28 Balance Sheet, 31 December 20__ ($’000) Current assets 3,500 Liabilities 6,000 Fixed assets 6,500 Shareholders’ equity 4,000 Total assets 10,000 Total liabilities and Shareholders’ equity 10,000 Company law in Britain, and the Securities and Exchange Commission in the US, require companies t publish annual balance sheets: statements for shareholders and creditors. The balance sheet is a document which has evo halves. The corals of both halves are always the same, so they halance, One half shows a business's assets, which are things owned by the company, such as factories and machines, thac will bring future economic trenefits. The other halt shows the company’s liabilities, and its capital or shareholders’ equity (see belone). [iabilities are obligations to pay other organizations or people: money that the company owes, or will owe at a future dave. These often include loans, taxes that will soon have to be paid, future pension payments to employees, and bills from suppliers: companies which provide raw materials or parts. If the suppliers have given the buyer a period of time before they have to pay for the goods, this is known as geanting credit, Since assers are shown as dehirs (as the cash or capital account was debited to purchase them), and the rotal must correspond with the toral sum of the credits ~ shat is the liabilities and capital — assets equal liabilities plus capital (or A = L + C). American and continental European companies usually pot assets on the lefe and capital and abilities on the right. In Britain, this was tradicionally the other way round, but now most British companies use a vertical formar, with assets at the top, and liabilities and capital below. Br€: balance sheet; AmE: balance sheet or statement of financial positio Br€: shareholders’ equity; AmE: stockholders’ equity Shareholders’ equity Shareholders’ equity consists of all the money belonging to sharcholders, Pare of this is share capital ~ che money the company raised by selling its shares. Bur shareholders’ equity also includes retained earnings: profits from previous years that have not been distributed ~ paid our to shareholders ~ as dividends. Shareholders? equity is rhe same as che company’s net assets, of assets minus liabilities A balance sheer does nor show how muck money a company has spent or received during a yeas, This information is given in other financial statements: che profit and loss account and the cash flow statement. (See Unit 14) Professional English in Use FinanceWd q2-2 Are the following statements true oF false? Find reasons for your answers in, A and Bopposiee. 1 British and American balance sheers show the same information, but arranged differently 2 The revenue of the company in the past year is shown on the balance sheet. 3 The nwo sides or halves of a balance sheer always have che same rors}. 4 The balance sheet gives mnformation on how much money the company has received fzom sales of shares, 5 The aysets toral is always the same as the liabilicies total. 6 The halance sheet tells you how much money the company owes. Complete the sentences. Look at A and B opposite to help you, are companies that provide other companies wich materials, components, etc are profits that the company has not distributed to shareholders. sare things a company owns ancl uses in its business. consist of everything @ company owes. sovnsnn COMSISIS OF Money belonging to a company's owners, Make word combinations using a word from each box, Then use the word combit to complete che sentences below. Look at A and B opposite to help you. jons distribute liabilities grant money owe profits pay earnings retain credit 1 We a lot of our because we don’s any of our to the shareholders, 2 Most businesses have customers who + because they them 30 or 60 days 3 We have a lot of that we'll have 10 Sater this year Hii “Tm afraid our accountants are being investigated for fraud — on the brigiter side, our financial statements have made the New York Times best-seller fiction list.” Over to you OL Pe eee sub-divisions of these categories: assets, liabilities, and shareholders’ equity? Professional Engish in Use Finance 2930 The balance sheet 2: assets Fixed and current assets FE 2ciance sneet'a1 Cecember 20. (€000} Current assets Gash and equivalents 3.415 Accounts receivable a: Inventory 5,68 Other current assets 5,562 Total current assets 23,200 Non-current assets Property, plant and equipment 4,500 Goodwill ‘950 Long-term investments 6.265 Tolal non-current assets 14715 Total assets 34,959 In accounting, assets are generally divided into fixed and current assets, Fixed assets (or non-current assets) and investments, such as huildings and equipment, will continue to he used by the business for a long time. Current assets are things that will probably be uscd by the business in the near furare. They include cash ~ money available to spend immediately, debtors — companies or people who owe money they will have to pay in the neat future, and stock, Ifa company thinks a debt will not be paid, it has to anticipate the loss — take action in preparation for che loss happening, according to the conservatism principle. (See Unit 7) It will sprite off, or abandon, the suin as.a bad debi, and make provisions by charging a corresponcling, amonne against profits: that is, deducting the amount of the debt from the year’s profits. Valuation Manofacturing companies generally have a stock of raw marcrials, work-in-progress ~ partially manulactuced products — and products ready for sale. There are various ways of valuing stock or inventory, but generally they are valued at che lower of cost or market, which means whichever figure is lower: their cost— the purchase price plus the value of any work done on the items ~ or the current marker price. This is another example of conservatism: even. if the stock is expected to be sold at a profit, you should nor anticipate profits. Tangible and intangible assets Assets can also be classified as cangible and mtangible. Tangible assets are assets with a physical existence - things you can touch — such as property, plant and equipment. ‘Tangible assets are generally recorded at their historical cost (see Unit 7) less accumulated depreciation charges — the amount of their cost that has already been deducted trom protits. This gives their net book value. Intangible assets include brand names — legally protected names for a company’s products, patents ~ exclusive rights to produce a particulas new produce for a fixed period, and trade ‘ks — names or symbols that are put oa products and cannot be used by other companies. Networks of contacts, loyal customers, reputation, trained staff or human capital’, and skilled management can also be considered as intangible assets. Because it is difficult 1o give an accurate value for any of shese chings, companies normally only record tangible assets. For this reason, a going concern should be worth more on the stock exchange than simply its net worth Gr net assets: assers minus liabilities, If a company buys another one at above its net worth = because of its intangible assets ~ the difference in price js recorded under assets in the balance sheet as goodwill. Professional English in Use Finence12.1 12.2 123 Find words and expressions in A. B and C opposite with the following meanings. an amount of money that is cwed bur probably won't be paid the accounting valve of a company (assets minus liabilities) a legal right to produce ond sell 2 newly invented product for a certain period of time the historical cost of an asset minus depreciation charges the amount a company pays for another one, in excess of the net value of its assets a legally protected word, phrase, symbol or desiga used to identify a product to accept that a debe will nor be paid to deduct money from profits because of debrs thar will aot he paid products chat are not complete or ready for sale 10 the amount of money owed by customers who have bought goods Int not yet paid tor them weovanawna ‘Match the two parts of the sentences. Look at A, B and C opposite to help you. 1 A company’s value on the stock exchange is aearly always 2 Brand names, trade marks, patents, customers, atid qualified! staff 3 Cash, money owed by customers, and inventory 4 Companies record inventory at the cost of buying or making the items, 5 Companies write off bad debts, and make provisions 6 Land, buildings, facvories and equipment a sre current asses. b are examples of intangible assers © are examples of tangible, fixed assets. 4 by deducting the amount from profits. ¢ higher than the value of irs net assets. f or che current marker price, whichever is lower, Sort che following into current, fixed and intangible assets. Look at A and © opposite to help you. buildings cash in the hank debxors goodwill human capital investracars stock land reputation Curzent assets Intangible assets Over +o You EUs ee ee ee assets? Are they shown on the balance sheet Professionat Engish er Use Finarce uMmk} The balance sheet 3: liabilities come Liabilities Liabilities are amounts of money that a company owes, and are generally divided into two types — long-term and current. Long-term liabilities or non-carreat liabilities mclude bonds, (See Unit 33) ‘Carremt liabilities are expected to be paid within a year of the dave of the balance sheet, They include: creditors — largely suppliers of goods or services to the business who are net paid at the time of purchase fm plapned dividends mm deferred taxes ~ money thac will have eo be paid as tax in the future, although the payment docs not have to be made now. Curront liabilities Short-term debt 4,555 Accounts payable 5,049 Accrued expenses 8,593, Total current liabilities 15,197 Non-current llabilities Deferred income taxes 950 Long-term debt 3,402 Other non-current tiablities, 4,208 Total non-ourrent liabilities 5,553 Total liabilities 20,750 Shareholders’ equity ‘Common stock 10,909 Retained earings 3.900 Total 14,209 Total liabilities and Shareholders’ equity 34,989 HEED accrued expenses Because of the matching principle, under which transactions and other events are reported in the periods to which they relate and not when cash is received or paid, balance sheers susually include accrued expenses, These are expenses that have accumulated or built up during the accounting year bur will not be paid until the following year, after the date of the balance sheet. So accrued expenses are charged against income — that is, deducted from profits ~ even though the hills have not yer heen received or the cash paid. Accrued expenses could include taxes and tility bills, for es snple electricity and water. Shareholders" equity on the balance shect Sharcholders’ equity is recorded op the same part of the balance sheet as liabilities, ‘because it is money belonging to the shareholders and not the company, Shareholders’ equity inclucles the original share capital (money From stocks or shaces issued by the company: see ‘Units 29-30) m share premium; money made if the company sells shares at above their face value ~ the value written on them mt rctained camings: profits from previous years thar have not been distributed ta shareholders fm reserves: funds set aside from share capital and earnings, retained | ByE: share premium for emergencies or other future needs. ‘Ame: paid-in surplus 32 Professioral English in Use Finance13.1. Are the following statements true or false? Find reasons for your answers in A, Band C opposite. 1 A current liabilicy will be paid before the date of the balance sheet. 2 A Jiabiliry thae must be paid in 13 months time is classified as long-term. 3A company’s accrued expenses ace like money an individual saves to pay bills in the furure 4 Shareholders’ equity consists of the money paid for shares, and retained earnings. 5 IF companies retain part of their profits, this money no longer belongs to the owners & Companies can sell shares ar a higher value than the one stated on therm, 13.2. Find words in A, B and C opposite with the following meanings. 1 money that will be paid in less chan 12 months from che balance sheet date 2 the money that investors have paid to buy newly issued shares, minus the shares’ face value 3 delayed, pur off or postponed until a later time 4 built up or increased over a period of eime 13.3 Sore che following into assets and liabilities. Look at A and B opposite to help you. You may need t0 look at Unie 12 [ Accounts payable Land and buildings | Accrued expenses Lavest | Dividends Cash and equi Inventory Delerred taxes counts receivable Long-term debt Ea ai Assets Liabilities “Ob, that three billion dolla (oN Senco Dee UO ee se ec eee Le like to work for. What differences do you notice in the balance sheets and what reasons ‘ean you find for these? Professional English in Use Finance 33mr The other financial statements aa) The profit and loss account Companies’ annual reports contain a profit arby PL and loss account. This is a finan statement Se Y © which shows the difference between the revenues and expenses of a period. Non- profit (or not-for-profit) organizations such as Sales Revenue charities, public universities and museums Cost of Sales generally produce an income and expenditure Gross Profit account. If they have more income than Selling, General and expenditare this is called a surplus rather Administrative Expenses than a profit. Earnings before Interest, Tax, At the top of these statements is total sales revenue or turnover: the total amount of money received during a specihe period. Nest is the cost of sales, also known as cost of g00ds sold (COGS): che costs associated with making the products that have heen sold, such as raw materials, laboug and Sactory expenses, The difference berween the sales Depreciation and Amortization Interest expenses Income Tax Net Profit Annual Profit and Loss Account, 1/20__ Depreciation and Amortization Earnings before Interest and Tax revenue and the cose of sales is gross profit. There are many other costs or expenses that have 10 be deducted from gross profit, such as rent, electricity and office salaries. These are often grouped rogether as selling, general and administrative expenses (SG&A) The statement also usually shows EBITDA {carnings before interest, tax, depreciation and amortization) and EBIT (earnings before interest and eax). The frst figure is more objective because depreciation and amortization expe can vary depending on which systcin a company uss, After all the expenses and deductions is the net profit, offen called the bottom line, This profit can be distributed as dividends (unless che company has to cover past losses), or wansferred vo reserves. | Bre; net profit; Ame: net income | BrE: profit and loss account; AmE: income statement HEBER the cash flow statement British and American companies also produce a cash flow statement. This gives details of cash flows ~ money coming inta and leaving the business, relating to: operations — day-co-day activities | mm investing — buying or selling property, plane and equipment financing ~ issuing or repaying debt, or issuing shares. cash flow statement shows how effectively a company generates and mana: Other names are sometimes used for it, including funds flow statement and source and jon of funds statement. appli British companies also have to produce a statement of rotal recognized gains and losses (STRGL), showing any gains and lasses that are not included in the profit and loss, account, such as the revaluation of fixed assets. 34 Professional English in Use Finance14.1 14.2 14.3 Which figure in cach of the following pairs is higher for a profitable company? Look at A opposite to help you. 1 cost of sales / sales revenue 4 net profit / pre-tas income 2 goss profit / net profit § income tax / net profit 3 EBLE / EBITDA, Complere the text with words from the box, You will once, Look at B opposite to help you sd c0 use cach word more than ii) means making money by sellin is spending cash, for the business's future growth, including cash acquired by selling assets. (3) inyolves raising money by issuing stocks and bonds (and also paying dividends and interest and cepaying bonds). Iris herter for che company if it can pay for furure growth out of money from (4) . Without having to use 5) » Soa thealthy” cash flow means thar the amount of cash provided by 6) is gaeater chan the cash used for (7) goods and servie! Would the following appear as operating, financing or investing activities on a cash flow statement? Look at the example below to help you. ‘Changes in operating assets and liabilities Payments to repurchase stock Dividlends paid Sale of property Purchase of plant and equipment Depreciation and amortization expenses Net income Income taxes payable Issuance of stock Repayment of debr Cash flow statement ($'000) Earnings Amortization Other adjustments to Earnings Net cash provided from operations _ Proceeds from issuing new stock Stock dividends paid Net cash provided from financing 167 ‘Additions to property, plant and equipment 2351 1,755 Net cash used for investing 32,351 1,755 Change in cash and equivalents during year 356 7 Cash and equivalents, beginning of year 2,150 2014 Cash and equivalents, end of year 2,506 2a Over +o You Look at ash flow statements in company annual reports, and at the share prices of those RO Ue ee ore ne au Ree en ‘more eash than they spent, and what happened to those that spent more than they generated? Professional Engish in Use Finance 35