Understanding check. Task 1. From the text, which of the following statements do you think is true about articles of association of a company?

Task 1. From the text, which of the following statements do you think is true about articles of association of a company?

a. They allow unlimited borrowing by that company.

b. They place restriction on how much can be borrowed.

c. They say nothing about how much can be borrowed.

d. They discourage the management from borrowing funds.

Score: 4

Task 2. Looking at the third paragraph, which of the following do you think the initials ASC stand for?

a. Advertising Standards Committee.

b. Auditing Standards Committee.

c. Advisory Standards Committee.

d. Accounting Standards Committee.

Score: 4

Task 3. Which of the following statements is true according to SSAP?

a. Leasing assets has the same.effect on the balance sheet as
buying them.

b. Leasing assets increases the off balance sheet debt.
c. Leased liabilities appear on the balance sheet.

d. Keeping leases off the balance sheet only affects people outside a company.

Score: 4

Task 4. Answer the questions:

a. What is one of the main ways used to judge a company's 'health'?

b. What is 'gearing'?

c. Why did the ASC issue its statement of Standard Accounting Practice?

d. What was the reaction of companies to the new accounting regulation about leasing?

Score: 4

Total score: 63 points

UNIT VII

Task 1. Remember the meaning of these words and word-combinations:

inflow – приплив

outflow – збиток

to inject into business – вводити в бізнес (використовувати в бізнесі)

debenture – боргове зобов'язання, всі форми незабезпеченого довгострокового боргу; облігації акціонерної компанії

overdraft – овердрафт (сума, яка отримується по чеку і перевищує залишок на поточному рахунку)

receipt – квитанція; розписка

repository – складове приміщення

cost – ціна; вартість

to highlight – висвітлювати

circumstances – обставини,

to release – звільняти;

fixture – фрахтова угода; фрахтування;

fitting – установлення; складання; збирання;

to redeem – викуповувати; повертати; погасити (борг);

to tap – використовувати (капітал для фінансування);

imprudent – нерозсудливий; необачний; необачливий

Score: 16

Task 2. Read and translate the text.

Text

Funds: inflow and outflow

The sources and uses of funds can be out as follows. Sources:

(a) funds generated by trading operations; cash received from sales net of cash paid out for expenses (the term cash flow is sometimes given to this amount);

(b) funds injected into, the business on a long-term basis;
issues of shares plus any premium received on issue;
debentures and other long-term loans;

(c) funds released from long-term applications for use elsewhere in the business; sales of fixed assets such as land, buildings, plant and vehicles; loans to subsidiary companies repaid by them;

(d) funds lent to the business on a short-term basis; trade creditors; bank loans and overdrafts; amounts payable to the Inland Revenue; bills of exchange payable.

Uses:

(a) funds lost in trading operations, i.e. when the payment of expenses exceeds receipts from sales;

(b) funds used to acquire permanent assets such as land, buildings, plant, vehicles, fixtures and fittings and long-term investments;

(c) funds paid away outside the business to repay debentures and loan stock, or to redeem share capital;

(d) funds invested outside the business in loans made to subsidiary companies;

(e) funds used to acquire assets of a short-term nature, stocks of material, work in progress and finished goods, trade credit allowed to debtors who have not yet paid for goods sold to them, short-term investments as a temporary repository of idle funds; bills of exchange receivable.

Note that already with this simple analysis shown above items concerning funds moved into and out of the business on a long-term basis are being mixed in with short-term movements, and the source and application of funds from changes in the asset structure.

The funds generated by trading operations can be computed as in sources (a) above, but an alternative method of calculating the same figure is to take the net profit before tax and add back all non-cash costs that have been deducted in the profit calculation. A good example of a cost which has not caused an outflow of cash during the year depreciation, because it is a means of spreading over a period of years the cash spent when a fixed asset was originally purchased. The term cash flow is often used for net profit plus 'depreciation and any other non-cash costs identified during the year.

If sources exceed uses there will be a balance of cash representing funds provided but not yet put to use in the business.

The 'capital employed' in figure 1 acts as a reservoir into which funds flow from four major streams. The funds are then tapped of as a result of managerial decisions to irrigate the five fields shown, and any funds remaining in the reservoir will be represented by the bank balance. If, however, uses exceed sources, the reservoir will run -dry and, unless extra short-term credit can be arranged at short notice, some of the uses will not receive all the funds they need and the business will suffer as the result. Funds, like water, can run in different directions, so funds from any source can be used to finance any use, although it is imprudent to use short-term funds to acquire fixed assets, unless long-term funds will be raised to cover the position quickly. Circumstances such as these would be highlighted in a funds flow statements.

Funds flow statements

This statement has several alternative names. Some accountants refer to it as an movement of funds statements, while to others it is a source and application of fund statement When projected forward from a recent balance sheet to a budgeted position it is sometimes called a long-term cash budget. There are, of course, alternative forms of statement which express the flow of funds. The statement is computed by finding the differences between the opening and closing balance sheets and arranging them in groups as illustrated in figure 1. For example, if the stock figure in the earlier balance sheet is deducted from stock in the later balance sheet, the extent of investment or disinvestment in stocks can be ascertained. The basic rule is that if an asset has increased during a period, this is an application of funds have been withdrawn from that asset for use in some other way. If a liability has increased, more funds have been loaned to the business and this is a source, but if a liability is reduced, funds have been applied to repay the liability.

The statement shows more than just the extra funds used during the year; it is extended to show changes in the way in which the funds are used.

Score: 25

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