Financial accounting: The key documents ‘The financial accounting function is responsible for three essential pieces of financial information. They are the balance sheet, the profit and loss account and the cash flow statement. ‘The balance sheet isa statement of the financial position of an organization ‘ona given date. I discloses all assets and liabilities and is prepared so tht it «ives a ‘true and fair view’ of the organization's financial state at that date. In the UK, the Companies Act of 2006 lays down the format of the halance sheet 2s list of items using the lewers to K for the main headings 2nd roman numerals for the subheadings. Subheading is the term for an item of slightly less importance than the main headings. A main heading ean consist of two or more subheadings. Therefore, a subheading will be grouped under its unique ‘main heading. A main heading will thus be the sum of all its subheadings. (On the balance sheet, under the heading flved assets, three kinds of assets sare listed. First come intangible assets — assets that do not have any physical cxistence, for example, goodwill und licences. Afier this, «eagible assers are ted —things that are concrete, such as plant and machinery. The third kind fof asset under the heading of fixed assets is invesimtents in other companies. Also on the balance sheet, ihe heading assets lists some specie itoms. Examples ate goods for resale (stocks), amounts owed by third pa (biors), shares in third parties and nomey held atthe bank and in petty eash, Both the main headings and the sabheadings must be shown in the main body ‘ofthe balance sheet. Lastly, there are further lists of detailed items which must bbe reported. These may be contained in additional pages to the balance sheet. "Next we must consider the profit and lass account (or income statemest)- ‘This shows the difference between the revenues and expenses in a period. The UK Companies Act 2006 allows four different formets for profit and loss atecounts, Profit an loss statements can be drawn up for as many periods in a ‘year as required, However, a fully audited statement is normally only drawn up once a year (One of the main annual financial statements in the UK is the eash flow Statement, sornetimes called! the funds flow statement. The cash flow statement is important. I: reconciles the profit in the profit anc loss acount to the met ccash flow within the business. That is, it adjusts for all the cash and non-cash items involved in ariving at the profit and loss figure. For example, the purchase of a fixed asset for cash will not be charged in one lump to the profit and loss account but be “written off” over the period in which itis being used For some asses, depreciation may be up to 15 years or more. The deprecation charge is merely ledger entry, not involving paying out or receiving eash, However, this charge will be in the profit and loss account as an expense. The ceash flow statement adds back all sueh charges. The result is thatthe amount ‘of profit shown in the profit and loss statement reconciles to the cash received and paid out by the business, from its day-to-day operation ‘Capi ind reserves CClledap stare capital Share premium acount Revahinon reserve Other reserves x 1 0 1 Vv Profit nd lose account gece L 2 Centorstes 3. Gross prot 44. Distatution costs 5. Administration expenses {6 Otuer oprating incoms 7. come fom shares in group adoring Tacome fom paicipating interests 9 Tacome frm cher ied asst invest (Gt inet weed and saa Li, Amounts writen off investments Interest payable nd sila enarges 3. Taxon pit cess of edinary satis . Profit ross on ordinary activities after xstcn ‘Exrsordinay income ‘Exteordnary chaepoe Extraordinary prot or ks Tax on ertrordiary profit o oss ‘Other aes showa under the ave ers 20, Pro or os forthe finch year is 6. i is 1s, Accounting at Work 7©) || paragraph structive + topic sentences * summarizing A. Study the words in box a ry = ‘ ‘ function balance account 1 Give an accounting meaning and a general meaning for Baer each word, where this is possible. ee bln ee 2 chack inyourdi oe any onary. 3 All the words in box a appear in the text in Lesson 2.2. What phrases do they form a part of? r ~ subheading intangible B study the words in box b. They are all from the text in Lesson 2.2. investments statement 1. What is the base word in each case? What part of speech machinery administration is the base word? | depreciation 2 Does the prefixsuffix change the part of speech? 3 How does the prefix/suffix change the meaning of the base word? Look back at the text on page 17. After each topic sentence, how does the writer continue the paragraph? Choose one or more from the following list: * defining and describing + aiving a list of points * giving (an) example(s) * giving more information © restating the topic sentence * concluding © Write a summary of the text on page 17. Paraphrase the topic sentences. Add extra information and examples. See Skills bank | sing research questions + writing topic sentences « summarizing Discuss these questions. 1. Can you remember the three documents described in Lesson 2.2? 2. Do you remember any of the subheadings for the balance sheet? 3. Why is net cash flow not the same as operating profit? B The lecturer has asked you to research the role and skills of the financial accountant. 1. What do you understand by the term ‘financial accountant’? 2. Think of good research questions before you read the text on the opposite page 3 Look quickly at the text on the opposite page, What is the best way to record information while you are reading? (© Study the text on the opposite page. 1 Highlight the topic sentences. 2 Read each topic sentence. What will you find in the rest of the paragraph? 3. Which paragraphs) will probably answer each research question? Read those paragraphs and make notes. 4. Have you got all the information you need? If not, read other paragraphs. 1D _Re-read the section on the balance sheet on page 17, including the information in the right-hand column. Then use the internet to find out more about the categories (|-V) listed for heading K, Capital and reserves. 1 Make notes. 2. Write a series of topic sentences which summarize your findings. 3. Report back to other students. Read out each topicsentence then add extra details. 18MANAGEMENT ACCOUNTING (1) stress within words « pretixes [A. Discuss this question, What is the main difference between a fixed cost and a variable cost? direct cost fixed cost period cost semi-fixed cost B study the pictures on the opposite page. unit cost variable cost 1 Discuss what is being illustrated in each picture. Use words from box a. 2. What happens to unit costs when sales decline? © Look at the words in box a, 1 Underline the stressed word in each compound noun. 2 Underline the stressed syllable in each word of more than one syllable. Complete each sentence with a compound noun from box a. Make any necessary changes. 1 are not carried as part of the work-in-progress stock valuation. 2 Rentisa — _, but direct labour isa 3 In calculating the prime cost of each product, we need to total all the _________ and expenses. 4 If we divide the total cost of production by the number of units produced, we get our 5 Some costs consist of both a fixed and a variable element. We call these E study the words in box b. Find the prefix and try to work out the meaning in each case. decentralization disclosure incomplete non-disclosure prepaid reassess underestimate default discount intangible non-profit —_preorder recalculate undervalue | devalue dishonour insolvency nom-value-added pretax reschedule underperforming _ F Complete each sentence with a word from box b, Change the form if necessary. 4 Fil have to the meeting to discuss the management accounts because I'm going to London that cay. In this case, we will offer a2% ______ to encourage prompt payment. ‘We made a loss on this contract because we ____ the labour cost. ‘The company has closed the division because itwas __. ‘The company sued its supplior because it __ the terms of tho contract. after the currency was . there was an improvement in export orders. ‘The company may need to ___ its present costing method because so many errors have occurred recently. waunwn= 5 preparing for a lecture + predicting lecture content » making notes Faculty: Accountancy “We intend to maintain our A F 2a Study the slides from a lecture about budgets. 1. Whatwill be in this lecture? Make a list. 2 Write down some key words you expect to hear, 3 Check the pronunciation of the key words with other students or with a dictionary. 4 How are you going to prepare for this lecture? G? Listen to Part 1 of the lecture. 1 What exactly is the lecturer going to talk about today? Tick the topic(s) you heard. « the function of budgets + capital budgeting * budgetary control + production scheduling «+ the stages of budget preparation —_ « forecasting labour hours 2 What reason does the lecturer give for talking about this topic? 3. What is a good way to organize notes for this lecture? @ Listen to Part 2 of the lecture. 1. What is the main idea of this section? 2 Whats the first step in formulating a long-range plan for the business? 3 Whats the next step? 4 What do you expect to hear in the next part of the lecture? G Listen to Part 3 of the lecture. 1. How could you write notes for this part? 2 Whatare the five steps in budget preparation? G@ Listen to Part 4 of the lecture. 1 What key terms are defined? 2 What are the definitions? 3 Whatis the research task? © Listen and say whether these sentences are true or false according to the lecture. 1 z 3 4 5 6 position as the market leader in the electrical repair industry, whilst providing investors with an adequate rate of growth on their investment in the business.” Slide 1 Siso. “We will continue to maintain cur geographical focus on the high-earning suburban areas around the three largest cities. We will seek to enlarge our market share in those geographical areas to 20 per Cent of the total market.” slide 2 Asales forecast Slide 3 hh. Preparing a budget - the FIVE steps slide 4— rest within words «tng information sourcss «reporting research findings AL W Listen to some stressed syllables. Identity the word below in each case. Number each word. Example: Youhear: 1 nai fneel/ You write: absorption element reschedule activity indirect services. analysis it overheads unaudited calculating period unrealized classification production valuation department prudence variable B Where is the stress in each multi-syllable word in Exercise A? 1 Mark the stress, 2. Practise saying each word, Cost © Work in pairs or groups. Define one of the words in Exercise A. The other student(s) must find and say the correct word. 1D Study these three words: Voline 11 What does each word mean to an accountant? to tH 2 What are some of the relationships between the items? E Before you attend a lecture you should do some research, Be isconrvssess 1. How could you research the lecture topics on the right? Faculty: Accountancy 2. What information should you record? Lecture topics: 3. How could you record the information? 1. Theorigins of accounting 2 The introduction of double entry F You are going to do some research on a particular lecture bookben ing topic. You must find: 1 a dictionary definition 2 an encyclopedia explanation 3. a Useful Internet site 3 The Companies Act in the UK 4. The SorbanesOxley Act Student A Student B * Do some research on the origins of ‘* Do some research on the Sarbanes-Oxley accounting. Act. Tell your partner about your findings. Toll your partner about your findings. 255 aking ter intormation + reparting information A. You are going to listen to a continuation of the lecture in Lesson 3.2. 1. Make a list of points from that lecture. 2 Whatis the lecturer going to talk about today? (Clue: Lesson 3.2 research task) 3 § Listen to the end of the last lecture again and check your ideas. 4. Report your findings from the research task in Lesson 3.3 (Exercise F).. B Look at the slides and handout for today's lecture on the opposite page. 1. What is the connection between the slides? 2 What do you see on each slide? (CG Listen to Part 1 of today’s lecture. 1. The lecturer detines something. What is it? 2 What does the lecturer say is crucial to cost-volume-profit analysis? 2 Whatiis a good way to make notes from this lecture? Propare a page in your notebook, DW usten to Part 2 of the lecture, Make notes. If necessary, ask other students for information. E.G Listen to Part 3 of the lecture. Tick the statement that best summarizes this part of the lecture, ‘a. what the accountant assumes about costs in the short term b how the breakeven point relates to fixed costs and level of activity € the most important points about breakeven analysis the difference between Slides 2 and 3 FG tisten to the last part of the lecture. What is the etfect of offering a discount to customers according to the lecturer? G Think of a word or phrase from this unit for each definition. 1. costs that change in proportion to volume over the short term 2. examination of costs and revenues over varying levels of production or activity 3. where total costs equal total revenue 4. costs that remain constant 1M Match the words and definitions. 1 marginal cost a where activity is below the breakeven point 2 economies of scale b the view the accountant takes 3 making a loss (~ the cost of producing an extra item 4 breakeven point the view the economist takes 5 short-term view © anestimate of income and expenditure 6 longer-term view 4 not necessarily maximized at maximum output 7 budget sharing a fixed cost over a greater number of units 8 profits h_ where total costs equal total revenue |. Write about the lecture slides using words and phrases from Exercises G and H. 26aS Be et Bw “Tota est and revenue (£000) “ ' ' ' ' ' ' L ‘Aetity i unis Slide 1: Revenue and costs: the economist’ view Slide 2: Variable costs ssessss sg “otal ost and evenve in ‘Aetivty n units Slide 3: Fined costs Slide 4: Total cost and total sales Graphs from Financial @ Management Accounting by Pauline Weetman, © Pearson Education Limited 1996, 1999 and 2003. 27Vocabulary bank 28 Stress within words Nouns, verbs, adjectives and adverbs are called content words because ‘they carry the meaning. One-syllable words Some content wortis have one syllable or sound. This is always stressed, Examples: ‘debt, “fund, ‘share, ‘cost ‘wo-syllable words Some content words have two syllables. Two-syllable nouns and adjectives are often stressed on the first syllable. Two-syllable verbs are often stressed ‘on the second syllable, Examples: Exceptions: Nouns credit, ‘budget, (product Nouns ac‘count, effect, ma‘chine| Adjectives _ | fragile, ‘total, ‘current ‘Adjectives | direct se'cure, re'serve Verbs pro‘duce, re'act, exipand | | Verbs ‘audit, vary, ‘surcharge Multi-syllable words Some content words have three or more syllables. Multi-syliable words are normally stressed three syllables from the end Example: G00 0000 cod00 This is true for most words ending in: ~yze!-izel-isa | ‘analyze, ‘realize, ‘itemize sis analysis Sate ‘accurate, ‘calculate “ity ‘classify, ‘specify phere __| ‘atmosphere, ‘hemisphere al ‘marginal, ‘annual “iy aibility, profitability ular particular, ‘regular Exceptions: Multi-syliable words ending in the following letters are normally stressed. ‘two syllables from the end, ~ion | im'pression, ne'gotiation, implemen'tation sent | de'partment, e'fficientGetting information from other people From the lecturer ‘We can sometimes ask a lecturer questions at the end of a lecture. Introduce each question in a polite or tentative way. Examples: Could you go over the bit about fixed costs again? 1 didn’t quite understand what you said about unit costs. I wonder if you could repeat the name of this approach to costing. Would you mind giving the name of that American law again? From other students It is a good idea to ask other students after a lecture tor information to complete your notes, Examples: What did the lecturer say about variable costs? Why did he say that story about the South Sea Bubble? I didn't get the bit about intangible assets. Be polite! In some situations, it can sound impolite to ask people a direct question. ‘We may add a polite introduction. Examples: Does a balance sheet have to contain information about the directors? > Do you know if a balance sheet has to contain information about the directors? What does ‘breakeven point” mean? ‘> Can you remember what ‘breakeven point’ means? What are your marginal casts for this unit of output? > Can you tell me what you think the marginal cost is for this unit of output? Reporting information to other people We often have to report research findings to tutor or other students in a seminar. Make sure you can give: © sources ~ books, articles, writers, publication dates ‘© quotes - in the writer's own words ‘© summary findings in your own words 29