BUSINESS COMMUNICATIONKEYS TO

ACCOUNTING,ACCOUNTANCY

ANDAUDITING

with two mini-glossaries of accounting

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CONTENTS

INTRODUCERE ................................................................................................ 4

SECTION I: ACCOUNTING IN TODAY’S BUSINESS WORLD ........................ 5UNIT 1. Training and Degrees in Accounting .................................. 6UNIT 2. Divisions of Accounting ....................................................... 9UNIT 3. Bookkeeping and Accounting ............................................. 12UNIT 4. Bookkeeping Systems .......................................................... 14UNIT 5. Bookkeeping Records .......................................................... 17UNIT 6. A Job Advertisement ............................................................ 20UNIT 7. Accounting Sensation ......................................................... 27

Self-assessment Test 28 Answer Key 29 Review I 29

SECTION II: FINANCIAL STATEMENTS AND REPORTING ........................... 31UNIT 1. The Profit and Loss Account ............................................... 32UNIT 2. The Balance Sheet in U.S.A. ................................................ 34UNIT 3. The Balance Sheet in U.K. .................................................... 35UNIT 4. Comparing the Results of Companies in Different

Countries (I) ........................................................................... 36UNIT 5. Liquidity, Capital Structure, Efficiency and Profitability

as Measured by Ratio Analysis ........................................... 39UNIT 6. Comparing the Results of Companies in Different

Countries (II) .......................................................................... 41 Review II 42 SECTION III: ESSENTIALS OF BUDGETING AND COST ACCOUNTING ..... 43

UNIT 1. The Master Budget. Sales and Purchases Budgets ........... 44UNIT 2. The Operating Expenses, Cash and Capital-Expenditures

Budgets .................................................................................. 46UNIT 3. Methods of Finding Costs ..................................................... 48UNIT 4. Costing Systems as Related to Management ...................... 50

Self-assessment Test 51 Answer Key 51 Review III 52

SECTION IV: THE ACCOUNTING FUNCTION OF AUDITING ........................ 54UNIT 1. Metaphors Used in Auditing ................................................ 55UNIT 2. Reporting on Financial Statements ..................................... 57

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UNIT 3. Scope and Opinion Paragraphs in Auditors’ Letters ......... 61UNIT 4. An Audit on the Adequacy of Money Laundering 64

Review IV 66

SECTION V: CONSOLIDATED FINANCIAL STATEMENTS ............................ 68UNIT 1. The Basic Idea ....................................................................... 69UNIT 2. An International Perspective on Consolidated Financial

Statements ............................................................................ 71UNIT 3. Foreign Currency Translation .............................................. 75

Self-assessment Test 78 Answer Key 78

MINI-GLOSSARIES OF ACCOUNTING ........................................................... 81I. ENGLISH-ENGLISH ............................................................................... 82II. ENGLISH-ROMANIAN ........................................................................... 106

BIBLIOGRAPHY 115

INTRODUCERE

Cursul „ENGLISH FOR PROFESSIONAL COMMUNICATION” se adresează studenţilor din anul I ( semestrul I şi II ), ai Facultăţii de Contabilitate şi Informatică de Gestiune, ID, conform planului de invatamant. Cursul cuprinde modele de texte autentice specializate din domeniul contabilităţii care presupun un nivel mediu şi avansat de cunoaştere a limbii engleze şi are ca obiective:

- Dezvoltarea de competente de comunicare ( capacitatea de intelegere a materialelor de referinta din domeniul financiar-contabil; comunicarea orala si scrisa in context academic si profesional)

- Imbunatatirea acuratetei si fluentei in comunicarea in afaceri in limba engleza

- Dezvoltarea de deprinderi de studiu, de evaluare si auto-evaluare.

Cursul cuprinde cinci unitati de invatare (capitole distincte), având fiecare un număr de lecţii a căror structură este flexibilă si cuprinde patru lucrari de verificare (cate doua pentru fiecare semestru)

Evaluarea cunostintelor se face sub doua forme:- evaluarea continua, pe baza lucrarilor de verificare- evaluarea finala, prin testul final in perioada de pre-sesiune.Criteriile de evaluare sunt urmatoarele:

1. Punctajul obtinut la lucrarile de verificare – criteriul 1 (C1) – 4 puncte ( pentru cele doua teme de control);

2. Punctajul obtinut pentru gradul de implicare in discutiile teoretice – criteriul 2 (C2) – 1 punct;

3. Punctajul obtinut la testul final – criteriul 3 (C3) – 5 puncte.

Lector universitar dr. Serban Ion Boicescu

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SECTION IACCOUNTING IN TODAY’S BUSINESS

WORLD

UNIT 1

TRAINING AND DEGREES IN ACCOUNTING

1. Accounting is one of the fastest-growing fields in the modern business world. Every new store, school, restaurant, or filling station – indeed, any new enterprise of any kind – increases the demand for accountants. Consequently, the demand for competent accountants is generally much greater than the supply. Government officials often have a legal background similarly, then men and women in management often have a background in accounting. They are usually familiar with the methodology of finance and the fundamentals of fiscal and business administration.

2. In fact, there are two major paths that a career in accounting might follow. One is through employment by a business or government organization in its accounting office. This is the broad area of private accounting, within which there are many different specialties, such as taxes, financial planning and budgeting, and internal auditing. To rise to the top of the field in private accounting requires a combination of both fiscal and management ability.

3. One starting point for a career in private accounting is book-keeping. Modern accounting practices grew out of bookkeeping procedures about a hundred years ago. Indeed, knowledge of bookkeeping is essential for an accountant. The financial records of on organization are the raw materials on which accounting is based. Large organizations keep separate books of account or ledgers for many different accounts, activities and operations. Many clerical workers with an aptitude for bookkeeping study accounting in order to acquire additional skills.

4. While any commercial and correspondence schools flourish today, education in accounting is tending to become a regular function of the universities. This corresponds with the general movement to give accounting the status of a profession. Indeed, the entire field is changing from a white-collar occupation to a profession. Certainly, most people who wish to become CPAs

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now take university courses in accounting and related subjects in order to be as fully prepared as possible for the certification examinations. This is the second major path to a career in accounting.

5. A large number of universities now have business schools that offer regular four-year programs leading to a bachelor’s degree in accounting, business administration, business law, and other areas that equip the student for professional or management careers in business. An accounting student in a university commercial college has the enormous advantage of being able to take courses in many of the related fields that are important to him or her. In fact, on the certification examination, which is prepared by a board of practicing CPAs, questions on tax and business laws that relate to accounting are always asked.

6. Knowledge of different aspects of law is necessary in many areas of accounting. Accountants who specialize in income taxes, for example, must have a thorough knowledge of the extremely complicated tax codes of their country and region. Since these laws are changes frequently, they also must be aware of the most recent legislation. Similarly, managerial accountants must be thoroughly familiar not only with corporate tax laws, but also with other laws that affect the particular business in which they work. And we have already noted that governmental and institutional accounting is often surrounded by legal regulations on both the source and spending of funds.

7. A few universities now also give courses leading to advanced degrees – the master’s or the doctorate – in accounting. Both public and private accountants take such courses in order to increase both their knowledge and their professional standing. It is an indication of the increasing importance of accounting that advanced degrees are now given in the field.

8. Another related subject that has become very important for accountants is computer programming.

9. Computers have immensely changed the ways in which data – that is, pieces of information – can be processed and stored. They have many applications in science as well as in business. They make it possible to handle or recover very large amounts of information in very short periods. In business, they are now used routinely for payroll records, inventory control, accounts payable

and receivable, and computation of tax liability. They can also be used to solve problems in budgeting and cost accounting.

10. Programmers prepare the data for the computers. They work out a step-by-step sequence for data and procedures that make the machines perform the desired tasks. Since the machines cannot think for themselves, the work of the programmer is essential in ensuring that computers do what they are supposed to do. In a business environment that is becoming more computerized every day, accountants who understand programming have a distinct advantage over those who do not. They can prepare programs themselves or understand programs prepared by others without having to employ someone else to interpret.

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UNIT 2

DIVISIONS OF ACCOUNTING

1. The field of accounting is divided into three broad divisions: public, private, and governmental. A certified public accountant, or CPA, as the term in usually abbreviated, must pass a series of examinations, after which he or she receives a certificate. In the United States, the certification examinations are prepared and administered by the American Institute of Certified Public Accountants. The various states or other major governmental jurisdictions set additional qualifications for residence, experience, and so on. The British equivalent of a CPA is called a chartered accountant.

2. CPAs can offer their services to the public on an individual consultant basis for which they receive a fee. In this respect and many others, they are similar to doctors or lawyers. Like them, CPAs may be self-employed or partners in a firm; or they may be employed by an accounting firm. Some CPAs perform work for corporations or government offices and receive a salary like other members of management. Nevertheless, they are still considered to be accountants. It is not necessary to have a certificate in order to practice accounting. Junior employees in large firms, for example, are often acquiring sufficient experience to take the examinations.

3. Public accounting consists largely of auditing and tax services. An audit is a review of the financial records of an organization. It is usually performed at fixed intervals of time - perhaps quarterly, semiannually, or annually. And as the tax laws have grown increasingly complex, not only corporations but also individuals have had to utilize the services of accountants in preparing their tax forms and calculating their tax liability. Business enterprises, government agencies, and nonprofit organizations all employ public accountants either regularly or on a part-time basis.

4. Many accountants work in government offices or for nonprofit organizations. These two areas are often joined together under the term governmental and institutional accounting. The two are similar because of legal restrictions in the way in which they

receive and spend funds. Therefore, a legal background is sometimes necessary for this type of accounting practice.

5. All branches of government employ accountants. In the United States, this includes federal, state, and local governments. In addition, government-owned corporations in the United States and in many other countries have accountants on their staffs. All of these accountants, like those in private industry, work on a salary basis. They tend to become specialists in limited fields like transportation or public utilities.

6. Private accountants, also called executive or administrative accountants, handle the financial records of a business. Like those who work for the government or nonprofit organizations, they are salaried rather than paid a fee. Those who work for manufacturing concerns are sometimes called industrial accountants. Some large corporations employ hundreds of employees in their accounting offices.

7. The chief accounting officer of a company is the controller, or comptroller, as he or she is sometimes called. Controllers are responsible for maintaining the record of the company’s operations. On the basis of the data that have been recorded, they measure the company’s performance; they interpret the results of the operations; and they plan and recommend future action. This position is very close to the top of management. Indeed, a controller is often just a step away from being the executive officer of a corporation.

8. One of the specialties within the private accounting field is cost accounting, which is chiefly concerned with determining the unit cost of the products the company manufactures and sells. For example, if a company manufactures radios, the unit cost of the product equals the cost of making each individual radio. The unit cost must include not only the price of the materials in the product, but also other expenses, including labor and overhead. Without unit costs, manufacturing firms could nor accurately determine the price they must sell their products for in order to bring an adequate return on investment.

9. Many private organizations also hire salaried accountants to perform audits. These people are sometimes called internal auditors. They are in charge of the protection of the firm’s assets - the things of value owned by the company, including cash,

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securities, property, and even goodwill. The internal auditor sees that current transactions are recorded promptly and completely. He or she also identifies inefficient procedures or detects fraudulent transactions. He or she is usually called upon to propose solutions for these problems.

10. Managerial accountants are other specialists within the broad area of private accounting. In particular, they work with the kinds of financial reports necessary to management for the efficient operation of the company, including budgets and cash flow projections.

11. A small business may retain the services of a CPA to perform all or some of these functions. A medium-sized business may employ a staff accountant who does all of them. As companies grow, their accounting staffs become increasingly specialized. As we have noted, the big corporations employ hundreds of people in their headquarters and branch offices for the purpose of fiscal administration. Many of the people who move ahead most rapidly in private organizations are CPAs. The simple fact of having passed the certifying examination give them an advantage over those who haven’t.

12. Many people have chosen accounting as a profession because of its many advantages. Many jobs are usually available, primarily because the education and training for accounting careers has not kept pace with the demand for accounting services. Once on the job, private or governmental accountants have security, and they are usually given the chance to move upward in the company – sometimes, as we have noted – to the top. Salaries for people with accounting training are usually good, even on the lower levels, and for those who rise to the top of profession, they are correspondingly high. Certified public accountants now enjoy professional status similar to that of doctors or lawyers.

13. Likely candidates for success in the field typically have an interest in business; they must be able to understand the conditions that indicate business success or failure. Another prerequisite is mathematical ability. Once they have completed their education in accounting, many paths are open to them.

UNIT 3

BOOKKEEPING AND ACCOUNTING

1. In the past, a bookkeeper kept the books of accounts for an organization; the present-day accountant’s job developed from the bookkeeper’s job. Today, a sharp distinction is made between the relatively unchanged work performed by a bookkeeper and the more sophisticated duties of the accountant. The bookkeeper simply enters data in financial record books, the accountant must understand the entire system of records so that he or she can analyze and interpret business transactions. To explain the difference briefly, the accountant sets up a bookkeeping system and interprets the data in it, whereas the bookkeeper performs the routine work of recording figures in the books. Because interpretation of the figures is such an important part of the accountant’s function, accounting has often been described as an art.

2. Accounting frequently offers the qualified person an opportunity to move ahead quickly in today’s business world. Indeed, many of the heads of large corporations throughout the world have advanced to their positions from the accounting department. In industry, management, government, and business, accountants generally start near the top rather than near the bottom of the organization chart. Management relies on the expert knowledge and experience of accountants to cope with the increasingly complex problems of taxes and cash flow.

3. Accounting is a basic and vital element in every modern business. It records the past growth or decline of the business. Careful analysis of these results and trends may suggest the ways in which the business may grow in the future. Expansion or reorganization should not be planned without the proper analysis of the accounting information: and new products and the campaigns to advertise and sell them should not be launched without the help of accounting expertise.

4. Earlier accounting procedures were simple in comparison with modern methods. The simple bookkeeping procedures of a

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hundred years ago have been replaced in many cases by the data-processing computer. The control of the fiscal affairs of an organization must be as scientific as possible in order to be effective.

5. Bookkeeping is an essential accounting tool. A small business or company may employ only one bookkeeper, who records all of the financial data by hand; large organizations may employ many bookkeepers, who use electronic and mechanical equipment for a large part of their work. Each organization has its own bookkeeping requirements, but all systems operate on the same basic principles. The bookkeepers themselves must be accurate, good in math, and meticulous; that is, they must be very careful to record each detail in its proper place.

6. About 3,000 B.C., the Sumerians, the Egyptians, and other peoples of the Middle East developed the first known business records. The results of tax collections, farming harvests, and the transactions of marchants were recorded by means of written numbers. The Romans, too, were prolific keepers of records. Indeed, Roman numerals were used in many parts of Europe until the fifteenth century A.D. The stimulus for modern bookkeeping came with the introduction of Arabic, or Hindu-Arabic, numerals and the decimal system in the twelfth century A.D. Most people today use Arabic numerals.

7. Regardless of the size of the operation, the bookkeeper is a key person in the organization’s system of financial information. In a small company, the bookkeeper may also function as a cashier, as an assistant to the manager, or in any number of clerical jobs. Larger firms have staffs of bookkeeper ranging from as few as two or three to several hundred.

8. Bookkeepers are also responsible for maintaining the records of a company, including of course, the computation of taxes that are to be deducted and withheld, and the completion of government forms that are required for tax and other employment purposes.

UNIT 4

BOOKKEEPING SYSTEMS

1. A body of principles and concepts underlies the practice of accounting. These concepts together form a general guide to the accounting profession. First, an accounting system must provide consistency in the accumulation and recording of financial data. A mixture of different systems does not give a true picture of the financial affairs of an organization. Second, an accounting system must take it possible to compare the data issued to management, government, and the public. This concept is called comparability, and without it there would be no firm basis on which to tax a company, to invest in it, or even to manage it. Each of the groups interested in a company would otherwise receive a different picture of its financial affairs. Third, an accounting system must provide the basis for arriving at decisions and solutions in handling the operational and financial problems of the organization. Without this decision-making base, most companies would be unmanageable. There would, for instance, be no way of pinpointing trouble areas within the company.

2. Certain assumptions underlie all accounting activity. Although accountants may disagree over the value of many rules of practice and procedure in their field, there are some assumptions on which they almost universally agree. One of them is the idea of the business as an accounting entity, independent of its owners for accounting purposes. This is similar to the concept of a legal entity that is embodied in corporation. A corporation has some of the legal rights and obligations of a single individual. Another common assumption is that money serves as the unit of measure to be used for recording and reporting transactions. This provides a common denominator for past, present, and future transactions. The concept is similar to the one that makes mathematics the common language of science. Still another commonly held assumption is that there is a basic accounting period, that is, an interval of time for which an income statement is prepared. Without using specific intervals, there would be no basis for

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illustrating the rate of change in the company. The accounting period is, in other words, a kind of business calendar.

3. Another standard that is generally accepted in the profession is that of objective evidence. Accountants need verifiable evidence just as scientists do. In the case of accountants, the evidence consists of business papers or other records for any transaction. This standard cannot always be universally applied, however, because there are situations in the practice of accounting when objective evidence is not available. Accounting for depreciation, for example, must be compiled on the basis of the accountant’s judgement, but within the guidelines specified in applicable tax codes.

4. The two basic systems of bookkeeping are double-entry and single-entry. The double-entry method was perfected by the merchants of Venice during the fifteenth century and is still used today. The basic principle of double-entry bookkeeping is that every transaction has a twofold effect. In other words, a value is received and a value is yielded or parted with. Both effects, which are equal in amount, must be entered completely in the bookkeeping records.

5. The second basic system of bookkeeping, as mentioned previously, is called the single-entry method. This method refers to any system that does not include the complete results of every transaction. The most common type of single-entry bookkeeping involves records of cash, accounts receivable, and accounts payable.

6. Many bookkeeping systems include journals and records for specific types of transactions. Special purchase books, for example, include invoice and voucher registers. Invoices are itemized statements of merchandise sold to a customer; they list the quantity and the charges. Vouchers are bills received for merchandise or services. One important, widely used journal is the cash disbursement register, which records the details of all checks written: to whom, when, how much, and for what purpose. Another popular journal is the cash receipts journal, in which all payments received are recorded.

7. Each business should have an accounting system best suited to its particular needs. The method used must provide the most effective means of recording, summarizing, and presenting appropriate accounting data for management and for others who have an interest in the business. The accountant is responsible for

the design and implementation of the accounting forms, the records, and the procedures. The accountant must also consider the present structure of the business as well as its likely course in the future. Modern accounting machines and data-processing equipment have substantially increased the speed with which information can be made available to management.

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UNIT 5

BOOKKEEPING RECORDS

1. When a business is being established, a system must be introduced that records all transactions in monetary terms. Transactions are either internal, that is, within the company, or external, outside the company.

2. An account is a record of the financial transactions that concern one item or a group of similar items. The account includes categories of financial data for each area of interest during a specific period: the value at the beginning of a period, changes in value during the same period, and the value at the end of a period. The broad areas of interest can be labeled assets, liabilities, and net worth. Income and expense accounts are totaled at regular intervals, and the resulting profit or loss is posted to a capital account.

3. Anything of value that a business or organization owns is commonly known as an asset. Asset accounts include cash, which is the money on hand or in the bank; furniture and fixtures; accounts receivable, the claims against customers that owe money; stock or inventory; office supplies; and many others that show what the organization owns.

4. Debts owed to creditors are known as liabilities. If money is owed to an organization or person for things or services purchased on credit, this liability is called an account payable. Other liabilities include wages or salaries that are owed to employees, or taxes that have not yet been paid.

5. The value of the business to the owner or owners is known as capital. Other terms used to designate capital are proprietorship, owner’s equity (usually abbreviated OE), ownership, or net worth.

6. A separate account is kept for each asset, liability, and capital item so that information can be recorded for each of them. Accounts are also maintained for income and for expenses, and like assets, liabilities, or capital, these accounts are also entered

in the ledger, which is a detailed listing of all the accounts of an organization.

7. Journals, or books of original entry, are designed to record information about different transactions, including sales, purchases, cash receipts, cash disbursements, and many others. Journals have two or more columns to record increases or decreases in the accounts affected by the transaction, and they often have space for a date and an explanation of the transaction. Entries from all the journals are transferred to the ledger at regular intervals. This process – called posting – is usually done monthly.

8. All transactions affect at least two accounts. Each transaction must be analyzed to determine which accounts are affected, and whether they should be increased or decreased. An entry made on the left-hand side or column of an account is called a debit, while an entry made on the right-hand side or column is a credit. Debit, usually abbreviated DR, at one time meant value received, or literally he owes. Credit, usually abbreviated CR, meant value parted with, or literally he trusts. In modern bookkeeping, debit refers only to the left-hand side of an account, whereas credit refers to the right-hand side. Some bookkeepers use a far right-hand to keep an up-to-date balance of the account.

9. From the basic accounting formula, that is, assets = liabilities + owner’s equity (or capital), certain guidelines have evolved through general agreement and custom. Asset accounts are increased by debiting, that is, on the left side, and they are decreased by crediting, that is, on the right side. The opposite is true for liability and proprietorship accounts, which are increased on the credit side and decreased on the debit side.

10. Income and expense accounts represent changes in equity. Income increases proprietorship, while expenses decrease proprietorship. Income accounts are increased on the credit side and decreased on the debit side, while expense accounts are increased on the debit side and decreased on the credit side.

11. Since every transaction affects at least two accounts, at least two entries must be made in the journal. When Morgan’s Appliance

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Store, for example, sells a refrigerator for $260, the bookkeeper debits the cash account (asset) and credits the sales account (income) by $260. On the day that Mr. Morgan pays his monthly rent of $500, the bookkeeper debits the rent account (expense) and credits the cash account (asset) by $500.

12. Regularly and at fixed intervals, usually monthly, the bookkeeper posts all the entries from each journal to the appropriate account in the general ledger. The bookkeeper then foots, or totals, the columns of each account; that is, he or she adds the amounts of the debits and credits and records the balance of each account. Since debits are always recorded in amounts equal to credits, the debits and credits should always equal each other. The test that determines whether the total of debits equals the total of credits is called a trial balance. If the accounts are not balanced, some error has been made which the bookkeeper must find and correct. The financial statements of a company, like those that will be discussed in the next unit, help management to evaluate, and direct the operations of an organization.

UNIT 6

A JOB ADVERTISEMENT

Top multinational company in the field of fast moving consumer goods, employing 170,000 people in more than 100 countries all over the world, a marker leader with well-known international brands, is now expanding its activity.

The Group considers the employees as one of the keys to its success, striving to grow their staff of the highest international caliber. We aim to be the consumers’ and employees’ first choice. Two positions are now available for top specialists to work with our Romanian team.

CONTROLLERCO/1296

Applicants are required to prove

– self motivation– good communication skills– ability to work under pressure– strong mathematical skills– good knowledge of PC software (i.e. Excel, Word) and internal

accounting software– knowledge of international reporting systems– knowledge of administrative organization of a production

company and warehousing– university degree in economics, having taken additional

courses in accounting or controlling– good knowledge of English, both verbal and writingThe controller will be responsible for– development of the cost center structure– control on allocation of actual costs– general cost analyses (overhead costs, marketing costs and

others)– brand margin control– cost price calculations

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– variances analyses and standard cost accounting– co-maintenance of the accounting system (sales-orders,

production-orders, purchase orders)– participating in the monthly and quarterly reporting and

evaluations– participating in the budgeting and forecasting company plan– economic analyses (ROI, NPV)1 and development financial

information system– developing the administrative organization and procedures– special projects

TREASURERTR/1296

Applicants are required to prove

self motivation good communication skills ability to work under pressure strong mathematical skills good knowledge of PC software (i.e. Excel, Word) and

preferably electronic banking systems experience with reporting systems in an international

company, with both sales of imported fast moving goods and own production

university degree in economics, having taken additional courses in accounting or treasury

good knowledge of English, both verbal and writing

The treasurer will be responsible for

cash and liquidity management foreign exchange management liquidity forecasting and planning credit control, control on payment terms preparation of the treasury reports electronic banking, preparation of the payments development of the contacts with the central, local and foreign

banks development of procedures on money flows

special projectsWe offer a challenging job and training facilities in an

international environment as well as opportunities for career development.

If you have the necessary skills ans enthusiasm for these exciting jobs, please send your C.V. in English stating the code of the position you are applying for including your telephone number, within 10 days after the date of placement of this advertisment to:

P.O. Box 9-30 Bucharest

FINANCE MANAGERHigh quality technical products on the Romanian Market

The Company: Market leader in producing, marketing and distributing technical equipment. Present in more than 20 countries with a worldwide distribution through own subsidiaries and importers, the Company’s product line is positioned at the upper end of the world’s market in terms of quality and price. Starting last year its operations on the Romanian market the Company had a fast growth of the activities in Romania.

The Tasks: Managing the Financial Resources of the Company (developing and maintaining accounting procedures and systems for the assessment and processing of financial data, ensuring the effective control of day-to-day accounting activities, supervising the efficient management of accounts payable and accounts receivable, cash-flow, banking operations). Elaborating Budget Strategy and Structure (developing and supervising step-by-step the evolution of the budget policy in direct connection with business requirements). Financial Reporting (direct supervision of all financial reports for the headquarters and for the local authorities, solving all issues related to taxation inquiries stated by the Romanian legislation, including VAT procedures, tax returns and other fiscal documents).

The Requirements: University degree in Economics, financial and accounting experience in leading positions within an international company, good knowledge of financial legislation, computer skills and computerized accounting literacy, high language proficiency in

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English/German knowledge would be advantageous, strongly target (profit/turnover) oriented personality, independent worker, self-confident, persuasive and loyal, extremely organized and accurate.

The Offer: Excellent career opportunities within a powerful company, pleasant working environment, effective support through the finance department of the parent company, high responsibility in developing a strong local business, interesting compensation package.

Your next step: Are you the most suitable person for this challenging assignment? Please do not hesitate in sending your credentials, including CV, copies of your study diplomas and references under the Ref. No. 2005 FM at the Bucharest office of:

MANAGEMENT SELECTPopa Savu Street 78, 71262 Bucharest, Romania; Tel. 223 44 30

MANAGEMENT SELECTa company of

STEIN & PARTNER MANAGEMENT CONSULTINGCENTRAL AND EASTERN EUROPE

BELGRAD BIELEFELD/DETMOLD BRATISLAVA BUCHAREST

BUDAPEST MOSCOW PRAGUE SALZBURG SOFIA VIENNA WARSAW ZAGREB

BUDGET SUPERVISORJoin a highly target-oriented company as a key player of the

Romanian team

The Company: Our client is the Romanian member of one of the world’s largest direct selling companies marketing over 400 products for personal and home care, with affiliate operations in more

than 75 countries and territories. The company presently aims to rapidly develop its distributors network all over the country.

The Tasks: Financial Reporting and Analysis (prepare, on a timely basis, reports for headquarters and local authorities; complete all cost/benefit studies related to capital purchase and business decisions; assist in year-end closing process; assist department heads to research financial issues; assist in treasure functions). Budget Administration (developing, administrating and making recommendations with regard to the departments budgets within acceptable guidelines; analyze monthly and annually variances – budget/prior year – and report the causes to management). Tax Reporting (prepare, on a timely basis, all the necessary tax returns for the Company and calculate all the funding needs for tax obligations with the Romanian authorities).

The Requirements: University degree in Economics, at least I year professional experience within an international company, proven background in a similar position would represent a valuable asset, good knowledge of the Romanian financial reporting system, US GAAP expertise would be an advantage, high language proficiency in English, accounting software and computer literacy, dynamic, strongly business oriented, used to work under pressure, with a developed team spirit and loyalty, open to travel (having a driving license would be advantageous).

The Offer: A key-player position within an important organization, excellent career perspectives, an attractive compensation package, high recognition of professional achievements.

Your next step: Are you committed to the demands of this challenging assignment? Please do not hesitate to send your credentials, including CV, copies of your study diplomas and references under the Ref. No. 1850 BS at the Bucharest office of:

MANAGEMENT SELECTPopa Savu Street 78, 71262 Bucharest, Romania; Tel. 223 44 30

MANAGEMENT SELECT

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a company ofSTEIN & PARTNER MANAGEMENT CONSULTING

CENTRAL AND EASTERN EUROPE

BELGRAD BIELEFELD/DETMOLD BRATISLAVA BUCHAREST

BUDAPEST MOSCOW PRAGUE SALZBURG SOFIA VIENNA WARSAW ZAGREB

GREAT CAREER OPPORTUNITY!

THE COMPANY Philip Morris is the world’s largest consumer packaged goods company and the leading multinational cigarette manufacturer, the producer of Marlboro, the number one cigarette selling brand in the world, L&M, Bond Street and other brands. Philip Morris has made a long term commitment in Romania and now is looking for young, hard-working and ambitious people to share its perspectives

for development and achievements.

JUNIOR ACCOUNTANT

THE POSITION Our colleague will carry on general and specific accounting operations.

THE PERSON We are seeking a person with good knowledge of Romanian accounting principles and chart of accounts. US GAAP knowledge would be an advantage. You must have an university degree in Finance/Economics and 1–2 years of professional experience within an international company. Your personal attributes should include flexibility, the ability to work in team and strong communications skills. Basic English knowledge and computer proficiency (Excel, Word, besides on accounting software) are also a must.

COST ACCOUNTANT

THE POSITION Our colleague will be responsible for the collection, computation and analysis of the financial data related to manufacturing costs in order to propose complete and accurate production and variation costs and inventory valuation.

THE PERSON We are seeking a person with good knowledge of cost and price calculations and Romanian accounting principles. You must have an university degree in Finance/Economics and 2–3

years experience in a similar position within an international company. Your personal attributes should include achievement orientation, good analytical thinking, the ability to work in team and strong communication and managerial skills. Fluent English knowledge and computer proficiency (Excel, Word, Power Point besides an accounting software) are also a must.If you are between 25–35 years old, have on military obligations (for male candidates), and are interested in joining a dynamic team of professionals in Bucharest, Philip Morris invites you to contact the

agency GEVA at 2110472 or 092 322603 in order to complete the application form.

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UNIT7

ACCOUNTING SENSATION!

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Self- Assessment Test

Complete the following words:

1. This is the name for buildings, machinery, money in the bank and money owed by customers. A- - - - S

2. The loss of value of the things in number. D-P--------N3. Money which is borrowed. L- - -4. The extra money a company or person pays for borrowing

money. I- - - - -ST5. The total sum of money which is supplied by the owners of a

company to set it up. C- - -T- -6. Cash or goods which the owner takes from the company for

his own private use. D- - W- - - S7. These are bought by people wishing to invest in the company.

S- - - -S8. The extra amount which is paid for a coompany above the

value of its assets. GOO- - - - -9. The purchase of another company. ACQU- - - - - - -10. A statement of the financial position of the company. B - - - - -

E SHEET.11. An official examination of the accounts. A- - - T12. A financial plan for the future. B- - - -T13. The official Books for keeping accounts. L-D- - - S14. A reduction in the price which is offered to customers. D - - C

- - - - 15. This company has supplied goods but has not received any

money for them yet. C- - - - - -RANSWER KEY

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1 ASSETS 2 DEPRECIATION 3 LOAN 4 INTEREST 5 CAPITAL 6 DRAWINGS 7 SHARES 8 GOODWILL 9 ACQUISITION 10 BALANCE SHEET 11 AUDIT 12 BUDGET 13 LEDGERS 14 DISCOUNT 15 CREDITOR

REVIEW I

I.Decide whether the following statements are true (T) or false (F) according to the text ”BOOKKEEPING RECORDS” (UNIT 5) only.1. Liabilities are debts owned by creditors.2. Accounts receivable are part of asset accounts.3.OE is used for capital.4.Expense accounts are increased and decreased in the same way as asset accounts.5.Other liabilities include the claims against customers that owe money.6. The cash account is an expense.7. Proprietorship accounts are like asset accounts.8. Accounts payable and receivable designate asset accounts.9.Cash disbursements belong to books of original entry.10.The balance of each account is recorded following the monthly posting and the addition of debits and credits.

II. MATCH the following terms (1-15) with their definitions (A-O):

1.Business as an accounting entity 2. Objective evidence 3.Accounting period 4. Money as a unit of measure 5.Consistency 6. Comparability 7. Decision-making base 8.Double-entry bookkeeping 9. Vouchers 10. Invoices 11.Cash disbursements 12. Cash receipts 13.Single-entry method 14. Double-entry and single-entry 15.Accounting concepts

A.The accounting system provides the basis for arriving at decisionsB.The general guide to accountancyC. Bills received for merchandise and services

D.Itemised statement of merchandise sold to customersE.Payments madeF.Payments receivedG.The same system used in recording financial dataH.Every transaction has a twofold effectI.A kind of business calendarJ.Verifiable evidenceK.Legal entityL.Assumption used as a unit of measure for reporting transactionsM.Differences among data issued to management, government and the public.N.The two basic bookkeeping systems.O.Records of cash, accounts receivable and accounts payable

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SECTION IIFINANCIAL STATEMENTS AND

REPORTING

UNIT 1

THE PROFIT AND LOSS ACCOUNT (STATEMENT)

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

2. 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.

3. In the P&L account below, the direct costs, or cost of sales of £30 million, are deducted from the turnover of £65 million to reach a gross profit of £35 million. The operating profit is reached by deducting other operating expenses, sometimes called fixed costs (in this case £15.5 million) to reach a figure of £19.5 million as an operating profit. On some statements, especially consolidated accounts, minority interests will be deducted from this sum. In this case, £5.4 million is due to the minority shareholders in the company’s subsidiaries and associated companies

4. The profit figure now reached (£14.1 million) is taxable at whatever rate of corporation tax is applicable. This company pays £1.8 million in tax to end up with £12.3 million in profit after tax. This year, an amount of £450,000 is set aside as an extraordinary item. This represents a sum contributed to a special disaster fund.

5. The £11.85 million can now be distributed between shareholders and retentions to the reserves. In this case there are a small number of preference shareholders who receive a fixed dividend of £50,0000 in total; a further £300,000 is paid out a dividend to the ordinary shareholders. The company retains earnings of £11.5 million. Of particular interest to investors is the earnings per share, which has risen from 25p last years to 31p this year.

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6. The financial statement known in U.K. as a profit and loss account or an income statement is referred to, in U.S.A., as a profit and loss statement, an income and expense statement or an operations statement. It shows how much profit or loss was generated by the operations of the company during the accounting period. In this case, operations may be considered as sales of goods or services. The profit from sales after the direct costs for producing the goods or services have been deducted is called gross income or gross profit. While income is produced, however, the business has certain other expenses – indirect costs related to the production of that income, such as general or selling expenses. The balance that is left when these further expenses are deducted is called net income or net profit.

7. The three basic types of business in terms of operations are service, merchandising, and manufacturing. A service business gives advice or service exclusively. An accounting firm, for example, offers services, as does a television repair shop. The giant travel and tourist industry, one of the largest industries in the world, sell services rather than goods. A merchandising business acquires goods for sale to its customers. A neighborhood grocery store may be considered a merchandising enterprise, and so may a huge mail-order and retail-outlet company like Sears-Roebuck. A manufacturing business changes the form of goods by analysis, as in an oil or a sugar refinery; by synthesis, as in a steel mill; or by assembly, as in an automobile assembly plant or an electronics factory that assembles consumer products like television sets.

An Operations Statement for a merchandising business

8. Copies of the various statements described above, together with the financial and operating data in the accounting record, are sent to owners, management personnel, labor unions, appropriate government bureaus, creditors, and the general public.

UNIT 2

THE BALANCE SHEET IN U.S.A.

Information about the nature of a transaction and the amount that is involved generally appears first on a business document, such as a sales invoice. Such documents are essential references in accounting because they reflect alterations in the company’s financial position and operating performance.

A typical sales invoice

Two basic financial statements are the balance sheet and the operations statement. The balance sheet shows the firm’s condition on the last day of the accounting period. It shows what the business owns and what it owes to its creditors or its owners. A business is always in a state of equilibrium. In other words, what it owns is equal to what it owes. This is expressed in the following accounting formula:

Assets = Liabilities + Owner’s Equity

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UNIT 3

THE BALANCE SHEET IN U.K.

1. In the balance sheet below, the fixed assets are broken down into intangibles (such as patents and goodwill, entered in the books at a value of £1.5 million) and tangible assets (such as freehold property, land and equipment, at a book value of £7.5 million).

2. The next heading is current assets and this is split into three: firstly stocks valued at £3.2 million, then debtors (in other words outstanding payment for goods sold) at £1.3 million, and thirdly cash at the bank, worth £350,000. The total of current assets is then reduced by the total of current liabilities, which in this case is £2.2 million and represents amounts owing to creditors, leaving a net figure of £2.65 million. Thus the total assets less the current liabilities amount to £11.65 million.

3. To reach the final balance this figure must be reduced by the sum of long-term liabilities such as loans and also any provisions. In this case £2.45 million is set aside for long-term loans and there is a £450,000 provision for deferred taxation. So this leaves a final balance of £8.75 million worth of net assets.

4. The net asset figure is represented by the final section of the balance sheet – capital and reserves. This company has a share capital of £ 6.5 million. This sum is topped up by a share premium account which represents the difference between the above issued share value and the actual price of the shares. In this case, the capital is further increased by £1.4 million. The company has also revalued its fixed assets to give them a more realistic market price so that the shareholders’ equity increases by a further £1.15 million and an equivalent amount is charged to depreciation in the profit and loss account. Finally, £300,000 is deducted in retained profit.

UNIT 4

COMPARING THE RESULTS OF COMPANIES IN DIFFERENT COUNTRIES (I)

By Richard Waters (abridged)

1. National accounting systems have developed at different rates and under different pressures (shareholder pressure in the Anglo-Saxon world, government pressure in many continental European countries). Net income reported under one convention bears little resemblance to that reported under another.

2. Does it matter? A growing number of accountants, stock exchanges and regulators think that it does. International capital markets cannot work efficiently without full information about the companies that are competing for capital. The debt markets have survived on credit ratings produced by recognized agencies: but equity investors, who are concerned with more than security and a fixed rate of return, need other, better ways of comparing companies.

3. The International Accounting Standards Committee, at its quarterly meeting in Copenhagen, took an important step in trying to tighten up international accounting rules. With the backing of stock exchanges, it hopes that these can become the standard for companies raising capital outside their home countries.

4. It is up to companies, investors and regulators to decide whether the IASC’s ideas should be taken forward. Lest they underestimate the importance of the task, they should consider the following example.

5. Airlines are big business. They have also sold a lot of shares to the public in recent years as governments around the world have shed their stakes in their national carriers. However, it is virtually impossible to compare the performance of different national airlines.

6. Take Japan Air Lines, which reported a net loss of $28m (£15.27m) in the year to March 31 1987 (to make comparisons easier, all figures have been translated into US dollars, either at

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exchange rates given by the company, such as JAL, or at the rate prevailing at the year end in question). Before understanding JAL’s results a reader needs to consider the following items: Japanese tax law allows companies to delay reporting income

arising from insurance claims. JAL’s delayed income from this source amounted to $76m during 1987 – nearly three times its reported profits.

JAL set aside $65m during the year to cover the expected costs of severance pay, but says that is only 40 per cent of the full amount. This implies that the full deduction from profits should have been $162.5m, although JAL gives no explanation in its accounts for this huge amount. The 40 per cent is taxdeductible, suggesting that the provision was made simply to take advantage of this tax concession.

The discount on bonds issued during the year was written off to profits. Elsewhere in the world, a consensus is forming that such costs are part of a company’s financing cost and should be spread over a number of years. The effect of JAL’s method: $7m off profits.

7. JAL is not alone in posing difficult questions for anyone hoping to arrive at its true profits. British Airways, which last year took over British Caledonian, adopted the standard British way of accounting for its acquisition: it wrote off the goodwill of £663m against reserves.

8. A US airline would have been required to write it off against future profits, although it could spread the cost over 40 years. When a new Australian accounting rule is introduced, an airline in that country would have to spread the cost over no more than 20 years.

9. Ignoring for a moment the rights or wrongs of these different approaches, the fact remains that they produce very different results. The IASC’s proposal is for goodwill to be written off over five years. That is bound to arouse antagonism on all sides, presenting the IASC with difficult task of convincing companies that comparability should come before their national version of what is right.

10. However, it is possible to compare BA to other countries’ airlines, or at leat those listed in the US. BA has to translate its figures into

US accounting language as a condition of being listed there. The result: British profits of $285m become US net income of $350m.

11. The industry, needless to say, does not rely on such unreliable figures for making performance comparisons. Its performance measure is revenue tonne kilometers – the number of miles of air travel that an airline sells during a year. This is the same in any language and does not need translating.

12. The difficulty of comparing profits shrinks into insignificance when compared with the difficulties of comparing balance sheets and, by extension, key ratios like gearing, return on capital, and so on.

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UNIT 5

LIQUIDITY, CAPITAL STRUCTURE, EFFICIENCY AND PROFITABILITY AS MEASURED BY RATIO ANALYSIS

1. Measurements of liquidity should answer the question: Can a company pay its short-term debts? There are two ratios commonly used to answer this question. Firstly, the current ratio, which measures the current assets against the current liabilities. In most cases, a healthy company would show a ratio above 1, in other words more current assets than current liabilities. Another method of measuring liquidity is the so-called quick ratio – this is particularly appropriate in manufacturing industries where stock levels can disguise the company’s true liquidity. The ratio is calculated in the same way as above but the stocks are deducted from the current assets.

2. The balance sheet will also reveal the gearing of the company – this is an indicator of the company’s capital structure and its ability to meet its long-term debts. The ratio expresses the relationship between shareholders’ funds and loan capital. Income gearing is also important and shows the ratio between profit and interest paid on borrowings. Relatively high borrowings would indicate vulnerability to an interest rate rise. Highly geared companies generally represent a greater risk for investors.

3. The balance sheet and the profit and loss account can be used to assess how efficiently a company manages its assets. Basically, sales are compared with investment in various assets. For example, in the retail sector, an important ratio which indicates efficiency is sales divided by stock – the resulting figure should be much higher than in the manufacturing sector where stock tends to show a much slower turnover. Another example of efficiency measurement is to calculate the average collection period on debts. This is found by dividing debtors by the sales per day. This can vary tremendously from industry to industry. In the retail sector it may well be as low as one or two days, whereas in the heavy manufacturing and service sectors it can range from thirty to ninety days.

4. Finally, profitability ratios show the manager’s use of the company’s resources. The profit margin figure (profit before tax divided by sales and expressed as a percentage) indicates the operational day-to-day profitability of the business. Return on capital employed can be calculated in a number of ways. One common method is to take profit before taxes and divide by the total assets – this is a good indicator of the use of all the assets of the company. From a shareholder’s point of view, the return on owner’s equity will be an important ratio; this is calculated by dividing the profit before taxes by the owner’s equity and expressing it as a percentage. If the company does not earn a reasonable return, the share price will fall and thus make it difficult to attract additional capital.

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UNIT 6

COMPARING THE RESULTS OF COMPANIES IN DIFFERENT COUNTRIES (II)

by Richard Waters (abridged)

1. A glance at the value of airline fleets shown in different companies’ accounts points to one fundamental difficulty. Lufthansa operates 151 aircraft which are shown in its accounts at nearly $3bn. JAL’s 77 aircraft (half the size of Lufthansa’s fleet), on the other hand, are recorded at $6.6bn, or more than twice the amount. And what about KLM’s 79 aircraft at $2bn and BA’s 197 at $3.3bn? The different mix of aircraft operated by different airlines, or different age profiles, surely does not account for such differences.

2. The first difficulty is that there are different methods of valuation. Whereas Lufthansa is required by law to show assets at historical cost, for instance, BA appears to feel free to apply various valuation methods to its aircraft. A revaluation of most of them in 1987 led to an additional $520m – equivalent to nearly half of BA’s total shareholders’ funds.

3. However, it did not revalue Concorde, which according to the accounts has a value of precisely nothing. With a range of valuation methods between different companies, not to mention different rates of depreciation, it becomes impossible to compare the value of fleets.

4. The second difficulty is that some aircraft are not shown in the balance sheet at all. Leased aircraft either may or may not be included, depending on the type of lease. Different countries have different tests for determining what should be recorded, making it still more difficult to compare airlines.

5. As a general rule, the more aircraft that do not appear in the balance sheet, the greater the level of borrowings that are kept out of the accounts and the lower the company’s gearing. Airlines may argue persuasively that they should not have to bring all

leased assets on to their accounts, but this does not make the readers’ task any easier.

6. Aircraft valuation becomes a simple exercise when compared with other balance-sheet problems. Take the UK and US versions of BA’s balance sheet. UK rules give the company shareholders’ funds of $1.2bn.

7. US accounting, on the other hand, adds $680m to this to reflect the value of goodwill that has been written off in the UK accounts; knocks off $575m to bring BA’s fleet back to its historical cost; and takes away a further $233 m to reflect the extra deferred taxes that US accounting rules say should be provided for.

8. These are all big numbers. But which version is ‘right’? At least the figures are available to allow the informed reader to make up his or her own mind. For many other companies they are not. And even when they are, it would be better if it were not left to the reader to make the adjustments.

9. The IASC is trying to fill this gap. However, it has a tough job ahead of it if it is to persuade the world that its rules are the right ones.

REVIEW II

I.According to the text ” THE PROFIT AND LOSS ACCOUNT (STATEMENT) ” only, are the following TRUE or FALSE?

1.Company consolidated profit and loss account generally includes five types of profits.

2.The income statement is referred to, in U.K., as an operations statement.

3.The net profit is generally divides three ways.4.The profit before tax is reached by deducting the minority

shareholders from the operating profit.5.After having paid the tax, the company will get the net profit.6.The profitability of the company is shown in the balance sheet or in

the cash flow statement.7.Preference shareholders’ dividend is fixed.8.Business in terms of operations is split into three.

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9.Cost of sales is another accounting used for direct costs.10.A special disaster fund is added as an extraordinary item.

II.MATCH the current assets ( namely, four items) and current liabilities ( one item) with the corresponding numerals, which are to be written in figures and letters, according to ” THE BALANCE SHEET IN U.K. ”.

II.WRITE a letter of application in reply to the job advertisement for a CONTROLLER or a FINANCE MANAGER. Consider the following aspects:

1.Give details about the job advertisement.2.Describe your relevant experience, skills and qualities.3.Describe how you meet the requirements of the job.4.Say when you are available for an interview.

SECTION IIIESSENTIALS OF BUDGETING AND

COST ACCOUNTING

UNIT 1

THE MASTER BUDGET. SALES AND PURCHASES BUDGETS

1. The primary objective of the budget is to establish a financial framework for the operations of the business. The accounting period for the budget is usually either the calendar year or the fiscal year. As we have noted, the fiscal year is any arbitrarily chosen twelve-month period that does not correspond to the calendar year. Many businesses have provisions for review and change of the budget more frequently, such as semiannually, quarterly, or even monthly.

2. A generally accepted budgeting device is a flexible master budget. This budget foresees that management plans to operate the business at various levels of activity and that all the different activities of the enterprise are included in the financial forecast. Budgets for various sections of the company are gathered together into one overall budget. Then, as the business year progresses, management can use the budget as a control device that permits monitoring of the company’s operations.

3. For our discussion, we will talk about a retail trade business. This type of enterprise purchases merchandise, sells those goods, pays its employees and its suppliers, and employs an administrative staff. It may also move into new headquarters or expand into new retail outlets. It must account for each activity. This is generally accomplished by means of separate budgets which then can be combined into a master budget.

4. One of the activity budgets is the sales budget. Information about unit prices, that is, the price of one item of each kind of merchandise sold, and the expected sales volume are the important entries for this budget. If the business sells more than one item, a provision for the sales mix must be added. This, of course, is the mixture of the different kinds and styles of goods sold by the retailer. A furniture store sells many different kinds of furniture with many different styles, and each piece of

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merchandise has its own unit price. In addition the furniture store may sell such goods as rugs, carpeting, or artificial flowers.

5. Sales budgets are designed to be both flexible and complete. The sales figures are adjusted for various reasons: some merchandise is returned for credit; a small but significant volume is unusable because of spoilage or damage; and further adjustment is necessary to account for allowances or discounts. Allowances are special price adjustment for certain customers; discounts are prices that are generally reduced, as when a store has a sale. All of these factors must be included in a complete sales budget. During changes in the business cycle, such as inflationary periods or recession, the principle of flexibility becomes extremely important. Prices are changed and allowances or discounts disappear or rise, depending on which change counteracts the adverse factors in the business cycle.

6. The purchases budget is the budget for the goods that the business will have to buy first in order to sell. The purchases budget is prepared after the sales budget is completed and after the existing inventory of goods for sale has been evaluated. The volume of purchases, the unit prices, and the purchase mix all reflect the estimates included in the sales budget.

7. The preparation and competent execution of a purchases budget often means the difference between business success or failure. Large inventories lying idle in warehouses drain the resources of a retail establishment. All or most of the merchandise must be sold by the close of a certain season. This is particularly true of retailers such as clothing stores, in which fashion plays an important part. The timing of the purchases called for in the budget in such cases is critical. The timing should be coordinated with the sales budget, because buyers need a certain amount of lead time to acquire the merchandise. Lead time is the period that elapses between ordering merchandise and displaying it for sale.

8. Contracts are important documents in the preparation of budget estimates. A contract with a supplier, either a manufacturer or a wholesaler, may, be the basis for estimating unit costs. If the contract lapses, however, it may be renewed at a higher price level, or a new source of supply may be necessary – again, often at a higher price. Contracts to which the company itself is not a party are often taken into account.

UNIT 2

THE OPERATING – EXPENSES, CASH AND CAPITAL – EXPENDITURES BUDGETS

1. After taking care of sales and purchases, the enterprise must calculate the expenses of conducting the business. This budget is commonly referred to as the operating-expenses budget. In the case of a retail establishment, it consists of two parts: one for those expenses which are incurred in selling the merchandise, and one for general and administrative expenses. The estimates of sales and general expenses are usually prepared monthly.

2. Once the sales budget and the operating-expenses budget are prepared, the accountant is ready to determine the break-even point. The break-even point is the minimum volume of sales the company needs to have, given the estimated operating expenses, in order not to incur a loss. The accuracy of the break-even point depends on the skill with which the operating expenses have been estimated.

3. The cash budget is somewhat different from other budgets. The other budgets are prepared on an accrual basis; that is, expenses are estimated for the period in which they are incurred and income is calculated for the period in which it is earned. These periods may differ from those in which actual cash is expended or in which cash payments are received. For example, a company’s accounting period ends on September 30, the last day of the third quarter. On September 28, the company orders large amount of office supplies. On an accrual basis, the purchase is shown in the third quarter, the quarter in which the expense is incurred, even though payment for the purchase is not ordinarily made until the fourth quarter. The same is true of credit sales. Those made near the end of an accounting period are probably not paid in cash until the following accounting period.

4. The cash budget, on the other hand, is prepared on a cash basis, estimating the accounting periods in which cash must be paid out

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or when it will be received. When preparing the cash budget, it is important to known what has been estimated in the sales, purchases, and expenses budgets in regard to receipts and disbursements because they will be summarized in the cash budget. Outstanding obligations at the beginning of the budget period are taken into account, and so are expected receipts from investments and collectible receivables that are expected to be received in the new accounting period.

5. The cash budget is often prepared each month. It can then be revised each succeeding month, incorporating new factors that affect the cash flow of the business. A company must know how much cash it has on hand to meet its obligations.

6. The estimated costs for new additions to plant facilities, or for replacement or improvement projects for the company’s fixed assets, make up the capital-expenditures budget. This budget may reflect a portion of a long-term planning project for this type of expenditure. A company may, for instance, have a five-year plan to improve and expand its plant facilities. The annual budget would then show only the part of the total amount to be spent during that particular year. This budget should therefore state whether changes in the rate of business activity will affect the long-term plan. For the benefit of management, the budget should indicate whether factors such as increased demand would make it desirable to speed up a long-term plan to expand production capacity; or, on the other hand, whether a reduction in business would make it desirable to slow down expansion or even stop it entirely.

UNIT 3

METHODS OF FINDING COSTS

1. One of the main objectives of industry is to determine the selling price of the products or the cost of services that are furnished by a company. To establish a selling price that ensures a profit, it is first necessary to determine the costs of making the product or of providing the service. This is the purpose of cost accounting, and many of the procedures of other branches of accounting have been adapted to achieve this end.

2. There are two principal methods of determining costs: the job-order cost accounting which is used to determine the cost of an individual item or of a batch, or job lot, of identical items and process cost accounting, suitable for use with the continuous-process type of manufacturing.

3. In job-order cost accounting, the accountant must first determine the prime, or direct cost of the product. The prime cost is the sum of direct material costs and direct labor costs.

4. Direct-material-costs data are obtained through the analysis of three perpetual inventories, that is, inventories that are maintained at all times. The first is a record of the raw materials on hand; the second is a record of the work in process; and the third is a record of the finished goods.

5. The basis for the raw-materials inventory is a “stores” ledger, which is a record of the raw materials on hand. Supporting documents for the stores ledger include purchase order, receiving reports, and store requisition slips.

6. The work-in-process and the finished goods inventories are also supported by ledgers that record the items actually being manufactured or the items in storage waiting to be sold of shipped. When the overhead is added to the prime cost, the resulting figure is called the factory cost.

7. The term overhead covers many different expenses, including the miscellaneous expenses of operating the plant. Depreciation and property taxes for the manufacturing plant, for example, are both accounted for as overhead costs, as is the plant foreman’s salary.

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Costs are subdivided into fixed, variable, and semivariable categories for the purpose of record keeping.

8. Indirect costs may be allocated, or assigned, to different products, job orders, or departments on the basis of a predetermined rate or percentage. This is called the burden rate. Sometimes an effort is made to determine actual indirect costs of each product or activity and to change them accordingly. However, this is usually very difficult to determine with any degree of accuracy. Thus, a predetermined burden rate is often used. For example, if a burden rate of $1 for every $10 of direct labor costs is predetermined, indirect costs of $6,000 are added to a job on which the direct labor cost was $60,000.

9. In process cost accounting, the indirect costs are accumulated for the process or for a department over a period of time. As in job-order costing, indirect costs are usually allocated on the basis of a predetermined burden rate. Whereas job-order cost accounting is supported by inventory ledgers, the process-oriented manufacturing concern maintains cost-accumulation ledgers. These ledgers are often supplemented for greater detail and clarity with cost-analysis sheets.

UNIT 4

COSTING SYSTEMS AS RELATED TO MANAGEMENT

1. Job-order costing and process costing are methods of finding costs. In addition, there are two systems which analyse these results in detail for the convenience of management. One of these is called full or absorption costing. In this system, all the fixed manufacturing costs become part of an inventory of manufactured goods. In essence, full costing provides an average fixed cost for a product.

2. The second system is known as direct or variable costing. It is based on the concept that the costs vary according to the volume of the product that is manufactured, so that an increase in volume will bring about an increase in variable costs. In other words, this system provides an average cost for a product.

3. The direct or variable costing gives management a better basis for making decisions concerning the level of manufacturing activity or the volume of goods to be carried in inventory.

4. The financial statements prepared under these two systems vary for any specific period according to the sales made in the same period. At the same time as the statements are issued, various schedules are also submitted to management in order to show detailed costs and to provide explanations when necessary. Such schedules usually give data about the cost of goods sold, the selling expenses, the general and administrative expenses, and nonoperating income and expense items.

5. Management may also require reports of costs, such as the payroll, taxes accrued or paid, production rates, and receipt or shipment both of raw materials and finished goods.

6. Cost accounting provides a systematic and logical process by which the cost of a product can be determined. This cost can then be used as a basis for determining the best selling price of a product. It also provides management with an extremely valuable decision-making tool.

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Self-assessment Test

Fill in the missing words in the sentences below by makingcombinationsom with the words ” budget” and ” costs ”. Choose fromthe following:

committee; current; fixed; functional; master; conversion; direct;fixed; indirect; labour.

1.Costs which are directly related to making a product (e.g. materials, labour and expenses) are known as ........ ..........

2....... .........is another way of expressing costs of changing materials into products.

3.Next year’s budget is being prepared by the ....... .......over the next few weeks.

4.They haven’t taken variable output levels into account and have set a ......... ..........of $ 800,000 for raw materials.

5.In order to have an effective management control system, we prepare a ....... .....for a short period of time.

6.The marketing department is divided into ten territories, each with its own ...... ........

7.The budgeted profit and loss account is incorporated in the final ..... ......once the board of directors has agreed it.

8. ..... ....... are not directly related to making a product (e.g. rent, administration).

9.Costs which always stay the same even if the number of items produced changes are ..... ......

10.The costs of paying workers to make the product are called .... ......

Answer Key

1.direct costs;2.conversion costs;3.budget committee;4.fixed budget;5.current budget; 6.functional budget;7.master budget;8.indirect costs;9.fixed costs;10.labour costs

Review IIII.The following jumbled sentences make up a short text about cost accounting. Do unjumble them and decide which order they should go in. After that, do try to translate them into Romanian.a.But to this have to be added all the factory’s overheads – rent or property taxes, electricity for lighting and heating, the maintenance department, the stores, the canteen, and so on.b.Finally, where a company does not want to calculate the price of specific orders or processes, it can use full costing or absorption costing, which allocates all fixed and variable costs to the company’s products.c.For example, if you produce 500 wooden door-knobs, each one requiring 100 grams of wood and taking the machine operator two minutes to make, you can easily calculate the direct cost.d.It is fairly easy to calculate the prime cost or direct cost of a manufactured article.e.One of these is job-order cost accounting, which involves establishing a price for an individual item or a particular batch ( a quantity of goods assembled or manufactured together ).f.There are lots of other expenses of running a business that cannot be charged to any one product, process or department, and companies have to price their products in such a way as to cover their administration and selling expenses, the research and development department, and so on.g.This is the sum of the direct costs of the raw materials or components that make up the product and the labour required to produce it, which, of course, vary directly with production.h.This is impossible where production involves a continuous process as with steel, flour or cement. In this case, companies often use process cost accounting, which determines costs over a given period of tlme.i.Various methods can be used to allocate all these expenses to the selling price of different products.

II.Complete the following sentences:1.Manufacturers have to find a way of...........all fixed and.......costs to their various products. 2.They have to cover the factory’s ........and things like administration and selling. 3.The direct cost of............and labour is easy to calculate.

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SECTION IVTHE ACCOUNTING FUNCTION OF

AUDITING

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UNIT 1

METAPHORS USED IN AUDITINGby David Walker (abridged)

1. An auditor finds out early in his training that he is a watchdog and not a bloodhound. From today, when the Auditing Practices Committee (APC) issues its long-awaited guideline on auditors and fraud, an auditor will also have to consider himself a whistle-blower.

2. The guideline sets out to clarify auditors’ responsibilities in relation to fraud, as well as other irregularities and errors. It recommends that auditors take a modestly pro-active role in reporting fraud to third parties.

3. The document acknowledges that an auditor’s primary duty is one of confidentiality to the client. But the document says an auditor should also consider throwing this narrow duty aside and think of the wider public interest.

4. Taking its cue from an ethical statement issued in 1988, Professional Contact in Relation to Defaults or Unlawful Acts, the documents spells out the circumstances when the public interest could be served by a nod and a wink to the Department of Trade and Industry or some other official authority.

5. Under normal circumstances, the auditor’s first step would be to alert the client’s management to the existence of fraud. But the guideline says that if senior managers or directors are involved in the fraud, the auditor may see fit to go over the head of the board of directors, even non-executive directors and the audit committee, to directly report to the regulatory authorities.

6. Alerting the authorities would be justified if the fraud is likely to result in a material gain or loss for any one person or group of people; is likely to be ‘repeated with impunity’ if not disclosed; or if ‘there is a general management ethic… of flouting the law and regulations’. The strength of the auditor’s evidence is deemed important too.

7. Legal advice on the matter given to the APC said auditors should attach importance to the wider interests of the company in any

case ‘where the auditor considered that the directors could not be relied upon to apply their minds properly to those interests’.

8. The advice continued: “An auditor will not be in breach of any legal duty if, although entitled to disclose, he fails to do so. His decision whether to do so or not is therefore a matter or professional judgement and not a matter of law. It is a decision which should reflect the proper expectations which the public has of his profession”.

9. So despite the codification of responsibilities within the guideline, it is all a matter of professional judgement. It appears that the only circumstance where the auditor of a company not in the financial sector definitely must ‘blow the whistle’ is when he stumbles upon treason; a practice for which there is as yet no APC guideline.

10. Today’s guideline – which for the first time establishes rules for auditors reporting on companies not in the financial sector – will offer solace to auditors confused about the precise nature of their duties.

11. The guideline makes it clear that the prime responsibility for detecting fraud rests with management. The auditor must plan an audit so that he or she has a ‘reasonable expectation’ of spotting serious misstatements which impinge on the truth and fairness of a set of accounts.

12. Thus the discovery of a major fraud after a set of accounts has been signed off is not necessary evidence that the auditors have failed to meet their responsibilities, the guideline will say. This is accurate-but hardly consolatory to companies who employ auditors or investors who rely on audited accounts which subsequently prove to be less than “true and fair”.

13. Investors, for one, are still reeling from the implications of the verdict in the Caparo case earlier this month which, in layman’s terms, said that auditors do not owe much of a duty to anybody other than existing shareholders.

14. Today’s guideline from the APC is pitched towards the practitioner and not the business public at large. It is unlikely to do much to tackle the gulf between what the public think auditors should do and what auditors themselves think that they are doing.

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UNIT 2

REPORTING ON FINANCIAL STATEMENTS

1. All banks incorporated in the UK must prepare financial statements in accordance with the Companies Act 1985 and are subject to the audit requirements of that Act. In addition, many foreign banks with UK branches choose to appoint an auditor to report on the financial statements of the UK branch. Both UK incorporated banks and UK branches of foreign banks are also subject to the requirements of the Banking Act 1987 and will generally be required to appoint reporting accountants (who will normally, but need not necessarily, be the auditors). The reporting accountants will report to the directors or the management of the bank in accordance with the specific instructions of the Bank of England on aspects of the bank’s records and systems and on the Bank of England returns used for prudential purposes.2. When performing an audit under the Companies Act, the

auditors need to carry out sufficient work to be able to report that:

the financial statements have been audited in accordance with auditing standards;

in their opinion the financial statements give a true and fair view of the bank’s state of affairs, its profit or loss and its cash flows; and

the financial statements have been properly prepared in accordance with the Companies Act.

3. To attain this objective the auditors will need to accumulate evidence about the transactions and balances included in the financial statements. An overall review of the financial statements will be necessary to determine whether in their opinion;

a) they have been prepared on the basis of acceptable accounting policies that have been consistently applied and are appropriate to the bank’s business;

b) the results of operations, state of affairs and other information disclosed in the financial statements are compatible both with each other and with the auditors’ knowledge of the bank;

c) there is adequate disclosure of all appropriate matters and the information contained in the financial statements is suitably classified and presented; and

d) the financial statements comply with all statutory requirements and other regulations that are relevant to the bank.4. It is from the conclusions drawn from these and other audit tests,

for example, compliance tests on systems and substantive tests, that the auditors are able to form an opinion on the financial statements.

5. Auditors in the UK have a fundamental duty to comply with UK auditing standards, which are included in the auditor’s operational standard issued by the Auditing Practices Committee of the Consultative Committee of Accountancy Bodies (CCAB) and are summarised under the following headings:

a) planning, control and recording;b) accounting systems;c) audit evidence;d) internal controls; ande) review of financial statements.

6. Before reporting, the auditors should consider whether it is necessary for them to discuss any matters of concern or relevance with the Bank of England. The auditors should also consider whether they need to obtain confirmation from the Bank of England that they are not aware of any significant matters that might have implications for their report. Generally, however, the Bank of England should take the initiative in informing the auditors about such matters.

7. The form of any audit report that may be given on branches of foreign banks will depend on the agreed scope of the auditors’ work. Where the bank’s management requests an opinion on whether the financial statements fairly present the state of the branch’s affairs and its results for the period, the auditors must consider whether they have obtained sufficient assurance that all the transactions and commitments relating to the branch and the income and expense arising from them have been properly recorded in the branch accounting records.

8. Problems may arise where transactions or commitments are entered into by head office on behalf of the branch, or where loan

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loss provisions relating to the branch are maintained at head office. In these circumstances, it may not be possible for the auditors to provide a ‘‘rue and fair’’ opinion on the financial statements of the branch as a stand-alone entity.

9. In addition to their report on the financial statements, the auditors should communicate to management any significant control weaknesses that they have identified during the course of their work.These should be reported to the appropriate level of senior management as soon as practicable, and will generally be recorded in a management letter.

10. The scope of the work performed by reporting accountants generally differs in nature and extent from that performed by the auditors. The requirements of the Banking Act, as explained in the auditing guideline, are more extensive than those of the Companies Act. The auditors must consider not only whether it will be possible for the bank to prepare reliable financial statements at a particular point in time, but also whether the accounting records are maintained in such a way as to enable the directors and management to control the business effectively from day to day.

11. The reporting accountants must consider whether the accounting and other records and the management information, that is produced from those records are sufficient to enable management to monitor and control the risk relating to the various activities of the bank and to make timely and informed decisions. It is possible therefore for auditors to conclude that accounting records are adequate for Companies Act purposes but, in their separate capacity as reporting accountants, that they are adequate for Banking Act purposes.

12. The auditors may examine the internal control systems as part of the audit, but are obliged to do so only to the extent that they need to place reliance on those systems. Generally, the auditors are concerned only with those risks and control weaknesses that may result in a material mis-statement in the financial statements.

13. The reporting accountants on the other hand are concerned with the much wider range of inherent risks. Some of these risks will have little relevance to the financial statements, but may nevertheless be important to the prudent management of a bank’s business.

14. The types of controls that are examined by reporting accountants and auditors may also differ. The auditors may be content to rely on detective controls, which provide assurance that any misappropriation or loss is properly reflected in the financial statements. The reporting accountants may be more concerned with preventative controls, which reduce the likelihood of loss. The reporting accountants’ examination of internal controls is therefore likely to be wider in scope and extent than that of the statutory auditors.

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UNIT 3

SCOPE AND OPINION PARAGRAPHS IN AUDITORS’ LETTERS

1. The accountant’s judgement or opinion on the fairness of the records is contained in a document sent to the client upon completion of the audit. It consists of a letter addressed to the client that contains both a scope paragraph and an opinion paragraph.

2. The scope paragraph states the extent or range of the accountant’s examination. The accountant states that he has examined the balance sheet, the statement of operations, and the statement of retained income for the accounting period.

3. In addition to the extent of the audit, the scope paragraph also states the standards that have been used for the audit. General categories for auditing have been developed in the accounting profession. These categories cover technical competence, independence of attitude, and reporting standards.

4. An independent auditor who examines a company’s records follows certain standards of field work. These deal with the planning and supervision, if necessary, of the audit. He or she is responsible for obtaining a reasonable and appropriate amount of evidential material from business papers, ledgers, and other sources in arriving at an opinion on the accuracy of the financial statements.

5. The reporting standards deal with the contents of the report. The report must state whether the financial statements of the organization have been prepared in accordance with generally accepted accounting principles. Furthermore, these principles must have been observed in the current accounting period in relation to the previous period. Unless the report states otherwise, the auditor verifies that the financial statements can be considered sufficient. The report must either express an opinion on the condition of the fiscal records or state that no opinion can be expressed, listing the reasons for the conclusion.

6. The opinion paragraph of the auditor’s letter meets the standards given immediately above. The opinion is based on a careful examination. To reach his or her conclusions, the auditor uses whatever tests and procedures he or she thinks are necessary.

7. The language of the opinion paragraph is important and must be precise. It can express several different opinions that fall into definite categories:

a) Unqualified opinion. The auditor is able to satisfy himself by through examination of the accounting records that the financial statements are in accordance with generally accepted accounting principles on a basis that is consistent with the practices of the previous accounting period. The opinion in the letter given as an illustration is unqualified:

The Board of DirectorsLederer Furniture Company, Inc.

I have examined the balance sheet of the Lederer Furniture Company, Inc., as of December 31, 1976, as well as the related statements of income and retained earnings and changes in financial position for the year ending on that date. My examination was made in accordance with generally accepted standards of auditing. It included tests of the accounting records and those other procedures that I considered necessary.

In my opinion, the accompanying balance sheet and statement of income and retained earnings present fairly the financial condition of Lederer Furniture Company, Inc., on December 31, 1976, and the results of its operations for the year ending on that date, in conformity with generally accepted principles of accounting applied on a basis consistent with that of the year preceding.

Daniel M. FletcherCertified Public Accountant

New York, New YorkJanuary 30, 1997

b) Qualified opinion. The auditor’s opinion is affected by procedural omissions and variations in keeping with the financial records. In this case, the auditor has to give a clear explanation of

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the reasons for the qualification and of the effect on financial position and results of operations.

c) Disclaimer of opinion. The auditor has not obtained sufficient competent evidential matter to form an opinion on the fairness of presentation of the financial statements as a whole. Disclaiming an opinion may arise either from a serious limitation on the scope of examination of from the existence of unusual uncertainties concerning the amount of an item or the outcome of a matter materially affecting financial position or results of operations. In some situations where a disclaimer of opinion is required, a piecemeal opinion may be given. This kind of opinion may be offered when some but not all aspects of the statements, such as inventory, can be audited and confirmed.

d) Adverse opinion. The auditor feels that the financial statements do not present fairly the financial position or results of operations in conformity with generally accepted accounting principles. This kind of opinion is required in any report where the exceptions to fairness of presentation are so evident that in the auditor’s judgement a qualified opinion is not justified. In such circumstances, a disclaimer of opinion is inappropriate because the auditor has sufficient information to form an opinion that the financial statements are not fairly presented.

UNIT 4

AN AUDIT ON THE ADEQUACY OF MONEY LAUNDERING

“Money laundering” embraces all those procedures that make it appear that money obtained illegally has originated from a legitimate source. Thus, for example, drug dealers need to conceal the origin of their income and often to disguise its true ownership. At the same time they need to have control of their money, to be able to exchange it from one currency to another or transfer it between accounts. The first and crucial step is to introduce cash into the banking system, either by depositing it or by selling it for a valuable asset, such as gold. The guidance note describes three stages of money laundering that could alert a bank:

a) Placement. Depositing the cash proceeds from an illegal activity.

b) Layering. Separating illicit proceeds from their source by creating complex layers of financial transactions designed to disguise the trail and provide anonymity.

c) Integration. Giving apparent legitimacy to criminally derived wealth by reintroducing the laundered proceeds of illegally acquired money back into the economy to support legitimate business activities.

It is important to note that (b) and (c) will often involve lending as well as deposit-taking. An audit of the adequacy of money laundering control procedures and training should involve:

a) Scrutinising the bank’s high level procedures to ensure that: there are procedures for developing and communicating

group policies on money laundering: internal audit or inspection departments are instructed to

confirm regularly that there has been compliance with politicies, procedures and controls relating to money laundering:

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staff are provided with training and guidance on the procedures and controls and their legal obligations.

There are procedures for generating a level of awareness and vigilance that facilitates the reporting of suspicions; and compliance by subsidiaries and overseas branches is monitored.

Where a branch of a foreign bank is being examined, account should be taken of any limitations on the scope this places on the audit work.

b) Confirming that there are operating procedures for: account opening; counter transactions; safe custody and safe deposit boxes; retention of records; monitoring transactions, and recognizing suspicious transactions:and that the operating instructions are: in accordance with the UK guidelines; easily understandable by all employees; fully in compliance with any relevant law; compatible with controls maintained by other banks; (where

appropriate) approved, tacitly or expressly, by the local central bank; and that they

do not deter bona fide customers; and do not warn customers of any suspicion.c) Reviewing controls to ensure that adequate policies,

management systems and appropriate day to day operating instructions are in place. This should include an examination of information and instructions that are disseminated by senior management to maintain an effective level of awareness amongst staff.

d) Meeting with the manager responsible for receiving reports of suspicious transactions and for reporting these to the competent authority; visiting a sample of branches or departments and, by questioning staff, assessing their level of knowledge and awareness of the bank’s procedures to counter money laundering; confirming that the bank’s internal guidelines and procedures are being followed from day to day.

e) Reviewing the reports of suspicious transactions to assess whether they are sufficiently recorded and appear to be well founded;

reviewing the decisions of the reporting officer to ensure that all reasonable suspicion reports from branches are passed to the authorities. It is important to check that each report is limited to the information needed to fulfil the statutory reporting requirements.

f) Assessing the adequacy of the account opening and customer identification procedures, by reference to the guideline.

Review IV

I.Indicate whether the following statements in ” Metaphors Used in Auditing ” are true (T) or false (F) :

1.The client confirms an auditor’s first responsability of confidentiality to his client.

2.The report suggests auditors must also consider other publics.3.Auditors should always go direct to the regulatory authorities

in cases of fraud.4.There are no cases where an auditor is legally obliged to

disclose information to the authorities.5.Most ’professional people’ are aware of what auditors do.6.An auditor’s role is very often confused with that of an

accountant.

II. MATCH these three roles ( the expressions are metaphors) with their best definition:

Roles: 1.Watchdog; 2.Bloodhound; 3.Whistle-blower.

Definitions: a.Responsibility for overseeing a company’s finances; b.Responsibility for informing the authorities of malpractice; c.Responsibility for tracking down the instigators of malpractice.

III. MATCH the words in the first list with their best synonym in the second one:

1.to alert; 2.to stumble upon; 3. to spot; 4. To give a nod and a wink; 5.pro-active; 6.to spell out; 7. to see fit; 8.impunity; 9.to flout; 10.solace; 11.to impinge upon; 12.a gulf.

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a.to affect; b.consolation;c.to consider right; d.to state clearly; e.tocome across; f.to warn; g.to notice; h.to inform indirectly; i.initiating; j.to openly ignore; k.an abyss; l.freedom from punishment.

IV.ANSWER the following questions focused on ” Reporting on Financial Statements:

1.Which are the two types of banks existing in the U.K.?2.Which are the Acts the banks in the U.K. must refer to in order

to prepare their financial statements?3.Who are the persons employed by the banks to perform work

in accordance with the Acts specified and what are their obligations?4.Which are the requirements of the Companies Act?5.Can you mention the audit tests used by the auditors to form

an opinion on the financial statements?6.Which are the U.K. auditing standards?7.Are there any differences between work performed by the

auditors and that performed by the reporting accountants?8.Can you specify the control types examined by the auditors

and the reporting accountants?

SECTION VCONSOLIDATED FINANCIAL

STATEMENTS

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UNIT 1

THE BASIC IDEA

Consolidated financial statements combine the separate financial statements of two or more companies to yield a single set of financial statements as if the individual companies were really one. What is the rationale for preparing consolidated financial statements? Often a business finds it advantageous to organize itself as a set of separate (legal) corporate entities rather than as one large corporate entity. For example, tax savings sometimes occur because of the way corporate income tax rates are structured. Or a company may separately incorporate the components of its business to limit legal liability. Multinationals are often required by the countries in which they do business to set up a separate corporation in each country. The point is that a legal entity is not necessarily the same as an economic entity. From an economic point of view, the activities of these various legal entities are centrally controlled from corporate headquarters. Thus, the intent of consolidated financial statements is to provide financial accounting information about the group of companies from an overall perspective.

Transactions among the members of a corporate family are not included on consolidated financial statements; only assets, liabilities, revenues, and expenses with external third parties are shown. By law, however, the separate corporate entities are required to keep their own accounting records and to prepare individual financial statements. This means that transactions with other members of the group must be identified so they can be excluded when the consolidated statements are prepared. The situation is analogous to preparing combined financial statements for a family. Even though a child may owe a parent some money, from the perspective of the family entity, the liability on the child’s personal balance sheet and the receivable on the parent’s offset one another. When the child is given his or her weekly allowance, there is a transfer of funds on an individual basis. However, the family unit is no better or worse off as a result. The family’s wealth is affected only when that money is given to someone outside the family. Thus, transactions that are all in

the family affect individual members but not the family as a whole. The same holds true for corporate “families”.

The process of preparing consolidated financial statements involves adding up the individual assets, liabilities, revenues, and expenses reported on the separate financial statements and then eliminating the intracompany ones. One company – the parent – normally dominates the other subsidiary companies. Taking a simple example, assume the following selected items form the individual financial statements of the parent and one subsidiary company:

The $50 receivable that Parent includes on its financial statements and the $50 payable included on Subsidiary’s statements represent an intracompany item. Since the purpose of consolidated financial statements is to treat the separate entities as if they were one, it would be incorrect to include this item on the consolidated financial statements. After all, the company cannot owe itself. Similarly, from a consolidated perspective, revenues and expenses would each be overstated by $400 if the rental transaction were included on the consolidated financial statements. Accountants handle these kinds of things by preparing a consolidation worksheet, as illustrated by the following:

Thus, on a consolidated basis, receivables are $590; payables are $140; revenues are $3,900; and expenses total $3,100.

To reiterate, the purpose of consolidated financial statements is to present information from an overall perspective about a group of companies under common control and operating as an economic unit.

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UNIT 2

AN INTERNATIONAL PERSPECTIVE ON CONSOLIDATED FINANCIAL STATEMENTS

Consolidated financial statements first appeared around the turn of the 20th century in the United States. This was a time of great economic expansion during which a number of corporations grew into giants. The era witnessed a wave of corporate mergers. It is said that J.P. Morgan was so proud of his U.S.Steel Company (the first billion-dollar company in the world) that he insisted on preparing and disseminating consolidated financial statements since the company’s inception in 1901. Since holding companies first became important in the United States, it is nor surprising that U.S. accountants were the first to experiment with consolidated financial statements. These statements are now a part of U.S. generally accepted accounting principles.

Holding companies became important in Great Britain and the Netherlands in the 1920s, so consolidated financial statements appeared there somewhat later than in the United States. Today they are required in both countries. The practice moved much more slowly in the other European countries: German law began requiring consolidations in the 1960s, although for domestic German subsidiaries only. The requirement was extended to all subsidiaries – German and non-German – effective 1990. French law requiring consolidated financial statements was enacted in the late 1980s. In Italy, only companies whose shares are listed on the stock exchange must prepare consolidated statements. In Switzerland, there are no legal requirements for consolidated statements, but a growing number of major companies prepare them anyway. At the moment, Europe represents a rather “mixed bag”. Japan’s requirement dates from 1977.

The observance or nonobservance of consolidated financial statements in a country can be related to several of the variables shaping accounting development.1. The Relationship between Business and Capital Providers.

Group financial statements were first accepted in the Netherlands,

Great Britain, and the United States – countries where financial accounting is oriented toward the decision needs of a diverse set of investors and creditors for whom the annual report is an important source of information about the company. Consolidated financial statements are also often used by multinational corporations – regardless of home country – that have global financing strategies. When a company secures funds on a worldwide basis, it probably prepares consolidated financial statements. Thus, the worldwide competition for funds seems to be propelling this practice.

2. The Legalistic/Nonlegalistic Orientation of Accounting. The legalistic/nonlegalistic orientation of accounting has also been an influence. It stands to reason that countries with a legalistic approach to accounting will tend to focus on the legal entity as the object to be accounted for. Combining parent and subsidiary financial statements means combining separate financial statements of separate legal entities. It may indeed be true that a group of companies operates as an economic unit, but the idea exists, after all, only conceptually. Consolidated financial statements represent accounting fiction to those with a legalistic orientation. It takes a certain amount of creativity to accept the notion of group statements, and accounting practices in legalistically oriented countries are usually not as innovative.

3. Political and Economic Ties. Finally, political and economic ties affect this practice. Accounting technology is imported and exported, which is why consolidations are customary in Mexico and the Philippines, countries heavily influenced by the United States. As a result of U.K. influence, such statements are also widespread among British Commonwealth countries such as Australia, Malaysia, and South Africa. One of the most dramatic examples today is occurring within the European Community (EC). The Seventh Company Law Directive requiring consolidated accounts was adopted in 1983, and full implementation by EC member countries is expected during the 1990s. Once this happens, consolidated statements will become common in EC countries. The recent changes in German and French laws discussed above are the direct result of the Seventh Directive.

Preparing consolidated financial statements is becoming the norm for the world’s multinational corporations. Investors realize that

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without consolidated financial stetemnts, companies can conceal losses in unconsolidated subsidiaries and thus hide the economic status of the entire group. To illustrate, consider the consolidations example discussed earlier. Suppose that the parent company is operating at below-normal profits. It could increase its reported profits by increasing the rental charge to the subsidiary above the current $400 amount. As you know, from a consolidated perspective, raising the rent has no effect on group profits since the rent is intracompany and gets eliminated in the consolidation process. But as far as the parent’s own financial statements are concerned, an increased rental charge to the subsidiary “drops right down into income”. The parent could accomplish the same result by shifting some of its employees to the subsidiary’s payroll. Again, this would not affect consolidated profits, but it directly increases the parent’s profits by reducing expenses. A third possibility is to sell some inventory to the subsidiary at inflated prices.

Firms that do not publish consolidated statements typically publish parent-only financial statements. Since they do not publish the subsidiaries’ separate financial statements, they have an opportunity to control their profits using methods like those described above. Such practices appear to have been widespread in Japan before the 1977 requirement for consolidated financial statements. A Business Week article appearing at the time discussed the “tradition-honored Japanese practice of ’window dressing’ the parent company financial results by showing losses onto hapless subsidiaries, whose red ink was seldom revealed”. And the article also noted that implementing the new accounting standard “is drastically altering the way many large Japanese companies do business”1.

We are not suggesting that all multinational companies preparing parent-only statements engage in such practices. However, knowledge of these possibilities casts a long shadow over such financial statements. And corporations that think they are fooling the resource providers probably are not.

The trend toward consolidated financial statements is unmistakable. Standard 27, “Consolidated Financial Statements and Accounting for Investments in Subsidiaries”, issued by the International Accounting Standard Committee (IASC), reinforces this

trend. Standard 27 modifies (and supercedes) the earlier Standard issued in 1976.

Having argued in favor of consolidated financial statements, we should also point out that they have their limitations. If a company is heavily dependent on a particular product line or on a certain area of the world for its profits, consolidated financial statements can mask such dependencies without additional disclosures. Also, the existence of specific unprofitable operations may be somewhat hidden when blended with the rest of the company. And, changing product mixes are harder to detect unless the company provides additional information. For these reasons corporations are increasingly disclosing – on a supplemental basis – detailed accounting information by product line and geografic area.

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UNIT 3

FOREIGN CURRENCY TRANSLATION

The foreign subsidiaries of multinational corporations normally keep their accounting records and prepare their financial statements in the currency of the country in which they are located. They do this because it would be too inconvenient to transact business in anything other than the local currency and too impractical to record these transactions in acounting records using another country’s currency. As a result, multinational corporations find that when they prepare their consolidated financial statements, the financial statements from individual foreign subsidiaries must be translated from the currency of the foreign country into the currency of the country where the multinational is headquartered. A U.S. multinational corporation, for example, may have to translate separate statements from pounds, pesos, francs, yen, marks, and lire into U.S. dollars.

Exchange Rates

The major currencies of the world are traded in many places and in many ways. An exchange rate is the price of one currency relative to another; that is, how much of one currency it takes to buy so much of another currency.

Exchange rates are not stable over time; they fluctuate just like the price of nearly everything else does. Exchange rates change for the following reasons:

1. Trade balance of payments surpluses or deficits. When a country exports more than it imports, it is said to run a trade balance of payments surplus. Surpluses cause the nations’s currency to appreciate in value (i.e., to strengthen). The opposite condition – deficits – causes a currency to command less of other nations’ currencies.

2. Relative rates of inflation. Currencies of countries with higher rates of inflation depreciate relative to the currencies of countries with lower levels of inflation. Generally speaking, inflation means that one is able to buy less and less of everything (including another country’s currency) for a fixed amount of one’s own currency.

3. Relative interest rates. Whenever one nation has higher interest rates relative to other nations, its currency appreaciates in value. (Foreigners purchase more of its currency in order to invest in and earn the higher interest).

4. Political factors and government intervention. For international transactions the currencies of countries considered politically stable tend to be favored over the currencies of unstable countries. Governments also buy and sell currencies when they want to change exchange rates.

The Problem with the Current Rate Mathod

Given that exchange rates change, a question arises as to which exchange rate should be used to translate the financial statemnts of a foreign subsidiary. The exchange rate at balance sheet date (this is called the current rate method) may seem a logical choice, but the problem with translating all balance sheet and income statements items using the rate existing at balance sheet date is that the procedure is incompatible with historical cost, which is, of course, the basis for current generally accepted accounting principles.

You can see why in the following example. Suppose a U.S. parent invests $30,000 in a foreign subsidiary and the subsidiary converts the money to its local currency when the exchange rate is 1 LC (local currency) = $1,25. The foreign subsidiary takes its LC24,000 ($30,000 1.25) and buys land. On a historical cost basis the land has a value of LC24,000 or $30,000. If by year-end the exchange rate changes to 1 LC = $1.50 and is used to translate the LC24,00 piece of land, it will appear on the consolidated. U.S. dollar financial statements at $36,000 [LC24,000 × (1 LC = $1.50)]. The piece of land appears to have magically increased in value! An alternative exchange rate to use is the one existing when the land was bought (i.e., 1LC = $1,25). Accountants call this the “historical” exchange rate. In this way the land would always appear on the consolidated financial statements at $30,000.

The Problem with the Temporal Method

Unfortunately, another problem arises when historical exchange rates are used (the temporal method of translation). Since the various assets are acquired at different times, different exchange

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rates have to be used to translate them. When this happens, the translated balance sheet no longer balances. What to do with the difference between debits and credits is a highly controversial subject among accountants. The amount of the imbalance arises mechanically as a result of the translation process and does not fit the definition of asset, liability, or owners’ equity. Yet it has to go somewhere to preserve the accounting equation.

The following example illustrates the point. Assume that on January 1, U.S. Multinational, Inc. (USM), forms a foreign subsidiary named Foreign Sub. USMI converts $100,000 into Foreign Sub’s local currency (LC) at a time when the exchange rate is 1 LC = $1.25. The initial investment, therefore, is LC80,000. Foreign Sub’s opening balance sheet (in local currency and dollars) looks like this:

FOREIGN SUBBalance Sheet

January 1Cash LC80,000 × (1LC = $1.25) = $100,000Owners’ equity LC80,000 × (1LC = $1.25) = $100,000

Now assume that on February 1, when the exchange rate is 1LC = $1.30, Foreign Sub buys LC40,000 worth of inventory. On February 28, when the exchange rate is 1LC = $1.40, Foreign Sub buys a fixed asset for LC40,000. The March 1 balance sheet will look like this:

FOREIGN SUBBalance Sheet

March 1Inventory LC40,000 × (1LC = $1.30) = $52,000Fixed asset LC40,000 × (1LC = $1.40) = $56,000 LC80,000 $108,000Owners’ equity LC80,000 × (1LC = $1.25) = $100,000 LC80,000 $100,000

While the balance sheet before translation (in local currency) balances, it does not balance after translation into U.S. dollars. In the translated balance sheet, debits exceed credits by $8,000. What to do with the nonexistent credit is a good question, and accountants disagree on the answer.

A conclusion may be apparent to you. Preserving the historical cost basis of accounting by translating foreign financial statements at different historical exchange rates introduces a dangling debit or credit whose nature is difficult to define. That problem can be solved by translating financial statements using a single exchange rate (the so-called current rate method), but the procedure is inconsistent with the historical cost basis of accounting. Either choice involves some undesirable side effects.

Self-assessment Test

Unjumble the fifteen jumbled items (a-o) of a CONSOLIDATED PROFIT AND LOSS ACCOUNT and decide which order from 1 to 15 they should go in:

a.Minority shareholders; b.Profit after tax; c.Ordinary shareholders’ dividend; d.Gross profit; e.Direct costs; f.Earnings per share; g.Net profit; h.Preference shareholders’ dividend; i.Retained earnings; j.Tax; k.Fixed costs; l.Turnover; m. Operating profit; n.Profit before tax; o. Extraordinary item.

1- 2- 3- 4- 5- 6- 7- 8- 9- 10- 11- 12- 13- 14- 15-

Answer Key

1l 2e 3d 4k 5m 6a 7n 8j 9b 10o 11g 12h 13c 14i 15f

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MINI-GLOSSARIES OF ACCOUNTING:

I. ENGLISH – ENGLISH

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Accelerated depreciation Any one of a number of allowed methods of calculating depreciation that permit greater amounts of deductions in earlier years than permitted under the straight-line method, which assumes equal depreciation during each year of the asset’s life.Accounting principles Rules and guidelines of accounting. They determine such matters as the measurement of assets, the timing of revenue recognition, and the accrual of expenses. The “ground rules” for financial reporting are referred to as Generally Accepted Accounting Principles (GAAP). To be “generally accepted”, an accounting principle must have “substantial authoritative support” such as by promulgation of a Financial Accounting Standards Board (FASB) pronouncement. Accounting principles are based on the important objectives of financial reporting. An example of an accounting principle is accrual.Accrual accounting Accounting method whereby income and expense items are recognized as they are earned or incurred, even though they may not have been received or actually paid in cash. The alternative is cash basis accounting.Amortization

1. Reduction of a debt by periodic charges to assets or liabilities, such as payments on mortgages.

2. In accounting statements, the systematic write-off of costs incurred to acquire an intangible asset, such as patents, copyrights, goodwill, organization, and expenses.Analytical review Auditing process that tests relationships among accounts and identifies material changes. It involves analyzing significat ratios and trends for unusual change and questionable items. Included in the analytical review process are: (1) reading important documents and analyzing their accounting and financial effects; (2) reviewing the ectivity in an account between interim and year end, especially noting entries out of the ordinary; (3) comparing current period account balances to prior periods as well as to budgeted amounts, noting reasonableness of account balances by evaluating logical relationships among them (i.e., relating payables to expenses, accounts receivable to sales).Appreciation In general, any increase in the market value of an asset. When used in international finance, appreciation occurs when a flexible exchange rate changes so that it takes more of a foreign nation’s currency to purchase a unit of the domestic nation’s currency, or, conversely, when a unit of the domestic nation’s

currency can purchase more of the foreign currency. Contrast Depreciation.Assets Anything owned that has value. See Balance sheet; contrast with Liabilities.Audit Inspection of the accounting records and procedures of a business, government unit, or other reporting entity by a trained accountant, for the purpose of verifying the accuracy and completeness of the records. It may be conducted by a member of the organization (internal audit) or by an outsider (independent audit). A CPA audit determines the overall validity of financial statements. A tax (IRS) audit determines whether the appropriate tax was paid. An internal audit generally determines whether the company’s procedures are followed and whether embezzlement or other illegal activity occurred.Balance of payments The system of recording all of a country’s economic transactions with the rest of the world during a particular time period. The balance of payments is typically divided into subaccounts, such as the capital and current accounts. The current account covers imports and exports of goods; the capital accounts covers movements of investments. These subaccounts may show a deficit or surplus; the overall balance of payments, however, will not be in surplus or deficit since every dollar spent on foreign items is returned to buy U.S. goods or securities. Balance sheet Financial report showing the status of a company’s assets, liabilities, and net worth on a given date. The fundamental accounting equation featured on a balance sheet is that assets are equal to liabilities and net worth. Unlike an income statement, which shows the results of operations over a period of time, a balance sheet shows the state of affairs at one point in time. In other words, a balance sheet shows the state of affairs at one point in time. In other words, a balance sheet is a snapshot, not a motion picture. See Assets; Income statement; Liabilities; Net worth.Bankruptcy State of insolvency of an individual or an organization, that is, an inability to pay debts. There are two kinds of legal bankruptcy under U.S. law: Chapter 7 or involuntary, when one or more creditors bring the petition to have a debtor judged insolvent by a court; and Chapter 11, or voluntary, when the debtor brings the

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petition. In both cases the objective is an orderly and equitable settlement of obligations.Base period Particular time in the past used as the yardstick or starting point when measuring economic data. A base period is usually a year or an average of years; it can also be a month or other time period.Base year Particular time in the past used as a yardstick for measuring economic data. For example, the rate of inflation is determined by measuring current prices against those that prevailed in a base year; the real GDP is calculated by valuing the current year’s output at prices prevailed during a base year.Blind entry

1. Entry that reveals only its classificatory identity, appropriate debit and credit amounts, and does not include an explanatory description of the transaction.

2. Posting to a ledger account not documented by a journal or other source record.Blind trust Trust where assets are not disclosed to their owner. This prevents the underlying asset owner, while in an official public capacity, from being charged with favoring companies in which he owns stock.Blue chip Informal term for the common stock of a big, high-quality company with a tradition of profit growth and regular dividends.Blue-collar Worker line employee performing a type of work that often requires a work uniform, which may be blue in color, hence blue-collar. Blue-collar workers range from unskilled to skilled employees. They are not exempt from hour and wage laws and therefore must be paid overtime for working more than 40 hours per week.Book value Value of individual assets, or of a company’s stock calculated as original cost less allowances for depreciation. Book value may vary from current market value although accounting principles require that assets be carried at the lower of cost or market values.Bottom line

1. Net income after taxes.2. Expression as to the end-result of something. An example is

the sales generated from an advertising compaign.

Budget Estimate of revenues and expenditures for a specified period.Business Commercial enterprise, profession, or trade operated for the purpose of earning a profit by providing a good or service. Businesses can be organized as proprietorships, partnerships, or corporations.Capital In economics, capital is factories, machines, and other man-made inputs into the production process. Economists differentiate between capital – the actual inputs – and the funds used to finance the purchase of the capital. In business, capital refers to the amount of money invested in an enterprise. In personal finance, it usually means the funds, sometimes called principal, put in financial investments, as distinguished from the interest and dividends earned by the capital. See also Working capital.Capital account The balance of payments account that keeps track of short – (under one year) and long-term investment funds flowing between the reporting country and foreign countries. Examples of subaccounts include bank deposits, currency holdings, securities transactions, loans, bond issues sold abroad, and direct investment in foreign plant and equipment. A positive capital account balance means more funds have flowed into the reporting country than outward.Capital asset1. Asset purchased for use in production over long periods of time rather than for resale. It includes (a) land, buildings, plant and equipment, mineral deposits, and timber reserves; (b) patents, goodwill, trademarks, and leaseholds; and (c) investments in affiliated companies.2. In taxation, property held by a taxpayer, except cash, inventoriable assets, merchandise held for sale, receivables, and certain intangibles.3. Fixed asset usually consisting of tangible assets such as plant and equipment and intangible assets such as a patent.Capital expenditure An acquisition or an improvement (as distinguished from a repair) that will have a life of more than one year. See Capital improvement.Capital flight Movement of large sums of money from one country to another to escape political or economic turmoil or to seek higher

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rates of return. The United States is perceived as a safe haven for capital.Capital gain The amount by which the market value of a capital asset or security investment exceeds its purchase price. Gains are said to be realized when the asset is sold and unrealized when simply held. Long-term capital goins, defined by the holding period, have at times been subject to favorable tax treatment by the Internal Revenue Service. See also Capital loss.Capital goods Goods, such as industrial buildings, machinery, and equipment used in the production of other goods, as well as highways, office buildings, and government installations. In the aggregate such goods influence the country’s productive capacity.Capital improvement Betterment to a building or equipment that extends its life or increases its usefulness or productivity. The cost of a capital improvement is added to the basis of the asset improved and then depreciated, in contrast to repairs and maintenance, which are expensed currently.Capital intensive Requiring large investments in capital assets. Motor-vehicle and steel production are capital intensive industries. To provide an acceptable return on investment, such industries must have a high margin of profit or a low cost or borrowing. The term capital intensive is sometimes used to mean a high proportion of fixed assets to labor.Capital loss Loss from the sale of a capital asset.Carrot and stick Strategy often used in negotiations where one side offers the other something it wants while threatening negative sanctions if the other side does not comply with its requests. Thus a union could offer wage concessions in exchange for better work-rule provisions while threatening to strike if no accommodation can be reached.Carrying costs Expenses incurred because a firm keeps inventories, also called holding costs. They include interest foregone on money invested in inventory, storage cost, taxes, and insurance. The greater the inventory level, the higher the carrying costs. Term also applies generally to any out-of-pocket costs incurred while an investor has a position. Also called cost of carry.Cash basis accounting Method of recognizing revenue and expenses when cash is received or disbursed rather than when

earned or incurred. Individual taxpayers generally use the cash basis. Contrast with Accrual accounting.Cash cow Business that generates a continuing flow of cash. Such a business usually has well-established brand names whose familiarity stimulates repeated buying of the products. Stocks that are cash cows have dependable dividends.Cash flow The cash a company generates from its operations and other activities, such as borrowing money, selling assets, or issuing new stock. The Statement of Cash Flows included in annual reports analyses all changes affecting cash in the categories of operations, investments, and financing. depending on whether more cash comes in or goes out, we speak of positive or negative cash flow. A business with more assets than liabilities can still go bankrupt if its cash flow is inadequate te meet obligations. In investing, cash flow means net income plus non-cash charges like depreciation, indicating the company’s ability to pay dividends.Certified public accountant (CPA) Accountant who has passed certain exams, achieved a certain amount of experience, reached a certain age, and met all other statutory and licensing requirements of the U.S. state where he or she works. In addition to accounting and auditing. CPAs prepare tax returns for corporations and individuals.Commodity Any tangible good; product that is the subject of sale or barter. Bulk goods such as grains, metals, and foods are traded on a commodities exchange or on the spot market.Common stock Units of ownership of a corporation. Owners of common stock typically are entitled to vote on the selection of directors and other important matters, as well as to receive dividends on their holdings. In the event the corporation is liquidated, the claims of preferred stockholders, bondholders, and other creditors take precedence over those of common stockholders.Concentration ratio Measure of competitiveness within an industry. A “four-firm concentration ratio” is commonly formed by adding together the market shares of the four largest firms within the industry. It is generally believed that high concentration ratios are associated with low degrees of competition. Therefore, many economists advocate that the government take action to reduce the concentration in concentrated industries.Conservatism

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1. Accounting: Understating assets and revenues and overstating liabilities and expenses. Expenses are recognized sooner, revenues later. Hence reported earnings are lower. Conservatism holds that in financial reporting it is preferable to be pessimistic rather than optimistic since there is less change of financial readers being hurt relying on the financial statements. Excessive conservatism may result in misguided decisions.

2. Business: cautious and careful attitude, such as not taking excessive risk. An example is a portfolio manager who invests in safe securities.

3. Politics: limited government spending, resulting in lower taxes.Consolidated balance sheet One that shows the financial position of an affiliated group of companies as though they constituted a single economic unit. The effect of intercompany relationships and the results of intercompany transactions will have been eliminated in the consolidation process. See also Consolidated financial statement.Consolidated financial statement Financial statement that brings together all assets, liabilities, and other operating accounts of a parent company and its subsidiaries.Conversion cost Cost of moving from one kind of equipment or production process to another. Conversion cost is high when converting from a manual system to a computerized system. It includes the cost of new equipment plus training.Correction Reverse movement, usually downward, in the price of an individual stock, bond, commodity, or index. If prices have been rising on the market as a whole and then fall dramatically, this is known as a correction within an upward trend.Cost accounting Branch of accounting concerned with providing detailed information on the cost of producing a product.Cost-effectiveness Ability to generate sufficient value to offset an activity’s cost. The value can be interpreted as revenue in the case of a business. Public relations is cost effective of it generates new and retains old business.Cost of capital Rate of return that a business could earn if it chose another investment with equivalent risk, that is, the opportunity cost of the funds employed as the result of an investment decision. Cost of capital is also calculated using a weighted average of a firm’s costs of debt and class of equity.

Cost-effectiveness Ability to generate sufficient value to offset an activity’s cost. The value can be interpreted as revenue in the case of a business. Public relations is cost effective if it generates new and retains old business.“Creative accounting” Management’s attempt to “fool around” with its accounting in order to overstate net income. Examples of income management include selling off low-cost basis assets to report gains, unjustifiably lengthning the expected life of an asset to reduce expense (e.g., depreciable life), and underaccruing expenses (e.g., bad debt provisions). To financial statement users, “creative accounting” has a negative connotation.Creeping inflation Slow but inexorable continuing inflation that though it seems tolerable in the short run, nonetheless leads to significant long-run price increases. A sustained inflation of 2% per year will cause prices to increase over fivefold in a century.Current account The balance of payments account that keeps track of the goods and services that flow out of (exports) and into (imports) the domestic country. When the current account is negative, that is, domestic residents have purchased more from foreigners than they have sold to them, the current account is said to be “in deficit”. In other words, when the current account is in deficit, imports have exceeded exports.Cycle billing Sending invoices to customers systematically throughout the month rather than billing all customers on the same day each month, thus spreading work evenly over time.Deficit financing Borrowing by a government agency to make up for a revenue shortfall. Deficit financing stimulates the economy for a time but eventually can become a drag on the economy by pushing up interest rates.Deficit spending Excess of government expenditures over government revenue, creating a shortfall that must be financed through borrowing.Demand deposit An account at a financial institution, such as a bank, which, without prior notice to the institution, can be immediately withdrawn by check or cash withdrawal. Also informally called “checking accounts”. Demand deposits make up the largest fraction of the nations’s M1 money supply. See M1.Depreciation (1) In national income accounting, depreciation is the consumption of capital during production – i.e., the wearing out of

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plant and capital goods. (2) In business accounting, the law encourages replacement of capital assets by permitting the recovery of cost through tax-deductible charges for depreciation. Acceptable depreciation methods range from straight-line, where equal annual charges are taken over the estimated useful life of the asset, to various methods of accelerated depreciation, where a higher proportion of cost is written off in early years with greater tax benefits. (3) In international finance, depreciation is the decline in the foreign exchange price of one currency relative to another. That is, it takes more of the domestic currency to purchase a unit of a foreign nation’s currency.Disposable income The after-tax income left available for households to spend on consumption or to save.Diversification Reducing risk by putting assets in the securities of different companies or in several categories – common stocks, bonds, and precious metals, for instance. Standard advice from most financial analysts is to diversify so that one bad choice does not wipe out the value of an entire portfolio.Dividend Distribution of earnings to shareholders in the form of money, stock, scrip, or, rarely, company products or property. The amount is decided by the board of directors and is usually paid quarterly. Taxpayers must declare dividend income in the year dividends are received. Mutual funds pay their own dividends, usually quarterly or monthly, using dividend and interest income earned from the fund’s investments.Double-entry bookkeeping Record of transactions that require entries in at least two accounts. Every transaction is reflected in offsetting debits and credits. For instance, when a telephone bill is accrued at year end, (1) telephone expense must be recorded and (2) accrued expenses payable must be increased.Downside risk Estimate of an investment’s possible decline in value and the extent of the decline, taking into account the total range of factors affecting market price.Downturn Shift of an economic or stock market cycle from rising to falling. The economy is in a downturn when it moves from expansion to recession, and the stock market is in a downturn when it changes from a bull market to a bear market.Dumping Selling goods abroad below cost in order to eliminate a surplus or to gain an edge on foreign competition. Dumping by foreigners is illegal in the United States and most other countries.

Earned income Income from personal services. Earned income generally includes wages, salaries, tips, and other employee compensation. Compensation includes items that can be excluded from gross income, such as lodging, or meals furnished for the employee’s convenience. Earned income also includes any net earnings from self-employment. Pension and annuity payments are not included.Equity In investments, ownership interest – stock as opposed to bonds. In lending, the difference between the amount an asset, such as a borrower’s home, could be sold for and the claims, such as mortgages, against it.Excise tax Federal or state tax on the sale or manufacture of a commodity, usually a luxury item, for example, federal and state taxes on alcohol and tobacco.Fair market value Price at which an asset or service passes from a willing seller to a willing buyer. It is assumed that both buyer and seller are rational and have a reasonable knowledge of relevant facts.Fair trade Term used in retailing that refers to an agreement between a manufacturer and retailers that the manufacturer’s product be sold at or above an agreed-upon price. In many states, fair trade agreements were incorporated into and enforceable by state lawa. However, in 1975, Congress passed the Consumer Goods Pricing Act, which prohibits the use of resale price maintenance laws in interstate commerce. This act has worked effectively to eliminate fair – trade arrangements.Fiduciary Person, company, or association holding assets in trust for a beneficiary. The fiduciary is legally responsible for investing money prudently for the beneficiary’s financial well-being. Executors of wills and estates, receivers in bankruptcy, and trustees who administer assets for underage or incompetent beneficiaries are examples of fiduciaries. Most states have laws regulating fiduciary investments and preventing fiduciaries from acting in their own interests.Financial statement Written record of the financial status of an individual, association, or business organization. The financial statement includes a balance sheet and an income statement (or operating statement or profit and loss statement) and may also include a statement of changes in working capital and net worth.

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Firm General term for a business, corporation, partnership, or proprietorship.First in, first out (FIFO) Method of inventory valuation in which cost of goods sold is charged with the cost of raw materials, semi-furnished goods, and finished goods purchased “first” and in which inventory contains the most recently purchased materials. In times of rapid inflation, FIFO inflates profits, since the least expensive inventory is charged against cost of current sales, resulting in inventory profits. As a consequence, last-in, first-out (LIFO) inventory valuation has become a more popular method, since it reduces current taxes by eliminating inventory profits.Fiscal policy Federal taxation, spending, and debt policies designed to level the business cycle, achieve full employment, and keep the inflation rate low. Fiscal policy is set by the actions of the Congress and president. Fiscal policy is administered separately from monetary policy, although the goals are the same.Fiscal year Any continuous 12-month period used by a business or government as its accounting period. Fixed costs Costs incurred by a firm that do not change as the firm’s output increases or decreases. For example, the rent that a firm must pay on its premises is a fixed cost since the rent must pe paid for the length of the contract regardless of the amount the firm produces. Ultimately the rental contract will come up for renewal, at which time the rent becomes a variable rather than a fixed cost. Float

1. Amount of funds represented by checks that have been issued but not yet collected.

2. Time between the deposit of checks in a bank and payment. Due to the time difference, many firms are able to “play the float”, that is, to write checks against money not presently in the firm’s bank account.

3. The issue of new securities, usually through an underwriter.Funcţional obsolescence Decline in value due to changing tastes or technical innovation.Future Common name for a futures contract, an agreement to buy or sell a specific amount of a commodity at a particular price on a stipulated future date. Futures originated as ways for farmers to protect (hedge) their crops against adverse price changes. Traded on various commodities exchanges composing the futures market,

futures are widely used for hedging purposes, for financial speculation, and for investment purposes. Futures are traded on a wide variety of agricultural and mineral commodities as well as currencies and financial instruments, includind stock indexes.General ledger Formal ledger containing all the financial statement accounts of a business. It contains offsetting debit and credit accounts. Certain accounts in the general ledger, termed control accounts, summarize the details booked on separate subsidiary ledgers.Generally Accepted Accounting Principles (GAAP) Conventions, rules, and procedures that define accepted accounting practice, including broad guidelines as well as detailed procedures.General partner In a partnership, a partner whose liability is not limited. All partners in an ordinary partnership are general partners. A limited partnership must have at least one general partner.Hard currency Currency recognized internationally to be relatively stable in value and readily acceptable in most international transactions. Examples of hard currency are the U.S. dollar, the Swiss franc, and the British pound.Hard goods Durable merchandise such as televisions, appliances, hardware, furniture, or recording equipment. Hedge Strategy used to offset business or investment risk. A perfect hedge is one eliminating the possibility of future gain or loss. Also called hedging.High-yield bond Bond that has a credit rating below the lowest investment grade, which is BBB. Such bonds are issued by companies lacking long records of stable sales and earnings and having questionable balance sheet strength. They pay a higher yield to compensate for the greater risk of default. Term is often used synonymously with junk bond, although bond professionals feel the latter has a pejorative connotation not warranted by the generally good payment performance of these issues.Historical cost Accounting principle requiring that all financial statement items be based on original cost or acquisition cost.Horizontal merger The combination into one business of two companies that sell similar products. For instance, the purchase of J.C. Penney by Sears would be a horizontal merger. Horizontal

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mergers are often deemed likely to lead to increased market concentration and adverse economic behavior. At the limit, a horizontal merger could produce a monopoly or near monopoly. Therefore, horizontal mergers are usually carefully scrutinized by government agencies, such as the Federal Trade Commission. See Concentration ratio; Vertical merger.Income statement Financial report that gives a firm’s operating results, such as net income or loss, for a specific period of time. The fundamental accounting equation used in preparing an income statement is that revenue minus expenses equals profit or loss. See Balance sheet.Income tax. Annual tax on income levied by the federal government and by certain state and local governments. There are two basic types: the personal income tax, levied on incomes of households and unincorporated businesses, and the corporate income tax, levied on the net earnings of corporations. Income taxes account for more than half of the federal government’s total revenue. The personal income tax is designed to be progressive, that is, to take a higher percentage of higher incomes than lower incomes. See Progressive taxes. Insider As defined by the Securities Act of 1934, corporate director, officer, or shareholder with more than 10% of a registered security, who through influence of position obtains knowledge that may be used primarily for unfair personal gain to the detriment of others. The definition has been extended to include relatives and others in a position to capitalize on inside information.Inventory The value of a firm’s raw materials, work în process, supplies used in operations, and unsold finished goods.Investment (1) When used in macroeconomics or national income accounting, refers to the purchase of additional capital goods, that is, to the purchase of the actual goods themselves. (2) When used in finance or more casually, refers to the use of funds to try to earn additional funds. For instance, investment in the stock market may refer to the purchase of stock in order to profit from increases in the price of the stock bought.Last in, first out (LIFO) Method of inventory valuation whereby the most recent goods purchased or manufactured are considered the first ones sold. It shows a lower profit during rising prices than would the First-in, first-out (FIFO) method.

Leakages A term used in Keynesian analysis of the aggregate economy. Leakages include any allocation of income not spent directly on goods and services, such as savings and taxes. Lease Contract granting use of real estate, equipmemnt, or other fixed assets for a specified time in exchange for payment, usually in the form of rent. The owner of leased property is called the lessor, the user the lessee.Letter of credit Instrument or document issued by a bank guaranteeing the payment of a customer’s drafts up to a stated amount for a stated period. It substitutes the bank’s credit for the buyer’s credit and eliminates the seller’s risk. It is used extensively in international trade.Leverage In general: the use of borrowed funds to enhance return or value without increasing investment. Operating leverage refers to the extent to which a business’s costs are fixed rather than variable; the more operating leverage a firm has, the more sales it needs to break even, but the more profitable it becomes after that point. Financial leverage refers to the amount of long-term debt a firm has in relation to its equity. Shareholders benefit from financial leverage to the extent the return on borrowed funds exceeds the cost of borrowing.Leveraged buy out (LBO) In general, the takeover of a company, financed by using borrowed funds. Most often, the target company’s assets serve as security for the loans taken out by the acquiring company or group, which then repays the loans out of the profits of the acquired company or by selling its assets. In recent years, many leveraged buy outs have been financed through issuing high-yield bonds. See High-yield bond.Liabilities Claim by others on the assets of a company or individual. If assets are what are owned, liabilities are what are owed. Casually equivalent to “debt”.Lien A creditor’s claim against property. For example, a mortgage is a lien against a house; if the mortgage loan is not paid, the house can be seized and sold to satisfy the debt. Liens may be granted by courts to satisfy judgments. A mechanic’s lien attaches to buildings and structures until contractors and suppliers are paid in full.Limited liability A festure of the corporate form of business organization that means each owner of the business is not liable for the debts of the company beyond the amount he or she invested in the company. Therefore, if a company goes bankrupt owing its

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creditors $100 million, the owners of the business are not personally liable for the debt.Limited partner Member of a partnership whose liability for partnership obligations is limited to the investment in the partnership. A limited partner is not allowed to take active part in the management of the partnership. Limited partnerships have always been useful for tax shelters. However, under the Tax Reform Act of 1986, limited partnerships are ruled passive investments and their tax benefits are severely limited. General partners have unlimited joint and several liability, and manage the partnership.Liquidity The ease with which an asset, such as a bond or a stock, can be converted into money: the easier this conversion, the more liquid is the asset.M1 The most popular measure of the money supply. M1 includes only cash held by the public plus checking accounts. Also called the narrow money supply.M2 Called the broad measure of the money supply, M2 is an alternative measure of the money supply that contains more assets than M1. Included in M2 are all the assets in M1 plus savings accounts, time deposits under $100,000, money market mutual fund shares, and a few other minor assets. See M1; Money.Marginal cost The increase or decrease in costs that result by producing either one unit more or less output. Determining marginal cost is important to the firm’s decision whether to expand or contract output.Marginal efficiency of capital Annual percentage yield earned by the last additional unit of capital; that is, the return a firm earns by increasing its capital by a unit. The marginal efficiency of capital measures the return from additional investment; the interest rate is the cost of making an investment. As long as the marginal efficiency of capital of an additional investment exceeds the interest rate, firms will make the investment in new capital. See Investment.Marginal physical product (MPP) The addition to total output due to an added unit of an input.Marginal revenue (MR) The change in total revenue caused by selling one additional unit of output. For a firm in a perfectly competitive industry, the marginal revenue equals the price of the product; for a firm in a monopoly industry, the marginal revenue is less than the products’s price.

Marginal revenue product (MRP) The addition to total revenue when one additional unit of an input (such as capital or labor) is employed.Merger Combination of two or more companies into one surviving firm. See Horizontal merger; Vertical merger.Micro accounting Term connoting the accounting for a person, company, or government agency, as distinguished from macro accounting, which is the accounting for aggregate economic activities of a nation. Micro accounting also applies to the accounting and reporting of financial information of subunits of the entity.National income accounts Statistical aggregates calculating the nation’s total production of goods and services, as well as the nation’s total income. The most important of these are the gross domestic product, the value of all the goods and services produced; the net domestic product; the GDP minus the total amount of depreciation; and disposable income, the total income individuals have left after taxes to spend or save. National income accounts were first developed during the 1930s and 1940s.Near money Assets that are easily convertible into cash. Some examples are government securities and bonds close to their redemption date.Negative cash flow Situation in which a business spends more cash than it receives through earnings or other transactions in an accounting period.Net worth Amount by which assets exceed liabilities. In general terms, net worth measures what would be left over if all assets were at their carrying value and all debts paid. For a corporation, net worth is also known as “stockholders’ equity”.Normal profit A profit just sufficient to cause a firm to remain in business. In other words, a profit that just covers the owner’s opportunity cost of investing in one line of business rather than another. For example, if $100,000 can be invested in a video rental store or saved in a savings account yielding 10%, the video rental store must return at least 10% (the normal profit) to cover the opportunity cost of investing in it rather than saving the funds in the savings account. Any return over 10% represents an economic profit.

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Obsolescence Process by which property becomes useless, not because of physical deterioration, but because of changes outside the property, notably scientific or technological advances.Overhead Expenses of running a business that are not directly associated with a particular product or service sold – for example, rent, heat, and employee benefits as opposed to labor and materials. Also called indirect costs and burden.Partnership A form of organizing a business in which two or more people agree to pool their funds and share in the profits and losses. Partnerships are common in service organizations, such as accounting and law. Unlike the owners of corporations, general partners can be personally liable for all the debts incurred by their company. See General partner; Limited liability; Proprietorship.Periodic audit

1. Audit for an intermediate period (e.g., one month, three months).

2. Audit carried out at specified intervals within the year.Portfolio Any group of investments designed to reduce risk through diversification. Portfolios aim to eliminate “specific or unsystematic” risk (for example, a particular stock’s falling in price because of financial difficulties) and do not reduce systematic or market risk (the risk common to all securities ina given category, the risk of a falling stock market, for example).Preferred stock Part of the equity of a corporation that enjoys priority over common stock in the distribution of dividends and of assets in liquidation. Preferred issues are normally non-voting and pay a fixed dividend, although some are adjustable.Present value Value of dollars to be received in the future (called future dollars) in terms of what they are worth today. A dollar to be received in the future is worth less than a dollar received today because the dollar received today can be invested and yield additional interest income.Price ceiling A law imposed by the government prohibiting the price of a product from going above a certain level. Price ceilings are often instituted to try to guarantee that demanders will be able to afford items deemed necessary. Frequently price ceilings give way to shortages and black markets. Price discrimination A situation that occurs when a supplier sells the same good or service to two different demanders for a different

price, even though the cost of providing the good or service to the demanders is the same.Price-earnings ratio (P/E ratio) Statistic that equals market price per share divided by earnings per share. It is a good ratio to use in evaluating the investment possibility of a company. A steady decrease in the P/E ratio reflects decreasing investor confidence in the growth potential of the entity. Some companies have high P/E multiples reflecting high earnings growth expectations. Young, fast-growing companies often have high P/E stocks with multiples over 20. A company’s P/E ratio depends on many factors such as risk, earnings trend, quality of management, industry conditions, and economic factors.Profit and loss statement See Income statement.Progressive taxes Tax system in which those with higher incomes pay taxes at higher rates than those with lower incomes. The U.S. income tax is an example since households with higher incomes generally face higher marginal tax rates than households with lower incomes. Property taxes Government taxes levied on property, particularly real estate. Property taxes are the major component of the revenue raised by most local governments.Proprietorship One of the methods used to organize businesses. A proprietorship is an unincorporated business owned by a single person. The individual proprietor has the right to all the profits from the firm and is also responsible for all the firm’s liabilities. See Partnership.Pyramiding

1. Use of financial leverage paper profits from an investment to finance purchases of additional investments.

2. Building of a business through a dealership network designed primarily to sell dealerships rather than useful products.

3. Fraudulent business practice in which the chain of distribution is artificially expanded by an excessive number of distributors selling to other distributors at progressively higher wholesale prices, ultimately resulting in unnecessarily inflated retail prices.Random walk Economic theory about the movement of stock prices that asserts that past price changes are of no use in forecasting future price movements. Most economists believe this theory is

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correct; many stock market analysts dispute it by contending that there are predictable patterns in the prices of stocks.Rate of return on investment Annual percentage return after taxes that actually occurs or is anticipated on an investment. For example, if $100,000 is invested in a stock and the after-tax return on it for the year is $8,000, the rate of return is 8%. The term Total Return includes any capital gains or losses.Real earnings Wages, salaries, and other earnings, corrected for inflation over time so as to produce a measure of actual changes in purchasing power.Real wage The wage paid to workers corrected for inflation; the real wage measures the number of goods and services a worker can buy with an hour’s work. Contrast Nominal wage.Rent When used in economics, refers to any payment to a factor of production in excess of the factor’s opportunity cost. For instance, a ball player who earns $300,000 a year and whose next best opportunity would pay $40,000 a year is receiving a rent of $260,000 a year.Retained earnings Profits kept to accumulate in a business after dividends are paid. Contrary to popular illusion, retained earnings are not necessarily kept in the form of cash. Instead, they are often invested in more capital, inventory, or other aspects of the business.Rollover

1. To replace a loan or debt with another.2. To change the institution that invests one’s pension plan,

without recognition of taxable income.Safe Harbor Rule Provision enacted as part of the Economic Tax Recovery Act of 1981 to guarantee sale/leaseback treatment to certain transactions if specific requirements are met. The purpose of this provision was to make it easier for loss companies to “sell” their tax benefits accruing on new asset purchases by entering into sale/leaseback transactions with profitable companies. The intent was to generate an immediate cash flow for such loss companies, rather than deferring the benefits through carryover provisions.Sale and leaseback Form of lease arrangement in which a company sells an asset to another party – usually an insurance or finance company, a leasing company, a limited partnership, or an institutional investor – in exchange for cash, then contracts to lease the asset for a specified term.

Sales journal Special book in which credit sales are recorded. The total columns of the sales journal are posted as a debit to accounts receivable and a credit to sales. Separate columns may exist to classify sales by category (e.g., product line).Savings The portion of disposable income not spent on consumption. See Disposable income.Scrip (1) In general: receipt, certificate, or other representation of value recognized by both payer and payee. Scrip is not currency, but may be convertible into currency. (2) Securities: temporary document that is issued by a corporation and that represents a fractional share of stock resulting from a change in the way a company’s invested capital is broken down and distributed. Scrip certificates may be aggregated or applied toward the purchase of full shares. Scrip dividends are sometimes paid by companies short of cash.Selling short Sale of a borrowed security by an investor who expects the price will drop. When the price falls, the investor profits by buying the security (at the lower price) and returning the security to whomever it was initially borrowed from.Shutdown price The price beneath which the firm will close its operations rather than continue to produce.Single-entry bookkeeping Accounting system that does not use balancing debits and credits. Transactions are recorded in just one account.Soft money

1. In a proposed development or an investment, money contributed that is tax deductible.

2. Sometimes used to describe costs that do not physically go into construction, such as interest during construction, architects’ fees, and legal fees.Sole proprietor Unincorporated business with one owner having all the net worth. In the event the business fails, the owner is personally liable for all debts incurred.Split Short for split-up, the increase in a corporation’s number of outstanding shares of stock without any change in the shareholder’s equity or the aggregate market value at the time of the split. Thus, a 2-for-1 split results in twice as many shares at half the market value. The usual purpose of a split is to make shares more affordable to more investors. Reverse splits, or split-downs, are rare.Statement of condition See Financial statement.

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Steel-collar worker Use of robots as employees on a production line. It symbolizes the replacement of the blue-collar worker.Stock Ownership of a corporation represented by shares that are a claim on the corporation’s earnings and assets. See Common stock.Stockholder Individual or organization with an ownership position in a corporation. Stockholders must own at least one share of stock. Stockholders are generally entitled to vote for the members of the board of directors and also to receive dividends as paid by the company.Stockholders’ equity See Net worth.Stock market General term referring to the organized trading of securities through various exchanges. The largest stock market is the New York Stock Exchange, located in Manhattan.Straight-line method of depreciation Depreciation method whereby an equal amount of the asset’s cost is considered an expense for each year of the asset’s useful life.Tax shelter Any device by which a taxpayer can reduce his tax liability by engaging in activities that provide him with deductions or credits that he can apply against his tax liability. In such cases, the activities engaged in are said to shelter the taxpayer’s other income from tax liability.Tender offer Public offer to buy, for cash, securities, or both, the shares of a corporation, usually at a higher price (called a premium) than the current market price.Tight money When credit is difficult to obtain, usually because of the monetary policy of the Federal Reserve. Tight money is frequently said to lead to higher unemployment, reduced growth in the real GDP, and lower inflation. Time deposit Savings account held in a financial institution for a fixed term or with the understanding that the banks may require notice before the depositor can withdraw the funds. Although banks are authorized to require 30 days’ notice withdrawal from savings accounts, this requirement is generally waived for passbook savings accounts.Total revenue Total dollar volume of sales over a given time period, usually one year or one quarter. This equals the price of the products(s) times the quantity sold.

Treasury bill (T-bill) Debt issued by the U.S. Treasury with a maturity of one year or less. The key distinction between a T-bill and other Treasury obligations is the T-bill’s year or shorter maturity. The U.S. Treasury borrows – issues debt – when the federal government is running a deficit, that is, spending more than it receives in taxes.Trial balance In accounting, one of the first steps in closing the books at year-end. All accounts are listed; debits and credits are totaled and should balance.Value added tax (VAT) A tax levied on the value added to a product at each stage of its manufacturing cycle as well as at the time of purchase by the ultimate consumer. For example, a steel company would pay a tax on the iron it purchases to make steel; an automobile manufacturer would pay a tax on the steel it bought to make a car; finally, the consumer would pay a tax on the car when it was purchased. The value-added tax is a major source of revenue for countries in the European Common Market but is not used in the United States.Venture capital Important source of financing for start-up companies or others embarking on new or turnaround ventures that entail some investment risk but offer the potential for above-average future profits; also called risk capital. Prominent among firms seeking venture capital in the 1980s are those classified as emerging-growth or high-technology companies.Vertical merger Combination into one business of firms at different stages of production. For instance, the purchase by General Motors of one of its steel suppliers would be a vertical merger. Vertical mergers generally do not pose the major threat of creating a monopoly and so are often easier to consummate than horizontal mergers. Compare Horizontal merger.Volatility Tendency of a security, comodity or market to rise or fall sharply in price within a short-term period. An individual stock’s volatility is related to that of the overall market using the Beta coefficient (called “Beta” for short).Wasting asset

1. Fixed asset, other, than land, that has a limited useful life and is therefore subject to depreciation.

2. Natural resource that diminishes in value because of: extractions of oil, ores, or gas, the removal of timber; or similar depletion.

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White-collar worker Classification for employees performing nonmanual work, which includes the majority of employees in the United States today. White-collar workers are those employees who work in clerical, administrative, and professional nonmanual occupations.Windfall profit Profit that occurs studdenly as a result of an event not controlled by the person or company profiting from it.Working capital Current assets less current liabilities, properly called net working capital. Working capital is a measure of a company’s liquidity. Sources of working capital are (1) net income, (2) increase in noncurrent liabilities, (3) increase in stockholders’ equity, and (4) decrease in noncurrent assets.Zero-base budgeting (ZBB) Method of setting budgets for corporations and government agencies that requires a justification of all expenditures, not only those that exceed the prior year’s allocations. Thus all budget lines are said to begin at a zero base and are funded according to merit.Zero coupon security Security that makes no periodic interest payments but instead is sold at a deep discount from its face value. The buyer of such a bond receives the rate of return by the gradual appreciation of the security, which is redeemed at face value on a specified maturity date. For tax purpose, the Internal Revenue Service maintains that the holder of a zero-coupon bond owes income tax on the interest that has accrued each year.

II. ENGLISH – ROMANIAN

A

Account = calcul, socoteală, contto keep ~ = a ţine contabilitateaprofit & loss ~ = contul de profit şi pierderideposit ~ = cont de depozitbank ~ = cont bancar~ payable = cont creditor~ receivable = cont debitor~ settled = cont achitat~ of goods purchased = cont de achiziţii~ of payee = în contul beneficiar~ of liabilities and assets = situaţie a activului şi pasivuluiblocked ~ = cont blocatchecking ~ = cont curentAccountancy = contabilitateAccountant = contabilcertified ~ = contabil autorizatAccounting = contabilitate, calcul~ period = exerciţiu financiarCost ~ = calcul al costurilorAcquisition = achiziţie, dobândire~ accounting = contabilitate de achiziţieAdverse = advers, potrivnic~ balance of payments = balanţa de plăţi pasivă/negativă~ balance of trade = balanţa comercială pasivă~ budget = buget deficitarAsset = activ (al unei companii)~ s and liabilities = activ şi pasiv = valoare, capital, bunuri, avere~ s tangible = active corporale~ s intangible = active necorporaleAcquire = a capăta

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Additional = în plus, suplimentarAssumption = prezumţieAccrued = angajatAllowance = încuviinţare, permisiune, admitereAdvertising = publicitate

B

Balance = sold, rest de plată~ due = sold debitor~ in hand = sold creditor~ of an account = sold al unui cont~ of payments = balanţă de plăţi~ sheet = bilanţ~ vb. = a cântări, a echilibrato ~ an account = a echilibra un contto ~ the budget = a echilibra bugetultrial ~ = balanţa de verificareBinary tag = fişa de evidenţă (a intrărilor şi ieşirilor)Background = pregătireBroad = largBook of account = carte de conturiBoard = consiliuBasis = bazaBook-keeper = contabilBookkeeping = contabilitateBusiness as an accounting entity = principiul entităţii patrimonialeBorrowing = împrumuturiBonds = certificate guvernamentaleBudget = bugetSales ~ = buget al vânzărilorBatch = lot

C

Capital = capital (assets)~ fixed = capital fixcash ~ = capital în numerarautorized share ~ = capital social

~ investment = investiţie de capital~ employed = capital investit~ expeditures = cheltuieli de capitalCertificate = certificat, titlu de valoare~ of incorporation = certificat de înfiinţareCharter = act, a întări un dreptCheck list = lista de controlClerical workers = funcţionăriCorporate = asociat, unitCreditors =creditoriController = şef contabilCash disbursment register = registru de cumpărăriCash receipt journal = registru de vânzăriCash receipts = încasăriConcellation = anulareCost = costfull or absorbtion ~ ing = cost total sau de absorbţiedirect or variable ~ ing = cost parţial sau variabilCut it back = a reduceCo. market capitalization = preţul pieţei

D

Debit = debit, datorie~ balance = sold debitorto ~ an account = a debita un contDirector = directorboards of ~ consiliu de administraţieDivision = împărţireDemand = cerereDegree = titlu, gradDrawings = cheltuieli personaleDebtors = debitoriDouble entry = dubla intrareDelays =a mânări

E

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Earmark = a aloca, a destinato ~funds = a aloca fonduriEconomical = economicosEconomics = ştiinţa economicăEconomist = economistElaborate = a elabora, a produceEntry = înregistrareto make an ~ of an item = a contabilizabook-keeping by double ~ = contabilitate în partidă dublăEstabilishment = instituţie oficială~ charges = cheltuieli fixeEntire = tot, totalEnquire = a cereEnvisage = a consideraExpenditure = cheltuială, consum~’s and receipts = cheltuieli şi încasăriExpenses of operating the plant = cheltuieli de exploatare

F

Field = domeniuFinance = finanţe, resurse financiareFinancial = financiar~ accountant = contabil financiar~ adviser = consilier~ forecast = prognoză financiarăFixed overheads = conturi indirecte fixeFloating capital = capital circulantFlourish = a înflori, a progresaFirst-quarter = primele trei luni ale anului financiarFunds = fonduriFirst-rate service = servicii de cea mai bună calitateFee = onorariu~ income = impozit pe onorariuFreehold property = proprietate

G

Gain = câştig, beneficiu, profit

~ in efficienty = creştere a eficienţeiGeneral = general~ balance sheet = bilanţ general, de ansamblu~ management = conducere~ manager = director general Gross = brut~ income = venit brut~ national product = produs naţional brut~ profit = profit brutGuarantee = garanţie, asigurareGet on = a contactaGo bankrupt = a da falimentGoodwill = fond comercialGap analysis = puncte care lipsescGearing = rata de îndatorare

H

Hang = a agăţa, a ţine deschisă linia telefonicăHard cash = bani lichizi, numerarHead office = birou centralHoard = stoc, rezervă, tezaurHolder = deţinător, purtător, posesorHolding company = companie mamăHug the ground = a suferi o înfrângereHiccup = o problemă mică

I

Increase = creştere, sporIncome = venitIncome account = cont de profit şi pierdereIncorporate = a constituiIndexation = indexareInflation = inflaţionistInput = intrareInvestment = investiţie, plasare de capitalInvoice = factură

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Incurred in connection with = determinat în legătură cu(extraordinary Item) = cont (pentru cheltuieli excepţionale)Inventory = stocuri(minority) Interest = acţionari (minoritari)

L

Ledger = registru contabil totalizator, registru de profit şi pierderiLegislation = legislaţie, corp de legiLeasing = o formă de închiriereLiabilities = datoriilong-term ~ = datorii pe termen lungcurrent ~ = datorii curenteLoans = împrumuturiBottom Line = profit net, extrabilanţier

M

Means = mijloace~ fixed = mijloace fixeManagement = conducere~ accounting = contabilitate pentru conducere~ audit = verificare contabilă a eficienţeiMeans of payment = mijloace de platăMerger = a fuzionaMutiny = revoltaMortgage = ipotecăMeasurement = măsurăMiscellaneous = divers, amestecat

N

National = naţional~ income accounting = contabilitate a venitului naţionalNotes payable = efecte comerciale de plată~ receivable = efecte comerciale de primitpromissory ~ = bilete la ordin

O

Office = instituţie~ supplies = rechiziteOpen = a deschide~ an account with a bank = a deschide un cont în bancăOverdraw = a depăşi contulOverdraft = cont în depăşireOverhead = cheltuieli, costuri indirecteOutgoings = cheltuieliOverrun = a întreceOutstanding payment = plată de efectuat

P

Pass = a treceTo ~ to account = a trece în contulPayment = plată, rambursare~ in cash = plată în numerar~ on account = acont, plată în contPlanning = planificarePay-roll = ştat de platăPortgage-ledger = cartea mare de verificarePurchase = cumpărare~ order = comandă de cumpărarePinpoint = a evidenţiaProfit = profitOperating ~ = profit de exploatarePower of attorney = procurăPay sum in tax = a plăti o sumă de bani drept impozitPrepaid insurance = asigurarea plătită în avansPatent = brevet

R

Record = inregistrareRequire = a cereRate = rataburden ~ = rata alocată de costuri indirecte pentru diferite produseRaw materials = materii primeRelate = a lega

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Refund = a restituiRun a business on a shoe string = a conduce o afacere cu foarte

puţini baniRank first = a fi primul în ierarhie~ last = a fi ultimul în ierarhieRevenue = venituriRetention = reţinereRetail = vânzare cu amănuntulRatio = ratăcurent ~ = rata curentăRoyalties = redevenţeRecord = înregistrare~ of the work in process = înregistrarea lucrărilor în proces~ of the finished goods = înregistrarea bunurilor finite~ of the raw materials on hand = rapoarte de producţie în curs Report = raportreceiving ~ = proces verbal de predare-primire

S

Skill = îndemânareSales account = cont de vânzăriSupply = stoc, rezervăSalaries = salariiShortlisted = selectat, admis pentru interviuSales = vânzări~ mix = vânzări mixteSit-in = acţiune de protestShrinkage = declinSpare parts = piese de schimbShare = acţiune~ premium = primă de capital~ capital = capital socialShareholder = acţionar~ equity = capitalul acţionarilorSection = secţiunecross ~ = secţiune transversală

T

Training = pregătire

Turnover = cifră de afaceriTransaction = tranzacţieTied up = indisponibil

U, V, W

Unlimited = nelimitat~ company = societate cu răspundere limitatăUnjumble = a pune în ordineValue = valoare~ in account = valoare în cont~ added = valoare adăugată~ added tax = taxa pe valoare adăugatăVouchers = documente justificativeWages = plăţi săptămânaleWoes = nenorociri

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BIBLIOGRAPHY

1. Confort J.L. Brieger N., Finance,Prentice Hall Int., 19922. Costinett, L., The Language of Accounting in English,Prentice Hall

Inc., 19773. Mueller G. Gerhard, L. German, H.L.Meek G., Accounting – An

International Perspective, IRWIN,1991 (1987)4.***, BANKS, An Industry Accounting and Auditing Guide, The

Institute of Chartered Accountants in England and Wales, London, 1993

5.***, The Economist, The Sunday Times

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