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Tasks
Match vocabulary terms to their definitions Read through a balance sheet and correct a text Analyze a balance sheet using ratios and discuss
the results
Vocabulary
Match these balance sheet terms to their definitions. 1. current assets 2. cash 3. accounts receivable (A/R) 4. allowance for doubtful accounts 5. inventory 6. non-current assets 7. fixed assets 8. land and buildings 9. plant and machinery 10. furniture and fixtures 11. depreciation 12. current liabilities 13. accounts payable 14. notes payable 15. current portion of long term debt (CPLTD) 16. accrued expenses 17. long term liabilities 18. long term debt 19. shareholder equity 20. preferred stock 21. common stock 22. additional paid-in capital 23. retained earnings a. contractual lease payments due twelve months after balance sheet date b. long-term assets owned by a company and used in its continuing operations c. shares representing ownership interest in a company with voting rights but no guarantee of dividends d. the manufacturing facility and production equipment e. loans and other obligations with a maturity of longer than one year after balance sheet date f. money borrowed by company due within one year of the balance sheet date g. assets that are expected to be converted into cash within one year of the balance sheet date h. an expense attributed periodically to a long-term tangible asset for its reduction in value i. money owed to suppliers from products and services bought on credit j. net earnings not paid out as dividends but kept to be reinvested or to pay debts k. raw materials, partially-finished goods, and goods ready for sale held by the company l. debt obligations that extend beyond current year m. assets which cannot easily be converted to cash within one year of the balance sheet date n. share capital plus retained earnings o. capital received from investors in return for shares above the states par value of the shares p. money owed to a company by its customers q. shares which provide specific rights including a dividend to their holders r. money in various bank accounts and in cash in the company s. debts or obligations of a company due within one year from the balance sheet date t. movable furniture, fixtures or equipment not permanently fixed in place u. expenses of company which have been incurred but not yet paid v. recognition of potential loss of value for possible uncollectible bills w. property and premises owned by the organization
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Reading/Speaking
Reading and comprehension
Look at the balance sheet on the following page and correct the mistakes in this news report.
Looking back at the years 2008-2009, we note some changes. Starting with the total current assets, it can be seen that they decreased year-overyear. Total liabilities, however, were at 89,543 in 2008 and decreased to 81,834 in 2009. It can be noted that accounts receivable went up from 2008 and the allowance for doubtful accounts was reduced. All xed assets stayed at the same level although the amounts deducted for depreciation were higher in 2008 than in 2009. The value of total xed assets was also higher in 2008 as well as the sum for investments. On the liability side, accounts payable indicated a decrease year-overyear as did the notes payable. Current portion of long term debt remained stable but accrued expenses rose considerably in 2009. Shareholder equity showed no change except for the additional paid-in capital, which went up.
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Reading/Speaking
The Balance Sheet Company XYZ Assets Current Assets Cash Accounts Receivable Less allowance for doubtful accounts Net Accounts Receivable Total Inventory Other current assets Total Current Assets Non-current Assets Fixed Assets Land and buildings Less Accumulated Depreciation Plant and machinery Less Accumulated Depreciation Furniture and fixtures Less Accumulated Depreciation Total Fixed Assets Investments Total assets Liabilities and shareholders equity Current liabilities Accounts Payable Notes Payable Current Portion of Long Term Debt Accrued Expenses Total Current Liabilities Long Term Liabilities Long Term Debt Total Long Term Liabilities Total liabilities Shareholder Equity Preferred Stock Common stock Additional Paid-In Capital Retained Earnings Total Shareholder Equity Total Liabilities and Shareholder Equity (In millions US dollars) 12/31/2009 12/31/2008 10,117 56,163 (2,808) 53,355 11,162 3,343 77,977 9,723 44,930 (2,246) 42,684 11,611 1,715 65,733
33,883 15,000 5,000 660 54,543 35,000 35,000 89,543 7,846 13,256 5,000 34,850 60,952 150,495
26,266 10,000 5,000 568 41,834 40,000 40,000 81,834 7,846 13,256 5,000 31,530 57,632 139,466
Discussion
Work in pairs. Analyze the company by using these ratios and comparing 2008 to 2009. 1. the current ratio (cash, A/R and Inventory divided by total current liabilities) 2. the quick ratio (cash and A/R divided by total current liabilities). 3. the equity ratio (shareholder equity divided by total assets) 4. gearing (leverage: US) (total liabilities divided by shareholder equity) Discuss the results with your partner. Which numbers do you get? What can you say about the company based on this information? What trends do you notice? Is it a positive or negative development and why?
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Tasks
Match vocabulary terms to their definitions Read through a balance sheet and correct a text Analyze a balance sheet using ratios and discuss
the results
Lead-in (5 minutes)
Have students discuss in pairs or small groups what they know about balance sheets and which vocabulary they already know. Find out which students have worked with balance sheets and ask them about their experiences. Note Explain that the purpose of balance sheets is to report the financial condition of a company at a specific time. It is divided into two areas or columns which must match up. The first part shows what a company owns (its assets) and the second part shows what a company owes (its liabilities). The balance sheet can also be looked at to determine where the sources of cash come from and how they are used. For more information see: http://ohioline.osu.edu/cd-fact/1154.html
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Reading/Speaking
Discussion (5 minutes)
(See Professional English in Use Finance, pages 36 and 38) Students work in pairs to analyze the balance sheet using the different ratios. Answers 1. the current ratio 2008 66,264 : 41,834 = 1.58 2009 77,442 : 54,543 = 1.42, 2. the quick ratio (also known as the acid-test ratio) 2008 54,653 : 41,834 = 1.3 2009 66,280 : 54,543 = 1.22 3. the equity ratio 2008 67,632 :139,466 = 48% 2009 60,952 :150,495 = 40% 4. leverage 2008 81,834 : 57,632 = 1.42 2009 89,543 : 60,952 = 1.46 Note on the ratios These ratios are used to determine solvency of a company, especially by creditors who are considering giving loans or reviewing existing loans and credit lines. The year-to-year comparison is important because creditors can see if their are changes in the company is ability to pay its debts. If the current ratio is much higher than the quick ratio, this indicates that the companys assets are more dependent on its inventory. The higher the current ratio, the better position a company is in to cover its debts. If the current ratio is under 1.0, this suggests that the company could not meet its obligations if they came due at the time of the balance sheet. Creditors generally prefer the current ratio to be high because their risk is reduced while investors prefer it to be low because this means the company has invested its assets for its continuing operations. A current ratio of about 1.5 or higher indicates that a company can cover its operating needs successfully. If the figure is too high, they may be keeping back assets rather than using them for further investment in the future of the company. It is important, as well, to compare these year-to-year and note the trend. The quick ratio indicates short-term solvency and the higher it is, the stronger the liquidity position. It is more conservative than the current ratio because it excludes inventory. The equity ratio is common in Central Europe and measures the amount of total assets financed by the stockholders and not by creditors and is used to determine how much debt the company has. This is often expressed as a percentage as shown above. Creditors look for this figure to be positive as this indicates that a company is in a good position to stay solvent. A percentage of 20% and higher is a good sign for creditors; the higher the percentage, the lower the risk. However, comparing year-to-year is also important here to see the trend. In this case, we can see that in the year 2008 48% of the total assets were equity and 52% were financed by loans. In 2009 only 40% were equity and 60% financed by loans. Gearing (leverage: US) shows how heavily the company is leveraged or how much money they owe. In this case the ratio in 2008 was 1.42 meaning that total liabilities were 42% higher than their equity and in 2009 this figure increased to 1.46 meaning liabilities were 46% higher than the equity meaning the company had accumulated more debt.
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