Unit 13 Accounting and financial statements

Unit 13 Accounting and financial statements

1a Vocabulary:

Match up the terms on the left with the definitions on the right. 1 B 2 C 3 D 4 G 5 A 6 E 7 F

1. Bookkeeping: B) writing down the details of transactions (debits and credits) 2. Accounting: C) keeping financial records, recording income and expenditure, valuing assets and liabilities, and so on 3. Managerial accounting: D) preparing budgets and other financial reports necessary for management 4. Cost accounting: G) working out the unit costs of products, including materials, labor and all other expenses 5. Tax accounting: A) calculating an individual’s or a company’s liability for tax 6. Auditing: E) inspection and evaluation of accounts by a second set of accountants 7. ‘Creative accounting’: F) using all available accounting procedures and tricks to disguise the true financial position of a company

1b Listening

You will hear Sarah Brandston, an accountant in New York, talking about bookkeeping and tax accounting. Read the following question and then listen to the interview.

1. In which fields do most of Sarah Brandston’s clients work? She mentions graphic designers, media people, writers, film makers, architects, people who consult in the computer field, and people who work in music. 2. Why do they need an accountant? She says that her clients are generally talented in their field, but they don’t necessarily know how to run a business, how to do bookkeeping, or how to keep accounting records that will allow them to file tax returns. 3. What does Sarah Brandston describe as ‘the basic rule for accounting? Keeping records that reflect the financial life in the business accurately enough to enable one to file a tax return. 4. An individual can do business as a self-proprietorship. Sarah Brandston mentions two other types of business. What are they? Corporations and partnerships. 5. Sarah Brandston says ‘bookkeeping is really a common sense way of keeping track of the income and expenses’. What does she mean by common sense in relation to recording expenses? She means that businesses should set up bookkeeping categories that allow them to record their expenses logically, according to what the expenses are and what the business does. 2a Vocabulary

These are some of the most common terms in accounting. Match them up with the definitions below.

Assets, liabilities, turnover, depreciation (GB) or amortization (US)

creditors (GB) or accounts payable (US), debtors (GB) or accounts receivable (US)

overheads (GB) or overhead (US), earnings or income

shareholders (GB) or stockholders (US), stock (GB) or inventory (US)

1. A company’s owners: shareholders or stockholders 2. The revenues received by a company

during a given period, minus the cost of sales, operating expenses, and taxes: earnings or income 3. All the money that a company will have to pay to someone else in the future, including taxes, debts, and interest and mortgage payments: liabilities 4. The amount of business done by a company over a year: turnover 5. Anything owned by a business (cash investments, buildings, machines, and so on) that can be used to produce goods or pay liabilities: assets 6. The reduction in value of a fixed asset during the years it is in use (charged against profits): depreciation or amortization 7. Sums of money owed by customers for goods or services purchased on credit: debtors or accounts receivable 8. Sums of money owed to suppliers for purchases made on credit: creditors or accounts payable 9. (The value of ) raw materials, work in progress, and finished products stored ready for sale: stock or inventory 10. The various expenses of operating a

business that cannot be charged to any one product, process or department: overheads or overhead

2b Reading

Insert the words in the box 2a in the gaps in the text.

1 assets 2 stock or inventory 3 depreciation or amortization 4 shareholders or stockholders 5 earning or income 6 turnover 7 overheads or overhead 8 liabilities 9 debtors or accounts receivable 10 creditors or accounts payable

2c Summarizing Complete the following sentences.

1. Companies record their fixed assets at historical cost because they do not need to know their real value: if the company is a going concern they are not for sale. 2. Historical cost accounting usually underestimates the value of assets that appreciate (gain value), such as land and buildings (US: real estate) 3. Countries with a regularly high rate of inflation generally use a system of current cost or replacement cost accounting, which records assets at the price that would have to be paid to replace them. 4. Company profits are usually split three ways: into tax (corporation tax in Britain, income tax in the US), dividends, and retained earnings. 5. Double-entry bookkeeping requires that every transaction is recorded in one account as a sum received and another as a sum paid. 6. A company’s net assets consist of its assets minus liabilities. 7. A company’s stock market capitalization is usually more than the value of its net assets, because this figure does not include intangible elements such as goodwill. 8. Flows of cash both in and out of the company are recorded in the source and application of funds statement.

3 Financial statements

1. Costs and expenses 2. Income tax 3. Net profit

4. Intangible assets 5. Inventories