Пойгина Л.Б., Туринова Л.А. - English for Masters. Management Part 2 (Пойгина Л.Б., Туринова Л.А. - English for Masters. Management Part 2.pdf), страница 9

Most accounting reports of uny significance depend, to a greater or lesser extent, on people's opinionsand estimates.2. Accounting reports are prepared in order to help people make decisions.3. Accounting reports are based on activities which have been carried out by people.But what specifically is accounting? It is very difficult to find a pithy definition that is all-inclusive but wecan say that accounting is concerned with: The provision of information in financial terms that will help indecisions concerning resource allocation, and the preparation of reports in financial terms describing theeffects of past resource allocation decisions. Examples of resource allocation decisions are: Should aninvestor buy or sell shares? Should a bank manager lend money to a firm? How much tax should a companypay? Which collective farm should get the extra tractor?As you can see, accounting is needed in any society requiring resource allocation and its usefulness is notconfined to 'capitalist' or 'mixed' economies.An accountant is concerned with the provision and interpretation of financial information.

He does not, asan accountant, make decisions. Many accountants do of course get directly involved in decision making butwhen they do they are performing a different function.Accounting is also concerned with reporting on the effects of past decisions. But one should considerwhether this is done for its own sake or whether it is done in order to provide information which it is hopedwill prove helpful so in current and future decisions. We contend that knowledge of the past is relevant onlyif it can be used to help in making current and future decisions, for we can hope that we shall be able toinfluence the future by making appropriate decisions but we cannot redo the past.

Thus the measurement ofpast results is a subsidiary role, but because of the historical development of accounting and, perhaps,because of the limitations of the present state of the art 'backward looking' accounting sometimes appears tobe an end in itself and not as a means that will help in achieving a more fundamental objective.(from "Foundation in Accounting" bvLewis, H.

and Gillespie,)6. Discussing exerciseAccording to the author "accounting contains elements both of science and art". Support Lhe idea thataccounting involves a human element. In your opinion what are the main proposes of accounting?7. Writing exerciseWrite a short article which might be the answer to lhe question posed in the heading.23Text31.

Pre-reading exerciseSkim through Text 3 and identify which logical part deals with each of the following topics:a)b)c)d)e)f)g)GAAP account revaluation;Management oobjectives;The balance sheet and its concept;The company's market place;Size of companyWorking investment analysis;Financial policies;The Balance SheetI ______________________The balance sheet provides a financial picture of a company at a given time. It categorizes all of acompany's resources as assets, liabilities, and owners' equity.

The company uses its assets, including facilitiesand equipment, to manufacture or purchase products for inventory that, when sold, converts to cash or createsaccounts receivable. A company's assets are financed by the company's liabilities (also called debt) and owners'equity (also called net worth or, simply, equity).The basic structure of the balance sheet is represented by the simple equationAssets = Liabilities + Equity.This equation helps the credit analyst understand each business constantly occurring changes in financialstructure. Sine equations must always be in balance, a change on one same or other side to maintain thebalance.

For example, an increase in assets (whether fixed assets or inventory) must be balanced by a decreasein another asset account (such as accounts receivable) or an increase in liabilities (such as bank debt) or equity.Thus, a company can only obtain assets by liquidating other assets, creating new liabilities, or raisingadditional equity.

Liabilities can be paid by liquidating assets or by increasing other liabilities or equity. Anycombination of increasing or decreasing assets, liabilities, and equity can complete a transaction, provided theequation remains in balance.The balance sheet is traditionally the financial statement that bankers focus on. As is discussed later,some bankers think that this focus supports lending based too much on collateral, physical assets whichmay be sold to repay the loan if the business venture fails. Furthermore, if many current assets and fewcurrent liabilities along with low debt relative to equity characterise a borrower's balance sheet,management's character and abilities are less likely to be tested; thus, the banker may take a more relaxedview of the company's creditworthiness.The balance sheet review consists of evaluating each asset account in terms of its value and liquidity(capacity for being quickly converted into cash at or near market value).

In general, high liquidity reduces therisk of insolvency, the inability to pay bills as they come due. Thus, each asset is considered to be potentialcollateral in a lending situation. Each liability account is evaluated in terms of its repayment requirements andthe expected sources of repayment. Equity may be evaluated in terms of a future source of cash through salesof stock.The asset and liability structure of a company's balance sheet depends on the numerous industry factors. Inreviewing a balance, sheet the credit analyst should recognize that the type of business, the industry, and thecompany's managerial style each affects the distribution of assets, liabilities, and equity in characteristic ways.These same factors, as well as the conditions in the company's markets, the stage in the company'sdevelopment, its management's financing philosophy, and the availability of financing-debt and equity-alsoaffect the company's balance sheet structure.24II_______________________A lender must also understand the larger environment in which a company operates.

This includes themarketplace, the regulatory environment, the effect of the nation's economy on the business, and the businessvulnerability to the almost innumerable uncertainties that every company faces to some extent — be it thevagaries of the weather or technological and social change.Market CharacteristicsTo put a company's financial results in perspective requires the credit analyst to understand the structure ofthe market in which the company competes. Here are some questions to guide the analyst's investigations: Does the company have many competitors or only a few? How easy is it for new competitors to enter the market? Does product differentiation play a majorrole in a company's success in this industry? To what extent can the company control the price of its products? Is the company an industry leader, or must it be ready to follow the leader's strategy on price.regardless of its own costs? To what extent do demographic and consumer preference trends affect the company? Is the market for the company's product expanding, stable, or contracting?If a company's sales fluctuate with the seasons, it faces an external factor called seasonally.

A boat dealer,for example, usually sees heavy sales from spring through summer, with, business almost nonexistent for theremainder of the year. General merchandise retailers, on the other hand, encounter heavy sales in Novemberand December due to holiday shopping. Recognizing seasonality is particularly important when analyzinginterim income statements.Products and services also have their own life cycles. They begin as an idea, are transformed into anentity for sale, and are marketed until they stop selling profitably.

The business thendiscontinues the product or service. The product life cycle may be very short for a fad product or verylong for a staple product. Consider at what stage of a company's life cycle its products or services are. Thismay be difficult to determine because unforeseen consumer trends and new technology may shorten aproduct's life cycle. For example, the demand for citizens band (CB) radios skyrocketed in the 1970s, thendropped precipitously after a few years when consumer interest waned. Nevertheless, evaluation theprobability of continued profitable sales for a company's product or service is critical to an effectiveexamination.Economic EnvironmentInterest rates, inflation, tax policies, and the ups and downs of the national economy affect all companiesto some extent.

Some industries, however, are particularly vulnerable to changes in the general economy. Forexample, the automobile, construction, and capital goods industries are considered to be cyclical becausethey are so sensitive to economic downturns and recoveries. This sensitivity results in fluctuations inrevenues between operating cycles caused by a reaction to the expansion or contraction of general businessactivity.Regulatory EnvironmentAnother important consideration is the extent to which government regulations affect a company.

Evenindustries that are not subject to a high degree of regulation may be subject to import quotas, export bans,price supports, or subsidies. Other companies are subject to clean air and clean water regulations, which haveadded tremendously to their cost of doing business. Besides federal regulations, state and local laws may bean important consideration for some companies.III.