Financial statements analysis

Exercise 9.1

Study the vocabulary:

1.	highlighting	1.	висвітлення, висування на перший план
2.	suffice it to mention	2.	достатньо згадати
3.	to make adjustments	3.	впорядковувати, вносити поправки
4.	a company's annual report	4.	річний звіт компанії
5.	a footnote	5.	примітка
6.	to accomplish a goal	6.	досягати цілі
7.	the trend	7.	курс, напрямок, тенденція
8.	expenses	8.	витрати
9.	net income	9.	чистий прибуток
10.	cash flow	10.	рух готівки
11.	return investment	11.	повернення інвестицій
12.	assessment of future potential and related risk	12.	оцінка майбутніх можливостей та пов’язаного з цим ризику
13.	profitability	13.	прибутковість
14.	liquidity	14.	ліквідність
15.	the electric utility	15.	електрична компанія загального призначення
16.	the interest rates on loans granted by a bank	16.	відсоткова ставка на кредити, надані банком

Exercise 9.2

Read and translate the text:

There are a number of techniques intended to aid in decision-making by highlighting important relationships in the financial statements. This is called financial statement analysis. The importance of financial statement analysis cannot be overestimated. Suffice it to mention that effective decision-making calls for the ability to sort out relevant information from a great many facts and to make adjustments for changing conditions. Very often, financial statements in a company's annual report run ten or more pages, including footnotes. If these statements are to be useful in making decisions, decision-makers must be able to find information that shows important relationships and helps them make comparisons from year to year and from company to company. This goal is accomplished by financial statement analysis.

Different individuals may use the tools of financial analysis in different ways. For example, creditors and investors use financial statement analysis in two general ways: to judge past performance and current position; and to judge future potential and the risk connected with possible investments.

It should be pointed out that past performance is often a good indicator of future performance. Therefore, an investor or creditor is interested in the trends of past sales, expenses; net income, cash flow, and return investment. These trends offer a means for judging the management's past performance and are a possible indicator of future performance. In addition, an analysis of current position will tell where the business stands today. For example, it will tell what assets the business owns and what liabilities must be paid. It will tell you what the cash position is, how much debt the company has in relation to equity, and how reasonable the inventories and receivables are. Knowing a company's past performance and current position is often important in achieving the second general objective of financial analysis: assessment of future potential and related risk.

The past and present information is useful only to the extent that it effects future decisions. An investor judges the potential earning ability of a company because that will affect the value of the investment (market price of the company's stock) and the amount of dividends the company will pay. A creditor judges the potential debt-paying ability of the company. The potential of some companies are easier to predict than others' and so there is less risk associated with them. The risk of the investment or loan depends on how easy it is to predict future profitability or liquidity. For example, the potential associated with an investment in an established electric utility is relatively easy to predict. On the contrary, the potential associated with a small minicomputer manufacturer may be much harder to predict. For this reason, the investment or loan to the electric utility is less risky than the investment or loan to the small computer company, which will be reflected in the interest rates on loans granted by a bank.

Exercise 9.3

Read the text again and choose the best variant:

1. Techniques aimed at the assistance in decision-making by highlighting important relationships in the financial statements are called …

a) the importance of financial statements

b) financial statement analysis

c) financial analysis

2. Financial statements in a company's annual report … ten or more pages, including footnotes.

a) cannot run

b) sometimes can run

c) often can run

3. The tools of financial analysis are used by different individuals …

a) in the same way

b) according to their preferences

c) in different ways

4. Аn investor or creditor … in the trends of past sales, expenses, net income, cash flow, and return investment.

a) is interested

b) is sometimes interested

c) is never interested

5. An analysis of [current position of business] will tell where the business stands today.

a) nature of the company’s business

b) current position of business

c) the size of the company

Exercise 9.4

Read the last paragraph of the text again and fill in the gaps. Then read and translate:

profitability; predict;information;investor;value; associated;company;loan;manufacturer;debt-paying;

The past and present…1… is useful only to the extent that it effects future decisions. An …2… judges the potential earning ability of a company because that will affect the…3… of the investment (market price of the company's stock) and the amount of dividends the …4… will pay. A creditor judges the potential …5… ability of the company. The potential of some companies are easier to …6… than others' and so there is less risk associated with them. The risk of the investment or loan depends on how easy it is to predict future …7… or liquidity. For example, the potential …8… with an investment in an established electric utility is relatively easy to predict. On the contrary, the potential associated with a small minicomputer …9… may be much harder to predict. For this reason, the investment or loan to the electric utility is less risky than the investment or …10… to the small computer company, which will be reflected in the interest rates on loans granted by a bank.

Exercise 9.5

Read the whole text again and choose the best answer:

1. What must the decision-makers be able to do if the financial statements are useful in making decisions?

a) They must find information that displays important relationships and helps them make comparisons from year to year and from company to company.

b) They must ignore information that shows essential relationships and helps them make comparisons from year to year and from company to company.

2. Why is the past performance often considered to be a good indicator of future performance?

а) Becausethe trends of past sales, expenses, net income, cash flow, and return investment are the true indicator of future performance.

b) Becausethese trends offer a means for judging the management's past performance and are a possible indicator of future performance.

3. What will the analysis of current position in business tell us?

а) It will tell what amount of money the business owes and what liabilities must be paid.

b) It will tell how reasonable the inventories and receivables are.

4. Why does the investor judge the potential earning ability of a company?

а) Because that won’t affect the rate of the investment (market price of the company's stock) and the amount of dividends the company will pay.

b) Because that will affect the value of the investment (market price of the company's stock) and the amount of dividends the company will pay. .

5. What does the risk of investment depend on?

a) It depends on how easy it is to predict future profitability or liquidity.

b) It depends on how difficult it is to predict future productivity or liquidity.

TEXT 10

THE BALANCE SHEET

Exercise 10.1

Study the vocabulary:

1.	assets	1.	активи
2.	liabilities	2.	пасиви
3.	equity, owner’s equity	3.	власний капітал
4.	current assets	4.	поточні активи, оборотний капітал, основні фонди
5.	fixed assets	5.	основний капітал, основні фонди
6.	mortgage	6.	іпотека, заставна (на нерухоме майно
7.	bond	7.	облігація до виплати, боргове зобов’язання
8.	bonds payable	8.	облігації до виплати
9.	employee pensions	9.	пенсія працівника
10.	long-term and current obligations	10.	довгострокові та поточні зобов’язання
11.	accounts and notes receivable	11.	рахунки та векселі до отримання
12.	inventory	12.	запаси, резерв; інвентарна відомість
13.	overdraft	13.	овердрафт, перевищення кредиту (у банку)
14.	a sole proprietorship	14.	одноосібна власність
15.	a partnership	15.	товариство
16.	stockholders' equity	16.	акціонерний (власний) капітал
17.	a stockholder	17.	акціонер

Exercise 10.2

Read and translate the text:

The balance sheet shows what a company owns (its assets) and the sources of financing these assets and operating activities by shareholders (equity) and by borrowing (liabilities). It is a «snapshot» of the company's financial position at a specified time. As a rule, the balance sheet consists of three major sections: assets, liabilities and owner’s equity.

It should be said that these three sections are arranged differently from country to country. In the USA and many European countries, the assets appear on the left-hand side of the page and the liabilities on the right. In Britain these sections are arranged vertically.

Assets.The assets of a company are often divided into two categories: current assets and non-current (fixed) assets. These categories are listed in the order of their liquidity (the ease with which an asset can be converted into cash). Current assets are more liquid than non-current assets.

Current assetscan be defined in the following way: cash or other assets that are reasonably expected to be realised in cash or sold during a normal operating cycle of a business or within one year if the operating cycle is shorter than one year. Cash is obviously a current asset. Temporary investments, accounts and notes receivable, and inventory are also current assets because they may be converted to cash within the next year or during the normal operating cycle of most firms. Prepaid expenses such as rent and insurance paid for in advance, and inventories of various supplies bought for use rather than for sale should be classified as current assets. To make a long story short, current assets are a list of all the assets owned by the business which have a life expectancy of less than one year. For example, inventories (stock of goods), trade and other receivables, prepayments, cash etc. are also current assets.

Non-current assets include: property, plant and equipment, fixed assets normally stated at net book value (cost of purchase less accumulated depreciation). The assets which are expected to remain in the balance sheet more than one year fall into non-current assets category too.

Liabilitiesare made up of mortgages, payable long-term notes, bonds payable, employee pensions, long-term and current obligations. They are also split into current and non-current (long-term) liabilities. Current liabilities usually consist of overdrafts, taxes due, but not yet paid, and goods supplied on credit. Non-current or long-term liabilities comprise debts of a business that fall due more than one year ahead, beyond the normal operating cycle, or are to be paid out of non-current assets.

Owner's equitycan be defined as the resources invested by the business. To put it differently, «owner's equity = assets – liabilities». It should be noted that the owner's equity section of the balance sheet will be different depending on whether the business is a sole proprietorship, a partnership, or a corporation. The owner's equity section of a corporation is called stockholders' equity and has two parts: contributed or paid-in capital and earned capital or retained earnings.

Exercise 10.3

Read the text again and choose the best variant:

1. The balance sheet is a «snapshot» of the company's financial position at a …

a) short period of time

b) specified time

c) indicated time

2. It should be said that assets, liabilities and owner’s equity are arranged … from country to country.

a) in different way

b) in the same way

c) spontaneously

3. Cash or other assets that are reasonably expected to be realized in cash or sold during a normal operating cycle of a business or within one year if the operating cycle is shorter than one year is called …

a) liabilities

b) non-current assets

c) current assets