6 Discuss your ideas with your partner, explaining your reasons.
Use the language box to help you.
Stating preferences Personally I’d go for option A because it’s … I think option A has much more going for it. For a start, it’s … My preference would be option A because … We would be better off buying option A, because … Option A offers better … The only disadvantage I can see is … I have several reservations about option B. firstly, it’s … I think option B has several drawbacks. It’s … Option B, on the other hand, is too … All in all, option A represents the best solution because …
VOCABULARY
Company finance
1 What financial mistakes do you think small businesses most commonly make? Work with a partner and make a list.
Not taking out insurance to cover the sudden loss of a senior /
key employee. 2 Put these words into the right place to make pairs of
financial terms.
Long-term expenditure accounts receivable net fix costs Retained profit unprofitable loss debtor liabilities 0 variable costs fixed costs 5 profit __________ 1 income ___________ 6 dividends ___________ 2 assets ____________ 7 creditor _____________ 3 gross _____________ 8 profitable ___________ 4 current _____________ 9 accounts payable ______
3 Using the words in exercise 2 complete this passage from an
online guide for investors.
Understanding financial statements
To make good investment decisions, you need to understand the business you’re investing in. knowing when to buy and when to sell depends not only on
understanding the market in general but also the financial health of the company. Your first port of call: the annual report.
This contains the accounts-the balance
Sheet, the income statement and the cashflow statement. We’ll deal with just the important. With all financial statements, you must compare the sets of figures from recent years to see how the company is developing.
The balance sheet is a snapshot of a company’s financial position at a given moment. Imagine tomorrow you make a list of everything you own (including what in others owe to you)-house, car, money in the bank, etc. these are your (1) _______. Set against these everything that you owe-mortgage, credit card bill, etc. These are your (2) _______. The two columns are what make up the balance sheet.
With a company balance sheet you also need to consider the shareholders’ equity (the shares owned in the company by others). The basic equation is assets=liabilities + shareholders’ equity.
The (3) _________ assets of a company are its buildings and equipment. As an investor you should pay particular attention to two kinds of current asset-the stock and the accounts receivable (money owed to the company by customers). If the amount of stock is growing fast, then it could be that stock isn’t moving. If the accounts receivable figure is large, then the (4) ________ aren’t paying their bills quickly enough. On the liability side look to see whether the debt, both short and long term, is increasing. Is the company borrowing more and if so, why? Read the notes to the accounts-maybe they will explain anything unusual. Look also at accounts (5) ______ to see if the company is paying its creditors on time.
The income statement (sometimes also called the profit and (6) _________ account) shows the company’s income and (7) ________ over a given period. It lists all the money generated by sales (the turnover) plus any other income, minus all the costs involved in running the business. This produces the gross profit that tells you if the business is healthy and operationally (8) _______ (9) _________ profit is the proverbial bottom line. It represents profit after tax and interest have been paid and is the amount that can be distributed to its shareholders in (10) _________ (though generally a part of this profit is retained for re-investment).
As you study the income statements of recent years, get out your calculator and do some sums.
Are sales growing? Are costs growing faster than sales or is the profit margin being maintained? What are the forecasts for future growth? Did any of the income come from the sales of assets?
4 What do these words and phrases from the passage on page 50 mean?
1 your first port of call 2 a snapshot
3 over a given period 4 the bottom line 5 do some sums
READING A financial summary
5 Study this financial summary of Tesco plc, Britain’s largest supermarket chain. Find the following items.
1 the turnover
2 the profit made after tax 3 the value of the company
4 the cash still available after other investments
Does the company seem to be in a healthy position or not? Financial Annual (2006) ￡millions Income statement (in millions of GBP) Total Revenue 39,454.00 Gross Profit 3,028.00 Operating Income 2,280.00 Net Income 1,570.00 Balance sheet (in millions of GBP) Total Current Assets 3,919.00 Total Assets 22,563.00 Total Current Liabilities 7,518.00 Total Equity 9,380.00 Cash flow (in millions of GBP) Net Income/Starting Line 2,280.00 Cash from Operating 2,619.00 Cash from Investing -1,962.00 Cash from Financing -492.00 Net Change in Cash 181.00