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ACCOUNTING,
ACCOUNTANCY
AND
AUDITING
CONTENTS
INTRODUCERE ................................................................................................
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32
34
35
36
39
41
42
54
55
57
UNIT 3.
UNIT 4.
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.
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
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
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5.
6.
7.
8.
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.
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,
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
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
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
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
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.
26
UNIT7
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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
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
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.
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
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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.
40
UNIT 6
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
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
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
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;
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.
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
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
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,
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.
Cash
Owners equity
FOREIGN SUB
Balance Sheet
January 1
LC80,000 (1LC = $1.25) = $100,000
LC80,000 (1LC = $1.25) = $100,000
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
Self-assessment Test
78
80
MINI-GLOSSARIES OF ACCOUNTING:
I. ENGLISH ENGLISH
82
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.
98
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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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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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
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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
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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
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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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