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UNIT 8. Accounting.

Introduction

TEXT A.

This short text comes from the annual report made by the directors of a company to its shareholders (i.e. people who hold a share in the company's capital and take a share of the profits).
To sum up, your company has enjoyed a successful year's trading. Profit before tax has risen over last year, despite adverse trade conditions. Company finances remain in a strong position, and there are adequate liquid funds to cover all future planned capital expenditure. Operating costs have risen less than expected.
The improvement in profits is expected to continue into 1988.

Exercise 1.
a. Where in the report do you think this text comes?
1. an early section of the report
2. a later section of the report

b. Which one of these topics do you think the main body of the report does not discuss?
1. this year's profits
2. last year's profits
3. expenditure incurred (i.e. money spent)
4. tax on company profits
5. financial assets
6. planned expenditure
7. tax on the directors' personal profits

CLUES:a. Notice the first three words, 'To sum up'.
b. Check which of these are not referred to in Text A. Does a company report discuss the personal affairs of its staff?

Exercise 2.
Choose the correct alternatives.
(a) in detail/To sum up profit (b) before/after taxation has increased (c) from/by 20% over (d) next/last year's figure of 43-1 m. Profits after taxation amount to (e) 49-5 m/39-5 m. The value of fixed assets has (f) risen/fallen from 9-5 m to 10-2 m. (g) In detail/To sum up, the company has enjoyed a more successful year's trading.

CLUES:a. Compare this sentence to the last sentence.
b. Compare this sentence to the second sentence.
d. Do you think the company has figures for next year's trading?
e. Do you expect profit after taxation to be greater or less than profit before taxation?

 

Focus: Summarizing

A mass of details are often followed by a summary. This makes a generalization that brings all the details together. Summaries are signalled in different ways. Sentences 1 -5 all summarize the same information.
In 1988, turnover fell by 30%. Profits after tax fell by 25%. Exports decreased. Capital expenditure rose. The value of capital assets declined.
1. To sum up, the company had a bad year.
2. In short, the company had a bad year.
3. In brief, the company had a bad year.
4. In all, the company had a bad year.
5. So we can see that the company had a bad year.
But be careful! Summaries are not always signalled.

Exercise3.
Match each piece of information on the right with the details that it summarizes.

a. Sales to Europe have gone up by 25% and to the USA by 30%. Here at home sales have doubled. 1. In short, manufacturing capacity has decreased.
b. Substitutes for our product are being manufactured in South East Asia at lower cost. Our main rivals here at home have opened a new factory and two new sales branches. Raw materials are 20% more expensive.2. To be brief, therefore, we buy most in Australia.
c. This year we increased our sales abroad by 20% in the USA, 25% in Europe and 15% in Australia.3. The situation may be summarized by saying that exports have massively increased.
d. The company has been forced to close its factory in New South Wales. The lime plant in Sydney is working only part time, and 400 workers in Canberra have been fired.4. In other words, we have increased our sales in all our areas.
e. We now obtain 35% of our raw materials from Northern Australia, 37% from Western Australia, and only 28% from Africa.5. All this goes to show that the market for our product is much more competitive.
CLUES:1. In other words, the company is able to manufacture less than previously.
3. Remember that 'exports' means sales abroad only.
4. When there are fewer customers for a particular type of product and more manufacturers trying to sell that product, each manufacturer has to compete more energetically with its rivals for instance, by cutting prices.

Exercise 4.
In each set of sentences below, the first four give details and the fifth summarizes. Which of the first four does not belong?
a. 1. In 1980, profits fell by 3%.
2. There was a further fall, this time by 7%, in 1981.
3. And last year the fall amounted to 10%.
4. We expect to be much more profitable next year. In short, there has been a consistent fall in profits over the last three years.

b. 1. The accountant keeps management informed about day-to-day expenses.
2. He has to train for several years before he can qualify for a licence to practise.
3. He also calculates profits and losses over longer periods.
4. He provides the figures on which management base their decisions about future operations.
To sum up, his work affects how the company plans its operations both in the immediate future and in the long term.

c. 1. Small businesses are often owned by a single proprietor.
2. A few small businesses still rely on pen-and-ink records of expenses and profits.
3. However, adding machines, calculators, cash registers and other, types of business machine are now commonly employed.
4. The use of computers and electronic equipment is spreading fast. It is fair to generalize that virtually all businesses have some mechanical means of recording their trading transactions.

d. 1. Last year, home sales fell by 20%.
2. There is an increased demand for our product abroad.
3. We have capital assets in this country worth 45 m.
4. Charges on importing raw materials have risen by 10%.
For all these reasons, your company intends to move the bulk of its manufacturing capacity to a profitable trading area overseas.

CLUES:Look at the summary sentences first!
a. The summary sentence refers to the fall in profits over the last three years. Which of the previous four sentences does not discuss falls in profits in the last three years?
b. Which sentence does not discuss the accountant's reports?
c. Which sentence does not discuss a means of recording trading transactions?
d. 'the bulk' means the greater part.

 

Exercise 5.
If you are working on your own, complete passage 1 with the phrases given after it. If you are working with a friend; one of you complete passage I and the other complete passage 2. Write the completed passages in your notebook.

PASSAGE 1.
In short, a company (a) ______ a satisfactory accounting system. And it is probably true to say that (b) ______ profit-making activities are made without some reference (c) ______.
Some of the information that an accounting system provides (d) ______ is basic; for instance, production costs, value of sales, (e) ______. Other figures show such details as expenditure on new equipment, advertising, and (f) ______ on borrowed money. And when the time comes to make (g) ______, the accountant calculates turnover, profits both before and after taxes have been paid, and profits available (h) ______.

PASSAGE 1 PHRASES.
1. management with
2. interest paid or collected
3. cannot succeed without
4. the annual report to shareholders
5. to accounting data
6. very few management decisions that affect
7. for distribution to shareholders
8. cash balance, and value of its inventory.

CLUES:If you are working on your own, check your answer by completing passage 2. But be careful! The two passages are slightly different.

 

PASSAGE 2.
An accountant is employed by a business (i) ______ about the costs of production, the cash balance, the value of sales, and (j) ______. He also provides figures to show (k) ______ on borrowed money, the cost of new equipment purchased, (l) ______. And at the end of the financial year, (m) ______ before and after taxes, and the amount of profit that (n) ______.
All this shows that a satisfactory accounting system (o) ______; and without it management (p) ______, and would not be able to make intelligent decisions affecting its profit-making activities.

PASSAGE 2 PHRASES.
1. such details as the interest paid
2. he calculates profits
3. to give reliable information
4. can be distributed to shareholders
5. would not know where it stood financially
6. is an absolute necessity
7. and expenditure on advertising
8. the value of capital assets.

CLUES:Compare the completed passages 1 and 2. But be careful! The two passages are slightly different.

Compare the two paragraphs of passage 1 and the two paragraphs of passage 2.
q. What is the most important function of passage 1, paragraph 1?
1. It gives details of the accountant's work
2. It summarizes the importance of the accountant's work

r. In which passage 2 paragraph is the importance of the accountant's work summarized?
s. Which passage is easiest to understand?

Reading.

Exercise 6.
Write out the following sentences in the order that makes best sense.
a. The accountant also aids management in planning future operations and controls through projected estimates of costs as set forth in the budget.
b. The accountant deals with the clarifying, summarizing and interpreting of events which have already taken place.
c. In the case of budget projection, the accountant summarizes, classifies, and interprets the data which have been submitted to him by those doing the planning and decision-making.
d. The accountant did not have control of the way in which, or the time when, these transactions and events took place.

CLUES:a. Notice the word 'also'. Do you think this sentence comes first?
c. Notice the words 'In the case of budget projection'. Do you think this sentence comes before a, which refers to 'projected estimates' as one of the accountant's other responsibilities?
d. Notice the reference to 'these transactions'. Do you think, that these are the same transactions as those referred to in b?
Text B gives you the answer.

 

TEXT B.


What is accounting? The American Institute of Certified Public Accountants has defined accounting as follows:
Accounting is the art of recording, classifying and summarizing, in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial s character, and interpreting the results thereof.*
It is significant to note that accounting is defined as an art rather than a science. This, of course, does not mean that accounting does not strive for accuracy in reporting. It merely means that accounting is flexible in the sense that procedures may change to meet changing conditions. Accountants are constantly striving to establish principles and to guides to their practice. A substantial body of accounting theory has evolved.
The accountant deals with the classifying, summarizing, and interpreting of transactions and events which have already taken place. The accountant did not have control of the way in which, or the time when, these transactions and events took place. The accountant also aids management in planning future operations and controls through projected estimates of costs as set forth in the budget. In the case of budget projection, the accountant summarizes, classifies, and interprets the data which have been submitted to him by those doing the planning and decision-making.

*Committee on Terminology, Accounting Terminology Bulletins (New York: American Institute of Certified Public Accountants, 1953). Number 1. p. 9.
Spriegel W.R. Principles of Business Organization and Operations
New Jersey: Prentice-Hall, inc. 1960.

Exercise 7.
The phrases on the left come from Text B. Which of the phrases on the right is closest in meaning within the context?

a. transactions 1. meetings
2. business deals
3. agreements that do not involve money
b. accounting does not strive for accuracy in reporting1. accounting does not aim to be accurate in reporting
2. accounting does not avoid being accurate in reporting
3. accounting emphasizes the importance of accuracy in reporting
c. procedures may change1. peoples' behaviour changes
2. methods of accounting change
3. laws governing accounting change
d. A substantial body of accounting theory has evolved1. A significant amount of accounting theory has been abandoned (given, up, dropped).
2. A significant amount of accounting theory has principles (rules)
3. A significant amount of accounting theory has developed
e. projected estimates of costs1. calculations of how much money will be spent
2. calculations of how much money the businessman afford to spend
3. calculations of how much money the business hopes to spend.
CLUES:a. Notice that the writer refers to 'transactions . . . which are, in part at least, of a financial character'. So there must be money involved.
b. Look at the sentence in the text and notice that there are two negatives: 'This . . . does not mean that accounting does not strive . . .'. So accounting does strive for accuracy in reporting.

Exercise 8.
Which of the following points does the writer of Text B agree with and which does he disagree with?
a. An accountant makes decisions about how management must employ its financial resources.
b. The accountant records, classifies and summarizes both financial and non-financial aspects of the company's activity.
c. The accountant does not aim for complete accuracy when he reports on financial matters.
d. The theories on which accountants base their calculations continually change and develop.

CLUES:Look at Text B.
b. Look Text B, also at Exercise 7.

 

Exercise 9.
On the left art some terms used by an accountant when he acts for a business firm. On the right are definitions. Match each term to its correct definition.

a. current assets 1. the cost involved in selling goods, paying shop and office staff, advertising, etc.
b. fixed assets2. debts that will not have to be paid for several years (e.g. money borrowed by selling shares or mortgaging property)
c. intangible assets3. the cost to the firm of the merchandise sold (including the cost of raw materials, labour, factory overheads)
d. current liabilities4. cash, or other assets, that will be changed into cash or consumed within a short time
e. long-term liabilities5. the value of goods that are in stock and for sale
f. cost of sales 6. the profit from sales after the costs of selling, and general expenses, have been subtracted
g. cross profit on sales 7. assets that are intended for use rather than sale, and that will be of use for more than one year (e.g. buildings, cars). Also known as plant assets.
h. net operating profit 8. assets that do not have physical reality, such as the good will of customers (i.e. a good reputation), trade connections, patents, copyrights
i. merchandise inventory 9. debts that have to be paid within a short time
j. selling and general expenses 10. the profit left after the cost of selling has been subtracted from the value of sales
CLUES:a. 'assets' may be defined as property or possessions.
c. 'intangible' means not able to be touched, without physical form.
d. a 'liability' is a debt, for which one is responsible.
2. a 'mortgage' is a loan for which a building or land is offered as security.
3. 'merchandise' means goods for sale.
4. 'consumed', as used here, means used, spent.
6. 'subtracted' means taken away; for instance, five subtracted from nine leaves four.

 

 

TEXT C.

Accounting statements.
Accounting data is classified and summarized in the form of statements, of which the profit and loss statement and the balance sheet are the most important.
The profit and loss statement summarizes the firm's income and expenses over a stated period of time. It reflects the results of business operations conducted over that period, and shows how far the firm (or department) has succeeded in achieving its objectives. An example of a simplified profit and loss statement is given here:

Statement of profit and loss
for the period ended December 31st 1988

Revenue from sales
Less cost of sales
36,000
12,000
Gross profit on sales
Less selling and general expense
Net operating profit
24,000
6,000
18,000
Add other income (dividends on stock) 1,100
Less other income (interest on expense) 600
  500
Net profit before tax
Less tax

Net profit
18,500
4,000

14,000

The balance sheet is a statement of the financial condition of the firm on the specific date when the balance sheet and profit and loss statement are calculated. Whereas the profit and loss statement is dynamic, and reflects the relative success or failure of the business within the period of time under consideration, the balance sheet is static. That is, it does not show how the firm's fortunes have changed.
It lists the firm's assets (i.e. the property it owns and uses in the operation of its business), its liabilities (debts owed to the firm's creditors), and its capital (net worth). Until its liabilities have been paid, the creditors have first claim against the assets owned by the firm. A secondary claim is held by those who have invested capital in the firm. Assets, therefore, equal liabilities plus capital. It is usual that a balance sheet shows the firm's assets on the left-hand side, and facing them, the firm's liabilities. Here is an example:

Balance sheet for the period ended December 31st 1988

Assets

Current assets
Liabilities

Current liabilities
Cash
Accounts receivable
Merchandise inventory
Office supplies
Prepaid insurance
Total current assets

Investments
7,000
5,000
17,500
1,500
2,000
33,000
Accounts payable
Taxes payable
Total current liabilities
12,000
3,000
15,000
Long term liabilities 
Stock in XYZ Co.

Fixed assets
3,500Mortgage payable
Total liabilities
14,500
29,500
Land
Buildings
Equipment
Total fixed assets

Intangible assets
10,000
42,000
12,000
64,000
Capital
Capital stock
Earned surplus
Total capital
62,000
11,000
73,000
Goodwill

Total assets
2,000

102,500
Total liabilities and capital102,500

 

Exercise 9.
In your notebook, copy and complete this accounting statement using the terms below.

(a) ______ December 31st 1988
Assets

(b) ______
(b) ______

Current liabilities
Cash
Accounts receivable
Merchandise inventory
Office supplies
Prepaid insurance
Total current assets

Plant assets
7,200
12,800
43,650
930
(c) ____
65,780
Accounts payable
(j) _____
Total current liabilities
(i) ____
13,250
21,750
(k) ______
Office equipment
Building
Land
(d) ______
6,320
31,000
47,400
74,720
Mortgage payable
Shares payable
Total long term liabilities

(l) ______

Net worth
Capital
28,000
12,000
40,000

(m) ____
Intangible assets
Goodwill
(e) ______
Total intangible assets

(f) ______
1,500
2,000
3,500
Capital stock
Earned surplus
(o) _______
(n) ____
40,550
85,250
Stock in Siva Iron Co.
Total Investments

(g) ______
3,000
3,000

147,000
Total liabilities and Net worth147,000
Terms:
1. 8,500
2. 1,200
3. 61,750
4. 44,700
5. Investments
6. Total net worth
7. Current assets
8. Total plant assets
9. Total liabilities
10. Notes payable
11. Balance sheet
12. Total assets
13. Patents
14. Liabilities
15. Long-term liabilities
CLUES:Look at your answers to Exercise 9, and at Text C.
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