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THE INCOME STATEMENT (the profit and loss statement or the operations statement). This statement is a summary of the income and expenses of the business. The income statement summarizes these facts for any period of time. Income statements may be made for a year, a month, a quarter, or a half-year. Some firms have weekly or daily income statements. Although many items appear on the income statement, the basic idea is very simple. The formula is: NET SALES minus COST OF GOODS equals PROFIT. Amount taken minus Amount paid out equals PROFIT.
With a larger business, expenses change the formula somewhat:
NET SALES minus COST OF GOODS SOLD equals GROSS PROFIT.
GROSS PROFIT minus EXPENSES (RENT, LIGHT, PHONE) equals NET PROFIT
In business there are two kinds of profit: GROSS PROFIT and NET PROFIT.
NET SALES minus COST of GOODS SOLD equals GROSS PROFIT GROSS PROFIT minus OPERATING EXPENSES equals NET PROFIT.
The operations statement is a summary of facts which have been recorded daily in the books of the business. No matter how complicated it may look, it is based on the following simple formulas:
GROSS PROFIT equals SALES minus COST OF GOODS NET PROFIT equals SALES minus COST OF GOODS AND EXPENSES.
The income statement might be compared to a "moving picture". It describes the business in action. It summarizes the results of past activities and gives hints of what the future holds. The final figure, net profit, is of the greatest importance. One might find, for instance, that even though sales had increased since last year, profits were less. The operations statement might show that expenses were too high, it might also show that the utilities increased or there was too much loss on bad debts. Once a problem area is identified, steps can be taken to correct it.
When applying for a loan, the bank may want to examine several operations statements. The bank is interested in how sales compare with expenses, how much inventory is carried, and credit which is extended by the business. The owner is provided with information about the business from the operating statement. Profits earned over a period of time, department performance, inventory size, overhead costs, and many other items are shown on the statement.
THE BALACE SHEET. In contrast to the operations the balance sheet is a "still picture" of the business. ASSETS on one side are balanced against liabilities on the other. ASSETS include everything that is owned by the business. LIABILITIES are those amounts which the business owes.
The principle is the same regardless of the size of the business. It is expressed in the formula: ASSETS minus LIABILITIES equals NET WORTH or ASSETS equals LIABILITIES plus NET WORTH.
The figures for the balance sheet come from the records kept by the business. Each item on the balance sheet is based on facts that have been recorded daily in different ledger accounts. The records used for the operations statement are also used in preparing a balance sheet.
CURRENT RATIO. The assets are divided into current assets and fixed assets. The relationship between current assets and current liabilities is a prime measure of liquidity of any firm. Liquidity is the measure of ability to pay debts as they become due.
Current assets are assets that are in the form of cash or will convert into cash within 90 days. Current liabilities are those debts that will be due within one year. The relationship between current assets and current liabilities is called the current ratio. Sound financing demands that this ratio be at least 2 to 1. The current ratio is found by dividing the current assets by the current liabilities:
QUICK RATIO. This ratio is also known as the acid test of liquidity. It is the relationship between only the most liquid assets (cash and accounts receivable) and the total of the current liabilities. The conservative rule is that this ratio should be at least 1 to 1. In other words, cash plus receivables should equal or exceed the current liabilities.
WORKING CAPITAL. Working capital is the difference between current assets and current liabilities expressed in dollars.
THE PROPRIETORSHIP RATIO of owner's equity ratio is the relationship between the owner's investment in the firm and the total assets being used in the business. This ratio can be expressed as a ratio of owner investment to total assets or as a percentage of those assets.
There are many other ratios utilized in the analysis of business firm operations. Most small firms that maintain adequate current ratios, quick ratios, and working capital, proper inventories, and a 50 percent proprietorship ratio maintain sound financial structure.
TRADING ON EQUITY. In connection with owner investment, prospective business owners and managers should become familiar with the phrase "trading on equity". This phrase refers to the relationship between the creditor capital (liabilities) in the business and the owner capital. Trading on too thin an equity is a term used to describe owners who have too little of their own money invested compared with the creditor capital (liabilities) used to finance the business. A proprietorship ratio of 50 percent indicates that the owner or owners have invested half the value of the total assets used in the business. When this ratio falls below 50 percent, the outside creditors are supplying more of the firm's total capital needs than the owners are. This indicates, in most cases, that further capital will be more difficult to obtain either from current loans, sale of securities, or other investors. Such owners are truly trading on too thin an equity and probably need more investment capital of their own.
QUESTIONS
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What records is a typical small business supposed to keep?
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What is the income statement?
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What kinds of profit in business do you know?
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Would you name the formula to calculate gross profit and net profit?
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What is the essence of the balance sheet?
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What does each side of the balance sheet represent?
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What in your opinion is the difference between current ratio and quick ratio?
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What is proprietorship ratio?
doggedly – refusing to yield to wedge – push into a small or tight space soubriquet – cognomen, by-name sophisticated – complicated and refined; elaborate, subtle
ECONOMIC POTENTIAL OF UKRAINE
Western Bound
One of the four original republics, which formed the USSR in 1922, Ukraine is today edging closer to the West in its ambition to restore its economy and capitalise on its considerable assets.
Since the country declared unilateral independence 1990 and the collapse of the Soviet Union, it has doggedly ploughed on with the transition from centralised command economy to a free market economy. Since 1991 Ukraine has developed much closer relations with the West. In 1994 Ukraine renounced the nuclear weapons it had inherited from the USSR and it has since joined NATO's Partnership for Peace programme. It has also applied to become an associate member of EU, with the objective of full membership in the long run. Wedged in the south east corner of Europe, pressing down on the Black Sea and the Sea of Azov, Ukraine is in a strategic location as a link to western Europe and to the East. It is a large country of more than 50 million inhabitants - at 231.990 sq. miles the second largest in Europe - and it is rich in mineral resources, including oil, gas and coal.
Economic Transition
Ukraine has an extensive high-technology sector which it inherited from the USSR, a well-educated labour force. There are also vast fertile plains, with soil that is even richer than the prairies of North America, earning the country the soubriquet breadbasket of the Soviet Union".
Over the past 8 years the country has carried out extensive reforms to fulfil its potential, but it is still struggling with some of the difficulties of its transition to a market economy. Figures published recently by the Ukrainian National Statistics Committee confirm the current situation. They show a drop of 1.7% in GDP in 1998, with industrial and agricultural output down by 1.5% and 8.3% respectively, and inflation at 20%, double that of 1997. By contrast the trade balance was positive in 1998, with exports at $16.4 billion and imports at $16.1 billion, although both were some 13% lower than the year before.
The government has done much to liberalise economy since 1994, when they began the process of reform. Economy Minister Vasyil Rohovy explains: "We overcame hyperinflation that reached 1000% a year. We succeeded in achieving macroeconomic and financial stabilisation. We started the privatisation process and managed to speed it up. We established conditions for small and medium - size businesses. We also implemented monetary reform and introduced the national currency, the hryvnia, two years ago." Members of the government admit that more reforms are needed if they are attract more foreign investment and so develop the country's resources. They accept that there has to be less state regulation and a less punitive tax system. But they insist that they have been unable to overcome political opposition, particularly in the Ukrainian parliament. " I believe it is because 7 years is still a very short period for a country that for 70 years lived under Soviet control", says Serhiy Tyhypko, deputy prime minister and minister for economic reform. " I think it is just a matter of time before we have created the conditions necessary for investors."
Khlib Ukrainy (Bread of Ukraine), the state joint stock company responsible for grain products, is in the process of privatisation. Company chairman Heorhiy Omelchenko said that investors should not be afraid of investing in the construction of facilities.
Space Pioneers
Ukraine has great expertise in aircraft manufacture and space technology, developed when the country was at the centre of the Soviet space program.
On July 17 a Zenit 2 rocked was successfully launched. It carried into orbit an Ocean 0 Ukrainian-Russian satellite (6300 kg). It is designated for scientific purposes - to carry out scientific researches and observations of the earth's surface -in the interests of both Ukraine and other countries. A well-earned triumph of Ukrainian space scientists was achieved on 27 March when a three-stage Zenit rocket, designed and built by KB Uzhnoye of Dnipropetrovsk, was the first commercial launch from an ocean-based platform, and a successful demonstration of the potential of a new technology, orders for 8 more Zenit rockets have since been received. The successful launch has served to restore the reputation of Ukraine's Zenit rockets, which was dented when a land-launched Zenit 2 crashed in Sept 1998. The failure was later found to have been caused by a faulty, made on-board computer, made in Russia.
Space expertise is just one of the high-technology areas in which Ukraine is taken advantage of its scientific potential. The country has some 200.000 well-trained scientists, with advanced knowledge in a wide range of fields. In space matters ,Ukraine extensively co-operates with Russia and western countries.
Computer Know-how
Another area of rapid high-technology development is the personal and integrated computer industry, which has grown by leaps and bounds since the 1980s. The domestic market is still small, but Evheniy Utkin, president and chairman of the board of Kvazar Micro, which assembles and distributes them, expects sales to grow to 600.000 in 2003, compared with 200.000 in 2001.
"In my opinion, Ukrainian users are more sophisticated than those in Europe or eastern Europe because Ukraine has always been a technologically developed country, particularly in electronics," he says.
Telecommunications Boom
There is certainly great potential for the development of telecommunications in Ukraine, where the density of telephones is only 18 per 100 inhabitants, well below that of west European countries. Foreign investment was accepted in 1992, when two joint ventured were established: Utel and UMC.
Huns Wagenaar, chairman of Utel's Supervisory Board, says: " Ukraine needs to attract billions of dollars to improve and expand its networks. We are sure that the market will grow. But there is great uncertainty over the pace."
An important debate is under way in Ukraine over the future of Ukrtelecom, the state-owned telecommunications operator. The government wants to privatise the company, in the belief that in this way it can attract the investment needed for its development, but there is opposition in the parliament and the proposal was rejected there in December 1998. The government's aim is to sell 25 percent plus one share of Ukrtelecom to a strategic investor, while retaining a 51 percent share itself. But it cannot do this under existing legislation, because Ukrtelecom is on a list of 'strategic' companies which may not be sold off.
Industrial Strength
There is also considerable potential in heavy industry. Some of the world's best metallurgists, engineers and scientists are on tap, as well as skilled labour force. It is estimated there are enough coal reserves to last 300 years and, while old coal-burning power stations which pollute the atmosphere will be slowly phased out, the way ahead points to the construction of modern clean-burn power plants which produce little or no gas emissions.
The government, via the State Property Fund, is now planning to sell 26 percent of Nikopolskiy ferrous alloys plant, in which the government will retain a 50 percent stake until 2001.
One leading company which has successfully restructured and found new markets is Dneprospetsstal, which is a joint stock company 68 percent-owned by financial investors and 32 percent-owned by government. Having modernised its facilities, the company now exports 100.000 tonnes of rolled steel to Europe. "Although the European quota is 45.000 tonnes annually, we are bypassing the quota because it is high quality steel", says Hennadiy Kikyo, Dneprospetsstal chairman. " That is why European manufacturers are developing methods to fight us. They cannot declare antidumping because we sell it at European prices."
From Stability to Progress
On 24 August Ukraine celebrated the anniversary of its independence. Ukraine continues to progress toward market economy status. However, the time is fast approaching when it is no longer sufficient to speak of great potential alone. The coming year is arguably one of the most important in Ukraine's new history and recent stability suggests that it is up to the challenge.
QUESTIONS
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Why does Ukraine try to entry different international organizations?
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Can you say that Ukrainian economy is developing?
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What are the results of reforms in Ukrainian potential development?
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Is our country still a “space pioneer”? What do you know about successes of space industry of Ukraine?
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If you were a computer company manager, what difficulties would you see in this area in Ukraine?
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What kind of telephone do you have? What would you advise Ukrainian government to improve the situations with telecommunications?
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Do you see a huge potential of Ukrainian heavy industry? Give examples from our town economy.
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How can privatisation influence the Ukrainian economic potential?
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Give the definition of damping prices. Do Ukrainian plants use them? In what spheres?
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Do you consider the 24-th of August a great holiday? What about your parents and grandparents?
List of the Topics
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What is marketing?
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Marketing concept
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Marketing strategy
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The foreign exchange and capital markets
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Budgeting in business
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Problems of European union
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Britain and the euro
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Accounting
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English and American banks
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The commercial banks
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Financial statements
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Economic potential of Ukraine
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