KPMG K-Foundation 2012

English for Finance

Accounting and financial statements

1 Types of accounting
1a Vocabulary
Match up the terms on the left with the definitions on the right. 1 bookkeeping A - calculating an individual's or a company's liability for tax B - writing down the details of transactions (debits and credits) C - keeping financial records, recording income and expenditure, valuing assets and liabilities, and so on D - preparing budgets and other financial reports necessary for management E - inspection and evaluation of accounts by a second set of accountants F- using all available accounting procedures and tricks to disguise the true financial position of a company G - working out the unit costs of products, including materials, labour and all other expenses

2 accounting

3 managerial accounting

4 cost accounting

5 tax accounting

6 auditing

7 'creative accounting'

1b Listening You will hear Sarah Brandston, an accountant in New York, talking about bookkeeping and tax accounting. Read the following questions, and then listen to the interview. 1 2 3 4 In which fields do most of Sarah Brandston's clients work? Why do they need an accountant? What does Sarah Brandston describe as 'the basic rule for accounting'? An individual can do business as a self-proprietorship. Sarah Brandston mentions two other types of business. What are they?

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English for Finance

Sarah Brandston says 'bookkeeping is really a common sense way of keeping track of the income and expenses'. What does she mean by common sense in relation to recording expenses?

1c Writing / Speaking What particular skills do you think different kinds of accountants need? Do you think you possess these skills? (What are your assets and liabilities?) If you have yet to choose a career, do you think it could be accountancy?

2 Company accounts 2a Vocabulary

These are some of the most common terms in accounting. Match them up with the definitions below. assets liabilities turnover depreciation (GB) or amortization (US) creditors (GB) or accounts payable (US) debtors (GB) or accounts receivable (US) overheads (GB) or overhead (US) earnings or income shareholders (GB) or stockholders (US) stock (GB) or inventory (US) 1 a company's owners 2 the revenues received by a company during a given period, minus the cost of sales, operating expenses, and taxes 3 all the money that a company will have to pay to someone else in the future, including taxes, debts, and interest and mortgage payments ' 4 the amount of business done by a company over a year 5 anything owned by a business (cash investments, buildings, machines, and so on) that can be used to produce goods or pay liabilities 6 the reduction in value of a fixed asset during the years it is in use (charged against profits) 7 sums of money owed by customers for goods or services purchased on credit 8 sums of money owed to suppliers for purchases made on credit 9 (the value of) raw materials, work in progress, and finished products stored ready for sale

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English for Finance

10 the various expenses of operating a business that cannot be charged to any one product, process or department

2b Reading Insert the words in the box in 2a in the gaps in the text. ACCOUNTING AND FINANCIAL STATEMENTS In accounting, it is always assumed that a business is a 'going concern', i.e. that it will continue indefinitely into the future - which means that the current market value of its fixed assets is irrelevant, as they are not for sale. Consequently, the most common accounting system is historical cost accounting, which records (1).................................. at their original purchase price, minus accumulated depreciation charges. In times of inflation, this understates the value of appreciating assets such as land, but overstates profits as it does not record the replacement cost of plant or (2)................................ . The value of a business's assets under historical cost accounting - purchase price minus (3) ................................. - is known as its net book value.

Countries with persistently high inflation often prefer to use current cost or replacement cost accounting, which values assets (and related expenses like depreciation) at the price that would have to be paid to replace them (or to buy a more modern equivalent) today.

Company law specifies that (4)................................... must be given certain financial information. Companies generally include three financial statements in their annual reports.

The profit and loss account (GB) or income statement (US) shows (5)................................... and expenditure. It usually gives figures for total sales or (6)......................., and costs, expenses and (7)..................................... The first figure should obviously be the highest, i.e. there should be a profit. Part of the profit goes to the government in taxation, part is usually distributed to shareholders (stockholders) as a dividend, and part is retained by the company.

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English for Finance

The balance sheet shows a company's financial situation on a particular date, generally the last day of the financial year. It lists the company's assets, its long-term and short-term (8) ................................... , and shareholders' (stockholders') funds. A business's assets include (9) ................................... as it is assumed that these will be paid. Companies also have intangible assets, whose value is difficult to quantify or turn into cash, such as goodwill, patents, copyrights and trademarks. Liabilities include (10) ..................................., as these will have to be paid. Long-term liabilities are usually loans and bonds; short-term liabilities include accrued or accumulated expenses that have not yet been paid such as taxes and interest. Negative items on financial statements, such as creditors, taxation, and dividends paid, are either enclosed in brackets or preceded by a minus sign.

In accordance with the principle of double-entry bookkeeping (that all transactions are entered as a credit in one account and as a debit in another), the basic accounting equation is Assets = Liabilities + Owners' (or Shareholders') Equity. This can be rewritten as Assets - Liabilities = Owners' Equity or Net Assets. This includes share capital (money received from the issue of shares), share premium (GB) or paid-in surplus (US) (any money realized by selling shares at above their nominal value), and the company's reserves, including retained profits from previous years. Shareholders' equity or net assets are generally less than a company's market capitalization (the total value of its shares at any given moment, i.e. the number of shares times their market price), because net assets do not record items such as goodwill.

The third financial statement has various names, including the funds flow statement, source and application of funds statement (GB), and the statement of changes in financial position (US). This shows the flow of cash in and out of the business between balance sheet dates. Companies often distinguish between operating activities, and financing and investment activities. Sources of funds include trading profits, depreciation provisions, sales of assets, borrowing, and the issuing of shares. Applications of funds include purchases of fixed or financial assets, payment of dividends, repayment of loans, and - in a bad year - trading losses. 2c Summarizing Complete the following sentences. 1 Companies record their fixed assets at historical cost because 2 Historical cost accounting usually underestimates 3 Countries with a regularly high rate of...

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English for Finance

4 Company profits are usually split... 5 Double-entry bookkeeping requires that... 6 A company's net assets consist of... 7 A company's stock market capitalization 8 Flows of cash both in and out of the company ...

3. Financial statements These are the 2000 consolidated financial statements of Nokia, the Finnish mobile telephone manufacturer , established according to International Accounting Standards ( IAS) (Consolidated means that these statements combine the individual figures of all Nokia group companies.) Nokia's net sales increased by over 50% in 2000 compared to 1999, as the global mobile phone market continued to grow. The statements printed here are slightly shortened, and include some material from the notes that accompany the statements in Nokia's Annual Report.

There are ten gaps in the three statements below. According to the information in the text in 2b, decide where the following headings should appear:

Accrued expenses Long-term liabilities Cash and cash equivalents at beginning of period Costs and expenses

Net cash from operating activities Income tax Net profit Intangible assets Inventories Retained earnings

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English for Finance

Consolidated profit and loss account (CSOCI) according to international accounting standards (IAS) Financial year ended December 31 (OOO's of euros) Net sales 1...................................................... Operating profit Shares of results of associated companies Financial income and expenses Profit before tax and minority interests 2...................................................... Minority interests (NCI) 3...................................................... 2000 EURm 1999 EURm

30,376 -24,600 5776 -16 102 5862 -1784 -140 3938

19,772 -15,864 3908 -5 -58 3845 -1189 -79 2577

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Consolidated balance sheet (CSFP), IAS 2000 EUR, m 6388 4394 1999 EUR, m 3487 2649

December 31 ASSETS Fixed assets and other non-current assets Property, plant & equipment, investments in other companies, deferred tax assets, other assets 4 .................................................................... (Capitalized R&D costs, intangible rights, goodwill, etc.) Current assets 5 .................................................................... (Raw materials, supplies, work in progress, and finished goods) Accounts receivable and pre-paid expenses Cash and cash equivalents Total assets December 31 SHAREHOLDERS' EQUITY AND LIABILITIES Shareholders' equity Share capital Share issue premium Treasury shares Translation differences 6 ..................................................................... Minority shareholders' interests 7 ..................................................................... Long-term interest-bearing liabilities (Bonds, convertible bonds, pension loans, etc.) Deferred tax liabilities Other long-term liabilities Current liabilities Short-term borrowings Current portion of long-term loan Accounts payable 8 ..................................................................... (VAT liabilities, personnel expenses, discounts, etc.) Total shareholders' equity and liabilities

1994

838

13,502 2263

10,792 1772

7056 4183 19,890 EUR, m

4861 4159 14,279 EUR, m

10,808 282 1695 -157 347 8641 177 311 173 69 69 8594 1069 47 2814 4664

7378 279 1069 -24 243 5801 122 407 269 80 58 6372 792 1 2202 3377

19,890

14,279

KPMG K-Foundation 2012

English for Finance

Consolidated cash flow statement (CSOCF), IAS 2000 EURm 5776 967 6743 -1377 5366 255 -155 -454 -1543 3509 -400 -160 -111 -393 -1580 4 75 221 51 -2293 72 7 -347 -1004 -1272 -56 4239 4183 1999 EURm 3908 597 4505 -21 4484 189 -212 -113 -1246 3102 -178 -25 -37 -271 -1302 27 121 318 6 -1341 152 28 -175 -597 -592 1 169 2990 4159

Financial year ended December 31 Cash flow from operating activities Operating profit Adjustments, total Operating profit before change in net working capital Change in net working capital Cash generated from operations Interest received Interest paid Other financial income and expenses Income taxes paid 9 ................................................. Cash flow from investing activities Acquisition of Group companies, net of acquired cash Treasury shares acquired Investments in other shares Additions in capitalized R&D costs Capital expenditures Proceeds from disposal of shares in Group companies net of disposed cash Proceeds from sale of other shares Proceeds from sale of fixed assets Dividends received Net cash used in investing activities Cash flow from financing activities Share issue Capital investment by minority shareholders Proceeds from and payments of liabilities, borrowings, and receivables Dividends paid Net cash used in financing activities Net increase in cash and cash equivalents 10 ................................................. Cash and cash equivalents at end of period