ACCOUNTING AND FINANCE

Accounting is frequently called the «language of business» because of its ability to communicate financial information about an organization. Various interested parties such as managers, potential investors, creditors, and the government depend on a company's accounting system to help them make informed finan­cial decisions. An effective accounting system, therefore, must include accurate collecting, recording, classifying, summarizing, interpreting, and reporting of information on the financial status of an organization.

In order to achieve a standardized system, the accounting process follows accounting principles and rules. Regardless of the type of business or the amount of money involved, common procedures for handling and presenting financial information are used. Incoming money (revenues) and outgoing money (expen­ditures) are carefully monitored, and transactions are summarized in financial statements, which reflect the major financial activities of an organization.

Two common financial statements are the balance sheet and the income statement. The balance sheet shows the financial position of a company at one point in time, while the income statement shows the financial performance of a company over a period of time. Financial statements allow interested parties to compare one organization to another and/or to compare ac­counting periods within one organization. For example, an in­vestor may compare the most recent income statements of two corporations in order to find out which one would be a better investment.

People who specialize in the field of accounting are known as accountants. In the United States, accountants are usually classified as public, private, or governmental Public accountants work independently and provide accounting services such as auditing and tax computation to companies and individuals. Public accountants may earn the title of CPA (Certified Public Accountant) by fulfilling rigorous requirements. Private accoun­tants work solely for private companies or corporations that hire them to maintain financial records, and governmental accoun­tants work for governmental agencies or bureaus. Both private and governmental accountants are paid on a salary basis, whereas public accountants receive fees for their services.

Through effective application of commonly accepted account­ing systems, private, public, and governmental accountants pro­vide accurate and timely financial information that is necessary for organizational decision-making.

Exercise

Use this as a working list and add other terms with which you are unfamiliar:

Reading and discussion

THE BALANCE SHEET

Financial statements are the final product of the accounting process. They provide information on the financial condition of a company. The balance sheet, one type of financial statement, provides a summary of what a company owns and what it owes on one particular day.

Assets represent everything of value that is owned by a busi­ness, such as property, equipment, and accounts receivable. On the other hand, liabilities are the debts owed by a company — for example, to suppliers and banks. If liabilities are subtracted from assets (assets — liabilities), the amount remaining is the owners' share of a business. This is known as owners' or stock­holders' equity.

One key to understanding the accounting transactions of a business is to understand the relationship of its assets, liabilities, and owners' equity. This is often represented by the fundamental accounting equation: assets equal liabilities plus owners' equity.

ASSETS = LIABILITIES + OWNERS' EQUITY

These three factors are expressed in monetary terms and therefore are limited to items that can be given a monetary value. The accounting equation always remains in balance; in other words, one side must equal the other.

The balance sheet expands the accounting equation by pro­viding more information about the assets, liabilities, and owners' equity of a company at a specific time (for example, on Decem­ber 31, 1996). It is made up of two parts. The first part lists the company assets, and the second part details liabilities and owners' equity. Assets are divided into current and fixed assets. Cash, accounts receivable, and inventories are all current assets. Prop­erty, buildings, and equipment make up the fixed assets of a company. The liabilities section of the balance sheet is often divided into current liabilities (such as accounts payable and income taxes payable) and long-term liabilities (such as bonds and long-term notes).

The balance sheet provides a financial picture of a company on a particular date, and for this reason it is useful in two important areas. Internally, the balance sheet provides managers with financial information for company decision-making. Exter­nally, it gives potential investors data for evaluation of the company's financial position.

Exercise 1

Use this a working list and add other terms with which you are unfamiliar:

Exercise 2

A. Substitute appropriate terms for the underlined words or phrases in the sentences below:

status agencies monitored maintain independently

procedure fee hire rigorous solely

1. Many accounting departments have strict entrance require­ments; only the most qualified applicants are allowed to enter these programs. ________________

2. The particular method used to process employee insurance claims may vary from company to company. ________________

3. The stock market is closely watched every day. ________________

4. Rather than expand into foreign lines, the dress shop manager chose to deal only with domestic fashion design­ers. ________________

5. Although the consultant's charge for services was high, his guidance and advice were well worth the money. ________________

6. The financial condition of a company is reflected in its financial statements. ________________

7. When the business began to expand, a second bookkeeper was brought in to help keep the books. ________________

8. In the United States there are numerous organizations that provide services at the local, state, and national lev­els. ________________

Exercise 3

Fill in the blanks with noun, verb, or adjective forms. Use your dictionary if necessary:

WHY FINANCE

One of the primary considerations when going into business is money. Without sufficient funds a company cannot begin operations. The money needed to start and continue operating a business is known as capital. A new business needs capital not only for ongoing expenses but also for purchasing necessary assets. These assets — inventories, equipment, buildings, and property — represent an investment of capital in the new busi­ness.

How this new company obtains and uses money will, in large measure, determine its success. The process of managing this acquired capital is known as financial management. In general, finance is securing and utilizing capital to start up, operate, and expand a company.

To start up or begin business, a company needs funds to purchase essential assets, support research and development, and buy materials for production. Capital is also needed for salaries, credit extension to customers, advertising, insurance, and many other day-to-day operations. In addition, financing is essential for growth and expansion of a company. Because of competition in the market, capital needs to be invested in developing new product lines and production techniques and in acquiring assets for future expansion.

In financing business operations and expansion, a business uses both short-term and long-term capital. A company, much like an individual, utilizes short-term capital to pay for items that last a relatively short period of time. An individual uses credit cards or charge accounts for items such as clothing or food, while a company seeks short-term financing for salaries and office expenses. On the other hand, an individual uses long-term capital such as a bank loan to pay for a home or car — goods that will last a long time. Similarly, a company seeks long-term financing to pay for new assets that are expected to last many years.

When a company obtains capital from external sources, the financing can be either on a short-term or a long-term arrange­ment. Generally, short-term financing must be repaid in less than one year, while long-term financing can be repaid over a longer period of time.

Finance involves the securing of funds for all phases of business operations. In obtaining and using this capital, the decisions made by managers affect the overall financial success of a company.

Exercise 1

Use these terms a working list and add other terms with which you are unfamiliar:

ACQUISITION OF CAPITAL

A corporation needs capital in order to start up, operate, and expand its business. The process of acquiring this capital is known as financing. A corporation uses two basic types of financing: equity financing and debt financing. Equity financing refers to funds that are invested by owners of the corporation. Debt financing, on the other hand, refers to funds that are borrowed from sources outside the corporation.

Equity financing (obtaining owner funds) can be exemplified by the sale of corporate stock. In this type of transaction, the corporation sells units of ownership known as shares of stock. Each share entitles the purchaser to a certain amount of own­ership. For example, if someone buys 100 shares of stock from Ford Motor Company, that person has purchased 100 shares worth of Ford's resources, materials, plants, production, and profits. The person who purchases shares of stock is known as a stockholder or shareholder.

All corporations, regardless of their size, receive their starting capital from issuing and selling shares of stock. The initial sales involve some risk on the part of the buyers because the corpo­ration has no record of performance. If the corporation is suc­cessful, the stockholder may profit through increased valuation of the shares of stock, as well as by receiving dividends. Dividends are proportional amounts of profit usually paid quarterly to stockholders. However, if the corporation is not successful, the stockholder may take a severe loss on the initial stock investment.

Often equity financing does not provide the corporation with enough capital and it must turn to debt financing, or borrowing funds. One example of debt financing is the sale of corporate bonds. In this type of agreement, the corporation borrows money from an investor in return for a bond. The bond has a maturity date, a deadline when the corporation must repay all of the money it has borrowed. The corporation must also make periodic interest payments to the bondholder during the time the money is borrowed. If these obligations are not met, the corporation can be forced to sell its assets in order to make payments to the bondholders.

All businesses need financial support. Equity financing (as in the sale of stock) and debt financing (as in the sale of bonds) provide important means by which a corporation may obtain its capital.

Exercise 1

Use these terms a working list and add other terms with which you are unfamiliar:

Exercise 2

Look at the terms in the left-hand column and find the correct synonyms or definitions in the right-hand column. Copy the cor­responding letters in the blanks:

Exercise 3

Fill in the blanks with noun, verb, or adjective forms. Use your dictionary if necessary:

Exercise 4

Fill in the blanks with the most appropriate terms from the list:

similarly capital primary short-term support

consideration purchase start up arrangements finance

The Robinsons were planning to ______________ a small retail business. Before making the final decision, they looked at the amount of personal ______________ they had to invest. The remain­ing funds they would have to __ through various ______________ and long-term ______________ . Another ______________ was the type of equipment they would have to ______________ initially. ______________ , the Robinsons evaluated the costs of inventory, employee salaries and benefits, and other general expenses. After reviewing all these factors, the Robinsons decided to open their business.

Exercise 5

Determine which of the following statements are true and which are false. Then put T or F in the blanks. Correct those statements which are false by rewriting them:

1. _________ Long-term financing is used by a company to purchase new equipment and to construct additional facilities.

2. _________A new business only needs capital to meet day-to-day expenses.

3. _________ In financing business operation, a company relies almost entirely on short-term financing.

4. _________ Long-term and short-term financing may be acquired from outside sources.

5. _________ How well a company manages its finances affects the overall success of the business venture.

Exercise 6

Substitute appropriate terms for the underlined words or phrases in the sentences below:

acquire utilizes primary arrangement last

external consideration repaid expect capital

1. Although Mr. Robinson and his partners had already defined their new product line, they were still searching for the money needed to purchase equipment and materials. _________

2. In general, a business that is able to manage its finances successfully will continue to exist. _________

3. One of the chief elements in financial planning is achieving the correct balance between long-term and short-term capital. _________

4. A company needs sufficient funds to obtain necessary assets such as property, buildings, and inventories. _________

5. When a company wants to expand, one factor that always affects this decision is cost. _________

6. In making investments, a financial manager uses a wide variety of information provided by all departments of the company. _________

7. When an individual or a company borrows money from a bank, this money must be paid back by a specific date. _________

8. Owners anticipate that fixed assets will be used by the company for many years. _________

Exercise 7

Circle the letters of the answers that best complete the sen­tences below:

1. The process of acquiring capital is known as:

a. finance

b. financier

c. financing

d. financial

2. The unit of ownership in a corporation is a:

a. bond

b. share

c. certificate

d. stock

3. All corporations receive their starting capital by:

a. selling bonds

b. purchasing stock

c. purchasing shares

d. selling stock

4. The sale of corporate bonds is an example of:

a. debt financing

b. bond financing

c. equity financing

d. corporate financing

5. A corporation may be forced to sell its assets if it does not:

a. pay dividends

b. share its profits with stockholders

c. make the required payments to bondholders

d. sell bonds

Exercise 8

Look at the terms in the left-hand column and find the correct synonyms or definitions in the right-hand column. Copy the cor­responding letters in the blanks:

[1] E.Jerome McCarthy. Basic Marketing (Homewood, III.: Richard D. Irwin, Inc., 1971), pp. 44-46.

[2] Salaried: paid a salary, usually monthly; not owning shares in a firm. Workmen are usually paid a weekly wage (weekly wages).

Date: 2014-12-21; view: 2414