FINANCIAL STATEMENTS

1.INTRODUCTION

Financial Statements represent a formal record of the financial activities of an entity. These are
written reports that quantify the financial strength, performance and liquidity of a company.
Financial Statements reflect the financial effects of business transactions and events on the
entity. They are the means to present the firm’s financial situation to the users. Preparation of
the financial statements is the responsibility of controllers. As these statements are used by
investors and financial analysts to examine the company’s performance in order to make
investment decision, they should be prepare very carefully and contain as much information as
possible.

The main types of financial statements are: Balance sheet, Profit and Loss account and Cash
flow Statement .

2.READING

Reading 1

Black company

Balance Sheet, 31 December 20……..($’000)

A balance sheet is a statement of a company's financial position at a particular point in time. It is

a document which has two halves. The totals of both halves are always the same, so they
balance. One half shows a business’s assets, which are things owned by the company, such as
factories and machines, that will bring future economic benefits. The other half shows the
company’s liabilities, and its capital or shareholders’s equity. Liabilities are obligations to pay
other organizations or people: money that the company owes, or will owe at a future date. These
often include loans, taxes that will soon have to be paid, future pension payments to employees,
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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
granting credit. Since assets are shown as debits and the total must correspond with the total
sum of the credits – that is the liabilities and capital- assets equal liabilities plus capital
(or A= L+ C).

American and continental European companies usually put assets on the left and capital and
liabilites on the right. In Britain, this was traditionally the other way round, but now most British
companies use a vertical format, with assets at the top, and liabilities and capital below.

Question 1:

Are the following statements true or false?

1. British and Ametican balance sheets show the same information, but arranged
differently. T

2. The revenue of the company in the past year is shown on the balance sheet. F

3. The 2 sides or halves of balance sheet always have the same total. T

4. The balance sheet gives information on how much money the company has received
from sales of shares. F

5. The total assets is always the same as the total liabilities . F

6. The balance sheet tells you how much money the company owes. F

1. Assets
- Current Assets:
+ Cash and cash equivalents
+ Accounts receivable
+ Inventory
+ Short-term investments
+ Prepaid expenses
- Non-Current Assets:
+ Property, plant, and equipment (PPE)

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+ Intangible assets (patents, trademarks, goodwill)
+ Long-term investments
+ Deferred tax assets
2. Liabilities
- Current Liabilities:
+ Accounts payable
+ Short-term debt
+ Accrued expenses (wages, taxes, interest)
+ Unearned revenue
- Non-Current Liabilities:
+ Long-term debt
+ Bonds payable
+ Deferred tax liabilities
+ Pension obligations
3. Shareholders' Equity
- Share Capital: Funds contributed by shareholders
- Retained Earnings: Profits reinvested in the company
- Treasury Stock: Shares repurchased by the company
- Additional Paid-in Capital: Excess amount paid by investors over the par value of shares

Reading 2

Profit and loss account

Companies’ annual reports contain a profit
and loss account. This is a financial statement
which shows the difference between the
revenues and expenses of a period. Non-
profit (or not for profit) organizations such as
charities, public universities and museums
generally produce an income and expenditure
account. If they have more income than
expense this is called a surplus rather than
profit.

At the top of these statements is total sales

reveune or turnover: the total amount of
money received during a specific period. Next
is the cost of sales, also known as cost of

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goods sold (COGS): the cost associated with making the products that have been sold, such as
raw materials, labour and factory expenses . The difference between the sales revenue and cost
of goods sold is gross profit. There are many costs or expenses that have to deducted from
gross profit, such as rent, electricity and office salaries. These are often grouped together as
selling, general and administrative expenses.

The statement also usually shows EBITDA (earnings before interest, tax deprciation and
armortization) and EBIT (earnings before inerest and tax). The first figure is more objective
because depreciation and amortization expenses can vary depending on which system a
company use.

After all the expenses and deduction is the net profit, often called the bottom line. This profit
can be distributed as dividends (unless the company has to cover past losses), or transferred to
reserves.

Question 2:

Which figure in each of the following pairs is higher for a profitable company?

1.Cost of sales/sales revenue Lower

2.Gross profit/net profit Higher

3.EBIT/EBITDA Higher

4.Net profit/pre-tax income Higher

5.Income tax/ net profit Lower

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Reading 3

The cash flow statement

British and American companies also produce a cash flow statement. This gives details of cash
flows- money coming into and leaving the business, relating to:

 Operations : day – to – day activities

 Investing: buying or selling property, plant and equipment

 Financing: issuing or repaying debt, or issuing shares.

The cash flow statement shows how effectively a company generates and manages cash. Other
names are sometimes used for it, including funds flow statement or source and application of
funds statement.

British companies also have to produce a statement of total recognized gains and losses,
showing any gains and losses that are not included in the profit and loss account, such as the
revolution of fixed assets.

Question 3:

Complete the text with words from the box.

Financing investing operations

(1)Operations means making money by selling goods and services. (2) investing is spending
cash, for the business’s future growth, including cash acquired by selling assets. (3)Financing
involves raising money by issuing stocks and bonds (and also paying dividends and interest and

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repaying bonds). It is better for the company if it can pay for future growth out of money
from(4) operations, without having to use(5) financing So a “healthy” cash flow means that the
amount of cash provided by (6) ) operations is greater than the cash used for (7) ) investing.

Question 4: Choose the best answers:

1.The balance sheet contains market values of assets at a point in time.

a. True

b. False

2. The P/L account statement has three components: operating activities, investing activities,
and financing activities

a. True

b. False

3. What can be found on a P/L acount statement?

a. Revenues, expenses and net profit (loss).

b. Assets, revenues and expenses.
c. Revenues, expenses, and stockholders' equity.
d. Assets, liabilities and stockholders' equity.

4. Which of the following is not one of the four basic financial statements?

a.Balance sheet
b.Audit report
c.Income statement
d.Statement of cash flows
5. What relationship exists between costs of goods sold and gross profit?

a. Cost of goods sold equals gross profit.

b. Only service companies report both cost of goods sold and gross profit.
c. Cost of goods sold plus gross profit equals sales.
d. None of above

6. On an accounting statement of cash flows, an "increase (decrease) in cash during the year"
appears as
a. a cash flow from operating activities
b. a cash flow from investing activities
c. a cash flow from financing activities
d. none of above
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7. Which of the following regarding retained earnings is false?

a.Retained earnings is increased by net income and decreased by a net loss.

b.Retained earnings is a component of stockholders' equity on the balance sheet.
c.Retained earnings is an asset on the balance sheet.
d.Retained earnings represents earnings not distributed to stockholders in the form of
dividends.

8.Which of the following is not one of the items required to be

shown in the heading of a financial statement?

a.The financial statement preparer's name.

b.The title of the financial statement.
c.The unit of measure in the financial statement.
d.The name of the business entity.

III. GRAMMAR
1. Look at the reading 1,2,3 again and find the words using “which”. How can you use “which”
in a sentence?
The word "which" can be used in different ways in a sentence, mainly as a relative pronoun (to
add extra information about a noun) or an interrogative pronoun (to ask a question).
2. How to use “If” and “Unless” in English.
- Unless: means 'except on the condition that; only if.'
- If: is a conjunction used to introduce a condition or possible situation.
- Use 'unless' to refer to a condition that must be met for something else to happen, while 'if' is
used to express a hypothetical outcome.
- 'unless' is used to provide an exception to a general rule, while 'if' is used to pose a question
or statement.
- Think of 'unless' as 'unless you do something' and 'if' as 'if something happens'.

IV.VOCAPBULARY
Question 5.The UK and the USA often have different terms for the same thing. Here are some
examples. What terms do you often use? Please translate them into your language.

UK U.S.A Your language

Balance Sheet Statement of Financial position Bảng cân đối kế toán

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 Profit and Loss Statement Statement of Income Báo cáo kết quả kinh
doanh

Shareholder Stockholder Cổ đông

Stock Inventory Hàng tồn kho

Question 6. Match the words with their partners.

1. Retained A. Assets

2. Account B. Flow

3. Common C. Receivable

4. Total D. Earning

5. Prepaid E. Stock

6. Accumulated F. Income

7. Intangible G. Depeciation

8. Net H. Liabilities

9. Cash I. Expense

Now match the word partners to their definition.

1.An asset which does not have physical nature (such as a trade mark or patent )

2.The total legal obligation of company to pay other parties

3.The ordinary shares held by the owners, who therefore are the last to receive their money
back in the event of liquidation.

4. Profit which is not paid out to shareholders in the form of dividends but instead is kept by the
company to reinvest or pay off debts.

5. The amount due from debtors to whom goods or services have been sold on credit.

6.Total depreciation on a tangible asset accumulated up to a specified date.

7.The excess of revenues over expenses for a designated period of time

8. The movement of money into or out of a business

9. The expense s of future period paid in advance

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Question 7. Choose the best way to say these numbers. (Sometimes more than one way is
possible.)

23.56 a twenty-three comma fifty-six 1999 a nineteen ninety-nine

b twenty-three point fifty-six b nineteen hundred ninety-nine

c twenty-three point five six c nineteen nine nine

d two three point five six d one nine nine nine

10,001 a one thousand and one 2009 a two thousand nine

b ten thousand one b two double oh nine

c ten thousand and one c two thousand and nine

d one triple oh one d twenty oh nine

£63.30 a sixty-three pound and thirty pence

b sixty-three pounds and thirty pence

c sixty-three pounds and thirteen pence

d sixty-three pounds thirty

5,400,34 a five hundred thousand, four hundred, three hundred and forty-two
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b five million, four hundred thousand, three hundred and twenty-four

c five million, four hundred thousand, three hundred and forty-two

d five billion, four hundred thousand, three hundred and twenty-four

€45,638 a forty-five thousand, six hundred and thirty-eight euro

b forty-five thousand, six hundred and eighty-three euro

c forty-five thousand, six hundred and three eight euro

d forty-five, sixty-three, eight euro

Question 8:

Are the following statements true or false ? Find the reasons for your answer from the text.

1.A current liability will be paid before the date of the balance sheet. F

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-> A current liability is expected to be settled within one year after the date of the balance
sheet, not before it.

2. A liability that must be paid in 13 months time is classified as long-term. T

-> A liability that must be paid in more than 12 months (such as 13 months) is considered long-
term liability.

3. Shareholders’ equity consists of the money paid for shares and retained earnings. T

-> True – Shareholders’ equity consists of money paid for shares (share capital) and retained
earnings (profits reinvested into the company).

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 Glossary:
Terms Definitions
Intangible assets An asset which does not have physical nature (such as a trade mark or
patent )

Common stock The ordinary shares held by the owners, who therefore are the last to
receive their money back in the event of liquidation

Total liabilities The total legal obligation of company to pay other parties

Retained earning Profit which is not paid out to shareholders in the form of dividends
but instead is kept by the company to reinvest or pay off debts

Account receivable The amount due from debtors to whom goods or services have been
sold on credit.

Accumulated Total depreciation on a tangible asset accumulated up to a specified

Depreciation date

Net income The excess of revenues over expenses for a designated period of time

Cash Flow The movement of money into or out of a business

Prepaid expense The expenses of future period paid in advance

Controller Who is responsible for: Preparation of financial statement,

Accounting and Taxes

Treasurer Who is responsible for: Cash management, Raising capital, Banking

relationships
Expenses The costs incurred in producing revenues

Cost An amount that has to be paid or given up in order to get something

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FINANCIAL STATEMENTS

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