Accounting and Financial Statements 1. Types of Accounting 1.a Vocabulary.

Match up the terms on the left with the definitions on the right. a) bookkeeping b) accounting A calculating an individuals or a companys liability for tax B writing down the details of transactions (debits and credits)

c) managerial accounting C keeping financial records, recording income and expenditure, valuing assets and liabilities, and so on. d) cost accounting e) tax accounting f) auditing D preparing budgets and other financial reports necessary for management E inspection and evaluation of accounts by a second set of accountants F using all available accounting procedures and tricks to disguise the true financial position of the company

g) creative accounting G working out the unit cost of products, including materials, labour and all other expenses 1.b Listening. You will hear Sarah Branson, an accountant in New York, talking about bookkeeping and tax accounting. Read the questions, then listen to the interview. 1. In which fields do most of Sarah Brandstons clients work? 2. Why do they need an accountant? 3. What does Sarah Brandston describe as the basic rule for accounting? 4. An individual can do business as a self-proprietorship. Sarah Brandston mentions two other types of business. What are they? 5. Sarah Brandston says bookkeeping is really a common sense way of keeping track of the income and expenses. What does she mean by common sense in relation to recording expenses?

2. Company accounts 2.a Vocabulary. Match up the words with the definitions below.

Assets; depreciation; liabilities; turnover; creditors (GB) or accounts payable (US); debtors (GB) or accounts receivable (US); overheads (GB) or overhead (US); revenue or earning or income; shareholders (GB) or stockholders (US); stock (GB) or inventory (US) 1. a companys owners 2. all the money received by a company during a given period 3. all the money that a company will have to pay to someone else in the future, including taxes, debts, and interest and mortgage payments 4. the amount of business done by a company over a year 5. anything owned by a business (case investments, buildings, machines, and so on) that can be used to produce goods or pay liabilities 6. the reduction in value of a fixed asset during the years it is in use (charged against profits) 7. sums of money owed by customers for goods or services purchased on credit 8. sums of money owed to suppliers for purchases made on credit 9. (the value of) raw materials, word in progress, and finished products stored ready for sale 10. the various expenses of operating a business that cannot be charged to any one product, process or department 2.b Reading. Insert the words in 2a in the gaps in the text below. Accounting and Financial Statements In accounting, it is always assumed that a business is a going concern, i.e. that it will continue indefinitely into the future, which means that the current market value of its fixed assets is irrelevant, as they are not for sale. Consequently, the most common accounting system is historical cost accounting, which records (1) at their original purchase price, minus accumulated depreciation charges. In times of inflation, this understates the value as it does not record the replacement cost of plant or (2) . The value of a businesss assets under historical cost accounting purchase price minus (3).. is known as its net book value. Countries with persistently high inflation often prefer to use current cost or replacement cost accounting, which values assets (and related expenses like depreciation) at the price that would have to be paid to replace them (or to buy a more modern equivalent) today. Company law specifies that (4)must be given certain financial information. Companies generally include three financial statements in their annual

reports. The profit and loss account (GB) or income statement (US) shows (5) ..and expenditure. It usually gives figures for total sales or (6) ., and costs and (7). . The first figure should obviously be higher than the second, i.e. there should be a profit. Part of the profit goes to the government in taxation, part is usually distributed to shareholders as a dividend, and part is retained by the company. The balance sheet shows a companys financial situation on a particular date, generally the last day of the financial year. It lists the companys assets, its (8) ., and shareholders funds. A businesss assets include (9).as it is assumed that these will be paid. Liabilities include (10), as these will have to be paid. Negative items on financial statements, such as creditors, taxation, and dividends paid, are usually enclosed in brackets. In accordance with the principle of double-entry bookkeeping (that all transactions are entered as a credit in one account and as a debit in another), the basic accounting equation is Assets=Liabilities + Owners (or shareholders) Equity. This can be rewritten as Assets Liabilities = Owners Equity or Net Assets. This includes share capital (money received from the issue of shares), share premium (GB) or paid-in-surplus (US) (any money realized by selling shares at above their nominal value), and the companys reserves, including the years retained profits. Shareholders equity or net assets are generally less than a companys market capitalization (the total value of its shares at any given moment, i.e. the number of shares times their market price), because net assets do not record items such as goodwill. The third financial statement has various names, including the source and application of funds statement, and the statement of changes in financial position. This shows the flow of cash in and out of the business between balance sheet dates. Sources of funds include trading profits, depreciation provisions, sales of assets, borrowing, and the issuing of shares. Applications of funds include purchases of fixed or financial assets, payment of dividends, repayment of loans, and in a bad year trading losses. 2c Summarizing. Complete the following sentences. 1. Companies record their fixed assets at historical cost because 2. Historical cost accounting usually underestimates 3. Countries with a regularly high rate of 4. Company profits are usually split 5. Double-entry bookkeeping requires that 6. A companys net assets consist of

7. A companys stock market capitalization 8. Flows of cash both in and out of the company

3.a Types of assets. Match the accounting terms with the definitions below current or circulating or floating assets fixed or capital or permanent assets intangible assets liquid or available assets net assets net current assets or working capital wasting assets 1. ..are anything that can quickly be turned into cash. 2. .are the excess of current assets (such as cash, inventories, debtors) over current liabilities (creditors, overdrafts, etc) 3. .are those which are gradually exhausted (used up) in production and cannot be replaced. 4. ..are those which will be consumed or turned into cash in the ordinary course of business. 5. .are those whose value can only be qualified or turned into cash with difficulty, such as goodwill, patents, copyrights and trade marks. 6. , or shareholders equity, on a businesss balance sheet, is assets minus liabilities (which is generally equal to fixed assets plus the difference between current assets and current liabilities). 7. .., such as land, buildings and machines, cannot be sold or turned into cash, as they are required for making and selling the firms products.

3. Reading

The lessons from Enron After the energy firm's collapse, the entire auditing regime needs radical change Feb 7th 2002 | from the print edition THE mess just keeps spreading. Two months after Enron filed for Chapter 11, the reverberations from the Texas-based energy-trading firm's bankruptcy might have been expected to fade; instead, they are growing. On Capitol Hill, politicians are engaged in an investigative orgy not seen since Whitewater, with the blame pinned variously on the company's managers, its directors, its auditors and its bankers, as well as on the Bush administration; indeed on anybody except the hundreds of congressmen who queued up to take campaign cash from Enron. The only missing ingredient in the scandalso faris sex. The effects are also touching Wall Street. In the past few weeks, investors have shifted their attention to other companies, making a frenzied search for any dodgy accounting that might reveal the next Enron. Canny traders have found a lucrative new strategy: sell a firm's stock short and then spread rumours about its accounts. Such companies as Tyco, PNC Financial Services, Invensys and even the biggest of the lot, General Electric, have all suffered. Last week Global Crossing, a telecoms firm, went bust amid claims of dubious accounts. This week shares in Elan, an Irish-based drug maker, were pummelled by worries over its accounting policies. All this might create the impression that corporate financial reports, the quality of company profits and the standard of auditing in America have suddenly and simultaneously deteriorated. Yet that would be wide of the mark: the deterioration has actually been apparent for many years. A growing body of evidence does indeed suggest that Enron was a peculiarly egregious case of bad management, misleading accounts, shoddy auditing and, quite probably, outright fraud. But the bigger lessons that Enron offers for accounting and corporate governance have long been familiar from previous scandals, in America and elsewhere. That makes it all the more urgent to respond now with the right reforms. Uncooking the books The place to start is auditing. Accurate company accounts are a keystone for any proper capital market, not least America's. Andersen, the firm that audited Enron's books from its inception in 1985 (it was also Global Crossing's auditor), has been suggesting that its failings are representative of the whole profession's. In fact, Andersen seems to have been unusually culpable over Enron: shredding of incriminating documents just ahead of the investigators is not yet a widespread habit. But it is also true that this is only the latest of a string of corporate scandals involving appalling audit failures, from Maxwell and Polly Peck in Britain, through Metallgesellschaft in Germany, to Cendant, Sunbeam and Waste Management in America. In the past four years alone, over 700 American companies have been forced to restate their accounts. At the heart of these audit failures lies a set of business relationships that are bedevilled by perverse incentives and conflicts of interest. In theory, a company's auditors are appointed independently by its shareholders, to whom they report. In practice, they are chosen by the company's bosses, to whom they all too often become beholden. Accounting firms frequently sell consulting services to their audit clients; external auditors may be hired to senior management positions or as internal auditors; it is far too easy to play on an individual audit partner's fear of losing a lucrative audit assignment. Against such a background, it is little wonder that the quality of the audit often suffers. What should be done? The most radical change would be to take responsibility for audits away from private accounting firms altogether and give it, lock, stock and barrel, to the government. Perhaps such a change may yet become necessary. But it would run risks in terms of the quality of auditors; and it is not always so obvious that a government agency would manage to escape the conflicts and mistakes to which private firms have so often fallen prey. As an intermediate step, however, a simpler suggestion is

to take the job of choosing the auditors away from a company's bosses. Instead, a government agency meaning, in America, the Securities and Exchange Commission (SEC)would appoint the auditors, even if on the basis of a list recommended by the company, which would continue to pay the audit fee. Harvey Pitt, the new chairman of the Securities and Exchange Commission, is not yet willing to be anything like so radical. He has been widely attacked because, when he acted in the past as a lawyer for a number of accounting firms, he helped to fend off several reforms. Yet he now seems ready to make at least some of the other changes that the Enron scandal has shown to be necessary. Among these are much fiercer statutory regulation of the auditing profession, including disciplinary powers with real bite. Hitherto, auditors have managed to get away with the fiction of self-regulation, both through peer review and by toothless professional and oversight bodies that they themselves have dominated. There should also be a ban on accounting firms offering (often more profitable) consulting and other services to their audit clients. Another good idea is mandatory rotation, every four years or so, both of audit partnersso that individuals do not become too committed to their clientsand of audit firms. The most effective peer review happens when one firm comes in to look at a predecessor's books. The SEC should also ban the practice of companies' hiring managers and internal auditors from their external audit firms. In search of better standards Then there is the issue of accounting standards themselves. Enron's behaviour has confirmed that in some areas, notably the treatment of off-balance-sheet dodges, American accounting standards are too lax; while in others they are so prescriptive that they have lost sight of broader principles. Past attempts by the Financial Accounting Standards Board to improve standards have often been stymied by vociferous lobbying. It is time for the SEC itself to impose more rigorous standards, although that should often be through sound principles (including paying less attention to single numbers for earnings) rather than overly detailed rules. It would also be good to come up with internationally agreed standards. Although audit is the most pressing area for change, it is not the only one. The Enron fiasco has shown that all is not well with the governance of many big American companies. Over the years all sorts of checks and balances have been created to ensure that company bosses, who supposedly act as agents for shareholders, their principals, actually do so. Yet the cult of the all-powerful chief executive, armed with sackfuls of stock options, has too often pushed such checks aside. It is time for another effort to realign the system to function more in shareholders' interests. Companies need stronger non-executive directors, paid enough to devote proper attention to the job; genuinely independent audit and remuneration committees; more powerful internal auditors; and a separation of the jobs of chairman and chief executive. If corporate America cannot deliver better governance, as well as better audit, it will have only itself to blame when the public backlash proves both fierce and unpleasant. 4. Word study. Collocations with account a) A description of facts, conditions, events; a record or narrative description of past events - adjective + account (e.g. brief/ detailed/accurate) - verb + account (e.g. give) b) A formal business arrangement providing for regular dealings or services (as banking, advertising, or store credit) - adjective + account ( e.g. personal/current)

- verb + account (e.g. have/ open/credit/debit) c) a record of the money a business earns or spends (accounts in the plural) - verb + account (e.g. keep/ audit) DERIVATIVES of account Accountable/ accountability TRANSLATE into Bulgarian 1. I have to take many things into account. 2. Try to keep accurate accounts. 3. Your accounts need to be submitted to the tax office. 4. He gave us a blow-by-blow account of the accident. 5. She received a glowing account of her sons progress. 6. There is no satisfactory account of these phenomena. 7. On no account must I turn down the invitation. 8. There was a very brief newspaper account of the fire. 9. I have never been there but its a lovely place by all accounts. 10. The money will be credited to your account tomorrow

Arsenal Holding plc Consolidated balance sheet At 31 May 2010

2010 000 Fixed assets Tangible fixed assets Intangible fixed assets Investments Current assets Stock - development properties Stock - retail merchandise Debtors - due within one year - due after one year Cash and short-term deposits 434,494 60,661 1,053 ---------496,208 45,755 1,887 62,289 2,928 127,607 ---------2009 000 440,369 68,446 730 ---------509,545 167,007 1,751 45,981 9,508 99,617 ----------

240,466 Creditors: amounts falling due within one year Net current assets Total assets less current liabilities Creditors: amounts falling due after more than one year Provisions for liabilities and charges Net assets Capital and reserves Called up share capital Share premium Merger reserve Profit and loss account Shareholders funds (154,835) ---------85,631 ---------581,839 (283,883) (42,634) ---------255,322 ---------62 29,997 26,699 198,564 ---------255,322 ----------

323,864 (314,096) ---------9,768 ---------519,313 (292,748) (32,235) ---------194,330 ---------62 29,997 26,699 137,572 ---------194,330 ----------

Arsenal Holdings plc Consolidated profit and loss account For the year ended 31 May 2010
2010 Operation s excluding player trading 000 Operation s excluding player Total trading 000 000 2009

Note Turnover of the group including its share of joint ventures Share of turnover of joint venture

Player trading 000

Player trading 000

Total 000

381,262 (1,866) ----------

460 ---------460

381,722 (1,866) ---------379,856

312,305 (2,555) ---------309,750

3,589 ---------3,589

315,894 (2,555) ---------313,339

Group turnover

379,396

Operating expenses

(319,272) (25,033) -------------------

(344,305 ) (250,950) (23,876) (274,826) -------------------------------------

Operating profit/(loss)

60,124

(24,573)

35,551

58,800

(20,287)

38,513

Share of joint venture operating result Profit on disposal of player registrations

463

463

455

455

----------

38,137 ---------13,564 ----------

38,137 ---------74,151 ---------(18,183) ----------

---------59,255 ----------

23,177 ---------2,890 ----------

23,177 ---------62,145 ---------(16,633) ---------45,512

Profit on ordinary activities before finance charges

60,587 ----------

Net finance charges

Profit on ordinary activities before taxation

55,968

Taxation

5,024 ----------

(10,282) ---------35,230 ----------

Profit after taxation retained for the financial year

60,992 ----------

Earnings per share Basic and diluted 4 980.31 566.24

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