meet its interest payments. If the gearing ratio is very high, a business will have large interest costs to meet out of its profits. Interest cover ratio indicates the level of cover, which the business has achieved.

If the gearing ratio becomes too high or if interest rates rise and the interest cover reduces, the business must look at ways to improve the situation. Two of the methods used are:

• to raise more shareholders' funds by issuing shares and perhaps using some of this cash to repay loans;

• selling fixed assets and using the proceeds to repay loans.

A particular interest group will be most concerned with specific aspects of the accounts and will therefore use the ratios relevant to those aspects (not all of these ratios would be used by everyone examining a set of accounts).

 

Case study 5. We must now have a look at the actual calculation of the ratios and start to see the way in which they can be interpreted. To do this we shall analyse the accounts of Newby Stores Ltd., from the viewpoint of John Slate as managing director.

Current liabilities

Creditors 29,000 45,000

Bank overdraft 4,000 -------

 

Case study 7. From the information below identify the main features of the company's performance over the period given with particular reference to 1999.

 

Computer Services Ltd. was formed in 1995 to manufacture and sell a small business computer. Until 1999 the company expanded rather rapidly and was very successful. However in 1999 the combined impact of technical change and very heavy competition from the market leaders resulted in a slowdown in the company's rate of growth and severe financial problems. The company's main ratios from 1995 to 1999 were as follows.

ROCE (%)	55.5
Cross profit margin (%)
Net profit margin (%)					0.3
Stock turnover (times)
Debtor collection period (days)		36
Current ratio (:1)	5.1	4.8	2.6	2.7	1.4
Acid test ratio (:1)	3.9	3.5	1.7	1.9	0.9

 

 

REFERENCE MATERIALS

1. Bright G., Herbert M. Mastering Accounting. Malaysia, 1990.

2. Costinett S.-The Language of Accounting in English. Essex, 1998.

3. Robson A.P. Essential Accounting for Managers. London: Cassell, 1997.

4. Wood F. Business Accounting. Moscow, Askeri, 1991.

5. Spurga R.C. Balance sheet basics. New York-London-Toronto-Sydney,1986.

6. Weaver M. Accounting. Oxford-Boston-Johannesburg-Melbourae-New Delhi-Singapore, 1997.

7. Willis D. Collins Cobuild Student's Grammar. The University of Birmingham, 1991.

8. Kenzie J.M. Financial English. Lund, LTP,1995.

9. Maclin A. Reference Guide to English.A Handbook of English as a Second Language. Washington: D. C, 1996.

10. New Webster's Dictionary of the English Language. Delhi, 1989.

Обязательствами

 

STARTER АСTIVITIES

TASK 1. Read the passage through quickly. Then answer the questions:

7. Why is the balance sheet considered to be a "still financial picture" of a business?

What financial components does the balance sheet contain?

The balance sheet and the profit and loss statements are considered to be the two most important financial statements. The difference between the two is explained by comparing the balance sheet to a "still picture" while the profit and

loss statement is regarded as a "moving picture". The balance sheet presents a financial picture of the business (its assets, liabilities, and ownership) on a given date. It is usually prepared as of the close of the last day of a month and answers the question how the business stood financially at that time. The profit and loss statement (also called the income statement) measures costs and expenses against sales revenues over a definite period of time, such as a month or a year, to show the net profit or loss of the business for the entir