Students` UNIT 3 Accounting and Financial Statements in Financial Institutions LEARNING OBJECTIVES After studying this unit you

should be able to compare and contrast accounting and bookkeeping; define main types of accounting; state the role of accounting system in banks and other financial institutions;

outline the basic components of accounting process; kno the main types of financial statements and describe their composition;

kno key accounting !ocabulary; define terminology related to the accounting process" STARTING!"# E$er%ise &' (is%uss the follo)ing *uestions' +a,e the use of the follo)ing e$-ressions fro. the bo$' #hat is accounting$ #hy is it necessary for companies and organi%ations$ &o you use accounting information$ #hat are the main sources of accounting information you use$ language of business in ter.s of .oney -rofits and losses -rofitability/ li*uidity o-erating results/ finan%ial fore%asting resour%e allo%ation e$ternal and internal users household budget sour%e do%u.ents re%ei-t/ %he%,/ sales sli-/ finan%ial state.ents to re%ord a transa%tion to inter-ret infor.ation to re-ort u-on finan%ial -osition to .a,e de%isions to -lan future a%ti0ities

E$er%ise 1' Co..ent on the follo)ing *uotations' 2hi%h of the. do you agree )ith3 2hi%h do you disagree )ith3 2hy3 It sounds e'traordinary( but it)s a fact that balance sheets can make fascinating reading" Mary Archer I don*t really care about money" I find money boring and accounting boring( so I*m probably not going to e!er make a lot of money" Juliana Hatfield I ha!e no use for bodyguards( but I ha!e !ery specific use for t o highly trained certified public accountants" Elvis Presley &id you e!er hear of a kid playing accountant + e!en if they anted to be one$ Jackie Mason

FINAN,IA- STAT./.NTS 0F A 1AN2 1anks necessarily use sophisticated accounting systems to record as clearly as possible hat the financial situation of the bank is" /ost accounting information is designed to be useful in making economic decisions" Accountants use their e'perience to aid the management to select the best plan of action for the business" /anagers and other bank specialists ill need some accounting kno ledge in order that they may understand hat the accountant is telling them" As economic decisions are made by persons both ithin and outside the bank accounting information may be generated for internal and e'ternal users" Managerial accounting is concerned largely ith pro!iding information for internal use by the management and focuses more upon planning hich includes financing( resource allocation and marketing decisions" Financial accounting is concerned largely ith reporting upon the financial position of a firm and upon its profitability to outsiders" Thus this type of information deals ith the firm*s financial condition 3or position4( and the results of operations 3profitability4" /any companies and banks publish these statements in an annual report " The report contains auditor's opinion as to the fairness of the financial statement( as ell as other information about a company*s acti!ities( products or types of ser!ices( profits by ma5or di!isions and plans" The actual record+making phase of accounting is usually called bookkeeping " -arge organi%ations employ many bookkeepers ho use electronic and mechanical e6uipment" They record all the transactions of a firm in a chronological order in journals sho ing the names of accounts that are to be debited or credited " .ach item on the balance sheet and income statement has a separate account in the company*s ledger to here all the transactions are transferred or posted at regular inter!als" Though each organi%ation has its o n bookkeeping re6uirements( all accounting systems operate on the same basic principles the most idespread of hich being the use of the double entry method " +This means that each transaction is entered t ice 3has a t ofold effect4( to sho a !alue recei!ed and a !alue yielded or parted ith" Thus the same transaction is entered as a credit 3,74 in the account and as a debit 3&74 in another account" The sum of 89(:;; deposited ith a bank ill be entered as a debit for the recei!er and as a credit for the gi!er" The resources at a bank*s disposal are kno n as assets( hereas the indebtedness for these resources if they are pro!ided by someone else other than the o ner is kno n as liabilities" The total amount supplied by the o ner is kno n as e!uity capital " The hole of financial accounting is based on the accounting e!uation < Assets = -iabilities > .6uity ,apital 1ecause banks are simply business firms selling a particular kind of product( they are no e'clusion and the same formula is e'pressed in their balance sheets" The particular ser!ices each bank; chooses to offer and the o!erall si%e of a banking organi%ation ill be reflected in its financial statements( the t o most important of them being the balance sheet and the income statement 3the profit and loss account4" A balance sheet is described as a photograph of a company*s business at a moment in time( usually 3: &ecember of a particular year" It sho s the amount and composition of funds sources the bank has dra"n upon to finance its lending and in!esting acti!ities and ho much has been allocated to loans and other funds used at any gi!en time" For people such as bank managers( accountants and in!estors ho look at a lot of different balance sheets it is easier to keep to a set pattern of items so as to enable comparison" The assets are usually sho n under t o headings Fi#ed Assets 3those of long life( such as buildings( machinery( !ehicles( fi#tures and fittings 4 and $urrent Ass ets 3short+li!ed( such as cash or con!ertible into cash4" There is a choice of t o methods of listing the assets under their respecti!e headings" The first( being used by companies( is that the assets are listed starting ith the least li6uid and in this case fi'ed assets ill be follo ed by current assets" In the other method( used mainly by banks( it is the most li6uid asset that appears first" Under the liabilities the order ill be starting

ith capital to meet the claims against the respecti!e assets( thus progressing from long+term liabilities" The method used in banks is the complete opposite" In banking the assets on the balance sheet include four ma5or items< cash in hand and due from banks 3money in vaults% balances "ith other banks% che!ues in process of collection 4( in!estments 3bonds( shares and interest+bearing securities purchased on the open market4( loans( fi'ed assets" Items listed in as liabilities are< deposits and non+deposit borro ings of funds in the money and capital markets( ta#es payable% dividends payable " The largest asset of a bank is normally its total portfolio of loans" &eposits usually constitute the largest liability" In contrast the income statement( or the profit and loss account( indicates ho much it has cost the bank to ac6uire its deposits and other resources and to generate re!enues from the uses of these funds" These costs include interest paid to depositors and other creditors of a bank( the e'pense of hiring management and staff( overhead costs in ac6uiring and using office facilities and ta'es paid for go!ernment ser!ices" The income statement also sho s the re!enue 3cash flo 4 generated by selling bank ser!ices to the public( including making loans and leases and ser!icing customers* deposits" Finally the income statement sho s the bank*s net earnings after all the costs 3including ta'es4 are deducted from the sum of all re!enues" Figures published in financial statements pro!ide essential data on the efficiency% li6uidity % safety and solvency of a bank" In today*s highly competiti!e financial markets( the financial statements of banks are being scrutini&ed by in!estors( competing financial institutions( and by the general public" The fight for loan and deposit customers has increased dramatically" All this poses ne challenges and demands for the effecti!eness of a bank*s performance" The most important performance dimen sions for any bank are profitability and e#posure to risk" The ob5ecti!e of ma'imum profitability ith a le!el of risk acceptable to the bank*s shareholders is not easy to achie!e" 2ord List :" Managerial accounting + ?@ABCDEFGHIJK LMDEI; N" financial accounting O PEFBFGLCJK LMDEI; 3" outsiders O QLCFERFE ILAJGS?CBTE 3PEFBFGLCLU EFPLAVBWEXU4; Y" annual report ' AETFJK QCES; 9" auditor's opinion O B?ZJSLAGHIJK CJGFLCLI; [" bookkeeping ' C\Z\FF] M?^_BDS\AGHIJ^ IFJ_( M?^LMDEI ( `" journal ' a?AFBD LMDEI? _LG@LZBAGHIJ^ L@\ABWEK; b" debit ' Z\M\S 3AB^?FIB4( Z\M\S?CBSJ; c" credit IA\ZJS 3AB^?FIB4(IA\ZJS?CBSJ; :;" balance sheet ' MBDBFGLCJK QCES; ::" income statement 4the profit and loss account) ' QCES @AL @AJM?SIJ SB QMJSIJ( QCES @AL A\Q?DHSBSJ _LG@LZBAGHILd ZE]DHFLGSE ( :N" ledger ' _LDLCFB M?^_BDS\AGHIB IFJ_B :3" transfer or post transactions O @\A\FLGJSJ QB@JG @AL L@\ABWEU( ALMJSJ @ALCLZI?; :Y" the double-entry method O V\SLZ @LZCEKFL_L QB@JG? ( :9" liabilities ' @BGJCJ; :[" equity capital O CDBGFJK 3BIWELF\AFJK4 IB@ESBD ILV@BFEd; :`" accounting equation ' M?^_BDS\AGHI\ AECF]FF]; :b" draw upon O MABSJ( CJILAJGSLC?CBSJ( QBD?TBSJ; :c" fixed assets ' LGFLCFJK IB@ESBD( LGFLCFE PLFZJ e QBGLMJ; N;" fixtures and fittings O @AJGSLG?CBFF] SB EFC\FSBA; N:" current assets O LMLALSFJK IB@ESBD( LMLALSFE PLFZJ e QBGLMJ; NN" cash in hand and due from banks O IBGLCB _LSECIB e FB]CFE _ALRLCE ILRSJ SB _LSECIB C EFRJ^ MBFIB^; N3" money in vaults O _ALRE ? MBFIECGHILV? G^LCJfE;

NY" balances with other banks ' QBDJRIJ FB AB^?FIB^ EFRJ^ MBFIEC; N9" cheques in process of collection ' T\IJ C @ALW\GE EFIBGBWEd; N[" taxes payable ' QBMLA_LCBFEGSH QB @LZBSIBVJ ( N`" dividends payable ' QBMLA_LCBFEGSH QB ZJCEZ\FZBVJ; Nb" overhead costs O FBIDBZFE CJSABSJ; Nc" make loans and leases ' CJZBCBSJ @LQJIJ SB QZBCBSJ C LA\FZ?; 3;" efficiency ' A\Q?DHSBSJCFEGSH( \ILFLVETFB \P\ISJCFEGSH 3:" safety ' M\Q@\IB; 3N" solvency O @DBSLG@ALVLaFEGSH; 33" scrutini e O A\S\DHFL @\A\CEA]SJ( 3Y" performance dimensions ' @LIBQFJIJ ZE]DHFLGSE; 39" exposure to risk ' G^JDHFEGSH ZL AJQJI?" !xercise " #ive $krainian equivalents for the following words and phrases% Sophisticated accounting system; ithin and outside the bank accounting information; financial accounting; firm*s financial condition 3or position4; the fairness of the financial statement; record+ making phase; 5ournals; ledger; !alue recei!ed and a !alue yielded or parted ith; deposited ith a bank; amount and composition of funds sources; a set pattern of items; fi'tures and fittings; current assets; to meet the claims against the respecti!e assets; progress from; che6ues in process of collection; non+deposit borro ings of funds; total portfolio of loans; the e'pense of hiring management and staff( ser!icing customers* deposits; bank*s net earnings" !xercise &' #ive !nglish equivalents for the following words and phrases% g^JDHFEGSH ZL AJQJI?; LMLALSFE PLFZJ; _ALRE ? MBFIECGHILV? G^LCJfE; ALMJSJ QCES ZD] QLCFERFE^ ILAJGS?CBTEC; B?ZJSLAGHIJK CJGFLCLI; @\A\FLGJSJ QB@JG @AL L@\ABWEU( ALMJSJ @ALCLZI?; V\SLZ @LZCEKFL_L QB@JG?; CDBGFJK 3BIWELF\AFJK4 IB@ESBD ILV@BFEd; QCES @AL @AJM?SIJ SB QMJSIJ; QBMLA_LCBFEGSH QB ZJCEZ\FZBVJ;LGFLCFE PLFZJ; V\SLZ A\XGSABWEd BISJCEC; IBGLCB _LSECIB e FB]CFE _ALRLCE ILRSJ SB _LSECIB C EFRJ^ MBFIB^; QBDJRIJ FB AB^?FIB^ EFRJ^ MBFIEC; QBMLA_LCBFEGSH QB @LZBSIBVJ ( FBIDBZFE CJSABSJ; @DBSLG@ALVLaFEGSH; A\S\DHFL @\A\CEA]SJ; @LIBQFJIJ ZE]DHFLGSE; ?@ABCDEFGHIJK LMDEI; @BGJCJ" !xercise (' +at%h the senten%es beginnings )ith their endings' Translate the. into ",rainian'

:" As economic decisions are made by persons both ithin and outside the bank accounting N" 3" Y" 9" [" `" b"
a" b" c" d" information hhhhhhh The report contains auditor*s opinion as to the fairness of the financial statement( hhhhhhh The resources at a bank*s disposal are kno n as assets( hhhhhhh It sho s the amount and composition of funds sources the bank has dra n upon to finance its lending and in!esting acti!ities and hhhhhhh Under the liabilities the order ill be starting ith capital hhhhhhhh Items listed in as liabilities are< hhhhhhhhh These costs include interest paid to depositors and other creditors of a bank( hhhhhhh The most important performance dimensions for any bank are hhhhhh

to meet the claims against the respecti!e assets( thus progressing from long+term liabilities" may be generated for internal and e'ternal users" profitability and e'posure to risk" the e'pense of hiring management and staff( o!erhead costs in ac6uiring and using office facilities and ta'es paid for go!ernment ser!ices" e" as ell as other information about a company*s acti!ities( products or types of ser!ices( profits by ma5or di!isions and plans"

f" deposits and non+deposit borro ings of funds in the money and capital markets( ta'es payable( di!idends payable" g" ho much has been allocated to loans and other funds used at any gi!en time" h" hereas the indebtedness for these resources if they are pro!ided by someone else other than the o ner is kno n as liabilities" E$er%ise 5' +at%h the nouns in the left!hand %olu.n )ith the 0erbs in the right!hand %olu.n' re%ord report allocate make dra up keep incure post allocate enter scrutini%e keep list generate enter dra up list incure make risk keep report post keep scrutini%e allocate dra up enter

%osts

funds

state.ent

balan%e sheet

assets

a%%ounts

entry

transa%tion

E$er%ise 6' Loo, at the )ords in the bo$ all of )hi%h are fro. the unit' +at%h the )ords )ith the %orre%t definition fro. the list belo)' Account( profit and loss account current liabilities( costs( e6uity( annual report( bookkeeper( re!enue( posting :" Summary of re!enues( costs and e'penses of a company during an accounting period" N" Amount of money that must be paid to ac6uire something; purchase price or e'pense" 3" iaid in capital plus retained earnings" Y" &ebts incurred by the reporting entity as part of normal operations and that are e'pected

to be repaid during the follo ing :N months" 9" ierson ho enters transactions into an accounting system" [" The money a company recei!es from selling its product" `" Assets( liabilities( income and e'penses as represented by indi!idual ledger pages to hich debit and credit entries are chronologically posted to record changes in !alue" b" Transferring of entries in subsidiary books of account to their appropriate ledger accounts" c" Formal financial statement issued yearly hich is sent to company shareholders as ell as to other interested parties( including customers" E$er%ise 7' Loo, through the te$t and then fill in s-a%es )ith )ords fro. the bo$8 so.e )ords are e$tra' Translate the te$t into ",rainian' A bank*s income statement indicates the amount of both """ 3:4 recei!ed and """ 3N4 incurred o!er a specific period of time( such as the current year" There is usually a close correlation bet een the principal """" 334 on a bank*s balance sheet and its """ 3Y4" After all( assets on the balance sheet""" 394 the ma5ority of operating re!enues( hile """ 3[4 generate most of a bank*s operating e'penses" item( o!erhead( income statement( profitability( re!enue( account for( e'penses( bookkeeping( liabilities E$er%ise 9' Ans)er the follo)ing %o.-rehension *uestions based on the te$t' :" jo can accounting data be used$ N" #hat e'plains the e'istence of t o types of accounting$ 3" #hat is the basic principle of bookkeeping$ Y" #hat is the essence of accounting e6uation$ 9" #hat statement sho s fund sources and uses$ [" #hat method of listing assets is used in banks$ `" #hat method of listing liabilities do business firms use$ b" Are accounts payable listed as assets or as liabilities in the balance sheet$ c" #hat do income statements sho $ :;" #hy are banks* financial statements scrutini%ed by in!estors$ ::" #hat are the main ob5ecti!es of bank performance$ E$er%ise &: A; Study the infor.ation gi0en belo)' #ar,er #ublishing Grou- #l% Su..ary #rofit and Loss A%%ount )udited for the year to March "*st +,,< .illion In%o.e 7e!enue from main business( maga%ine publishing< 7e!enue from other acti!ities< Total turno!er< E$-enses iay and other employee costs< &epreciation of fi'ed assets< Selling and marketing costs< 117 &6 1=> 59 ? ?7

0ther operational costs< Total operating costs< #rofits 0perating profit< irofit from sale of fi'ed assets< Net interest payable< irofit before ta'< Ta'< irofit after ta'< Shareholder di!idends< irofit retained in the business< .arnings per share< Note< )he profit and loss account summary above is simplified* .) Match the words from the account summary with the definitions' :" audited N" re!enue 3" turno!er Y" fi'ed asset 9" depreciation [" net `" shareholder b" di!idend

5& &6& &>6 5 1 &=9 ?1 &&6 >> 51 &6'=-

a" reduction in !alue of an asset o!er time b" money paid to shareholders c" asset purchased for long+term use( such as land( buildings and e6uipment d" after any deductions e" accounts checked by an independent e'aminer f" a person ho has in!ested in the company through buying shares g" income h" total income

,4 /ook at the account summary0 and answer true or false' :" Turno!er is income after outgoings ha!e been deducted" N" Salaries and ages ere the only ma5or operating cost" 3" &epreciation of fi'ed assets seriously reduced operating profits" Y" iarker iublishing spent a lot on sales and marketing" 9" The company sold some assets" [" Nearly all the profits ent to the shareholders" `" &i!idends ere only :`"Yp per shareholder" b" It as a !ery bad year for iarker iublishing"

1) 2hoose the best words to fill the spaces' :" The year to /arch 3:st can also be called the year hhhhhhhhhh /arch 3:st"

a' finishing b' ending %' terminating N" Another term for kmain businessk is hhhhhhhhhh business" a' central b' first %' core 3" A company hich makes a profit can be described as profitable or hhhhhhhhhh" a' profit+getting b' profit+making %' profit+ha!ing Y" A company hich makes a loss can be described as hhhhhhhhhh" a' loss+getting b' loss+making %' loss+ha!ing 9" kirofit before ta'k can also be called hhhhhhhhhh" a' pre+ta' profit b' ithout+ta' profit %' non+ta' profit [" Another ord for shareholders 3especially in American .nglish4 is hhhhhhhhhh" a' ticket+holders b' stockholders %' paper+holder `" Another ord for koperating costsk is hhhhhhhhhh" a' o!erheads b' headings %' heads b" A company hich makes neither a profit or a loss is said to hhhhhhhhhh" a' fall e!en b' drop e!en %' break e!en Study the infor.ation gi0en belo)' 1A-AN,. Sj..TS #ar,er #ublishing Grou- #l% Balan%e Sheet )udited for the year to March "*st +,,-< .illion @i$ed assets iroperty Fleet ,omputers and other e6uipment Total fi'ed assets< Current assets Stock /oney outstanding 0ther current assets Total current assets< Liabilities ,urrent liabilities< -ong+term liabilities< Assets less liabilities +oney in0ested in #ar,er #ublishing =6 9 1 >7 > &1 1 &9 6 1? =6

Share capital 3Y;m 9;p shares4 7eser!es< Total< Note< )he balance sheet above is simplified* 14 Match the words from the balance sheet with the definitions' :" property N" fleet 3" stock Y" outstanding 9"current liabilities ["long+term liabilities `" share capital b" reser!es

1: 97 &&7

a" !ehicles 3cars( deli!ery !ans( lorries etc"4 b" not yet paid 3in this case( not yet paid to iarker iublishing4 c" money in deposited in bank accounts d" land( buildings and parts of buildings e" money hich must be paid out ithin one year f" money hich must be paid out after one year g" goods not yet sold h" money raised by issuing shares in the company

,4 3rite the words into the spaces' arm liabilities cash flo outstanding founded pounds* orth in its o n right sale or return ent public trading tied up subsidiary

iarker iublishing

as :hhhhhhhhhhhhhhhhh in :b`N by jieronymous iarker( originally as the speciali%es in lifestyle maga%ines( and(

publisher of a religious periodical called )he Preacher" It no

through its Nhhhhhhhhhhhhhhhhh Tekpress( also publishes se!eral highly successful periodicals on consumer interest sub5ects such as computing and hi+fi" The distribution 3hhhhhhhhhhhhhhhh also distributes maga%ines from other publishers( and has become highly profitable Yhhhhhhhhhhhhhhhhh" The company 9hhhhhhhhhhhhhhhhh in :cb`" The shares( originally priced at 9;p( are [hhhhhhhhhhhhhhhhh at the time of riting for around l3"N;" -ike many maga%ine publishers( iarker are !ulnerable to `hhhhhhhhhhhhhhhhh problems" As their maga%ines are on bhhhhhhhhhhhhhhhhh( they usually ha!e millions of pounds chhhhhhhhhhhhhhhhh from retailers( and ha!e :;hhhhhhhhhhhhhhhhh of se!eral million more in printers* bills" In addition they ha!e to keep large sums of money ::hhhhhhhhhhhhhhhhh in stock O the firm*s arehouses in -ondon and /anchester usually contain around fi!e million :Nhhhhhhhhhhhhhhhhh of maga%ines"

&4 /ook at the article above and the balance sheet in exercise ))' )nswer the questions' :" #hat are iarker iublishing*s main current liabilities$ a' money o ed to other companies 3particularly printers4" b' salaries and ages

N" The article doesn*t mention long+term liabilities" In the case of iarker iublishing are these more likely to bem$ a' money that must be paid to printers in the distant future" b' repayments on a bank loans used to buy a fleet of lorries and the arehouse in /anchester" 3" The company*s share capital is lN;m" &oes this mean thatm$ a' their shares are currently orth a total of lN;m b' the shares ere orth lN;m hen issued( but are no Y" #hat*s the company currently orth$ a' lN;(;;;(;;; b' lcb(;;;(;;; %' l::b(;;;(;;; E$er%ise &&' a; +at%h the ",rainian e*ui0alents )ith the English ones' to offset debit G?VB @LQJIJ 3MBFI"4 IA\ZJS?CBSJ AB^?FLI( QB@JGBSJ FB AB^?FLI; CEZF\GSJ FB AB^?FLI fractional+reser!e banking @LQJIJ CJZBFE the loan proceeds ILV@\FG?CBSJ( CEZRILZ?CBSJ surrenders legal title QM\AE_BSJ CGU G?V? C A\Q\ACE the liability o ed by the bank to its depositor G@JG?CBSJ Q AB^?FI? BISJCEC hold the entire sum in reser!e CEZVLCD]SJG] CEZ @ABCB CDBGFLGSE loans recei!able TBGSILC\ MBFIECGHI\ A\Q\AC?CBFF] method of payment QBILFFJK QBGEM @DBS\a? bank)s books QBDJRLI AB^?FIB credit 3MBFI"4 Z\M\S?CBSJ AB^?FLI( G@JGBSJ Q AB^?FIB account balance MBFIECGHIB IFJ_B; IFJ_B MBFIECGHIL_L LMDEI? debiting an asset account QLMLC)]QBFF] MBFIB @\A\Z CIDBZFJILV economic substance \ILFLVETFB G?SFEGSH legal tender G@LGEM L@DBSJ b; @ill in the blan,s )ith the )ord %o.binations fro. the table8 then listen to the te$t and %he%, your ans)ers' From a legal and financial accounting standpoint( the term ndeposito is used by the banking industry in financial statements to describehhh hhhh hhh hhhh( and not the funds that the bank holds as a result of the deposit( hich are sho n as assets of the bank" For e'ample( a depositor opening a checking account at a bank in the United States ith 8:;; in cash hhhh hhhh hhh to the 8:;; in cash( hich becomes an asset of the bank" 0n thehhhh hhhhh( the bank hhhhhits currency and coin on hand account for the 8:;; in cash( and hhhhhhhha liability account 3called a demand deposit account( checking account( etc"4 for an e6ual amount" 3See double+entry bookkeeping system"4 In the audited financial statements of the bank( on the balance sheet( the 8:;; in currency ould be sho n as an asset of the bank on the left side of the balance sheet( and the deposit account ould be sho n as a liability o ned by the bank to its customer( on the right side of the balance sheet" The bank)s financial statement reflects the hhhh hhhhof the transaction O hich is that the bank has actually borro ed 8:;; from its depositor and has contractually obliged itself to orth much more

repay the customer according to the terms of the demand deposit account agreement" hhhhh this deposit liability( the bank no o ns the actual( physical funds deposited( and the bank sho s those funds as an asset of the bank" Typically( an account pro!ider ill not(hhhh hhhh hhhh hhhh but ill loan all or most of the money out to other clients( in a process kno n ashhh hhh hhh" This process allo s pro!iders to earn interest on the asset and hence to pay out interest on deposits" 1y transferring the o nership of deposits from one party to another( banks can a!oid using physical cash as a hhh hhh"If bank in the United States makes a loan to a customer by depositing hhh hhhh in that customer)s checking account( the bank typically records this e!ent hhhh hhhh hhh on the bank)s books 3called hhh hhh or some similar name4 and credits the deposit liability or checking account of the customer on the bank)s books" From an economic standpoint( the bank has essentially created economic money 3although ob!iously nothhhh hhhh4" The customer)s checking hhh hhhh has no dollar bills in it( as demand deposit account is simply a liability o ed by the bank to its customer" In this ay( commercial banks are allo ed to increase the money supply 3 ithout printing currency( or legal tender4" E$er%ise &1' A%t as an inter-reter for -arts A and B' :" p ZBFJK TBG FE ZD] IL_L F\ X G\IA\SLV( +o% ,'m sorry , have to disagree* fL ALMLSE V\F\Za\AEC ? MBFIB^ FBZBXSHG] LGLMDJC\ QFBT\FF]" qD\ ] F\ VLa? -ell% that's not right ,'m afraid* QALQ?VESJ( TLV? @ALP\GEKFB ILV@\S\FWE] , really do think that *** V\F\Za\AB @LCJFFB CIDUTBSJ SBILa E ,'m absolutely convinced that QFBFF] C LMDBGSE M?^+_BDS\AGHIL_L LMDEI?" rD] TL_L a SLZE C MBFIB^ EGF?USH G@\WEBDHFE CEZZEDJ( ]IE QBKVBUSHG] @JSBFF]VJ LMDEI?$ N" r]I?U( pJ V\F\ @\A\ILFBDJ" s WHLV? .ou are al"ays "elcome """ CJ@BZI? V\FE M ^LSEDLG] @LGSBCJSJ pBV ,'m glad you asked me that/ Z\IEDHIB @JSBFH" tJV CJQFBTBXSHG] GSA?IS?AB MBDBFG? MBFI? E ]I ALQ@LZED]USHG] AB^?FIJ KL_L MBDBFG?$ 3" uL CEZLMABaBXSHG] FB BISJCFJ^( B fL FB -ell no" *** @BGJCFJ^ AB^?FIB^$ Y" vBGIEDHIJ V\FE CEZLVL( C FLV\FIDBS?AE E#actly* MBFI? X AB^?FLI wqIWEd( @Bd SB EFRE @B@\AJx" )hat's true* uL LMDEILC?X W\K AB^?FLI$ vB@\CF\( S?S 0ight you are* VLCB KZ\ @AL BIWEd EFRJ^ LA_BFEQBWEK" E$er%ise &?' Translate into English' A4" yBDBFGJ ILV\AWEKFJ^ MBFIEC CJILAJGSLC?USHG] ZD] BFBDEQ? E ?@ABCDEFF] ZE]DHFEGSU MBFIECGHIJ^ ?GSBFLC( CJQFBT\FF] @LIBQFJIEC d^ DEICEZFLGSE( ?@ABCDEFF] MBFIECGHIJVJ AJQJIBVJ( @LPBISLAFL_L BFBDEQ? MBFIECGHIL_L @AJM?SI?" z@B FLCJ^ ?VLC MBFIECGHILd ZE]DHFLGSE MBDBFG ILV\AWEKFL_L MBFI? X F\ DJR\ QBGLMLV M?^_BDS\AGHILd QCESFLGSE( BD\ E QBGLMLV ILV\AWEKFLd EFPLAVBWEd( MBFIECGHIL_L V\F\ZaV\FSB( B SBILa QBGLMLV G\AKLQFLd A\IDBVJ ZD] @LS\FWEKFJ^ IDEXFSEC( ]IE @AB_F?SH _DJMLIL SB @ALP\GEKFL ALQEMABSJG] ? ZE]DHFLGSE MBFIB" yBDBFG { LGFLCFB PLAVB M?^_BDS\AGHILd QCESFLGSE MBFIB( ]IB QLMABaBX C _ALRLCLV? CJABa\FFE GSBF CDBGFJ^ E QBD?T\FJ^ QBGLMEC MBFI? QB Za\A\DBVJ d^ ?SCLA\FF]( B SBILa ALQVEf\FF] WJ^ QBGLMEC FB @\CF? ZBS?" gSA?IS?AB MBDBFG? CJQFBTBXSHG] P?FIWELFBDHFLU ZE]DHFEGSU E @AJFWJ@BVJ LMDEI? MBFIECGHIJ^ L@\ABWEK" pGE MBDBFGLCE AB^?FIJ ILV\AWEKFJ^ MBFIEC Q_A?@LCBFE

QB @AJFWJ@LV \ILFLVETFL LZFLAEZFL_L QVEGS? E DEICEZFLGSE" zFBFF] FLV\FIDBS?AJ AB^?FIEC MBDBFG? E ?VEFF] KL_L wTJSBSJx X F\LM^EZFLU ?VLCLU ALQ?VFL_L MBFIECGHIL_L V\F\ZaV\FS?" |B^?FIJ FLV\FIDBS?AJ MBDBFG? MBFIEC @EZALQZED]USHG] FB MBDBFGLCJX E @LQBMBDBFGLCE" yBDBFGLCE AB^?FIJ M?CBUSH @BGGJCFJVEJ( BISJCFJVJ E BISJCFL+@BGJCFJVJ" zBGLMJ FB @BGGJCFJ^ AB^?FIB^ X A\G?AGBVJ MBFIB ZD] IA\ZJS?CBFF] E @ALC\Z\FF] EFRJ^ MBFIECGHIJ^ L@\ABWEK" zBMLA_LCBFEGSH FB BISJCFJ^ AB^?FIB^ @LIBQ?X CJILAJGSBFF] 3FB@A]VLI4 WJ^ A\G?AGEC" 14" vB @BGJCFJ^ AB^?FIB^ CEZLMABaBUSHG]< PLFZJ MBFI?( ILRSJ @EZ@AJXVGSC( LA_BFEQBWEK( PEQJTFJ^ LGEM( ZL^LZJ Z\AaBCFL_L MUZa\S?( Z\@LQJSJ( ILRSJ C ALQAB^?FIB^( @AJM?SLI MBFI?( IA\ZJSLAGHIB QBMLA_LCBFEGSH( EFRE @BGJCJ E QBD?T\FE ILRSJ( CIDUTBUTJ G?VJ A\PEFBFG?CBFF]( LSAJVBFE CEZ EFRJ^ MBFIEC" vB BISJCFJ^ AB^?FIB^ LMDEILC?USHG] < _LSECIB C IBGB^ MBFI?( ILALSILGSALILCE E ZLC_LGSALILCE IA\ZJSJ( CJSABSJ Z\AaBCFL_L MUZa\S?( CJSABSJ FB IB@ESBDHFE CIDBZ\FF]( Z\MESLAGHIB QBMLA_LCBFEGSH( EFRE BISJCJ" vB @LQBMBDBFGLCJ^ AB^?FIB^ @LIBQ?XSHG] A?^ WEFFLGS\K E ZLI?V\FSEC( fL FBZ^LZ]SH ZL MBFIECGHIJ^ ?GSBFLC FB QM\AE_BFF]( EFIBGL BML FB ILVEGEU" gUZJ CEZFLG]SHG] SBILa QBGLMJ L@DBSJ Z\AaBCFL_L VJSB( MDBFIJ G?CLALd QCESFLGSE( MDBFIJ BIWEK( BIWEd QB ZLA?T\FF]V E FB QM\AE_BFFE( EFRE ZLI?V\FSJ SB WEFFLGSE" }VEGEKFL+QBGFLCFJWHIB ZE]DHFEGSH ILV\AWEKFJ^ MBFIEC QLMABaBXSHG] FB BISJCFL+@BGJCFLV? AB^?FI? wqIWEd( @Bd SB EFRE WEFFE @B@\AJx( ]IJK CEZIAJSJK C N: ALQZEDE MBDBFG?" p BISJCE ZBFL_L AB^?FI? CAB^LC?USHG] C LGFLCFLV? @AJZMBFE BIWEd EFRJ^ LA_BFEQBWEK E MBFIEC( B SBILa BCBFGJ( CJZBFE ZD] WHL_L; C @BGJCE + ILRSJ( LSAJVBFE CEZ IDEXFSEC ZD] @AJZMBFF] WEFFJ^ @B@\AEC( SLMSL _ALRLCB CJA?TIB CEZ A\BDEQBWEd BIWEK SB EFRJ^ WEFFJ^ @B@\AEC off-balance accounts{@LQBMBDBFGLCE AB^?FIJ chart of account + AB^?FIJ FLV\FIDBS?AJ MBDBFG?( @DBF AB^?FIEC accounts payable O IA\ZJSLAGHIB QBMLA_LCBFEGSH accounts receivable O Z\MESLAGHIB QBMLA_LCBFEGSH encashment or commission + EFIBGL BML ILVEGE] promotional emission activity + \VEGEKFL+QBGFLCFJWHIB ZE]DHFEGSH E$er%ise &? LISTENING & TA#ES O@ ACCO"NTING' &' Aou are going to listen to Eri% Shar-8 a finan%ial dire%tor8 tal,ing about a%%ounting' Before you listen8 %he%, your understanding of the )ords and -hrases in the bo$ by .at%hing the. )ith their definitions 4&!&:;' Assets e'penditure ,ost accounting liabilities income 1ookkeeping Ta' accounting /anagement accounting Financial accounting Auditing

:" Anything o ned by a company O cash( buildings( machines( etc" N" ,alculating ho much ta' an indi!idual or a company should pay O or trying to reduce this figure" 3" ,hecking and e!aluating financial records" Y" &etermining the unit cost of a manufactured product( including indirect costs" 9" 2eeping financial records and preparing financial statements" [" /oney that a company ill ha!e to pay to someone else O bills( debts( interest( ta'es( etc" `" 7ecording transactions 3purchases and sales4 in ledgers" b" The money that a company recei!es from supplying goods or ser!ices"

c" The money that a company spends" :;" The use of company)s accounting data by its managers for planning and control" 1' Listen to Eri% Shar- tal,ing about the different bran%hes of the a%%ounting -rofession' 2hat three roles or areas of )or, does he .ention3 ?' No) listen again and .at%h the t)o -arts of the senten%es belo)' :" 1ookkeepers a" Is about making sure that the management has sufficient control o!er hat is going on in the company" N" /anagement accountants b" &o the boring ork O recording transactions in purchase ledgers and sales ledgers" 3" Senior accountants at financial controller c" ja!e to !erify that a company)s and director le!el published financial statements gi!e a true and fair !ie of its profit( its assets and its liabilities" Y" Internal auditing d" Interpret the transactions recorded by bookkeepers" 9" .'ternal auditors e" Use accounting data to make decisions about ho the business should proceed" ?' 2hi%h bran%hes of a%%ounting defined in e$er%ise & are not .entioned by Eri% Shar-3 2ould you be interested in )or,ing in these areas of a%%ounting3 LISTENING 1 @INANCIAL STATE+ENTS -isten to .ric Sharp talking about financial statements( and complete the te't" .ric Sharp< There are three or four different statements that companies include in their Annual 7eports( hich hhhhhhhhhhhhhhhhh can legally e'pect to see" The key documents are the profit and loss account( the balance sheet( and a funds flo statement of some kind" In the USA( and under International Financial 7eporting Standards( the profit and loss account is called an income statement" This document is fairly self+e'planatory< it)s hhhhhhhhhhhhhhhhhhh " The balance sheet is a statement sho ing hat the company has( and hhhhhhhhhhhhhhhhhhhhhh at the end of the year( hile the funds flo statement attempts to sho hether the company is hhhhhhhhhhhhhhhhhhhhh cash" The ta' authorities re6uire more detail than is gi!en in these documents; hhhhhhhhhhhhhhhhhhhhhhhhh is not the same as accounting profit( so they ill e'pect to see reconciliations bet een the t o" =' No) loo, at the in%o.e state.ent fro. Bar%lays Ban,8 and %o.-lete it using ans)ers fro. the tas, &' So.e )ords %an be used .ore than on%e' Barclays PLC 2005 2004 (1) _______ income statement - IFRS m m For the year ended 31st December

Continuing operations Interest income Interest e"#ense %et interest income Fee and commission income Fee and commission e"#ense %et (2) ____ and (3) _____ income

17 232 ($ 157) ! 075 & 430 (725) 5 705

13 !!0 (7 047) & !33 5 50$ (&&2) 4 !47

%et tradin' income %et in(estment income )rinci#a* transactions %et (4) ______ +rom ins,rance contracts -ther income .ota* income %et c*aims and bene+its #aid on ins,rance contracts .ota* income (5) ________ o+ ins,rance c*aims Im#airment char'e and other credit #ro(isions %et income

2 321 !5! 3 17$ !72 147 17 $7! (&45) 17 333 (1 571) 15 7&2

1 4!7 1 027 2 514 1 042 131 15 3&7 (1 25$) 14 10! (1 0$3) 13 015 (! 514) (22) (! 53&) 5& 45 4 5!0 (1 27$) 3 301

-#eratin' e"#enses e"c*,din' amorti/ation o+ (&) (10 44 __(7)___ !) 0morti/ation o+ (!) ____ ($) _____(7$) -#eratin' e"#enses (10 527 ) Share o+ #ost-ta" res,*ts o+ associates and 1oint 45 (ent,res )ro+it on dis#osa* o+ associates and 1oint (ent,res _ )ro+it be+ore ta" (10)__________ %et #ro+it +or the year IFRS 2Internationa* Financia* Re#ortin' Standards 5 2!0 (1 43$) 3 !41

I.-air.ent %harge and other %redit -ro0isions + CEZAB^?CBFF] FB A\Q\ACJ @EZ QF\WEF\FF] SB EFRE IA\ZJSFE A\Q\ACJ; net %lai.s and benefits -aid on insuran%e %ontra%ts O TJGSB CBASEGSH CEZRILZ?CBFH SB CJ@DBS QB GSAB^LCJVJ ILFSABISBVJ; fee and %o..ission in%o.e O ILVEGEKFE ZL^LZJ; -rin%i-al transa%tions O LGFLCFE L@\ABWEd; Boint 0entures O TBGSIB @BASF\AEC SB G@EDHFJ^ @EZ@AJXVGSC @EGD] G@DBSJ @LZBSIEC; -rofit on dis-osal of asso%iates and Boint 0entures O @AJM?SLI ? ALQ@LA]Za\FFE @BASF\AEC SB G@EDHFJ^ @EZ@AJXVGSC" >' Study the Bar%layCs %onsolidated balan%e sheet su..ary'

Barclays PLC Consolidated balance sheet summary - IFRS 0s at 31st December 2005 m 5, !" n#a $5%, $ ! %&', $ 2004 m 3 525 & &5! n4a n4a

Assets 3ash and other short-term +,nds .reas,ry bi**s and other e*i'ib*e bi**s .radin' and +inancia* assets desi'nated at +air (a*,e Deri(ati(e +inancia* instr,ments Debt sec,rities and e5,ity shares 6oans and ad(ances to ban7s 6oans and ad(ances to c,stomers 0(ai*ab*e +or sa*e in(estments Re(erse re#,rchase a'reements and cash co**atera* on sec,rities Ins,rance borro8ed assets inc*,din' ,nit-*in7ed assets )ro#erty #*ant and e5,i#ment -ther assets .ota* assets Liabilities De#osits and items in the co,rse o+ co**ection d,e to 3,stomer acco,nts ban7s .radin' and +inancia* *iabi*ities desi'nated at +air (a*,e 6iabi*ities to c,stomers ,nder in(estment contracts Deri(ati(e +inancia* instr,ments Debt sec,rities in iss,e *ent Ins,rance contract *iabi*ities inc*,din' ,nit-*in7ed *iabi*ities S,bordinated *iabi*ities -ther *iabi*ities .ota* *iabi*ities Shareholders, e-uity Shareho*ders9 e5,ity e"c*,din' minority interests :inority interests .ota* shareho*ders9 e5,ity .otal liabilities and shareholders, e-uity n4a 2 not a##*icab*e IFRS 2Internationa* Financia* Re#ortin' Standards

& 141 710 n#a &%,%!5 %($' , )' 5&,*)" %'!,&) %%* +$($,"5 %&,%*& * +&()$*, &5" "",*' +*($& , '%!*,)* * ) 5,$!% %&",)"% %!&,&$ &,"'" %$,*'& %*,)% " %",*$' ",!!* +5)$*,* " 15 !70 !$4 1& 7&4 112 22$ 217 4$2 n4a n4a n4a !3 !42 n4a ! 377 12 277 !7 200 !0 &32 2&2 40$ n4a n4a ! 57& 2 2!2 32 3!$ 53! 1!1

Re#,rchase a'reements and cash co**atera* on sec,rities %$%,%"

)),)$ 521 417

&! )$*,&5 53! 1!1

Treasury bills and other eligible bills + IBQFBT\KGHIE C\IG\DE SB EFRE C\IG\DE Trading and finan%ial assets designated at fair 0alue O SLA_LCE SB PEFBFGLCE BISJCJ( ]IE LWEFUUSHG] QB G@ABC\ZDJCLU CBASEGSU Loans and ad0an%es to ban,s O @LQJIJ SB BCBFGJ MBFIBV Insuran%e assets8 in%luding unit!lin,ed assets O GSAB^LCE BISJCJ( CIDUTBUTJ GSAB^LCE BISJCJ Q EFC\GSJWEKFLU GIDBZLCLU (e-osits and ite.s in the %ourse of %olle%tion due to ban,s + Z\@LQJSJ SB QLMLC)]QBFF] @\A\Z MBFIBVJ Re0erse re-ur%hase agree.ents and %ash %ollateral on se%urities + A\Q\AC @L A\@L ?_LZBV SB _ALRLC\ QBM\Q@\T\FF] WEFFJ^ @B@\AEC Re-ur%hase agree.ents and %ash %ollateral on se%urities lent O ?_LZJ A\@L SB _ALRLC\ QBM\Q@\T\FF] QB@LQJT\FJ^ WEFFJ^ @B@\AEC Insuran%e %ontra%t liabilities8 in%luding unit!lin,ed liabilities O QLMLC)]QBFF] QB GSAB^LCJVJ ILFSABISBVJ( CIDUTBUTJ GSAB^LCE QLMLC)]QBFF] Q EFC\GSJWEKFLU GIDBZLCLU +inority interests O ZLD] V\FRLGSE 3ZLD] VBDJ^ BIWELF\AEC( ]IE VBUSH V\FR\ 9;~ BIWEK4 ShareholdersD e*uity e$%luding .inority interests O BIWELF\AFJK IB@ESBD QB CEZAB^?CBFF]V VEFLAJSBAFL_L IB@ESBD? Subordinated liabilities O G?MLAZJFLCBFJK MLA_ I.agine that you are the Chief @inan%ial Offi%er at Bar%lays8 -resenting the 1::> results to the Board of (ire%tors' Gi0e the .ost i.-ortant figures8 su%h as the income recei!ed from interest( fees and commissions( trading( and insurance premiums the net income the pre+ta' and after+ta' profit the !alue of the group*s assets( liabilities( and shareholders* e6uity" ou can also report ho much higher or lo er these figures are compared to the pre!ious year( the annual percentage increase or decrease( and some reasons for the changes" Use a calculator if you need to" S"##LE+ENTARA TASES E$er%ise &' +at%h u- the na.es of the finan%ial state.ents )ith the definitions belo)' 3 Income statement 3or Statement of income( irofit and loss statement( or irofit and loss account4 A a statement gi!ing details of money coming into and lea!ing the business( di!ided into day+to+day operations( in!esting and financing B a statement sho ing the difference bet een the re!enues and e'penses of a period C a statement sho ing the !alue of a business*s assets( its liabilities( and its capital or shareholders* e6uity 3money the business has that belongs to its o ners4 &a;' Google In%' Balan%e sheet Loo, at the balan%e sheet o--osite8 and ans)er these *uestions' :" #hich lines on the balance sheet do the definitions belo it refer to$ N" #hich t o figures ha!e to be the same 3to balance4( by definition$ jo much money had the company already paid in ad!ance for goods and ser!ices( on the date of the N;;b balance sheet$ 3" At the N;;b balance sheet date( hich is greater( the amount of capital the shareholders ha!e paid into : 1alance sheet 3or Statement of financial position4 N ,ash flo statement

the company( or the amount of profit that has not been spent$ Y" At the N;;b balance sheet date( hich total is higher + the money oogle currently o es( or the money that it is o ed$ Google In%' Balan%e Sheet In /illions o0 1 As o0 $!! -%$- As o0 $!!"-%$-&% &% 3ash ; <5,i(a*ents ! &5&=&7 & 0!1=5$ Short .erm In(estments 7 1!$=10 ! 137=02 .ota* Recei(ab*es %et 2 &42=1$ 2 1&2=53 )re#aid <"#enses 1 404=11 &$4=21 -ther 3,rrent 0ssets .ota* 2!&=11 213=7$ .otal Current Assets $!,%" 2% %",$ )2%* )ro#erty4)*ant4<5,i#ment .ota* 5 233=!4 4 03$=2& 3ross >ood8i** %et (10) 4 !3$=!5 2 2$$=37 Intan'ib*es %et $$&=&$ 44&=&0 6on' .erm In(estments !5=1& 1 05$=&$ -ther 6on' .erm 0ssets .ota* 433=!5 201=75 .otal Assets &%,"'"25" $5,&&52 % 0cco,nts )ayab*e 17!=00 2!2=11 0ccr,ed <"#enses 1 !24=4& 1 575=42 -ther 3,rrent 6iabi*ities .ota* 2$$=&3 17!=07 .otal Current Liabilities $,&!$2!) $,!&52'! De+erred Income .a" 12=51 0=00 -ther 6on' .erm 6iabi*ities .ota* 1 214=11 &10=53 .otal Liabilities &,5$ 2"% $,'*'2%& 3ommon Stoc7 .ota* 0=31 0=31 0dditiona* )aid-in 3a#ita* 14 450=34 13 241=22 Retained <arnin's (!) 13 5&1=&3 $ 334=7! -ther <5,ity .ota* 22&=5! 113=37 .otal 3-uity $ ,$& 2 ' $$,' )2' .otal Liabilities 4 &%,"'"25" $5,&&52 % Shareholders, 3-uity :" all the money belonging to the company*s o ners N" assets hose !alue can only be turned into cash ith difficulty 3e"g" reputation( patents( trade marks( etc"4 3" capital that shareholders ha!e contributed to the company abo!e the nominal or par !alue of the stock Y" e'penses such as ages( ta'es and interest that ha!e not yet been paid at the date of the balance sheet 9" money o ed by customers for goods or ser!ices purchased on credit [" money o ed to suppliers for purchases made on credit `" money paid in ad!ance for goods and ser!ices b" profits that ha!e not been distributed to shareholders c" tangible assets such as offices( machines( etc" :;" the difference bet een the purchase price of ac6uired companies and their net tangible assets ::" the total amount of money o ed that the company ill ha!e to pay out &b;'Google In%' In%o.e state.ent Loo, the in%o.e state.ent o--osite' 2hi%h lines refer to the follo)ing3

:" N" 3" Y"

money recei!ed from in!estments money spent in order to produce income in the future the e'penses specific to pro!iding the company*s ser!ices additional e'penses in!ol!ed in running the company

Google In%' In%o.e State.ent In +illions of F Total Re0enue ,ost of 7e!enue( Total Gross #rofit SellingeeneraleAdministrati!e .'penses 7esearch &e!elopment Unusual .'pense 3Income4 Total O-erating E$-ense O-erating In%o.e 3Non+operating4 Interest Income Net Net 0ther( Net In%o.e Before Ta$ Net In%o.e After Ta$ &1 .onths &1 .onths ending ending 1::7!&1! 1::6!&1!?& ?& 1&869>'>> &58>9?'99 b([N:"9: [([Yc";c &?8&6=':= 989=='9: 3(`Yb"bb N(`Y;"9N N(`c3":c N(::c"cb :(;cY"`[ ;";; &581>7'?= &&8>:9'>9 >8>?6'1& >8:7='=: 3::"bc 9cY"Nb Y"9; 3Y"`;4 >87>?'5: >856?'97 =8115'75 =81:?'61

&%;' Cash flo) state.ent Cash flo) state.ents %ontain three %ategories Cash fro. O-erating A%ti0ities 4O-s';8 Cash fro. In0esting A%ti0ities 4In0'; and Cash fro. @inan%ing A%ti0ities 4@in';' 2hi%h %ategories do the follo)ing ite.s belong to 4as -ositi0e or negati0e a.ounts;3 0ps" Amorti%ation 3loss of !alue of intangible assets4 ,hanges in the si%e of the in!entory &epreciation 3loss of !alue of tangible assets4 &i!idends paid Income ta'es paid iayments to suppliers for goods and ser!ices iayments to employees iroceeds from issuing shares or debt iurchases or sales of property( plant and e6uipment 7eceipts from the sale of goods or ser!ices 7epurchase of company shares or repayment of debt Vo%abulary note oogle*s financial statements use American terms( hich sometimes differ from 1ritish ones" In!" Fin"

A.eri%an English Accounts iayable 7ecei!ables or Accounts 7ecei!able Additional iaid+in ,apital Annual Stockholders /eeting ,ommon Stock Net income

British English ,reditors &ebtors Share iremium Annual eneral /eeting 0rdinary Shares irofit

&d;' Role -lay #RESENTING A CO+#ANADS RES"LTS The ,hief Financial 0fficer of oogle Inc" is going to present the company*s results at the Annual Stockholders /eeting" jeeshe ill refer to the 1alance Sheet and Income Statement( and e'plain hich figures ha!e increased and hich ha!e decreased" In groups( prepare the presentation" This is a home ork task to prepare for the ne't lesson( you could look up more recent figures on the Internet on sites such as htt- GGin0estor'google'%o. / htt- GG finan%e'yahoo'%o./ htt- GG.oney%entral'.sn'%o. " ou could also use the company*s ebsite or the Internet to find details about ac6uisitions( product de!elopments( and so on( hich might e'plain any changes" Alternati!ely( you could present the accounts of a company you ork for or ha!e orked for or kno ell" E$er%ise 1' The arti%le gi0en belo) loo,s at ho) an a%%ounting standard for Euro-ean ban,s )as %hanged in 1::7 in res-onse to the global ban,ing %risis' 1a;' (is%uss these *uestions' : #hat sort of problems can arise if the amount of money that banks are allo ed to lend to their pri!ate and business customers suddenly becomes restricted$ N 1riefly describe the crisis in the international banking system hich began in N;;`" RE+E+BERH The amount amount of of money money that that a a bank bank can can lend lend to to its its The customersdepends dependson onthe theamount amountof ofcapital capitalreser!es reser!esitit customers holds" Therefore( Therefore( ifif the the !alue !alue of of a a bank`s bank`s assets assets holds" decreases(the theamount amountof ofmoney moneyititcan canlend lendalso alsogoes goes decreases( 1b; Read the arti%le and say )hether these state.ents are true 4T; or false 4@;' do n" n" do : The .uropean banks changed the ay they !alued certain types of asset in late N;;b" N In Sir &a!id T eedie*s opinion( this eakened banking accounting practices" 3 je said that the o!erruling of the IAS1 by politicians posed no particular threat to the gradual mo!e to ards a global set of accounting rules" Y The change had the effect of increasing the book !aluation of certain bank assets" 9 .uropean banks originally used the amorti%ed cost system of accounting to !alue their assets" [ These changes came about after a sharp upturn in the economy" ` In Sir &a!id T eedie*s opinion( a change in the ay regulators calculated a bank*s lending ability ould ha!e been better than a change in banking accounting and reporting practice" 1%; "nderstanding details read the arti%le again and ans)er these *uestions' : #hich institution as Sir &a!id T eedie representing$ N #hich institution imposed the ne accounting rules$

3 In one eek alone( by ho much ere the troubled .uropean banks able to increase their asset !alues$ Y In that eek( ho much in losses did they sa!e$ 9 #hich country*s regulators had been mo!ing closer to using the IAS1 accounting rules before the change$ [ #hat did the ne amortised cost !aluation rules re6uire banks to do$ ` #hat as the banks* criticism of the old rules$ IASB I"ESTIONS RELAJING O@ @AIR!VAL"E ACCO"NTING by ennifer jughes A4" .uropean banks* accounting practices deteriorated as a result of the rela'ing of fair+!alue accounting standards in late N;;b( according to Sir &a!id T eedie( jead of the International Accounting Standards 1oard 3IAS14" After a battle ith the .uropean ,ommission in 0ctober N;;b( the IAS1 as forced to change its rules ithout consultation" je armed that any further interfering in accounting rules by politicians ould risk destroying the long+running pro5ect to ards de!eloping a single global set of accounting rules" 14" The change helped troubled .uropean banks reclassify some of their assets and a!oid a hit to their earnings" In a single eek( more than :l3bn 38 :YYbn4 as mo!ed under the ne rules" This sa!ed N; more than 3bn in losses from banks* re!enues" ,4" The ad5ustment allo ed banks to account for more of their assets using the amorti%ed cost method" This ay( N9 asset gains are reported steadily o!er the lifetime of the financial in strument" Therefore( during a period of market !olatility( the reduced market !alue of an asset at any specific point in time is not taken into account" &4" The change came as the US Securities and .'change ,ommission as close to releasing its o n detailed *roadmap* of ho it proposed to shift from US accounting rules to the international system + a mo!e that ould effecti!ely *cement* the use of the IAS1*s rules as the single orld ide accounting language" jo e!er( Sir &a!id e'plained that in order to create a le!el playing field for the international banking sector( the IAS1 had made its change only because its US counterpart as not yet in a position to do so" .4" The ne rules ould re6uire banks to disclose any assets !alued at amorti%ed cost" jo e!er( Sir &a!id argued that the original *fair+!alue* system( hich led banks to rite do n hundreds of 9; billions in the !alue of their holdings as markets plunged in N;;b( had its benefits" It had at least forced regulators and e'ecuti!es to face the problems head on( rather than hiding from them" F4" je arned that in spite of the added disclosures( using amorti%ed cost ould still allo banks to rely to hea!ily on their o n 5udgment in !aluing their holdings + a practice he 6uestioned" They bought these assets originally and thought they ere going to be fine" #ell( they eren*t" So ho accurate is their long+term assessment$) 4" 0n the other hand( many banks had [9 complained that fair+!alue accounting as pro+cyclical because it helped to e'aggerate the impact of a do nturn" They had critici%ed the rules for reducing their capital reser!es by making them report losses on assets hich they continued to hold and had no intention of selling" j4" 7egulators closely link their assessment of a bank*s reser!es ith its published accounts" These atchdogs can suddenly re6uire a bank to hold more capital hen markets are falling + at the !ery point hen it is hardest for it to do so" Sir &a!id argued that it ould be better if regulators changed the ay they used a bank*s accounts to calculate its capital needs"

I4" The changes created a storm in the accounting and regulatory orld" Some b9 obser!ers arned that by gi!ing in to political pressure( led by .uropean opposition to the current fair+!alue rules( the IAS1 had permanently damaged its credibility" 1d; (efinitions .at%h these a%%ounting ter.s 4&!1; )ith their .eanings 4a!b;' : fair!alue asset !aluation N amortised cost asset !aluation a4 An asset*s market !alue at any specific point in time is not taken into account" It is assumed to increase steadily o!er the asset*s lifetime" b4 An asset*s !aluation at any specific point in time is based on the amount of money that could be obtained if the asset ere sold at that time" 1e; Synony.s find )ords or -hrases in the arti%le )hi%h .ean the sa.e as these )ords and -hrases' : a change 3paragraph ,4 a1111111 N to change 3paragraph &4 to s11111 3 5udgment 3paragraph F4 a1111111 Y regulators 3paragraph j4 "1111111 9 cash and easily li6uidated assets that a bank must hold to satisfy stock+e'change regulations 3paragraph j4 c11111 n11111 1f; O--osites find )ords or -hrases in the )ords' :" impro!ed 3paragraph A4 dhhhhhh N" healthy 3paragraph 14 thhhhh 3" market stability 3paragraph ,4 mhhhhh !hhhhhh Y" increased market !alue 3paragraph ,4 rhhhh mhhhhh !hhhh+ arti%le )hi%h ha0e the o--osite .eaning to these 9" [" `" b" to keep secret 3paragraph .4 to dhhhhhhh to mark up 3paragraph .4 to dhhhhh rose sharply 3paragraph .4 to hhhhh dhhhhh an upturn 3paragraph 4 a dhhhhhhh

1g; "nderstanding e$-ressions %hoose the best e$-lanation for ea%h underlined -hrase fro. the arti%le' : n""" rela#ing of fair+!alue accountingo a4 making stricter b4 making easier N n""" o!er the lifetime of the financial instrument*2 a4 an in!estment such as a bond or share b4 an order to buy shares 3 n a mo!e that ould effecti!ely 3cement3 the use """o a4 stick b4 formali%e Y n""" in order to create a level playing field for the international banking sectormn a4 a situation here the conditions are e6ual for e!eryone b4 a reduction in the !olatility of the market 9 o"""forced regulators and e'ecuti!es to face the problems head on/*2 a4 ignore the problems b4 deal ith the problems openly [ n that fair+!alue accounting "as pro cyclical/2

a4 follo ed the economic cycle b4 mo!ed in the opposite direction to the economic cycle ` nmby giving in to political pressure/2 a4 doing something due to political pressure b4 putting political pressure on someone b nmthe IAS1 had permanently damaged its credibility*2 a4 the e'tent to hich someone can be belie!ed or trusted b4 the amount of credit someone is allo ed to ha!e 1h;' Reasoning and dis%ussion' : Taking into account global economic crises( should politicians ha!e the right to suddenly change the accounting rules laid do n by nthe orld*s top accounting rule+making bodyo$ &o you think this episode damaged the International Accounting Standards 1oard*s credibility$ .'plain your ideas in a short report" N &o an Internet search to research further de!elopments in the banking accounting rules or any subse6uent banking and accounting crises" E$er%ise ?' Translate into ",rainian' 2hat Is the Cash @lo) State.ent3 There are three important parts of a company*s financial statements< the balance sheet( the income statement and the cash flo statement" The balance sheet gi!es a one+time snapshot of a company*s assets and liabilities" And the income statement indicates the business*s profitability during a certain period" The cash flo statement differs from these other financial statements because it acts as a kind of corporate checkbook that reconciles the other t o statements" Simply put( the cash flo statement records the company*s cash transactions 3the inflo s and outflo s4 during the gi!en period" It sho s hether all those lo!ely re!enues booked on the income statement ha!e actually been collected" At the same time( ho e!er( remember that the cash flo does not necessarily sho all the company*s e'penses< not all e'penses the company accrues ha!e to be paid right a ay" So e!en though the company may ha!e incurred liabilities it must e!entually pay( e'penses are not recorded as cash outflo until they are paid" The follo ing is a list of the !arious areas of the cash flo statement and hat they mean< $ash flo" from operating activities + this section measures the cash used or pro!ided by a company*s normal operations" It sho s the company*s ability to generate consistently positi!e cash flo from operations" Think of knormal operationsk as the core business of the company" For e'ample( /icrosoft *s normal operating acti!ity is selling soft are" $ash flo"s from investing activities + this area lists all the cash used or pro!ided by the purchase and sale of income+producing assets" If /icrosoft( again our e'ample( bought or sold companies for a profit or loss( the resulting figures ould be included in this section of the cash flo statement" $ash flo"s from financing activities + this section measures the flo of cash bet een a firm and its o ners and creditors" Negati!e numbers can mean the company is ser!icing debt but can also mean the company is making di!idend payments and stock repurchases( hich in!estors might be glad to see" #hen you look at a cash flo statement( the first thing you should look at is the bottom line item that says something like knet increaseedecrease in cash and cash e6ui!alentsk( since this line reports the o!erall change in the company*s cash and its e6ui!alents 3the assets that can be immediately con!erted into cash4 o!er the last period" If you check under current assets on the balance sheet( you ill find cash and cash e6ui!alents 3,,. or ,,.4" If you take the difference bet een the current ,,. and last year*s or last 6uarter*s( you*ll get this same number found at the bottom of the statement of cash flo s"

E$er%ise =' 2rite the su..ary to follo)ing te$t' r\]IE \D\V\FSJ C\Z\FF] M?^_BDS\AGHIL_L LMDEI? FB @EZ@AJXVGSCE BML C MBFI?( SBI GBVL ]I( FB@AJIDBZ( AB^?FIJ E MBDBFG( VBUSH MB_BSL G@EDHFL_L QB PLAVLU E VBKa\ EZ\FSJTFE QB @AJQFBT\FF]V" |B^?FIJ M?^_BDS\AGHIL_L LMDEI? @AJQFBT\FE ZD] _A?@?CBFF] E @LSLTFL_L LMDEI? LZFLAEZFJ^ L@\ABWEK" vB ILa\F CJZ QBGLMEC SB d^ Za\A\D CEZIAJCBXSHG] LIA\VJK AB^?FLI" |LQAEQF]USH ZCB CJZJ AB^?FIEC< BISJCFE E @BGJCFE" gCLU FBQC? CLFJ LSAJVBDJ CEZ FBQCJ GSLAEF MBDBFG? E CEZLMABaBUSH d^ QVEGS" BI( BISJCFE AB^?FIJ @AJQFBT\FE ZD] LMDEI? ILRSEC QB d^ GIDBZLV SB ALQVEf\FF]V( @BGJCFE + ZD] LMDEI?( Za\A\D QBGLMEC QB d^ WEDHLCJV @AJQFBT\FF]V" y?ZLCB AB^?FIEC( F\QBD\aFL CEZ d^ CJZ?( @A\ZGSBCD]X GLMLU SBMDJWU ZCLGSLALFFHLd PLAVJ( DECB GSLALFB ]ILd X Z\M\S( B @ABCB + IA\ZJS" rD] MEDHRLGSE AB^?FIEC ^BABIS\AFB FB]CFEGSH QBDJRI? 3GBDHZL4 FB @LTBSLI E FB IEF\WH VEG]W] E LMLALSEC QB VEG]WH @L Z\M\S? E IA\ZJS?" v\LM^EZFL @BV]SBSJ( fL @AJ LZFBILCEK M?ZLCE AB^?FIEC @AJQFBT\FF] GSLAEF 3Z\M\S? E IA\ZJS?4 C BISJCFJ^ E @BGJCFJ^ AB^?FIB^ AEQFB" g?VB ILaFLd L@\ABWEd QB@JG?XSHG] FB AB^?FIB^ ZCETE 3@L Z\M\S? LZFL_L AB^?FIB E @L IA\ZJS? EFRL_L AB^?FIB4( fL E FBQJCBXSHG] @LZCEKFJV QB@JGLV" pLFB QBM\Q@\T?X CQBXVL@LC)]QBF\ CEZLMABa\FF] L@\ABSJCFLd ZE]DHFLGSE MBFI? C M?^_BDS\AGHILV? LMDEI?" AEV SL_L( dd CJILAJGSBFF] VBX C\DJI\ ILFSALDHF\ QFBT\FF]( LGIEDHIJ CJVB_BX LMLC)]QILCLd QMBDBFGLCBFLGSE 3AECFLGSE4 @EZG?VIEC QB@JGEC FB AB^?FIB^" \ QZEKGFUXSHG] @EGD] QBIEFT\FF] ILaFL_L QCESFL_L @\AELZ?( ILDJ @EZAB^LC?USHG] G?VJ LMLALSEC @L Z\M\S? E IA\ZJS? CGE^ AB^?FIEC F\QBD\aFL CEZ d^ CJZ?" pLFJ @LCJFFE M?SJ VEa GLMLU AECFE( F\AECFEGSH GCEZTJSH @AL @LVJDI?( ZL@?f\F? C QB@JGB^ BML @EZAB^?FIB^" yBDBFG C M?^_BDS\AGHILV? LMDEI? ALQ_D]ZBXSHG] ]I G@LGEM ?QB_BDHF\FF] K _A?@?CBFF] QBGLMEC @EZ@AJXVGSCB E d^ Za\A\D FB @\CF? ZBS?" AJ @LM?ZLCE MBFIECGHIJ^ MBDBFGEC CJILAJGSLC?USHG] @AJFWJ@J _A?@?CBFF] L@\ABWEK QB \ILFLVETFL LZFLAEZFJVJ LQFBIBVJ< ]I @ABCJDL( DEICEZFEGSH GSBS\K @L BISJC? G@BZBX( B GS?@EFH QBSA\M?CBFF] ILRSEC @L @BGGJC? QV\FR?XSHG]" yBDBFG ILV\AWEKFL_L MBFI? + W\ M?^_BDS\AGHIJK MBDBFG( C ]ILV? CEZLMABaBXSHG] GSBF CDBGFJ^ E QBD?T\FJ^ ILRSEC MBFI? SB d^ ALQVEf\FF] C IA\ZJSFE K EFRE BISJCFE L@\ABWEd" zB ZBFJVJ MBDBFG? QZEKGFUXSHG] ILFSALDH QB PLAV?CBFF]V E ALQVEf\FF]V _ALRLCJ^ A\G?AGEC; GSBFLV IA\ZJSFJ^( ALQAB^?FILCJ^( IBGLCJ^ SB EFRJ^ MBFIECGHIJ^ L@\ABWEK( CIDUTBUTJ L@\ABWEd Q WEFFJVJ @B@\ABVJ" yBDBFGJ ILV\AWEKFJ^ MBFIEC X _LDLCFLU TBGSJFLU d^ QCESFLGSE" ^ BFBDEQ ZLQCLD]X ILFSALDUCBSJ DEICEZFEGSH MBFIEC( ?ZLGILFBDUCBSJ ?@ABCDEFF] MBFIECGHILU ZE]DHFEGSU" \AECFJWSCL MBFIEC( CJILAJGSLC?UTJ QCESJ EFRJ^ MBFIEC( LQFBKLVDUXSHG] QE GSBFLV G@ABC ? FJ^ @AJ CGSBFLCD\FFE ILA\G@LFZ\FSGHIJ^ CEZFLGJF( FBZBFFE IA\ZJSEC E S" Z" TER+S A%%ount re%ei0able ! claim against a debtor for an uncollected amount( generally from a completed transaction of sales or ser!ices rendered" A%%ounting + recording and reporting of financial transactions( including the origination of the transaction( its recognition( processing( and summari%ation in the financial statements" A%%ounts -ayable + this current liability account ill sho the amount a company o es for items or ser!ices purchased on credit and for hich there as not a promissory note" A%%rued e$-ense O an e'pense that has occurred but is not recogni%ed in the accounts" Assets ! an economic resource that is e'pected to be of benefit in the future" Any o ned tangible or intangible ob5ect ha!ing economic !alue useful to the o ner"

Balan%e sheet + basic financial statement( usually accompanied by appropriate disclosures that describe the basis of accounting used in its preparation and presentation of a specified date the entity*s assets( liabilities and the e6uity of its o ners" also kno n as a statement of financial condition" Boo,,ee-ing ! the process of recording financial transactions and keeping financial records" Business 4sour%e; do%u.ent a document that e!idences 3supports4 a business Cash flo) state.ent ! one of the main financial statements reports the sources and uses of cash by operating acti!ities( in!esting acti!ities( financing acti!ities( and certain supplemental information for the period specified in the heading of the statement" The cash flo statement is also kno n as the statement of cash flo s" current asset + asset that one can reasonably e'pect to con!ert into cash( sell( or consume in operations ithin a single operating cycle( or ithin a year if more than one cycle is completed each year" Current liability + obligation hose li6uidation is e'pected to re6uire the use of e'isting resources classified as current assets( or the creation of other current liabilities" (ebits and %redits debit is the name for the left side of a t+account" debits represent increases in assets and decreases in liabilities and o ners* e6uity" credit is the name for the right side of a t+account" credits represent decreases in assets and increases in liabilities and o ners* e6uity" (eferred in%o.e ta$es + assets or liabilities that arise from timing or measurement differences bet een ta' and accounting principles" (e-re%iation + e'pense allo ance made for ear and tear on an asset o!er its estimated useful life" (ouble!entry .ethod + method of recording financial transactions in hich each transaction is entered in t o or more accounts and in!ol!es t o+ ay( self+balancing posting" total debits must e6ual total credits" @air!0alue a%%ounting n" hen an asset*s !aluation at any specific point in time is based on the amount of money that could be obtained if the asset ere sold at that time" @i$ed assets O tangible long term assets used in the continuing operation of a business that are unlikely to change for a long time" Good)ill + the !alue that a business has in addition to the !alue of its assets" good ill includes things such as the good reputation that a business has( the names of its products( and the good relations it has ith its customers" In%o.e state.ent ! income statement one of the main financial statements reports the re!enues( gains( e'penses( losses( net income and other totals for the period of time sho n in the heading of the statement" if a company*s stock is publicly traded( earnings per share must appear on the face of the income statement" Intangible assets + asset ha!ing no physical e'istence such as trademarks and patents" Journal + any book containing original entries of daily financial transactions" Ledger + any book of accounts containing the summaries of debit and credit entries" Liabilities + debts or obligations o ed by one entity 3debtor4 to another entity 3creditor4 payable in money( goods( or ser!ices" Long!ter. liabilities O a debt that falls due more than one year in the future or beyond the normal operating cycle( or that is to be paid out of noncurrent assets" +oney outstanding + not settled or paid" Net interest -ayable + this current liability account reports the amount of interest the company o es as of the date of the balance sheet" 3future interest is not recorded as a liability"4 O-erating in%o.e + income from a company*s normal operating acti!ities( not including e'ceptional items" O-erational %osts O an e'pense other than cost of goods sold that is incurred in running a business" O)nerKs e*uity + the residual interest in the assets of a business entity that remains after deducting the entity)s liabilities" #re-aid e$-enses + costs incurred to ac6uire economically useful goods or ser!ices that are e'pected to be consumed in the re!enue+earning process ithin the operating cycle" Retained earnings + accumulated undistributed earnings of a company retained for future needs or for future distribution to its o ners"

Share %a-ital + money that a company has from in!estors ho ha!e bought shares" Share -re.iu. 3paid+in capital4 + the amount paid or contributed by stockholders in e'change for shares of a corporation*s stock" ShareholdersD e*uity + the difference bet een the !alue of a company*s assets and its liabilities( other than those to shareholders" in principle( this is hat the company ould be orth to shareholders if it stopped trading( its assets ere sold and its debts ere paid" Sto%,holdersK e*uity + the o ner`s e6uity in a corporation" Turno0er + the number of times a particular product is sold and restocked during a fi'ed period of time"