Basic financial statements

It is possible to get a clear picture of the firm’s financial condition by looking at its financial statements. There exist three basic financial statements: the income statement, the balance sheet, and the statement of cash flows.

The income statement measures the firm’s profitability over a period of time. The firm is able to choose the length of the reporting time period (it may be a month, a quarter, or a year). The income statement shows revenues, expenses, and income. Revenues represent gross income which the company has earned during the definite period of time (usually from sales). Expenses represent the cost of providing goods and services during a given period of time. Expenses include costs incurred while conducting the operations of the firm and financial expenses, such as interest on debt and tax owed. Net income is the sum which is left after expenses are subtracted from revenues. In addition to the income statement, many companies prepare a short statement of retained earnings.

The balance sheet shows the firm’s assets, liabilities, and equity at a given point in time. On the balance sheet the firm’s assets are listed in order of their liquidity. Liquidity is the ease with which you can convert an asset to cash. The liability and equity section of the balance sheet shows how the company’s assets were financed. The funds come from those who have liability (debt) claims against the firm or from those who have equity (ownership) claims against the firm.

The statement of cash flows like the income statement shows how cash flows into and out of the company over a definite period of time. The statement of cash flows is constructed by adjusting the income statement to distinguish between income and cash flow, and by comparing balance sheets at the beginning and at the end of the relevant period of time. The statement of cash flows shows cash flows in operating, investing, and financing activities, as well as the overall net increase or decrease in the flow of the firm. Operating activities on the statement of cash flows shows what a company had in net income for the year. This number represents what was left after the company has paid all the firm’s expenses for that year. Investments activities section in the statement of cash flows shows investing activities in long-term securities or plant and equipment. Increasing investments shows a cash outflow and decreasing investments shows a cash inflow. The financing activities section in the statement of cash flows shows financial activities related to the sales and retirement of bonds preferred and common stock and other corporate securities. The retirement of previously issued securities signals a cash outflow, and the issuing of securities is a cash inflow.

Exercise 7. Read the text once again and find key words in every passage.

Exercise 8. Read every passage once again and express its contents in one sentence.

Exercise 9. Translate the sentences into English. Review grammar in §3, §4 of grammar supplementary:

1. Если бухгалтер разрешит, мы внимательно изучим балансовый отчет этой компании.

2. Они не подпишут контракт до тех пор, пока не будут изучены все финансовые документы.

3. Как только прибыль будет получена, она будет инвестирована в покупку оборудования.

4. На месте финансового менеджера, я бы внимательно изучил отчет о доходах.

5. Если бы в прошлом году мы выпустили акции, то получили бы прибыль.

6. Как только ты расскажешь мне об инвестиционной и финансовой деятельности компании, я смогу закончить проверку.

7. Если бы издержки компании не были бы такими значительными в прошлом году, мы бы смогли сохранить рабочие места.

8. На твоем месте, я бы больше узнал о притоке и оттоке наличности.

9. Известно, что финансы тесно связаны с бухгалтерским учетом и экономикой.

10. Иногда говорят, что бухгалтерский учет – это язык финансов.

Exercise10. Read the text once again and make a presentation of your visit as an inspector to the company for checking basic finance statements. Begin with: “If I came to the company as an inspector, first of all I would check …”

Test 3

1. They __________ to take an active part in management of organization.

A are supposed

B supposes

C is supposed

2. The more we reduce the prices, the __________ profit we are going to get.

A less

B little

C few

3. The manager carefully analyzed the financial condition, __________?

A doesn’t he?

B wasn’t he?

C didn’t he?

4. I saw them ____________ terms of contract in the conference room.

A discussed

B to discuss

C discuss

5. The director explained that they ___________ that agreement a year before.

A have signed

B signed

C had signed