III. Vocabulary to Text A1

IV. Test

1. Выберите из колонки справа по смыслу слова, пропущенные в предложениях.

2. Выберите существительное, которое может следовать за данным глаголом:

3. Выберите из приведенного списка термины, соответствующие данным определениям.

Unit 9

I. Information for Study.

Text A

Прочтите следующую информацию и запишите на полях основные термины, связанные с тематикой текста.

OUTPUT SUPPLY

REVENUES, COSTS, AND PROFITS

A firm’s revenue is the amount it earns by selling goods or services in a given period such as a year. The firm’s costs are the expenses incurred in producing goods or services during the period. Profits are the excess of revenues over costs.

Thus we can write

Although these ideas are simple, in practice the calculation of revenues, costs, and profits for a large business is complicated. Otherwise we would not need so many accountants. We begin with a simple example.

Rent-a-Person is a firm that hires people whom it then rents out to other firms that need temporary workers. Rent-a-Person charges £10 per hour per worker but pays its workers only £7 per hour. During 1987 it rented 100 000 hours of labour. Business expenses, including leasing an office, buying advertising space, and paying telephone bills, came to £200 000. Figure 5 shows the income statement or profit-and-loss account for 1987. Profits or net income before taxes were £100 000. Taxes to central government (corporation tax) plus taxes to local government (rates assessed on some of the property the firm owned) came to £25 000. Rent-a-Person’s after-tax profits in 1987 were £75 000.

Now we can discuss some of the complications in calculating profits.

OUTSTANDING BILLS

People do not always pay their bills immediately. At the end of 1987, Rent-a-Person has not been paid for all the workers it hired out during the year. On the other hand, it hasn’t paid its telephone bill for December. From an economic viewpoint, the right definition of revenues and costs relates to the activities carried out during the year whether or not payments have yet been made.

FIGURE 5.RENT-A-PERSON INCOME STATEMENT FOR THE YEAR ENDING 31 DECEMBER 1987.

This distinction between economic revenues and costs and actual receipts and payments raises the important concept of cash flow.

A firm’s cash flow is the net amount of money actually received during the period.

Profitable firms may still have a poor cash flow, for example when customers are slow to pay their bills.

Part of the problem of running a business is that cash flow at the beginning is bound to be slow. Set up costs must be incurred before revenues start to flow in. That is why firms need financial capital to start the business. If the business prospers, revenues will build up and eventually there will be a healthy cash inflow.

CAPITAL AND DEPRECIATION

Physical capital is the machinery, equipment, and buildings used in production.

Rent-a-Person owns little physical capital. Instead, it rents office space, typewriters, and desks. In practice, businesses frequently buy physical capital. Economists use ‘capital’ to denote goods not entirely used up in the production process during the period. Buildings and lorries are capital because they can be used again in the next year. Electricity is not a capital good because it is used up entirely during the period. Economists also use the terms ‘durable goods’ or ‘physical assets’ to describe capital goods.

How should the cost of a capital good such as typewriters be treated in calculating profits and costs? The essential idea is that it is the cost of using rather than buying a piece of capital equipment that should be treated as part of the firm’s costs within the year. If Rent-a-Person leases all its capital equipment, its costs include merely the rentals paid in leasing capital goods.

Suppose however that Rent-a-Person buys eight typewriters at the beginning of the year for £1000 each. It should not count £8000 as the cost of typewriters in calculating costs and profits for that year. Rather the cost should be calculated as the reduction in the value of the typewriters over the year. Suppose the wear-and-tear on the typewriters over the year has reduced their value from £1000 to £700 each. The economic cost of the use of eight typewriters over the year is £2400 (8 ´ £300). This amount of depreciation is the cost during the year.

Depreciation is the loss in value resulting from the use of machinery during the period.

The cost during the period of using a capital good is the depreciation or loss of value of that good, not its purchase price.

The existence of depreciation again leads to a difference between economic profits and cash flow. When a capital good is first purchased there is a large cash outflow, much larger than the depreciation cost of using the good during the first year. Profits can be high but cash flow low. However, in subsequent years the firm makes no further cash outlay, having already paid for the capital goods, but must still calculate depreciation as an economic cost since the resale value of goods is reduced still further. Cash flow will now be higher than economic profit.

The consequence of treating depreciation rather than purchase price as the true economic cost is thus to spread the initial cost over the life of the capital good; but that is not the reason for undertaking the calculation in this way. Rent-a-Person could always have sold its typewriters for £5600 after one year, restricting its costs to £2400. The fact that the firm chose to keep them for reuse in the next year indicates that the latter strategy is even more profitable. Hence the true economic cost of using the typewriters in the first year can be at most £2400.

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