BUSINESS COMMUNICATION

KEYS TO
ACCOUNTING,
ACCOUNTANCY
AND
AUDITING

with two mini-glossaries of accounting

CONTENTS
INTRODUCERE ................................................................................................

SECTION I: ACCOUNTING IN TODAYS BUSINESS WORLD ........................

5
UNIT 1. Training and Degrees in Accounting ...................................
6
UNIT 2. Divisions of Accounting .......................................................
9
UNIT 3. Bookkeeping and Accounting ............................................. 12
UNIT 4. Bookkeeping Systems .......................................................... 14
UNIT 5. Bookkeeping Records .......................................................... 17
UNIT 6. A Job Advertisement ............................................................ 20
UNIT 7. Accounting Sensation ......................................................... 27
Self-assessment Test
28
Answer Key
29
Review I
29
SECTION II: FINANCIAL STATEMENTS AND REPORTING ............................
UNIT 1. The Profit and Loss Account ...............................................
UNIT 2. The Balance Sheet in U.S.A. ................................................
UNIT 3. The Balance Sheet in U.K. ....................................................
UNIT 4. Comparing the Results of Companies in Different
Countries (I) ...........................................................................
UNIT 5. Liquidity, Capital Structure, Efficiency and Profitability
as Measured by Ratio Analysis ...........................................
UNIT 6. Comparing the Results of Companies in Different
Countries (II) ..........................................................................
Review II

31
32
34
35
36
39
41
42

SECTION III: ESSENTIALS OF BUDGETING AND COST ACCOUNTING ...... 43

UNIT 1. The Master Budget. Sales and Purchases Budgets ........... 44
UNIT 2. The Operating Expenses, Cash and Capital-Expenditures
Budgets .................................................................................. 46
UNIT 3. Methods of Finding Costs ..................................................... 48
UNIT 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 .........................

UNIT 1. Metaphors Used in Auditing ................................................
UNIT 2. Reporting on Financial Statements .....................................

54
55
57

UNIT 3.
UNIT 4.

Scope and Opinion Paragraphs in Auditors Letters ......... 61

An Audit on the Adequacy of Money Laundering
64
Review IV
66

SECTION V: CONSOLIDATED FINANCIAL STATEMENTS ............................. 68

UNIT 1. The Basic Idea ....................................................................... 69
UNIT 2. An International Perspective on Consolidated Financial
Statements ............................................................................ 71
UNIT 3. Foreign Currency Translation .............................................. 75
Self-assessment Test
78
Answer Key
78
MINI-GLOSSARIES OF ACCOUNTING ........................................................... 81
I.
ENGLISH-ENGLISH ............................................................................... 82
II.
ENGLISH-ROMANIAN ........................................................................... 106
BIBLIOGRAPHY

115

INTRODUCERE
Cursul ENGLISH FOR PROFESSIONAL COMMUNICATION
se adreseaz studenilor din anul I ( semestrul I i II ), ai Facultii de
Contabilitate i Informatic de Gestiune, ID, conform planului de
invatamant. Cursul cuprinde modele de texte autentice specializate
din domeniul contabilitii care presupun un nivel mediu i avansat
de cunoatere a limbii engleze i 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 autoevaluare.
Cursul cuprinde cinci unitati de invatare (capitole distincte),
avnd fiecare un numr de lecii a cror structur este flexibil 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

SECTION I
ACCOUNTING IN TODAYS 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 bookkeeping. 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
now take university courses in accounting and related subjects in
6

5.

6.

7.

8.
9.

order to be as fully prepared as possible for the certification

examinations. This is the second major path to a career in
accounting.
A large number of universities now have business schools that
offer regular four-year programs leading to a bachelors 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.
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.
A few universities now also give courses leading to advanced
degrees the masters 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.
Another related subject that has become very important for
accountants is computer programming.
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.

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 companys
operations. On the basis of the data that have been recorded,
they measure the companys 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 firms assets the things of value owned by the company, including cash,
10

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 havent.
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 accountants job developed from the
bookkeepers 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
accountants function, accounting has often been described as an
art.
2. Accounting frequently offers the qualified person an opportunity to
move ahead quickly in todays 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
12

5.

6.

7.

8.

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.
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.
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.
Regardless of the size of the operation, the bookkeeper is a key
person in the organizations 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.
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
14

3.

4.

5.

6.

7.

illustrating the rate of change in the company. The accounting

period is, in other words, a kind of business calendar.
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 accountants
judgement, but within the guidelines specified in applicable tax
codes.
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.
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.
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.
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.

16

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,
owners 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 +
owners 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 Morgans Appliance
18

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.
CONTROLLER
CO/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 writing
The 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
20

 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
TREASURER
TR/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 projects
We 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 MANAGER
High 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 Companys product line is positioned at the upper end of the
worlds 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
22

and computerized accounting literacy, high language proficiency in

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 SELECT
Popa Savu Street 78, 71262 Bucharest, Romania; Tel. 223 44 30

MANAGEMENT SELECT
a company of
STEIN & PARTNER MANAGEMENT CONSULTING
CENTRAL AND EASTERN EUROPE
BELGRAD BIELEFELD/DETMOLD BRATISLAVA
BUCHAREST
BUDAPEST MOSCOW PRAGUE SALZBURG SOFIA
VIENNA WARSAW ZAGREB

BUDGET SUPERVISOR
Join 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 worlds 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 SELECT
Popa Savu Street 78, 71262 Bucharest, Romania; Tel. 223 44 30

MANAGEMENT SELECT
24

a company of
STEIN & 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 worlds 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 12 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 23

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 2535 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.

26

UNIT7

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When completed, you will have computerized the financial side
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effect they have on the Balance Sheet and Profit & Loss Statement.
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the multi-books version which is 50 more, making an all inclusive

total of 185.66. Theres no risk, credit cards are accepted so

telephone or fax us now.

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--------N
3. Money which is borrowed. L- - 4. The extra money a company or person pays for borrowing
money. I- - - - -ST
5. 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- - - S
7. These are bought by people wishing to invest in the company.
S- - - -S
8. 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- - - T
12. A financial plan for the future. B- - - -T
13. The official Books for keeping accounts. L-D- - - S
14. 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- - - - - -R
ANSWER KEY
28

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
decisions
B.The general guide to accountancy
C. Bills received for merchandise and services

D.Itemised statement of merchandise sold to customers

E.Payments made
F.Payments received
G.The same system used in recording financial data
H.Every transaction has a twofold effect
I.A kind of business calendar
J.Verifiable evidence
K.Legal entity
L.Assumption used as a unit of measure for reporting
transactions
M.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

30

SECTION II
FINANCIAL 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 owners 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
companys 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.
32

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 companys 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 firms 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 + Owners Equity

34

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 IASCs 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
36

exchange rates given by the company, such as JAL, or at the rate

prevailing at the year end in question). Before understanding
JALs results a reader needs to consider the following items:
Japanese tax law allows companies to delay reporting income
arising from insurance claims. JALs 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 companys financing cost and should
be spread over a number of years. The effect of JALs 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 IASCs 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.

38

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 companys 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 companys 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 managers use of the

companys 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 shareholders point of view, the return on
owners equity will be an important ratio; this is calculated by
dividing the profit before taxes by the owners 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.

40

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. JALs 77 aircraft (half the size of Lufthansas fleet),
on the other hand, are recorded at $6.6bn, or more than twice the
amount. And what about KLMs 79 aircraft at $2bn and BAs 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 BAs
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 companys gearing. Airlines
may argue persuasively that they should not have to bring all

6.

7.

8.

9.

leased assets on to their accounts, but this does not make the
readers task any easier.
Aircraft valuation becomes a simple exercise when compared with
other balance-sheet problems. Take the UK and US versions of
BAs balance sheet. UK rules give the company shareholders
funds of $1.2bn.
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 BAs 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.
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.
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.
42

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 III
ESSENTIALS 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 companys 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
44

5.

6.

7.

8.

merchandise has its own unit price. In addition the furniture store
may sell such goods as rugs, carpeting, or artificial flowers.
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.
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.
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.
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 companys
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
46

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 companys 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 foremans salary.
48

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.
50

Self-assessment Test
Fill in the missing words in the sentences below by making
combinationsom with the words budget and costs . Choose from
the 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 years budget is being prepared by the ....... .......over the next
few weeks.
4.They havent 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 III
I.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 factorys 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 companys
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 factorys ........and
things like administration and selling. 3.The direct cost of............and
labour is easy to calculate.
52

SECTION IV
THE ACCOUNTING FUNCTION OF
AUDITING

54

UNIT 1
METAPHORS USED IN AUDITING
by 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 auditors 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 auditors first step would be to
alert the clients 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 auditors 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. Todays 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 laymans
terms, said that auditors do not owe much of a duty to anybody
other than existing shareholders.
14. Todays 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.

56

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 banks 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 banks 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 banks 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 auditors 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; and
e) 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 banks management requests an opinion on
whether the financial statements fairly present the state of the
branchs 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
58

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
banks 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.

60

UNIT 3
SCOPE AND OPINION PARAGRAPHS IN AUDITORS
LETTERS
1. The accountants 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
accountants 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 companys 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 auditors 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 Directors
Lederer 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. Fletcher
Certified Public Accountant
New York, New York
January 30, 1997
b) Qualified opinion. The auditors 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
62

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
auditors 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 banks 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:
64

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 banks procedures to counter money laundering; confirming
that the banks 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 auditors 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 auditors 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 companys
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.
66

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 V
CONSOLIDATED FINANCIAL
STATEMENTS

68

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 childs personal balance sheet and
the receivable on the parents 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 familys 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 Subsidiarys 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.

70

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 companys
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. Japans 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 worlds multinational corporations. Investors realize that
72

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
parents 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 subsidiarys payroll. Again, this would not affect consolidated
profits, but it directly increases the parents 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
business1.
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.

74

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 countrys 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 nationss 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 countrys
currency) for a fixed amount of ones 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
76

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 Subs
local currency (LC) at a time when the exchange rate is 1 LC =
$1.25. The initial investment, therefore, is LC80,000. Foreign Subs
opening balance sheet (in local currency and dollars) looks like this:

Cash
Owners equity

FOREIGN SUB
Balance Sheet
January 1
LC80,000 (1LC = $1.25) = $100,000
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:

Inventory
Fixed asset
Owners equity

FOREIGN SUB
Balance Sheet
March 1
LC40,000 (1LC = $1.30) = $52,000
LC40,000 (1LC = $1.40) = $56,000
LC80,000
$108,000
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- 15Answer Key
1l 2e 3d 4k 5m 6a 7n 8j 9b 10o 11g 12h 13c 14i 15f

78

80

MINI-GLOSSARIES OF ACCOUNTING:

I. ENGLISH ENGLISH

82

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 assets 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
nations currency to purchase a unit of the domestic nations
currency, or, conversely, when a unit of the domestic nations

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 companys
procedures are followed and whether embezzlement or other illegal
activity occurred.
Balance of payments The system of recording all of a countrys
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 companys
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
84

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
years 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 companys 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 manmade 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 asset
1. 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
86

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 countrys 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
companys 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
88

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
activitys 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 firms
costs of debt and class of equity.

Cost-effectiveness Ability to generate sufficient value to offset an

activitys 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 Managements 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 nationss 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
nations 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 funds 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 investments 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
employees 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 borrowers 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 manufacturers 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 beneficiarys 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, semifurnished 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 firms
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 firms bank
account.
3. The issue of new securities, usually through an underwriter.
Funcional 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 firms 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 governments 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 firms raw materials, work n 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 customers drafts up to a stated
amount for a stated period. It substitutes the banks credit for the
buyers credit and eliminates the sellers 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 businesss 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 companys
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 creditors 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 mechanics 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 firms 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 productss 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
nations total production of goods and services, as well as the
nations 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 owners
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 stocks 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, fastgrowing companies often have high P/E stocks with multiples over
20. A companys 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 firms 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 hours work. Contrast Nominal wage.
Rent When used in economics, refers to any payment to a factor of
production in excess of the factors 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 ones 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 companys 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 corporations number of
outstanding shares of stock without any change in the shareholders
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 corporations 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 assets cost is considered an
expense for each year of the assets 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 taxpayers 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-bills 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 stocks
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
companys 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 years
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, socoteal, cont
to keep ~ = a ine contabilitatea
profit & loss ~ = contul de profit i pierderi
deposit ~ = cont de depozit
bank ~ = cont bancar
~ payable = cont creditor
~ receivable = cont debitor
~ settled = cont achitat
~ of goods purchased = cont de achiziii
~ of payee = n contul beneficiar
~ of liabilities and assets = situaie a activului i pasivului
blocked ~ = cont blocat
checking ~ = cont curent
Accountancy = contabilitate
Accountant = contabil
certified ~ = contabil autorizat
Accounting = contabilitate, calcul
~ period = exerciiu financiar
Cost ~ = calcul al costurilor
Acquisition = achiziie, dobndire
~ accounting = contabilitate de achiziie
Adverse = advers, potrivnic
~ balance of payments = balana de pli pasiv/negativ
~ balance of trade = balana comercial pasiv
~ budget = buget deficitar
Asset = activ (al unei companii)
~ s and liabilities = activ i pasiv
= valoare, capital, bunuri, avere
~ s tangible = active corporale
~ s intangible = active necorporale
Acquire = a capta
106

Additional = n plus, suplimentar

Assumption = prezumie
Accrued = angajat
Allowance = ncuviinare, permisiune, admitere
Advertising = publicitate
B
Balance = sold, rest de plat
~ due = sold debitor
~ in hand = sold creditor
~ of an account = sold al unui cont
~ of payments = balan de pli
~ sheet = bilan
~ vb. = a cntri, a echilibra
to ~ an account = a echilibra un cont
to ~ the budget = a echilibra bugetul
trial ~ = balana de verificare
Binary tag = fia de eviden (a intrrilor i ieirilor)
Background = pregtire
Broad = larg
Book of account = carte de conturi
Board = consiliu
Basis = baza
Book-keeper = contabil
Bookkeeping = contabilitate
Business as an accounting entity = principiul entitii patrimoniale
Borrowing = mprumuturi
Bonds = certificate guvernamentale
Budget = buget
Sales ~ = buget al vnzrilor
Batch = lot
C
Capital = capital (assets)
~ fixed = capital fix
cash ~ = capital n numerar
autorized share ~ = capital social

~ investment = investiie de capital

~ employed = capital investit
~ expeditures = cheltuieli de capital
Certificate = certificat, titlu de valoare
~ of incorporation = certificat de nfiinare
Charter = act, a ntri un drept
Check list = lista de control
Clerical workers = funcionri
Corporate = asociat, unit
Creditors =creditori
Controller = ef contabil
Cash disbursment register = registru de cumprri
Cash receipt journal = registru de vnzri
Cash receipts = ncasri
Concellation = anulare
Cost = cost
full or absorbtion ~ ing = cost total sau de absorbie
direct or variable ~ ing = cost parial sau variabil
Cut it back = a reduce
Co. market capitalization = preul pieei
D
Debit = debit, datorie
~ balance = sold debitor
to ~ an account = a debita un cont
Director = director
boards of ~ consiliu de administraie
Division = mprire
Demand = cerere
Degree = titlu, grad
Drawings = cheltuieli personale
Debtors = debitori
Double entry = dubla intrare
Delays =a mnri
E
108

Earmark = a aloca, a destina

to ~funds = a aloca fonduri
Economical = economicos
Economics = tiina economic
Economist = economist
Elaborate = a elabora, a produce
Entry = nregistrare
to make an ~ of an item = a contabiliza
book-keeping by double ~ = contabilitate n partid dubl
Estabilishment = instituie oficial
~ charges = cheltuieli fixe
Entire = tot, total
Enquire = a cere
Envisage = a considera
Expenditure = cheltuial, consum
~s and receipts = cheltuieli i ncasri
Expenses of operating the plant = cheltuieli de exploatare
F
Field = domeniu
Finance = finane, resurse financiare
Financial = financiar
~ accountant = contabil financiar
~ adviser = consilier
~ forecast = prognoz financiar
Fixed overheads = conturi indirecte fixe
Floating capital = capital circulant
Flourish = a nflori, a progresa
First-quarter = primele trei luni ale anului financiar
Funds = fonduri
First-rate service = servicii de cea mai bun calitate
Fee = onorariu
~ income = impozit pe onorariu
Freehold property = proprietate
G
Gain = ctig, beneficiu, profit

~ in efficienty = cretere a eficienei

General = general
~ balance sheet = bilan general, de ansamblu
~ management = conducere
~ manager = director general
Gross = brut
~ income = venit brut
~ national product = produs naional brut
~ profit = profit brut
Guarantee = garanie, asigurare
Get on = a contacta
Go bankrupt = a da faliment
Goodwill = fond comercial
Gap analysis = puncte care lipsesc
Gearing = rata de ndatorare
H
Hang = a aga, a ine deschis linia telefonic
Hard cash = bani lichizi, numerar
Head office = birou central
Hoard = stoc, rezerv, tezaur
Holder = deintor, purttor, posesor
Holding company = companie mam
Hug the ground = a suferi o nfrngere
Hiccup = o problem mic
I
Increase = cretere, spor
Income = venit
Income account = cont de profit i pierdere
Incorporate = a constitui
Indexation = indexare
Inflation = inflaionist
Input = intrare
Investment = investiie, plasare de capital
Invoice = factur
110

Incurred in connection with = determinat n legtur cu

(extraordinary Item) = cont (pentru cheltuieli excepionale)
Inventory = stocuri
(minority) Interest = acionari (minoritari)
L
Ledger = registru contabil totalizator, registru de profit i pierderi
Legislation = legislaie, corp de legi
Leasing = o form de nchiriere
Liabilities = datorii
long- term ~ = datorii pe termen lung
current ~ = datorii curente
Loans = mprumuturi
Bottom Line = profit net, extrabilanier
M
Means = mijloace
~ fixed = mijloace fixe
Management = conducere
~ accounting = contabilitate pentru conducere
~ audit = verificare contabil a eficienei
Means of payment = mijloace de plat
Merger = a fuziona
Mutiny = revolta
Mortgage = ipotec
Measurement = msur
Miscellaneous = divers, amestecat
N
National = naional
~ income accounting = contabilitate a venitului naional
Notes payable = efecte comerciale de plat
~ receivable = efecte comerciale de primit
promissory ~ = bilete la ordin
O

Office = instituie
~ supplies = rechizite
Open = a deschide
~ an account with a bank = a deschide un cont n banc
Overdraw = a depi contul
Overdraft = cont n depire
Overhead = cheltuieli, costuri indirecte
Outgoings = cheltuieli
Overrun = a ntrece
Outstanding payment = plat de efectuat
P
Pass = a trece
To ~ to account = a trece n contul
Payment = plat, rambursare
~ in cash = plat n numerar
~ on account = acont, plat n cont
Planning = planificare
Pay- roll = tat de plat
Portgage- ledger = cartea mare de verificare
Purchase = cumprare
~ order = comand de cumprare
Pinpoint = a evidenia
Profit = profit
Operating ~ = profit de exploatare
Power of attorney = procur
Pay sum in tax = a plti o sum de bani drept impozit
Prepaid insurance = asigurarea pltit n avans
Patent = brevet
R
Record = inregistrare
Require = a cere
Rate = rata
burden ~ = rata alocat de costuri indirecte pentru diferite produse
Raw materials = materii prime
Relate = a lega
112

Refund = a restitui
Run a business on a shoe string = a conduce o afacere cu foarte
puini bani
Rank first = a fi primul n ierarhie
~ last = a fi ultimul n ierarhie
Revenue = venituri
Retention = reinere
Retail = vnzare cu amnuntul
Ratio = rat
curent ~ = rata curent
Royalties = redevene
Record = nregistrare
~ of the work in process = nregistrarea lucrrilor n proces
~ of the finished goods = nregistrarea bunurilor finite
~ of the raw materials on hand = rapoarte de producie n curs
Report = raport
receiving ~ = proces verbal de predare-primire
S
Skill = ndemnare
Sales account = cont de vnzri
Supply = stoc, rezerv
Salaries = salarii
Shortlisted = selectat, admis pentru interviu
Sales = vnzri
~ mix = vnzri mixte
Sit- in = aciune de protest
Shrinkage = declin
Spare parts = piese de schimb
Share = aciune
~ premium = prim de capital
~ capital = capital social
Shareholder = acionar
~ equity = capitalul acionarilor
Section = seciune
cross ~ = seciune transversal
T
Training = pregtire

Turnover = cifr de afaceri

Transaction = tranzacie
Tied up = indisponibil
U, V, W
Unlimited = nelimitat
~ company = societate cu rspundere limitat
Unjumble = a pune n ordine
Value = valoare
~ in account = valoare n cont
~ added = valoare adugat
~ added tax = taxa pe valoare adugat
Vouchers = documente justificative
Wages = pli sptmnale
Woes = nenorociri

114

BIBLIOGRAPHY
1. Confort J.L. Brieger N., Finance,Prentice Hall Int., 1992
2. Costinett, L., The Language of Accounting in English,Prentice Hall
Inc., 1977
3. 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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