English for future financiers


Иностранные языки, филология и лингвистика

Each unit includes the main text with a vocabulary, a few additional texts and supporting exercises designed to develop students’ English language skills in reading, speaking, listening and writing. Most tasks are intended for work in pairs or in small groups to help students develop the interpersonal...



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2 чел.



Tokun I.I., Yaremchuk L.I.



dnipropetrovsk – 2009

 I.I., Yaremchuk L.I. English for future financiers. – Dnipropetrovsk: DSFA, 2009. – 164 p.

English for future financiers is a course for finance students majoring in finance. It consists of this book, a book of supplementary reading intended for self-study and an audiocassette.

Reviewed by Kuchina N.M., candidate of science, head of Foreign Languages Department.

Approved by the meeting of the Department

of Foreign Languages

Record №4 of 16.11.2009


PREFACE ...............................................................................................



WHY START A BUSINESS?...............................................






WHAT IS FINANCIAL MANAGEMENT?.........................






COSTS AND COSTING ......................................................



FINANCE ..............................................................................



MONEY MATTERS AND PAYMENT ...............................



TEXTS FOR SELF – STUDY ……………………………..


TAPESCRIPTS .......................................................................................






 English for future financiers is a course for finance students who major in finance and taxation. It is designed for 52 academic hours in a classroom setting and 27 hours of self-study.

The goal of the course is to develop and improve students’ English language skills in reading, speaking, listening and writing that are involved in studying finance and are essential for financiers.

This book contains 8 units covering in a coherent and logical order the most important questions concerned with starting and running a new business, financial management, accounting, finance, some aspects of money matters and payments.

Each unit includes the main text with a vocabulary, a few additional texts and supporting exercises designed to develop students’ English language skills in reading, speaking, listening and writing. Most tasks are intended for work in pairs or in small groups to help students develop the interpersonal skills they will need in their future work and to facilitate the learning process. The goal of the unit 8 “Texts for self – study” is to develop students’ English skills in supplementary reading texts pertaining to finance. Each text is accompanied by exercises designed to develop reader’s skills in finding key words, guessing the meaning of new words from the context, understanding both main points and supporting details contained in the text, and summarizing the material. End-of-book materials include tapescripts of audio materials and a glossary of key terms.

 All the materials are based on austhentic texts from: Business studie (New Edition) by  Susan Hammond (Longman Group UK Limited, 1998).

Unit 1

Why start a business?


  1.  Match the following English words with their Ukrainian equivalents. Use your dictionary if necessary.

1. reason

18. personnel

2. to appreciate

19. failure

3. to make an attempt

20. to succeed (in)

4. to exploit

21. to lack

5. to adopt

22. to provide a service

6. employee

23. to depend upon, on

7. to inspire

24. to research the market

8. experience

25. to supply the product

9. redundancy

26. required quantity

10. to persuade

27. to relate to

11. to take on a risk

28. to get smth. to

12. to bring on a feeling of revulsion

29. premises

13. determination

30. to afford

14. conviction

31. to combine

15. entrepreneur

32. reward

16. to survive

33. input

17. to run a business

34. efficiency

1. необхідна кількість


2. ефективність, продуктивність

18. приміщення

3. надихати, запалювати

19. прийняти, вибрати

4. вести бізнес

20. скорочення штатів робітників або службовців

5. витрати

21. брати на себе ризик

6. причина

22. підприємець

7. дозволяти

23. невдача, неуспіх; банкрутство

8. удаватися, досягати успіхів, мети

24. рішучість

9. намагатися, робити спробу

25. службовець, робітник

10. переконувати

26. досвід

11. використовувати

27. переконання

12. викликати відразу до чого-небудь

28. досліджувати ринок

13. відносити до

29. надавати послугу

14. об’єднувати, з’єднувати

30. виживати

15. постачати продукт

31. персонал

16. винагорода, компенсація

32. бракувати

33. залежати від

34. постачати

  1.  Complete the charts with the different parts of speech. Translate the obtained pairs of words into your mother tongue.




















Pre-reading task

Work in small groups.

Answer the following questions:

  •  What are the reasons for starting a business?
  •  Can you identify the major decisions to be made when starting a business?

Preface each answer with one of the following according to what is true for you:

I suppose that…

In my view…

I am not sure…

I have no idea…


  1.  Read text 1. How much of the information did your group already know?


Why start a business?

Before starting and running your own business you should be able to identify the reasons for starting a business, major decisions to be made, to outline the major stages in the planning process, appreciate the importance of planning to the business enterprise and appreciate the main sources of business finance.   

There are probably as many reasons and combinations of reasons for starting a business as there are people who make the attempt.
  1.  A person with an original idea for a service might decide to go into business to exploit the idea, rather than try to find somebody else prepared to adopt it.
  2.  Some people go into business because they hope for a higher standard of living as an  owner of a business rather than as an employee.
  3.  The desire for independence can also inspire people who are already employed.
  4.  Redundancy and the fear of never finding another job may persuade someone to take on the risks of a business. The experience of redundancy can also bring on a feeling of revulsion against being dependent on the decisions of other people and a determination to have more control over life.

Whatever the reason for starting a business there are feelings of conviction, determination and optimism on the part of the entrepreneur.  The entrepreneur must be careful to find the answers to the following questions if the business is to survive:

  1.  Have I the skills, experience and determination to run a business?  The owner of a business is a resource of that business, and will be offering production and management skills to the small business. We can say that the answer to this question lies within the function of personnel. The success or failure of all the other functions will depend on the skills of the people engaged in them. Yet even the most skilful workforce cannot succeed if it lacks the support of finance, materials, market and organization.
  2.  What product will I make or what service will I provide?   The answer to this question must go further than a list of the good or service. Amongst other things it must concern itself with design and quality. The decision will depend upon who will be likely to buy and the ability of the business to produce the good or service. This lies within both the marketing and production functions.
  3.  Will people buy my product?  Who will buy it? Where will it be bought and at what price? Before an answer can be found to these questions the entrepreneur will have to research the market. This activity is part of the marketing function.
  4.  Can I supply the product at the right time, in the required quantities, at the desired quality and at the right price?   These questions relate to the production activities of the firm.
  5.  Can I get the product to my customers at the right time, in the right quantities and at the right price?  Marketing has the responsibility for answering this question too, together with the problem of informing and persuading people to buy.
  6.  Have I the money to buy the necessary premises, materials and machinery? Can 1 afford to employ labour? Which machines will give me the greatest profit? Which product will give me the greatest profit?  The answers to these questions lie in the function of finance.
  7.  How am I to combine the different functions listed above so that they will work together and give the maximum reward for the minimum input?   The term used to describe this concept is efficiency. The answers lie in the area of organization and control.

2.  Comprehension check.

Are the following statements true or false? Correct the false ones.

  1.   Realization of an original idea, aspiration for a better standard of living, striving for independence, threat of dismissal from the staff are the reasons for starting a business.
  2.   Assuming risks of business can not prevent an entrepreneur from launching a business.
  3.   The survival of business involves proficient employees, the support of finance, materials, market and organization.
  4.   High quality goods and services, right price, market place, prompt delivery of product to customers are the essential conditions for the survival of a business.
  5.   Insufficient finance will give the maximum return for the minimum costs.

Pre-reading task

Work in small groups.

1) Have any of you ever had to consider or draw up a business plan? Why do you think an entrepreneur needs a business plan? Give specific reasons to support your answer.

2) What information do you think a business plan must represent?


  1.  Skim through the text 2 and think of the suitable title.


A business plan is a detailed written statement that describes the nature of the business, the target market, the advantage the business will have in relation to competition, and the resources and qualifications of the owner(s).

It may be months or even years between the birth of an idea and the starting of a business. During this time the would-be entrepreneur should be developing and refining the business plan. The business plan is likely to highlight problem areas in a proposed business. There are three reasons for this:

  1.   A thorough investigation into the costs, markets and available finance, clearly presented will identify the areas of weakness in the original idea and allow them to be eradicated before they cost money or lead to failure.
  2.   A good business plan will impress people like bank managers, both in its information and the business-like qualities of the person who has drawn it up.
  3.   The discipline of drawing up a business plan can draw attention to the areas in which the business lacks experience.

Contents of a business plan

  1.  Summary of the plan. A brief description of the business will include the goods it intends to offer to its customers, an indication of its market and its sources of supply. How brief this introduction is will depend upon the business. For a small, one person start-up business a hundred words might suffice. A more complex organisation will need a more detailed, and therefore a longer description. This part of the business plan is important if it is to be used to support a request for external investment. Many organisations offering capital to new businesses specialize in certain types of business activity. If they are going to reject a plan it is in the interests of the entrepreneur that they do so quickly. Then she/he can seek more sympathetic organisations without too great a loss of time.

  1.  Management. Information relating to the personal experience of the entrepreneur will indicate the chances of success to the bank manager or anyone being approached for capital. Banks and other lenders will need to understand the quality and experience of the management of the company. This section will contain details of the names, ages, experience, qualifications of the management, weaknesses and how to deal with them.

  1.  Personnel. Information relating to the rotation and personnel recruitment, i.e. employment of new managers, regional sales managers, sales people for the new regional structure. Arrangement and implementation of training for all staff concerned with the new production line etc.    
  2.  Products and pricing. A detailed description of the product would include production costs and the proposed selling price. It should also try to isolate what sets this product apart from all similar products on the market. This will normally be very detailed, listing each product or service and saying why the company is producing or offering it, what market it is designed to reach and how successful it has been. It will also say how those products have been priced and how the company intends to increase or decrease the prices over the next few years.  

  1.  Marketing. The business plan should also include a description of the market at which the product is directed. This will include the geographical area over which it is to be sold, the number of competitors and the special points which will set this business apart from its competitors. It should also indicate the potential for growth in the area.

  1.  Operational details. The location chosen for the business should be stated and explained. The explanation might include details of premises and the site chosen in terms of costs and in relation to the market, suppliers, manufacturing facilities and equipment needed.

  1.  Financial analysis. The business plan should also include the amount of funding that will be required. If the plan is intended to persuade people to invest in the business it should also state the return the investors can expect. For an existing business this statement should be accompanied by the financial statements of the business over several years. A new business might include projected financial statements of what is expected to happen.

  1.  Read text 2 more carefully. Try to guess the words underlined from the context. Then use your dictionary to check the words.

  1.  Comprehension check.

Working in pairs, take turns answering the questions:

  1.  What are the reasons why a business plan is important to the success of an enterprise?
  2.  What are the major headings that should be included in a business plan?

  1.  Study the scheme of a business plan, using your dictionary to help with new words.

What should be in the plan?


  1.  SUMMARY OF YOUR PLAN, highlighting the

attraction of your business     one or two pages

  1.  what is the business?
  2.  what is the market?
  3.  potential for business
  4.  forecast profit figures
  5.  how much money is needed?
  6.  prospects for the investor/lender


  1.  when business started            one page plus
  2.  brief summary of past performance (put         Appendix

    accounts for last three years in an Appendix)

  1.  indication of how relevant or not past

    performance is to future progress

3. management (this is a crucial section)

  1.  your past employment and business as many pages as needed

    record – identify achievements, not just a          

    chronological statement

  1.  the record of other people working with you
  2.  if there are obvious weaknesses in your

    management, how you propose to deal with them


  1.  a simple description of what it does (avoid  two pages plus

     technical words). If essential, technical descriptions        Appendix

     can go in an Appendix

  1.  why the product is unique or distinct
  2.  brief survey of competition
  3.  how the products will be developed, what new products are being considered, when replacement will be needed for existing product range, what competitive products may emerge
  4.  any patents applied for

  1.  MARKETING (also crucial)

The market:

  1.  its size, its past and future growth
  2.  analysis of market into sectors; identification of sector your business is aimed at
  3.  likely customers: who are they, type (that is, industrial or consumer), size, how they buy
  4.  your competitors: who are they, their size, their position in market, likely response to your challenge

three or four pages (detailed market statistics in Appendix)


  1.  promotion, advertising (if any)
  2.  who will sell
  3.  some idea of your sales pitch (for example, the benefits)

    of your product

  1.  how you will price


a) where you will be based – location, premises  length depends

b) suppliers         on nature of

c) manufacturing facilities     business

d) equipment needed


  1.  summary of the forecasts          two or three pages
  2.  monthly profit and loss forecast for two years       plus figures in
  3.  profit forecast for further three years (optional)      Appendix
  4.  monthly cash flow forecast for two years
  5.  cash flow forecast for further three years (optional)
  6.  forecast balance sheet for two years
  7.  audited accounts for last three years (if available)
  8.  the assumptions behind your forecasts
  9.  what are the principal risks which could affect figures?


  1.  your objectives – short-term, long-term   one or two pages
  2.  the finance needed and what it is needed for
  3.  shareholdings suggested (if appropriate)
  4.  prospects for the investor or lender (if appropriate, including possible value of business if floated on the stockmarket, so investors will be able to cash in their investment)

5. Read an extract of a business plan and arrange given information according to the appropriate items of the plan.

Hans Gast


I wish to set up a refrigerated road transport business, with myself as a sole proprietor.

Initially, I shall have one truck with a load capacity of 1.5 tonnes. It will be fitted with a mobile phone. I shall undertake deliveries for chilled food distributors, offering them a service on which they know they can rely at short notice and in case of emergency. I have made preliminary enquiries with a number of firms, which I contacted while following a marketing course at Cardiff Polytechnic. Their response was very favourable.

I shall drive the truck myself and also employ part-time drivers. My fiancée will help me with administration, book-keeping and telephone enquiries. Her parents have offered us the use of a room in their house as an office, until we can find a small office to rent.

To finance this venture, I have £10,000 capital. My start-up costs will total £25,000. I am therefore seeking a bank loan of £15,000. I can offer the truck (estimated value £20,000) as security.

I have prepared a detailed cash-flow forecast for the first years of operation, and this shows that the break-even point (беззбитковість) is reached after twenty-two months. This assumes a bank loan of £15,000 over five years at an annual percentage rate of 18.5%, with interest-only repayments during the first six months.

6. Draw up your own business plan for a small business using the information given just above (Ex. 4, 5 pp.)

Unit 2

Starting and running

a new business


  1.  Match the following Ukrainian words with their English equivalents. Use your dictionary if necessary.

а) існуючий

б) набувати, одержувати

в) позичати, брати на певний час

г) розмір, величина, об’єм

д) досягати

е) фінансувати

є) “впорскування” грошей

ж) використовувати перевагу

з) збереження

и) позика, кредит

і) розширювати, розвивати

ї) ділити, розподіляти, брати участь в

й) заощадження

к) власність, майно

л) витрачати гроші

м) втрата, збиток

н) забезпечення, запорука

о) повертати борг

п) позичати, давати в борг

р) вимагати

с) повертати собі, отримувати заново

т) застава

у) покупка у розстрочку

ф) початковий, первинний платіж

х) здавати або брати в найм, в оренду

ц) розумний, розсудливий

  1.  savings
  2.  security
  3.  mortgage
  4.  sensible
  5.  existing
  6.  size
  7.  to fund
  8.  to lease
  9.  to lend
  10.  initial payment
  11.  to acquire
  12.  hire purchase
  13.  to borrow from
  1.  to reach
  2.  loan
  3.  to share
  4.  injection of capital
  5.  to recover
  6.  to take advantage
  7.  to claim
  8.  maintenance
  9.  to spend money
  10.  to repay
  11.  to expand
  12.  possession
  13.  loss

    Which verbs in
    A can go with which nouns in B?

Use your dictionary if necessary.

e.g. to start a business


Acquire    lend    take    receive    borrow    carry    own    reach    make    start    recover    fund    buy    expand    hire    share    claim    invest    lease    pay for    spend        repay    bring in    risk


Income    money    equipment    business    risk    development    good(s)    capital     profit    loan    payment    refrigeration unit    service(s)    ownership    decision      investment    possession(s)    advantage(s)

Pre-reading task

Work in small groups.

Have you got any idea where to get the money to start a new business? Do you know what factors will affect the capital requirements of a business?

Preface each answer with one of the following according to what is true for you:

I would like to say…

As far as I know…

There is no doubt…

I am afraid that…

I can only say that…


  1.  Read text 3. Were your ideas about ways of getting money to start a new business and factors affecting the capital requirements of a business correct?


Starting a new business

Starting a new business carries with it the greatest degree of risk. It may be possible to begin on a very small scale without risking too much capital. You will also have greater freedom of action. You will not be limited by decisions other people have taken in the past if you buy an existing business. Starting a new business requires finance. There are just three ways in which a business acquires money:

  1.  from the money invested in the business by the owner or owners, including any profit which they decide to reinvest.
  2.  by borrowing money from private individuals or from another organisation.
  3.  by buying goods and services on credit, i.e. having the use of the goods and services before they are paid for.

The basic principles of acquiring capital may be simple but the reality is far more complex. Each business will have its own particular requirements based upon such factors as:

  1.  the size of the business.
  2.  the stage of development it has reached. For example, two businesses with a similar number of employees and making a similar profit, may have totally different capital requirements. One business might be able to fund future investment from profits already made, but its future investment potential might be limited. The other business may need a large injection of capital if it is to take advantage of the market.
  3.  maintenance of control; that will mean loans to expand the capital rather than sharing the ownership with other people.
  4.  the organisations that make money available to businesses.
Let’s look at some basic definitions and the ways in which a very small business just starting up might find its capital in the first years of life.
  1.  The owner of the business invests money in it. This can come from savings or the sale of possessions. The important thing to remember is that it is the owner's money, to be spent as she/he wishes. If the money is lost, it is the owner's loss.
  2.  Money can be borrowed using possessions as a security. This statement means simply that if someone cannot repay the money then the person or organisation who lent that money can claim or sell that possession in order to recover the money they have lent. Mortgages are a specialised form of a loan on security. The security in this case is always property. All loans are usually made for a fixed period of time, for a fixed amount and at a fixed rate of interest.
  3.  Hire purchase and credit sales for equipment have a great deal in common. The difference lies in the ownership of the item. If a business buys a display refrigeration unit on hire purchase it does not own it until the last payment has been made. If it is a credit sale, it will own the refrigeration unit as soon as the initial payment has been made.
  4.  Trade credit is a system whereby a business receives the ownership of goods or services and does not have to pay for them immediately. The time involved can vary. In some businesses the goods or services bought in can be used and have brought in income before they have to be paid for.

Businesses can also lease equipment. If the equipment is needed for only a relatively short period of time then it is sensible to hire it. If the equipment is going to be used continuously then it is better to lease equipment.

    Comprehension check.

Read the text again more carefully. Are the following statements true or false? Correct the false ones:

  1.  If you decide to buy an existing business it is sensible to start on a large scale without risking too much money.
  2.  The finance invested in the business, borrowings from natural persons or from another organization, purchasing commodities or credit are the possible ways through which a recently set up business obtains money.
  3.  There are four basic factors determining particular requirements of each business.
  4.  Money invested in a small business just starting up can be obtained from savings or the sale of possessions.
  5.  If a person fails to pay back the money then the lender can divest that possession.
  6.  Hire buying and credit sales facilities have many discrepancies.
  7.  Trade credit requires to pay promptly for the ownership of goods and services.
  8.  It is sensible to hire the equipment if it is going to be used continuously.

Pre-listening task

  1.  The words and word combinations in A are in the dialogue you will hear. Use your dictionary if necessary and match each of them with a definition in B.


  1.  loan
  2.  store
  3.  to plan
  4.  profitable
  5.  business
  6.  origin
  7.  customer
  8.  money
  9.  to pay back
  10.  estimate
  11.  interest
  12.  security
  13.  to borrow
  14.  property
  15.  to own


  1.  to repay
  2.  to posses
  3.  an organization that buys or sells products or services for money
  4.  what someone earns, saves, invests and uses to pay for things
  5.  money provided by a bank to a customer for an agreed purpose
  6.  assets
  7.  something one intends to do and makes arrangements to achieve
  8.  a statement telling a customer how much money you will charge if they employ you to do a particular piece of work
  9.  property or goods that you agree to give to someone who has lent you money if you  can not pay the money back
  10.  the country, race or social situation that someone comes from
  11.  shop
  12.  to receive and use something that belongs to someone else and promise to give it back to them later
  13.  how someone are charged for borrowing money
  14.  client
  15.  lucrative


T 1. The conversation you are going to hear gives a tip on starting a new business.

 Listen to it and answer the questions:

  1.  Where did this conversation most likely take place?
  2.  Who are the participants of the conversation?
  3.  Give the main idea of the dialogue.

Pre-reading task

The words and word combinations in the box make a key vocabulary of the text you are going to read. Use your dictionary if necessary.

What is this text about?

ultimate    clerical

secure     price elasticity

to hinder    attitude

labour force    pressure group

obsolete    to mount a campaign

labour costs    impact

competitive    to reassess

implications    to modify

costing    circumstances

production cost   to take into account


  1.  Read text 4 and think of the suitable title.


A business, like the people who run it and the society in which it exists, is constantly changing. The way in which it develops and its ultimate success or failure depend upon:

  1.  People The person who starts a business might be prepared to work long hours to make it a success. As it becomes more secure she/he might prefer more leisure time to increased profits. The way in which the business develops can be helped or hindered by the available skills in the labour force.
  2.  Technology Changes in technology can make a product or a production method obsolete, that is old-fashioned or out of date. New products will have to be found, new machinery bought and the labour force retrained.
  3.  The economy  A high level of unemployment in an economy can mean a reduction in labour costs. It can also mean less demand for the product and a more competitive market. This will have implications for the costing, pricing and marketing of a product. It can also lead to changes in production methods and will certainly affect profitability.
  4.  The government  Governments make laws. A change in the laws governing health and safety in the workplace can lead to increased production costs. Other laws might increase the clerical work required of a business.
     The government can also affect the general level of demand in an economy by the way in which it raises money and the way in which it spends it. If the government decides to increase the tax on a particular type of good then it is likely that the demand for that good will fall. The extent to which the demand falls will depend on its price elasticity.
  5.  Other organizations  The attitudes and activities of trade unions, the activities of pressure groups can also affect the development of a business. A powerful and active trade union can influence working practices and raise the labour costs of a business. A political pressure group might mount a campaign to stop people buying certain types of goods.
  6.  The market  The markets in which a business operates will also affect its development.

 The impact of these forces will vary from business to business and will depend, amongst other things, upon the size of the business, the quality of its management, the finance available to it and the way in which it has developed in the past. Whatever the effect on a business the business plan must be constantly reassessed and modified to take changing circumstances into account.

  1.  Comprehension check.

Here are some answers about factors affecting the development of a new business. Write the questions.

a) What            ?

The way in which a new business moves forward or fails depends upon six factors.

b) Why           ?

To make a new business a success.

c) In what case          ?

The available skills in the labour force.

d) What           ?

New product will have to be found, new machinery bought and the labour force retrained.

e) What           ?

A high level of unemployment in the economy means a reduction in labour costs, less demand for the product and a more competitive market.

f) In which ways          ?

By the ways in which the government raises money and spends it.

g) Who           ?

A powerful and active trade unions.

h) Why           ?

To take changing circumstances in which a business exists into account.


Work in pairs.

Using the key vocabulary from the Pre-reading task, discuss what you have learned about factors affecting the development of a new business.

Give your ideas and motives for starting your own business.

Unit 3

What is financial management?


  1.  Do you know the meaning of the following words? Try to match up each of them to its Ukrainian equivalent. Use your dictionary if necessary.

  1.  finance
  2.  application
  3.  to be responsible for
  4.   assets
  5.  management
  6.  charitable
  7.  retail
  8.  sufficient
  9.  to collect
  10.   supplier
  11.   to supervise
  12.  to focus on
  13.   treasurer
  14.  controller

  1.  to charge with
  2.   liaison
  3.   to oversee
  4.   to obtain
  5.   accounting
  6.   auditing
  7.   to report to
  8.   to aim at
  9.   capital budgeting
  10.   to gain
  11.   equity
  12.   working capital
  13.   to ensure

а) бути відповідальним за

б) роздрібний

в) дивитися, спостерігати за

г) збирати

д) скарбник

е) з’єднувальна ланка

є) фінанси

ж) наглядати, спостерігати за

з) бухгалтерський облік

и) доповідати, звітувати

і) бухгалтер-аналітик, контролер

ї) благодійний

й) активи

к) покладати відповідальність на

л) достатній

м) одержувати, здобувати

н) акціонерний капітал, власний капітал, звичайна акція

о) застосування, використання

п) одержувати, здобувати (прибуток)

р) проведення ревізії, аудит

с) забезпечувати, гарантувати

т) розрахунок прибутковості капіталовкладень

у) постачальник

ф) оборотний капітал

х) домагатися, прагнути

ц) зосереджувати увагу на

ч) управління, керівництво; адміністрація

Pre-reading task

Work in small groups.

Can you answer the following questions?

  •  What are the most important decisions a company has to make before starting or doing some business?
  •  What is corporate finance?
  •  Which managers does the Vice-President for Finance supervise?
  •  What is capital budgeting?
  •  What is capital structure?
  •  What is working capital?

Preface each answer with one of the following according to what is true for you:

As far as I remember …    Unfortunately, I have no idea …

I would like to point out that …   I am not absolutely certain, but I think …


  1.  Read text 5. How much of the information did your group already know?


Financial activities and their management

Finance is the application of economic principles and concepts to business decision-making and problem solving. It is the function in a business responsible for acquiring funds for the firm, managing funds within the firm, and planning for the expenditure of funds on various assets.

Finances of a business enterprise need management. It is just the sphere of financial management. Financial management is the investment and financing decision making that goes on within all types of firms. The firm may be a business enterprise, such as manufacturing company, an accounting firm, an oil producer, a credit union, or a charitable organization. The small retail firm requires such decisions as where to get funds for its seasonal cash needs, selecting the appropriate level of inventory and cash on-hand, and deciding when best to expand. The large corporation needs to set its credit terms, decide where to get funds needed for expansion etc.

Any person or company starting or doing some business has three questions to answer, all connected to finance.

The first question is, “What long-term investments are necessary?” This means identifying the business to be done, and the buildings, machinery, and equipment needed to do it.

The second question is, “Where and how can the firm get long-term financing to pay for those investments?” Will the firm’s own money be sufficient? If not, will it try to interest others to invest in the business and share ownership, or will it borrow money?

The third question is, “How will the firm manage everyday financial activities?” These activities include collecting money from customer, paying suppliers, paying salaries and wages, administrative costs, etc.

The financial structure of a company is called corporate finance. The Financial Department in a company is responsible for its corporate finance.

It is known, that financial management is the responsibility of the Vice-President for Finance, who supervises the work of the Financial Department of a company.

High-level positions of a business that focus primarily on financial management typically include: Vice-President for Finance, Treasurer, Controller and Chief Financial officer. The Vice-President for Finance is charged with policy-making duties and acts as a liaison between financial manager and other management personnel. Often the Vice-President for Finance oversees the activities of the Controller and the Treasurer. The Treasurer is charged with obtaining capital for investments and investing cash in other assets of business. The Controller is charged with accounting and auditing functions and financial planning.

The Chief Financial officer is generally part of the top layer of management that reports to the Board of Directors.

All the financial activities are aimed at answering the three questions listed above. The answer to the first question is called capital budgeting. It is the process of planning and managing the firm’s long-term investments. To do that, the Financial Manager has to try to find opportunities for investments which are worth more to the firm than they cost to be acquired. That means that the amount of cash to be received as a result of an investment should be greater than its cost, i.e. greater than the amount of money spent to gain it.

The answer to the second question is found in capital structure. This structure is a mixture of long-term debt and the equity that a firm uses to finance its operations. Debt is a result of the firm borrowing money to finance its operations. Equity is the value of its property (also used as security for the financing) after deducting all the charges to which that property may be liable. The Financial Manager should decide on the suitable balance of debt and equity – what mixture of debt and equity is best for the firm. He or she should also find the least expensive sources of funding for the firm.

The working capital management is the answer to the third question. Working capital is the firm’s short-term assets - for instance, inventory. It also includes short-term liabilities, such as paying suppliers. Managing the working capital is necessary to ensure continuity of the firm’s operations without interruption. It requires a number of decisions, such as how much cash and inventory should be readily accessible at a moment’s notice, how to obtain short-term financing, etc.

Decisions made regarding any of these three basic questions of finance involve risks. That is why no firm can avoid some financial losses. But efficient financial management can bring those losses to a minimum, thus maximizing the profits.

  1.  Comprehension check.

  1.  Return to the questions in Pre-reading task.

  •  Which of them did you answer correctly?
  •  If your answers were only correct in general, formulate more specific answers.
  •  Which of your answers were wrong?
  •  What are the correct answers to those questions?

  1.  Work in pairs. Using the key vocabulary of the text, explain what you understand about the following:

  •  investments should be worth more to the firm than they cost;
  •  debt and equity should be balanced when financing the firm’s operations ;
  •  the working capital includes the firm’s short-term assets and liabilities.

c) Look at the suggested organizational chart of financial activity in a large firm, supervised by the Vice – President for Finance. Match managers ( under A) with definitions of their responsibilities ( under B).

a) treasurer

b) controller

c) cash manager

d) cost accounting manager

e) credit manager

f) financial accounting manager

g) data processing manager h) tax manager

1) regulates the flow of cash;                      

2) supervises the issues of tax payments;           

3) manages credit issues;

4) is responsible for financial planning and planning capital expenditure;

5) processes all financial information concerning the firm

6) supervises cost accounting;

7) supervises financial accounting;

8) is in charge of controlling expenditure.

А        В


Use your dictionary to look up any new words.

  1.  Write the following words in the correct column.

financial   task (2)   include   development   application   monitoring   creating   evaluating   credit (2)   investing   excess   cash (2)   acquiring   issuing   additional spinning-off   interpret   report (2)   improve   data   optimally   effective       finance (2)   similarly   need (2)   understand   like (3)   remember   critical   expect   survive   essential (2)   challenge (2)   face (2)   entire (2)   function (2)   greatly.

Nouns (23)

Verbs (17)

Adjectives (7)

Adverbs (3)


  1.  Combine a word in A with a word in B to form a suitable noun phrase

E.g. financial manager

A      B

  1.  financial (3)    1) cash
  2.  business     2) management (2)
  3.  credit     3) accountant
  4.  excess     4) activity
  5.  cash     5) challenge
  6.  equity     6) business
  7.  top      7) manager
  8.  good     8) securities
  9.  small     9) statement

10) careful     10) life

11) essential     11) strength

12) entire     12) balance

13) accounting     13) policy

14) matters


  1.  Read text 6 and think of the suitable title.


The financial manager’s task include the development, application, and monitoring of policies and decisions regarding such business activities as:

  •  Creating and evaluating credit policies for customers
  •  Investing excess cash balances
  •  Acquiring another company
  •  Issuing additional equity securities
  •  Spinning-off a subsidiary

A financial manager for a business is the doctor who interprets the report and makes recommendations to the patient regarding changes that would improve health. Financial managers use the data prepared by the accountants and make recommendations to top management regarding strategies for improving the financial strength of the firm.

A manager cannot be optimally effective at finance without understanding accounting. Similarly, a good accountant needs to understand finance. Accounting and finance, finance and accounting – the two go together like bread and butter.

As you may remember, financing a small business is a difficult but critical function if a firm expects to survive those important first five years. The simple reality is, the need for careful financial management is an essential ongoing challenge a business of any size must face throughout its entire life.

All financial managers functions depend greatly on the information provided by the accounting statements such as:

  •  Planning
  •  Budgeting
  •  Obtaining funds
  •  Controlling funds

              (funds management)

  •  Collecting funds

(credit management)

  •  Auditing
  •  Managing taxes
  •  Advising top management on financial matters

  1.  Comprehension check.

Here are some answers about financial manager’s work. Write the questions.

  1.  What ___________________________________________________________?

The major task of financial manager is the development, application and monitoring of policies and decisions of a business.

  1.  Who ____________________________________________________________?

Accountants collect and choose data for financial managers.

  1.  Whom ___________________________________________________________?

Financial managers suggest the top management ways of improving the financial standing of the firm.

  1.  In what case ______________________________________________________?

Without understanding accounting a manager cannot be effective at finance.

  1.  What ____________________________________________________________?

Accounting statements.

Role – play

Work in pairs.

Imagine that you are a human resource manager who selects employees to fill vacancies of:

  •  a finance manager
  •  a treasurer
  •  a controller

Tell them about your company. Ask them about their education, business experience and professional qualification. Also have a talk with candidates about their official duties.

Writing a summary (an abstract)1 of a text, a book, an academic paper etc.

Steps in writing a summary

If you follow the steps below, you will have an excellent chance of producing a useful and accurate summary:

  1.  Read the article once for general comprehension without taking notes.
  2.  Reread and underline the main points (ideas) and supporting details.
  3.  Take notes on the main points and supporting details on a separate sheet of paper. Be careful to use your own words!
  4.  Using your notes, write the introductory statement of your summary, explaining what the original is about.
  5.  Write the body of your summary, using your own words and making sure to cover all the key points and add important supporting or explanatory details.
  6.  Write your last part, in which you explain what the original author’s conclusions were. Be sure to keep your own opinions out of this part. Even though the summary is organized by you and is written in your own words, it should not contain your ideas.
  7.  Reread and edit your summary. Correct grammar, spelling, and punctuation errors.
  8.  Write a clean draft and proofread for copying errors.

Here are a few tips for you about writing a summary 

and some useful expressions

  •  In the introductory statement if your summary

a) cite the author, title, source, and, in the case of a magazine or journal article, the date of publication;

b) state the topic or general subject matter of the text:

The article is devoted  to …

The article deals with …

The text presents…

-   the analysis of …

  •  the comparison of …
  •  the description of …
  •  the discussion of …
  •  the results of the research on / in (investigation of / into, study of) …

- a review of literature on …

Статтю присвячено …

У статті розглядається …

У тексті представлено …

- аналіз …

- порівняння …

- опис …

- обговорення …

- результати дослідження з

- огляд літератури з

The author

- analyses …

- compares …

- describes

- discloses (reveals)…

- reviews …

- shows (demonstrates)…

- provides the reader with ...


- аналізує …

- порівнює …

- описує …

- розкриває …

- робить огляд …

- показує …

- надає читачеві …


  •  presents…
  •  describes…


  •  представляє …
  •  описує …

с) point out the purpose of the underlying research or the piece of writing:

The purpose of the article (text / chapter, etc) is …

- to inform …

- to clarify …

- to determine (ascertain, establish) …

- to elucidate …

- to explain …

- to prove (validate) …

- to substantiate …

- to compare …

- to persuade …

Мета статті (тексту / розділу тощо) полягає в тому, щоб ...

- поінформувати ….

- з’ясувати (внести ясність у) …

- визначити (встановити) …

- висвітити (роз’яснити) …

- пояснити …

- довести …

- обґрунтувати …

- порівняти ...

- переконати …

  •  In the body of your summary

  1.  present the main points of the piece of writing:


The author begins by explaining ...

Автор починає з пояснення…

The author emphasizes (stresses) the importance of …

Автор підкреслює важливість …

The author focuses on …

Автор зосереджується на …

Special emphasis (stress) is laid (placed, put) on …

Особливий наголос ставиться на …

Particular importance (significance, value, weight) is attached to …

Особливе значення надається …

Readers’ attention is called (attracted, drawn) to …

Увага читачів привертається до …

The author uses examples to confirm / prove that…

Автор використовує приклади, щоб підтвердити / довести …

The obtained data are exemplified with …

Прикладом отриманих даних служить ...

  •  In the final part of your summary

  1.  explain the author’s conclusions

The author makes important implications (inferences, conclusions).

Автор робить важливі припущення (висновки).

Hence (therefore, thus) it is concluded that …

Отже (таким чином), робиться висновок, що …

It follows from these findings that …

Із цих результатів випливає, що …

  1.  indicate the target readership of the piece of writing:

The article (text / section, etc.) is intended for …

Стаття (текст / розділ тощо) призначена для ...  

The article (text / chapter, etc) will be useful (helpful, valuable) for ...

  •  bankers and accountants

  •  students of Economics
  •  future financiers

Стаття (текст / розділ тощо) буде корисною для ...

  •  банкірів і головних бухгалтерів
  •  студентів-економістів
  •  майбутніх фінансистів

The book is intended for a wide audience, including ...

Книга призначена широкій аудиторії, включаючи …

  1.  specify the subject of the piece of writing:

The book (article, section etc) is devoted (dedicated) to …

Книгу (статтю, розділ тощо) присвячено …

The book (article, section etc) deals with …

У книзі (статті, розділі тощо) розглядається …

  1.  point out the purpose of the piece of writing:

The book (article, section etc) under consideration (under discussion / debate) presents

  •  the analysis of …
  •  the comparison of …
  •  the description of …
  •  the discussion of …
  •  the results of the research on / in

(investigation of / into, study of) …

  •  a review of literature on …
  •  a survey of the relevant literature

Книга (стаття, розділ тощо), що розглядається (обговорюється), представляє

  •  аналіз …
  •  порівняння …
  •  опис …
  •  обговорення …
  •  результати дослідження …

  •  аналіз літератури з …
  •  огляд відповідної літератури

The author

  •  analyses …
  •  compares …
  •  describes …
  •  discloses (reveals) …
  •  reviews …
  •  shows (demonstrates) …


  •  аналізує …
  •  порівнює …
  •  описує …
  •  розкриває …
  •  робить огляд …
  •  показує …

The author attempts (tries)

  •  to clarify …
  •  to determine (ascertain, establish)
  •  to elucidate …
  •  to explain …
  •  to prove (validate) …
  •  to substantiate …

Автор намагається

  •  з’ясувати (внести ясність у) …
  •  визначити (встановити) …
  •  висвітити (роз’яснити) …
  •  пояснити …
  •  довести …
  •  обґрунтувати …

  1.  present the main points of the piece of writing:

The essence of the book (article, section etc) is that …

Суть книги (статті, розділу тощо) полягає у тому, що …

The study emphasizes (stresses) the importance of …

У дослідженні підкреслюється важливість …

The author states (asserts, affirms) that …

Автор стверджує, що …

The author considers the possibility of …

Автор розглядає можливість …

It is also emphasized (stressed, underlined) that …

Підкреслюється також, що …

Special emphasis (stress) is laid (placed, put) on …

Особливий наголос ставиться на …

Particular importance (significance, value, weight) is attached to …

Особливе значення надається …

Reader’s attention is called (attracted, drawn) to …

Увага читачів привертається до …

It is also noted that …

Відзначається також, що …

The obtained data are exemplified with …

Прикладом отриманих даних служить …

Two important implications (inferences, conclusions) follow from this.

Із цього випливають два важливі висновки.

It follows from the book (article, section etc) that …

Із книги (статті, розділу тощо) виходить, що …

  1.  give your opinion of the piece of writing:

Hence (therefore, thus) it can be concluded that …

Отже (таким чином), можна зробити висновок, що …

All things considered, it can be said that …

Враховуючи все, можна сказати, що …

The book (article, section etc) is very useful (helpful, valuable) for

  •  bankers and accountants
  •  human resource managers
  •  students of Economics

Книга (стаття, розділ тощо) дуже корисна для

  •  банкірів і головних бухгалтерів
  •  менеджерів з персоналу
  •  студентів-економістів

The book (article, section etc) is of great (crucial, paramount) importance for

  •  our understanding of …
  •  further investigation into / of …

Книга (стаття, розділ тощо) має велике (вирішальне, першорядне) значення для

  •  нашого розуміння …
  •  подальшого дослідження …

  1.  Read the following review of text 5.

Text “Financial activities and their management” is devoted to finances of a business enterprise and financial activities of a business that focus primarily on financial management of a company.

The purpose of the text is to outline and clarify the main issues relating to the sphere of financial management.

The essence of the text is that there are three main questions arising while starting or running some business.

Particular importance is attached to responsibilities of high-level position dealing with the financial management of a company.

The text is useful for financial managers and students of Economics.

  1.  Write the review of text 6.


Accounting: an aid to decision making


Do you know the meaning of the following words and word combinations? Try to match up each of them to its Ukrainian equivalent. Use your dictionary if necessary.

  1.  to devise
  2.  to keep a record
  3.  to possess
  4.  value
  5.  to keep an account
  6.  to render an account
  7.  financial accountant
  8.  chartered accountant
  9.  management accountant

  1.  cost accountant
  2.   fair
  3.   transaction
  4.   to draw up an account
  5.   to act on behalf of smb
  6.   to declare
  7.   auditing

17. to derive from

а) вести рахунок

б) бухгалтер-фінансист

в) бухгалтер-калькулятор
г) складати фінансовий звіт
д) чесний; достатній
е) вартість; цінність
є) діяти від чийогось імені
ж) оголошувати; заявляти
з) проведення ревізії
и) придумувати, винаходити

і) надавати рахунок
ї) головний бухгалтер - аналітик
й) володіти

к) одержувати, здобувати
л) угода
м) дипломований бухгалтер вищої кваліфікації; аудитор
н) вести облік; вести документацію

Pre-reading task

Work in small groups.

Can you answer the following questions?

  •  Why is it necessary for any company to keep a record of what they possess?
  •  The accounting profession has some advantages and disadvantages. Do you have any idea about what they are?

Preface each answer with one of the following according to what is true for you:

I believe it is rather an interesting problem…

My personal opinion as to…

Unfortunately, I have no idea …

It depends, I think, on…

I’m not absolutely certain, but I think…


  1.  Read text 7. How much of the information did your group already know?

Text 7

Introduction to accounting

Since people have owned properly they have devised methods of keeping a record of what they possessed and its value. They wished to keep an account of what they had and, when responsible for other people’s property, they needed to render an account of how they had used it. Traditionally the accounting profession has been divided into financial accountants, whose professional association is the Institute of Chartered Accountants, and management accountants, who are members of the Institute of Cost and Management Accountants.

Financial accountants are primarily concerned with making sure that the accounts of a business are a true and fair record of the financial transactions of the business. They may do this by drawing up the accounts of a business from the records kept by the various departments or, acting on behalf of another business, they may examine existing accounts and declare them to be a true and fair record. This process is known as auditing.

Management accountants are more interested in the information they can derive from financial accounts.

  1.  Comprehension check.

Working in pairs, answer the questions.

a) What is of vital importance for people if they own property and run a business?

b) What is a traditional division in the accounting profession?

c) Which of two professional associations mentioned in the text relates to financial accountants and which to management accountants?

d) In what way do the responsibilities of a financial accountant differ from a management accountant?

Role – play

Work in pairs.

Student A  You are a staff manager in a food processing company who selects both a financial accountant and a management accountant. You are expected to explain applicants their duties and choose the right person for these posts.

Student B – is an applicant for the post of a financial accountant.

Student C – is an applicant for the vacancy of a management accountant.

You have just graduated from the University and are eager to get experience in accounting and well – paid job. Persuade the staff manager that you are the best applicant for this post. Have a talk with a staff manager of a company.


  1.  Match up each of the following words and word combinations and word groups to its Ukrainian equivalent. Use your dictionary if necessary.

a) fixed assets

b) current assets

c) to intend

d) to turn into cash

e) loss of value

f) liquid assets

g) to reflect

h) leasehold land

i) lessor

j) lessee

k) freehold property

e) marginally

m) vehicles

n) to rank

o) goodwill

p) trademark

q) to enjoy

r) to deny

s) to secure

t) letters patent

u) to invent

v) to license

w) copyright

x) originator

y) prepayment

z) to grant a credit

а) передплата

б) той, хто дає щось в оренду

в) надавати кредит

г) надавати ліцензію

д) користування землею на правах оренди

е) автотранспортні засоби

є) авторське право

ж) перевести, перетворити у готівку

з) поточні активи, оборотні засоби

и) мати намір, призначати (ся)

і) гарантувати, забезпечити

ї) користуватися правами

й) відображати

к) гранично

л) основний капітал, основні засоби

м) патентна грамота

н) орендар

о) повна земельна власність

п) втрата вартості

р) товарний знак

с) винаходити

т) ліквідні активи, оборотний капітал

у) класифікувати, розподіляти

ф) умовна вартість репутації і ділових зв’язків

х) автор , творець

ц) заперечувати, відмовлятися

Pre-reading task

Work in small groups.

Answer the following questions:

  1.  Do you know the meaning of the word “liquid”? Why cash is the most liquid of assets?
  2.  What is the distinction between current and fixed assets?
  3.  Express your thoughts on what liabilities are.

Preface each answer with one of the following according to what is true for you:

I think, I know…

I am sure that…

I am not quite sure that (but)…

I don’t know whether…


  1.  Read text 8. How much of the information did your group already know?


Assets and liabilities

Assets can be defined as the properties, machinery, investments and cash owned by a business and which are used to achieve objectives. Thus, assets are the resources owned by a business. They are classified as fixed assets and current assets. Fixed assets are normally those which the business intends to hold for more than one year and which are not intended for resale. They are the resources the business needs to function, but they may also include investments in other firms. The conventional order for listing fixed assets begins with the most illiquid, that is the assets which is most difficult to turn into cash without loss of value and ends with the most liquid asset, i.e. the one most easily turned into cash without loss of value. This order also tends to reflect the life of an asset within a business. In normal circumstances land and buildings would be the last assets to be sold if the business went bankrupt or into liquidation. It is therefore classified as the most fixed, i.e the least liquid, asset. Cash is changing all the time, and is therefore the least fixed, i.e the most liquid, asset. An outline listing of fixed assets can be given as:

1. Freehold land and buildings. The word “freehold” means that the owner has absolute rights over the land and does not have to pay rent for it.

2. Leasehold land and buildings. A lease is a legal agreement between the owner of a property, the lessor, and another person, the lessee, that the lessee shall have the use of that property for a specified period of time. The time clause means that a leasehold is both less fixed in terms of ownership than freehold property and also more difficult to sell without loss of value.

3. Plant, machinery and equipment. After buildings a business needs the physical equipment to produce the good or service. Without them the business could not function, so they are only marginally less fixed than the buildings.

4. Vehicles. A van or car is both more flexible in use and has a shorter working life than a piece of machinery or a factory. It therefore ranks as less fixed than both.

5. Goodwill, patents and trademarks. These are easy to define but more difficult to value.

  •  Goodwill is the favour and prestige a business enjoys which adds value to it beyond the value of its physical assets. Unfortunately there is no way of knowing the value of goodwill until the business is sold. To ignore it totally would be to deny an asset of the business. Estimates of goodwill should be conservative.
  •  Patents are legal documents securing to an inventor the exclusive right to make or sell an invention. Once an inventor has secured the letters patent to an invention they may license other people to use the invention. This is a legal agreement and the inventor will receive royalties in payment for the licence. Patents usually refer to the invention of machinery. In the media - books, films, records, videos - and the world of computer software the equivalent protection is copyright. Both patents and copyright attempt to protect the originators of an idea from exploitation by other people
  •  Trademarks identify a product and help build up consumer loyalty. If you bought a factory manufacturing the well-known Megamints you would want to be able to continue using that name. A successful trademark is the end result of good marketing and quality control. It ensures continuing sales.

 6. Investments. These are not expected to be held beyond the present accounting period. An accounting period usually lasts for one year.

Current assets

Current assets are those which are 'used up' in the day-to-day operations of a business and which can be converted into cash faster and without potential loss of value. Their listing follows the same convention as fixed assets: the most permanent and illiquid are placed first, whilst cash is last. Current assets include stock, debtors and prepayments, cash at bank and cash in hand. Debtors are those businesses which have taken delivery of goods but which have not yet paid for them, in other words, firms to whom the business has granted trade credit.


Strictly speaking a liability is a contribution of resources to a business for which a business has to render an account of its use. The formation of a company gives the business a separate legal identity and the people who run the business must, by law, account for the way in which they have used the money entrusted to them. This will include money lent to the business and also money invested in the business by the owners that is shareholder’s funds. Sole traders and partnerships are not subject to the same legal constraints as companies, in that their accounts do not have to be made public, but the accounts of these businesses are treated as if the business is a separate identity from the owner. This has the practical advantage of allowing the owners of the business to keep a clear record of how much money they have invested and therefore of being able to judge the profit/loss position of the business more accurately. In the case of the sole trader the owner's capital would be presented as proprietor's funds. The usual practice is to start with owner's funds, follow this with loans which will not have to be repaid in the current accounting year, then current liabilities.

Current liabilities

Payments which will have to be made in the current financial year include provision for repayments of debts expected to mature and other expenses such as tax, bank overdrafts and creditors. There is no conventional order for the presentation of current liabilities.

  1.  Comprehension check.

1. Use the chart and without looking into the text:

a) define the words:

  •  current assets
  •  liquid assets
  •  illiquid assets                                




b) distinguish between current and fixed assets.

2. Here are some answers about assets of a company. Write the questions.

a) What ______________?

Assets are the resources owned by a business

b) How_______________?

Liquid asset is the asset which is easily turned into cash without loss of value whilst illiquid asset is the one which is difficult to turn into cash without loss of value.

c) Why_______________?

Fixed assets are normally those which the business intends to hold for more than one year and which are not intended for resale.

d) What___________________?

Both patents and copyright attempt to protect the originators of an idea from exploitation by other people.

e) In what way______________?

Current assets are those which are used up in the day – to – day operations of a business and which can be converted into cash faster and without potential loss of value.

f) What____________________?

Current assets include stock, debtors and prepayments, cash at bank and cash in hand.

g) Which___________________?

Money lent to the business and also money invested in the business by the owners.

h) When____________________?

Current liabilities payments are to be made in the current financial year.


Work in small groups.

Define a patent and discuss why patents, goodwill and  trademarks are considered assets of a business.


  1.  Read text 9 using your dictionary to help with new words.


Balance sheet

A balance sheet is the financial statement that reports the financial condition of a firm at a specific time as recorded by an accountant. It is composed of assets and liabilities.

A balance sheet provides a summary of the way in which a business has used the resources available to it over a period of time. In Table 1 you can see the balance sheet of the Baines Nursery at the start of trading.

Table 1 Balance sheet, Baines Nursery at start of trading

Balance sheet: Baines Nursery as at 30 September 2004

Freehold land/buildings £ 30000   Proprietor's capital      £35000

Cash at bank                  £  5000

Between 1 October and 14 November the Baines employ a builder to undertake the necessary alterations. For the purposes of this case study we will assume that the cost of the alterations was exactly the same as his estimate, £10 000. He funded the alterations by borrowing £10 000 from the bank. This gives the following action:

  •  Assets (freehold property)+£10 000

combined with a reaction:

  •  Assets (bank loan)-£10 000

Table 2 Balance sheet, Baines Nursery, after alterations to premises

Balance sheet: Baines Nursery as at 30 November 2004         

Freehold land/buildings   £40000   Proprietor's capital       £35000

Cash at bank                    £ 5000    Bank loan                     £10000

The Baines buy fixtures and fittings together with equipment to the value of £5000. Again this is an assets +/ assets- transaction.

Table 3 Balance sheet, Baines Nursery, after purchase of fixtures, fittings and equipment and grant of bank loan

Balance sheet: Baines Nursery as at 31 December 2004

Freehold land/buildings   £40000    Proprietor's capital          £35000

Fixtures & fittings           £ 5000     Bank loan                        £10000

Cash at bank                    £—

The Baines are now short of money. They negotiate an overdraft for £1000. This increases both their liabilities and their assets.

Table 4 Balance sheet, Baines Nursery, after negotiation of overdraft

Balance sheet: Baines Nursery as at 31 January 2005

Freehold land/buildings   £40000    Proprietor's capital          £35000

Fixtures & fittings           £ 5000     Bank loan                        £10000

Cash at bank                    £ 1000    Overdraft                         £ 1000

Table 5 Balance sheet, Baines Nursery, after first six months' profit

Balance sheet: Baines Nursery as at 31 July  2005

Freehold land/buildings £40000   Proprietor's capital   £35500

Fixtures & fittings       £ 5000    Bank loan                £10000

Cash at bank       £   500

After six months in operation the Baines have accumulated enough cash to pay off their overdraft with £500 to spare. Their cash figure will fall (assets-) but so will the overdraft disappear (liabilities-) and the proprietors' capital will be increased by the amount of their own money now in the bank. This is, of course, a very simple form of balance sheet but it does illustrate the principles contained in all balance sheets. On the right are the liabilities or the sources of funds used by a business. On the left the listed assets show how these funds have been used.

Table 6 Columnar form of balance sheet

Balance sheet as at.................

                                                                 £000            £000          £000


FIXED ASSETS                                      Cost             Deprec.       Net

Freehold premises                             4000           1000             3000

Leasehold premises                           1000             370               630

Plant and machinery                          5000           2355             2645

Motor vehicles                                     970             200               770

Investments                                       10970           3925             7045


Stock (inventories)                                              5500

Debtors and prepayments                                     1500

Marketable (liquid) securities                                500

Bank balance and cash                                           100




Creditors                                                     1754

Tax and prepayments in coming year          500

Bank overdraft                                              451

Proposed dividends                                       335


NET CURRENT ASSETS                                                                 3040   

NET ASSETS EMPLOYED                                                              4560




Ordinary shares                                                                           5300

Preference shares                                                                          2100


RESERVES                                                                                         2500


LOAN CAPITAL                                                                                2500

     Debentures                                                                                   12400

The way in which the balance sheet in Table 5 is presented is called the T form. It is still in use but most large businesses now use the columnar form, as shown in Table 6. This has the major advantage of distinguishing clearly between the sources and use of funds and it is generally accepted as an easier form to interpret.

The balance sheet shows the position of a business at a given moment but it does not tell us how the business reached that position, the level of its sales and how the profit made had been divided between the various parties with a claim to it. For this information we need two other financial statements: the profit and loss account and the funds flow statement.

  1.  Comprehension check.

Working in pairs, answer the questions.

a) What is a balance sheet?

b) Why is it necessary for a business to provide a balance sheet for report?

c) What is the difference between the columnar form and the T form?

d) What are two other financial statements?

  1.  Read the text again. Find and write down words in the text that mean the same as the following words and definitions. They are in the same order as they appear in the text.

a. a written statement showing the value of a company at a particular time

b. something such as money, workers, or equipment that can be used to help a business

c. an arrangement in which someone completely owns a building or a piece of land

d. money in the form of notes and coins

e. to agree to be responsible for a job or project and do it

f. a change in the form of something

g. the amount of money that is needed in order to buy, pay for, or do something

h. a statement telling a customer how much money you will charge if they employ you to do a particular piece of work

i. to provide the  money for something that costs a lot

j. to receive and use money that belongs to someone else and promise to give it back to them later

k. money provided by a bank to a customer, for an agreed purpose and period of time

l. the buildings that a business or organization uses

m. a piece of furniture or equipment that is fixed in its place and is considered part of the building

n. a piece of something that you connect to something

o. the action or process of buying or selling or doing something related to business

p. to buy something

q. to be pressed for money

r. an agreement with your bank that allows you to spend  money when you have no money left in your account

s. a person, place or thing that provides something you need or want

t. assets which are expected to stay in the business for longer than the given accounting period. The business will need them to continue operations in future

u. assets which are “used up” in the day - to – day operations of a business and which can be converted into cash faster and without potential loss of value

v. property or goods that you agree to give to someone who has lent you money if you cannot pay the money back

w. to take an amount or number from a total

x. regular costs and money owed

y. an official arrangement with a company in which the company promises to pay a fixed rate of interest on money you have invested in it

z. an official document that lists the amounts of money that have been put in or taken out of a bank account

  1.  Working in pairs, compare the net profit of Baines’ Nursery after tax with the amount of money they invested in the business. Assuming banks are paying 10 per cent interest on deposit accounts should the Baines be pleased with the results of their first year’s trading? Explain your answer.

  1.  Look at this example of a balance sheet. Replace the underlined words or phrases with a word or phrase from the box with a similar meaning.

bank overdraft      land                preference shares       tax

capital reserves     ordinary shares     share capital             working capital creditors        plant                stock


Balance sheet as at 31 December 2004

ASSETS                                                                                       $000

Fixed assets

(1) Property                                                                                 420

Buildings                                                                                     180

(2) Equipment and machinery                                                     100

Total fixed assets                                                                                      700

Current assets

Raw materials             } (3) goods

Work-in-progress        } held in                                                   200

Finished goods            } storage

Debtors                                                                                          90

Cash in bank                                                                                  60

Total current assets                                                                                  350

Current liabilities

(4) People owed money                                                                80

(5) Money owed to the bank                                                          50

(6) Money owed to the government                                               35

Total current liabilities                                                                             165

(7) Net current assets                                                                               185

Net assets                                                                                                    885


(8) Money invested in the company and represented by shares

(9) Shares paying a variable dividend to shareholders                  500

(10) Shares paying a fixed dividend to shareholders                     300

(11) Shares held in a special fund used to pay off

creditors if the company goes into liquidation                                85

Total                                                                                                            885


  1.  Read text 10 using your dictionary to help with new words.


Financial statements

The profit and loss account

The profit and loss account is a statement of the amount of profit or loss a business has made in a period of time. For convenience and ease of interpretation the information is contained in three sections.

1. The trading account This includes the revenue from sales and the costs associated with producing those sales.

  •  Revenue - Cost of sales = Gross profit

2. The profit and loss account Payments such as interest and directors' fees are deducted from the gross profit to give net profit before tax. Tax is then deducted to give net profit after tax.

Table 7 A profit and loss account

Profit and loss account for year ending 30 June 2005

                                                                     £000         £000       £000



Cost of sales






Wages and salaries




Heat and light


Rates, rent, insurance








Bad debts












Net profit


Corporation tax


Net profit after tax


Ordinary share dividend




3. The appropriation account To appropriate means to set aside for a purpose or to make something the private property of an individual or an organization. The appropriation account tells interested parties how the business has used the net profit after tax. A company's appropriation account would include the amount distributed to shareholders, the amount transferred to general reserve and the retained profit.   The presentation of a profit and loss account is shown in Table 7.              

Funds flow statement

A funds flow statement shows the sources and uses of funds employed by a business over a period of time.

If you look at the information given in a funds flow statement and compare it with the information given in the balance sheet you will see many apparent similarities in the information. The difference lies in the period of time summarized by each statement. The balance sheet gives the sources and use of funds from the beginning of the life of a business. The funds flow statement usually relates to a shorter period of time.

Funds flows are useful to analyze the effects of changes in working capital. Transactions that result in an increase in working capital are sources of funds. Those which lead to a decrease in working capital are funds flowing out of the firm, that is the use of funds. The funds flow analysis shows changes in working capital for a given period.

Value added statement

The value added statement indicates the difference between the cost of bought in goods and services and the sales revenue of the business. It is the value added to these things by the effort of the business.

  1.  Comprehension check

Working in pairs, answer the questions.

  1.  What is the profit and loss account?
  2.  What is the difference between the balance sheet and the profit and loss account?
  3.  What does a funds flow statement present?
  4.  What is the main difference between the balance sheet and the funds flow statement?

  1.  Read the text once again. Find words in the text that mean the same as the following.

a. revenue

b. damage

c. bill

d. included

e. selling

f. expenses, charges

g. per cent

h. bonus

i. levy

j. price

k. supplementary costs

l. cover

m. wear

n. publicity campaign

o. to allocate

p. dispensed

q. stockholders

r. remitted

s. retention

t. movement

u. utilized

v. resemblances

w. to concern

x. current assets

y. alterations

z. attempt


Do you know the meanings of the following words? Try to match up each of them to its Ukrainian equivalent. Use your dictionary if necessary.

  1.  life span
  2.  to appear low
  3.  declared profit
  4.  to write off
  5.  depreciation
  6.  to save up
  7.  replacement
  8.  book value
  9.  straight line depreciation
  10.  declining balance depreciation
  11.  residual value

  1.  straightforward calculation
  2.  return
  3.  fixed percentage
  4.  to apportion
  5.  to subtract
  6.  running costs
  7.  maintenance costs
  8.  earning power
  9.  susceptible
  10.  obsolescence

а) накопичувати ( гроші)

б) балансова вартість

в) рівномірне нарахування зносу

г) прибуток, надходження

д) виявитися низьким

е) вираховувати, відраховувати

є) експлуатаційні витрати, виробничі витрати

ж) тривалість життя

з) метод дегресивної амортизації

и) зниження вартості

і) заміна

ї)стабільний процент

й) експлуатаційні витрати, витрати на технічне обслуговування та поточний ремонт

к) списувати суму

л) здібність давати прибуток

м) підвержений чомусь, сприйнятливий до

н) моральне застаріння  

о) рівномірно розподіляти

п) пряма калькуляція

р) остаточна вартість

с) декларований прибуток

Pre-reading task

Work in small groups.

Now you are going to read about the valuation of fixed assets. In what way does it relate to depreciation?

Preface each answer with one of the following according to what is true for you:

I consider that…

Speaking of…

As far as I know…

I am not completely certain that…

If  I make no mistake…


  1.  Read text 11. How much of the information did your group already know?


Valuation of assets

The only sure way of knowing what an asset is worth to a business is by offering it for sale. Fixed assets such as machinery and vehicles have a limited life span, although at times it can run into decades. So far we have referred to the “life” of a machine as if this was a fixed period of time. The life span of a machine can vary according to the situation in which the business finds itself. Museums contain many examples of working machines that are obviously still in existence but whose usefulness is over. Throughout its life an asset's value is falling. If this change in value is ignored the profit declared by a business can appear low compared with the amount of capital employed. It is usual, therefore, to write off some of the value of the machine each year. This appears as a charge on the profit and loss account before tax is paid. This charge is called depreciation.

By depreciating its fixed assets a business saves on tax and increases profit. However, depreciation itself is not a method of saving up for replacement machinery. That is a decision taken separately by the business when deciding how to use its profit. Depreciation reduces the book value of an asset, i.e. its value after depreciation has been charged. The book value does not reflect the market value of the asset and in itself depends on the method of depreciation used.

The two most common methods of depreciation are straight line depreciation and declining balance depreciation.

1.  The straight line method of depreciating assets reduces the book value of the asset by the same amount for each year of its life. An asset which cost £12 000 with an expected life of ten years and a residual value (that is the amount the business expects to sell the machine for at the end of its working life) of £2000 would be depreciated by £1000 per year:

(Cost of asset - Residual value)/ Life of asset

Figure 1 Straight line depreciation         Figure 2 Declining balance depreciation

Book value                                                                  Book value

12                                                                                     12

10                                                                                     10

8                                                                                         8

6                                                                                         6

4                                                                                         4

2                                                                                         2

1                      Residual value                                     1                          Residual value

0         1   2   3   4   5   6   7   8   9   10                               0        1   2   3   4   5   6   7   8   9   10

                   Time (years)                                                          Time (years)

Straight line depreciation is a simple and straightforward calculation. It gives a higher level of profit to the business in the first years of the life of the machine and is particularly useful when the business is expecting constant returns over the life of the asset. This is shown in Figure l.

2. The declining balance method of depreciation reduces the book value of the asset by a fixed percentage calculated to apportion the value of the machine after residual value has been subtracted from initial cost over the expected life of the machine. This means that depreciation is highest in the early years of the life of the machine. The use of the declining balance method takes into account that as the machine grows older its running and maintenance costs are likely to increase and its earning power will decrease. As a machine gets older it is more susceptible to obsolescence and may be more difficult to sell. Figure 2 shows declining balance depreciation using the data from Figure 1.

  1.  Comprehension check.

Read the text again more carefully. Choose the correct answer from a, b, c.

1. To become aware of an assets value means:

b) to see it

c) to buy it

d) to change it

2. Fixed assets are:

a) petrol and oil

b) machinery and vehicles

c) stock and debtors

3. During a life span an asset’s value:

a) does not change

b) decreases

c) increases

4. Some of value of fixed assets is necessary:

a) to charge each year

b) to write off in a year

c) to write off each year

5. Writing off some of value is:

a) a charge on the profit and loss account after tax is paid

b) a charge on the profit and loss account before tax is paid

c) a charge on the profit and loss account

6. Deprecation of fixed assets means:

a) to economize on tax and increase profit

b) to economize on tax and decrease profit

c) to understate taxes and increase profit

7. To depreciate the book value of an asset is:

a) to reduce the book value of an asset

b) to increase the book value of an asset

c) to control the book value of an asset

8. The book value does not reflect:

a) historical value of an asset

b) cost value of an asset

c) market value of an asset

9. How many methods of depreciation exist?

a) one

b) four

c) two

10. What method of depreciation does not exist?

a) the straight line method

b) the declining balance depreciation

c) the progressive balance depreciation

11. The straight line method of depreciating assets:

a) reduces the book value by the fixed amount for each year of its life

b) reduces the book value by the same amount for each year of its  life

c) reduces the book value by the amount increasing each year

12. The declining balance method indicates that:

a) deprecation is lowest in the early years of the life of an asset

b) deprecation is highest in the early years of the life of an asset

c) deprecation is the same each year of the life of an asset

13. The use of the declining balance method takes into account that as an asset grows older:

a) its running and maintenance costs increase

b) its production and distribution costs increase

c) its running and maintenance costs increase

  1.  Read the text once again. Find words in the text that mean the opposite of the following.

  1.  to be of little value
    1.  to reject
    2.  purchase
    3.  to raise
    4.  stability
    5.  taken into account
    6.  hidden, concealed
    7.  saved, economized
    8.  increase in a book cost of fixed assets
    9.  loss
    10.  installation, setting up
  1.  historical, purchase value
    1.  partial
    2.  value, price
    3.  curve line
    4.  variable
    5.  added
    6.  final cost
    7.  grow younger
    8.  desolation, neglect
    9.  unprofitability

  1.  Solve the problem. An assets cost £20000. Its residual value is expected to be £2000 and its life span is six years. The business concerned uses the straight line method of depreciation. By how much will it reduce the book value of machine each year?


  1.  A machine costs £30 000 and has a useful life of five years. At the end of that time it will have a residual value of £5000. The business decides to use the declining balance method of depreciation. The figures are as follows:

Year Depreciation  provision                                           Net book value

  1.  9035                                                                          20965
  2.  6314                                                                          14651
  3.  4412                                                                          10239
  4.  3084                                                                            7155
  5.  2155                                                                            5000

a. What is meant by the terms:

І  residual value?

ІІ depreciation?            

ІІІ net book value?    

b. From the data given and using the same axes draw graphs to show the effect on   the book value of using:

i the straight line method of depreciation,                                        

ii the declining balance method.                                                

c. Give one reason why the business might have decided to use the declining balance method of depreciation.

d. State and explain three factors which influence the life of an asset.        

  1.  The information given below is a summary of the transactions of a small business during its first year of trading.


Cash received

                Cash paid

Proprietor's funds


For stock


Loan from bank


For rent of premises


Sales revenue


For fixtures & fittings


For rates


For administration


Owner's drawings


Heating & lighting


The following information is also available at the end of the accounting period:

  •  the business is owed £2000 by its customers.
  •  there is a stock of goods worth £5000.
  •  cash and bank balances total £1000.
  •  the business owes suppliers £4000.
  •  cost of lease £10 000.
  1.  Draw up the profit and loss account for the firm at the end of the first year of trading.
  2.  Draw up the balance sheet of the business at the end of the first year of trading,
  3.  What other information would you need in order to estimate the business’s chances of survival?

  1.  Щоб оволодіти лексичними одиницями, необхідними для розкриття сутності витрат у бізнесі, виконайте вправу 1 (Оцінюється в 2 бали).

Exercise 1. Do you know the meaning of the following words? Try to match up each of them to its Ukrainian equivalent. Use your dictionary if necessary.

  1.  cost (s)
  2.  to incur
  3.  corresponding costs
  4.  to attach to
  5.  fixed costs
  6.  to tend to be unaffected
  7.  output
  8.  to meet the costs
  9.  capacity
  10.  to operate at less than full capacity
  11.  average fixed cost
  12.  when setting prices
  13.  variable costs
  14.  to consume
  15.  to assume
  16.  a bulk discount
  17.  semi – variable costs
  18.  marriage
  19.  direct costs
  20.  direct labour
  21.  direct materials
  22.  indirect costs

  1.  indirect materials
  2.  stores
  3.  lubricants
  4.  indirect labour
  5.  supervision costs
  6.  marginal costs
  7.  imputed (implicit) costs
  8.  monetary value
  9.  opportunity cost
  10.  to lay off
  11.  labour costs
  12.  production costs
  13.  advertising costs
  14.  distribution costs
  15.  storage costs
  16.  selling costs
  17.  administrative costs
  18.  cost price
  19.  manufacturing cost
  20.  operating costs
  21.  cost analysis
  22.  cost of sales

  1.  витрати виробництва
  2.  припиняти роботу (підприємства); звільняти (робітників)
  3.  витрати на робочу силу
  4.  непрямі матеріали
  5.  обігові витрати
  6.  труд підcобних робітників
  7.  тісний союз
  8.  витрати на реалізацію
  9.  мастильні матеріали
  10.  аналіз витрат

  1.  припускати, вважати
  2.  граничні витрати
  3.  середні витрати на одиницю продукції
  4.  продуктивність, випуск продукції
  5.  терпіти (збитки), нести (збитки)
  6.  експлуатаційні витрати
  7.  пов’язувати з чим – небудь
  8.   торгові витрати
  9.  при призначенні цін
  10.  витрати на зберігання
  11.  жива праця, основна робота
  1.  заводська собівартість, виробничі витрати
  2.  відповідні витрати
  3.  витрати на рекламу
  4.  мати тенденцію не змінюватися
  5.  адміністративні, управлінські витрати
  6.  постійні витрати
  7.  працювати при неповному завантаженні потужностей
  8.  витрати на контроль
  9.  виробнича ціна, собівартість продукції
  10.  собівартість, витрати
  11.  споживати
  1.  матеріально – виробничі запаси
  2.  знижка на великий обсяг замовлення
  3.  непрямі витрати
  4.  покривати вартість
  5.  прямі витрати
  6.  грошова оцінка
  7.  вмінені витрати
  8.  обсяг, здатність; потужність, продуктивність
  9.  перемінні витрати
  10.  основні виробничі матеріали
  11.  напівперемінні витрати
  12.  витрати в результаті прийнятного альтернативного курсу

2. Постарайтесь дати відповіді на запитання, використовуючи фрази:

As for this problem…          I am afraid that I don’t know…

It may be assumed that…    I am not quite sure that…

It is essential for…

Do you have any idea about fixed and variable costs?

Do you know anything about them?

3. Прочитайте швидко (за 2-3 хвилини) текст 12 і скажіть, чи підтвердилися ваші припущення.


  1.  Read text 12. How much of the information did your group already know?

Text 12


Costs are incurred by all the activities a business undertakes. Every decision, no matter how small, involves a corresponding cost. The importance which should be attached to cost in any business enterprise cannot be surprising when it is remembered that:

Profit = Revenue - Costs                      

Some basic cost definitions are given in this text.

Fixed costs

Fixed costs are those costs which, over a given period of time, tend to be unaffected by changes in output. For example, a factory capable of producing 100000 engineering parts in a certain period of time might have fixed costs in terms of rent, heating, lighting and the cost of machinery of £100 000 in that time. If the factory only produces 80 000 units it will still have to meet the costs associated with 100 000 units.

The total number of goods and services a business is capable of producing is known as its capacity. You should realise that businesses offering services will also have a limit to the total amount they can provide for their customers. A hairdressing salon has a given number of seats, sinks, dryers and stylists. A restaurant is limited in the number of meals it can supply by its kitchen capacity, by seating accommodation, the number of staff, and on the number of meals they can serve. The TV engineer is limited by level of skill and the time spent on the number of repairs possible in one day.

When a business produces less than the amount of which it is capable we say it is operating at less than full capacity. This is usually expressed as a percentage of full capacity:

(Number of units produced x 100) / Capacity of business

In the example given above this would be:

(80000 x 100) / 100000 = 80 per cent

Figure 1 Fixed costs                                 Figure 2 Avarege fixed costs declining as                                                        output increases

 Costs                                                                           Costs

300                                                                                     5


200                                                                                     3                                                                                     

                                                    Fixed cost                                    

100                                                                                     1                      Average fixed costs



0         10   20   30   40   50   60   70   80   90   100         0        10   20   30   40   50   60   70   80   90   100

                               Output                                                                      Output

Figure1 shows the position of a business with a capacity of 100 000 at a fixed cost of £100 000 in a given period of time.

Average fixed cost is the proportion of total fixed costs carried by each item produced and is calculated by dividing total fixed cost by output. When the business described above is producing at full capacity then the average fixed cost will be £1. When it is operating at 80 per cent capacity the average fixed cost will be £1.20.

Try the same calculation for different levels of output for the above business. You should find that the lower the level of output the higher the average fixed cost. This fact has a significance for businesses when setting prices and deciding whether or not to accept a particular order. Figure 2 shows average fixed costs decreasing as output increases.

Variable costs

An increase in output will tend to lead to an increase in the amount of raw materials being used, an increase in the power consumed and an increase in certain types of labour. These costs are known as variable costs because they vary with output.

The simplest example of variable costs assumes that the cost of raw materials, labour and power will be the same for each unit produced regardless of the level of output. This simplifying assumption is made to illustrate the concept of variable costs. A business might find that raw material costs decline as output increases because suppliers are willing to reduce the price of orders above a certain size (a bulk discount).

Variable costs of £2 per unit produced (the average variable cost) would result in total variable costs of £20 000 at an output of 10 000 units, £40 000 at an output of 20 000 units and so on until the maximum capacity of the plant was reached. This would give a straight line graph as illustrated in Figure 3.

Figure 3 Variable costs

                                 Costs (£ 000)










              20                                       Total variable costs



             0            10   20   30   40   50   60   70   80   90    100  


Semi-variable costs

The rent of a hired car is a fixed cost, the petrol to keep it running is a variable cost. This marriage of fixed and variable costs is common in business.

Direct cost

Direct cost is a cost that can be clearly allocated to a particular product. The labour and materials will be referred to as direct labour and direct materials.

Indirect costs

Indirect materials will cover stores that are used for all departments, for example lubricants for machines. Indirect labour will include the cost of supervision and maintenance.


A business performs a number of other functions in addition to production, for example marketing, personnel, research and development and finance. Costs which are clearly attributable to one of these functions are termed overheads. They include labour, materials and expenses.

Marginal costs

In economic theory marginal cost is defined as the cost of producing one extra unit of output. It is calculated by subtracting the total cost (total fixed costs + total variable costs) of the first level of output from the total costs of the second level of output. Accountants use the same basic definition of marginal cost but use only direct costs in its calculation.

Imputed costs

His is the cost of using something the business already owns. It can be seen as a method of giving a monetary value to the opportunity cost of using a resource.

Classification of costs

The classification of a cost varies according to the use of resource and the purposes of the classification. Labour, for example, can be classified in a variety of ways.

  •  Labour employed in the production of a good or service is a direct cost.
  •  Labour employed in selling a product is an overhead, unless of course that labour is employed in retailing, when it may be classified as a direct cost.
  •  Labour which can be laid off when output falls can be classified as a variable cost. A production line worker might be classified as both direct labour and as part of variable costs.
  •  When agreements between management and unions make it impossible to lay off labour then labour costs must be regarded as fixed for the period of time covered by the agreement. This situation might also arise if management has a policy of continuous employment.

  1.  Comprehension check.

Working in pairs, answer the questions:

  1.  Distinguish between fixed costs and variable costs.

Can you give your own example of semi – variable costs?

What is the difference between direct cost and indirect costs?

What costs belong to overheads?

How are marginal costs calculated?

What is the definition of imputed costs?

  1.  Solve the problem.

Given that a business can produce 150000 items in a month; its fixed costs per month are £ 10000; the average variable cost is £ 5 per unit and it is operating at full capacity. What is the cost per unit? Calculate the total production costs.

*4. The owner of a business described in task 3 wishes to make a profit equivalent to 25 per cent of production costs. At what price should the output be sold?

 5. Sketch a variable cost curve to show what happens when unit variable costs  decline as output increases.

*6. State one problem a business might experience in deciding on imputed cost.

 7. Read the definitions below, then complete the phrases that follow by combining an appropriate word from the box with cost (s).

price             manufacturing                  fixed               operating

variable            labour                 selling              analysis               sales

1  Usual expenses such as rent, heating, lighting, which are not changed by the volume of production.                                    ………….. costs

2.  Expenses which increase with increased production, e.g. labour, raw materials. ………….. costs

3   All costs directly related to production.                ……………… costs

4   All costs directly related to getting someone to buy a product.  ………. costs

5   The cost of employing workers and staff.                  ………………. costs

6   The costs for the day-to-day running of a company or business.      ……. costs

7   Selling at a price which is exactly what the product has cost to make.

     cost ……………..

8   The study of all likely costs associated with a product.     cost……

9   The total costs for all products sold.         cost of…………

Pre-reading task

The words and word combinations in the box make a key vocabulary of the text you are going to read. Use your dictionary if necessary.

What is this text about?

break – even point                                            selling price

the lowest possible output                                intersect                          

revenue                                                             total profit                                       

irrespective of                                                   similar

curve                                                                 calculation

origin                                                                 total losses

equation                                                             margin of error

vertical axes


  1.  Read text 13 and think of the suitable title

Text 13

 What is the lowest possible output at which a business can operate without losing money? The answer is called the break-even point. At this level the costs of production are exactly the same as the revenue received from sales, assuming the whole output is sold. The break-even point is illustrated graphically in Figure 4.

Figure 4 Break – even chart

                                 Costs/ revenue (£ 000)




                 400                                      3 Revenue

                 350                                                           5


             250   4 Break – even point                  2 Total costs


             150                                              1 Fixed costs


              50          6                                 7                              


             0            10   20   30   40   50   60   70   80   90    100  

                                         Output (000s)

1. Fixed costs stay the same irrespective of output.

2. Total costs = total fixed costs + total variable costs. As we saw in Figure 3 the total variable cost curve passes through the origin. By introducing fixed costs we have added a constant to the equation which defines the curve. The total cost curve always cuts the vertical axis at the level of fixed costs.

3 The revenue line is found by multiplying the selling price of each unit by the level of output. In this instance the selling price is £4.

4 The point at which the revenue curve and the cost curve intersect is the break-even point.

5 To the right of the break-even point revenue is greater than total cost. The vertical difference between the two curves at any given point will give the total profit.

6 To the left of the break-even point a similar calculation to that described in 5 will give the total losses of the business at any given level of output.

7 If the business is operating at 70 per cent capacity it will still make a profit. The difference between the output at which a business is operating and the break-even output is known as the margin of error.

  1.  Comprehension check.

  1.  Reading from the information given in Figure 4, state whether or not the business will be making a profit or loss at each of the following levels of capacity: 20000, 35000, 55000, 70000, 90000.
  2.  What is the margin of error when output is 80000 units?


Look at the diagram below showing the break-even point for a business. Then complete the description below using words from the box.

break - even point       loss             sales revenue       variable costs

fixed costs                   profit            total costs


                                                                                                   Sales revenue



                                                                                                       Total costs


                                                                                                   Variable costs


                                                                                                   Fixed costs




                   0                    break – even point                Amount of sales     


The horizontal line shows (1)........................ The dotted line which starts at point 0 shows the (2).......................... for different levels of sales. The (3)....................... are fixed costs and variable costs combined. The solid line starting at point 0 shows the (4).............................................. at different levels of units sold. Point X is the (5)........................ To the left of point X, the business is making a (6)................... To the right, the business is in (7).......................


Use your dictionary to look up any new words.

  1.  Write the following words in the correct column.

absorption   fixed   produce (2)     result (2)     approach(2)   job     packaging  plant (2)   brand (2)        cope with  blend (2)     perforation(s)

design(2)        distinctive      aim (2)             acquire      allocate     length

useful   valuation      reliable    guidance     involve       subjectively   objectively

marginal  accept   short-run     operate  distinction   revenue contribution loss  lease (2)          regret(2)       decline(2)      trading  legally  liable  

incur   staff (2)         expenses  leading(2)         mail(2)           supply(2)      inclination     closely    include   contribute     overall      objective(2)     record (2)   performance    indication       clarify    discover    increase(2) variance  box (2)

Nouns (36)

Verbs (28)

Adjectives (10)



  1.  Which verbs in A can go with nouns in B?

E.g: to make teabags


make cope with  involve  accept  minimize  discontinue   suggest generate  produce  reduce  include  do  cover  introduce  set   clarify  calculate


distinction  look at  method teabags variance trading brands revenue calculations   target   services  costs   product debt decisions losses  order

    Combine a word in A with a word in B to form a suitable noun phrase.

E.g: absorption costs.

A                                                             B   

1) absorption                                      1) tea        

2) fixed   2) statistics

3)  packaging                                      3) costs

4) different                                          4) area (s)

5) particular                                         5) shop

6) general 6) plant

7)finished 7) expenses

8) semi – finished                                8) catalogue

9) reliable                                             9) element

10) marginal                                        10) calculation

11) certain         11) indication

12) full   12) costing

13) direct   13) gates

14) a loss – making            14) performance

15) trading   15) brand

16) living     16) process

17) steel  17) goods

18) summer    18) figures

19) rapid      19) capacity

20) indirect

21) standard

22) detailed

23) production

24) historic

25) important

26) better

27) clear

28) inefficient

29) actual

30) total

Pre-reading task

Work in small groups.

You know already that costing is the process of identifying and allocating the costs associated with the production of a good or service. Each business enterprise facing the wide variety of problems uses a number of costing techniques. Do you have any idea what these techniques are?


  1.  First read text 14 quickly. Can you find any proofs of your suggestions?

Text 14

Costing methods

In this text we will examine just three of the costing methods.

Absorption costing

Absorption costing absorbs the fixed costs and overheads into the production of a good. In a single product business, absorption costing would produce the same result as the total cost approach. In many businesses the same machine can be used for a number of jobs.

A tea packaging plant makes teabags and boxes them for a number of different

brands all produced by the same company. There is no difference in the size of the teabag or box used and the same machinery copes with all brands. The blends of tea used differ, the number of perforations in the teabag differ between blends and the design of the packaging is distinctive according to the market at which it is aimed. How should the costs of acquiring and running the machines be allocated to each brand?

The costs can be allocated according to the length of time the machinery is used for a particular tea. Thus if the total cost for the running of the machinery over a period of time is £20 000, Brand A might have used the machines for 40 per cent of the time and will be, allocated costs of £8000; Brand B is allocated £5000; and Brand C £7000.

Absorption costing is useful in giving a general cost of production, in the valuation of  stocks of finished and semi - finished goods and in the allocation of fixed costs between goods when there are reliable production statistics for guidance. It is less useful in the allocation of overheads. When overheads involve services to a product they are difficult to cost subjectively and expensive to cost objectively.

Marginal costing

This method is useful if a business has to make decisions on whether or not to accept an order, or whether or not to continue in business. Marginal costing accepts that, in the short run, certain costs are fixed and must be paid by the business whether or not it continues in operation or is operating at full or less than full capacity.

In the definition of marginal cost a distinction was made between an economist's and an accountant's definition. We will use the accountant's definition in the discussion of marginal costing, i.e. direct costs of production subtracted from revenue. This ignores fixed costs. They have to be paid so any contribution towards them minimizes the losses of the business in the short run.

A loss-making shop has six months to run on its lease, the cost of which is £5000 per year. The owner of the shop regrets renewing the lease, business had already begun to decline at that point, and wishes to discontinue trading. The accountant is less positive, and suggests a closer look at the trading figures. The owner of the shop is legally liable for £2500. To continue trading would incur the cost of bought in stock, heating, lighting, staff and other expenses to a total of £31 000, but would also generate revenue of £33 000.

So the owner of the shop would be worse off by stopping trading than by continuing. Stopping trading with six months to run on the lease will produce a debt of £2500. Continuing trading would reduce that debt to £500 - assuming, of course, that living expenses have been taken into account!

Arkwrights mass produces pressed steel gates. The cost of a single gate to fit a three foot opening is £30, of which £10 can be classified as indirect cost. A leading mail order company approaches Arkwrights and asks them to supply 500 gates at £28 per gate. Arkwrights' first inclination is to refuse. They then look at the order more closely. Their busiest time is in the summer when they operate at 100 per cent capacity. This order is for the period September to December when they operate, on average, at 200 under capacity. The mail order company will be including the product in their spring/summer catalogue which is sent out to agents in February. Arkwrights do some rapid calculations.

  •  Indirect costs are £10 per gate.
  •  Direct costs are £20.
  •  It would receive £28 in revenue.
  •  £20 would cover the direct costs of production and it would have £8 to contribute to a lowering of their indirect costs.

Arkwrights accepted the order.

Standard costing  

Standard costs are decided in advance of production. In this it is similar to budgeting but unlike budgeting, it is limited to the detailed costs of the production process and takes no account of the overall objectives of the business.

Records of historic costs are, of course, an important element in deciding standard costs. It is also possible to introduce a target into the system. If the targets set are realistic then they can act as motivators to better performance, as well as giving managers a clear indication of the inefficient areas of their operation. The following example will help clarify the method:                          

A department has been given a standard cost for labour of £3.00 per hour. At the end of the accounting period it is discovered that the actual cost of labour was £4.25, an increase of over 40 per cent. Part of this increase could be the result of a negotiated pay rise. On the other hand it could be the result of inefficiencies in other parts of the organization that resulted in an unacceptable level of overtime being worked.

The difference between the standard cost and the actual cost is known as the variance. The variance for labour, from the example given above, can be calculated as follows:

(standard quantity x actual cost) / (quantity x standard cost).

  1.  Comprehension check.

Read the text again more carefully. Choose the correct answer for each statement from a, b, c.

1. Absorption costing absorbs:

  a) fixed and storage costs

  b) fixed costs and variables

  c) fixed costs and overheads

2. In a single product business absorption costing would provide the similar outcome as:

  a) the standard cost approach

  b) the total cost approach

  c) the travel cost approach

3. How should the costs of acquiring and running the machines be allocated to each brand?

  a) according to the length of time the machinery is used for a particular tea box

  b) according to the cost of machinery for a particular tea

  c) according to the length of time the machinery is used for a particular tea

4. Absorption costing is useful in:

  a) the valuation of stocks of finished and semi – finished goods

  b) the reduction of stocks and semi – finished goods

  c) the giving a sale value of finished and semi – finished goods

5. Absorption costing is less useful in:

  a) the allocation of direct costs

  b) the allocation of overheads

  c) the allocation of standard costs

6. Marginal costing is useful in making a decision on whether or not:

  a) to valuate stocks of finished and semi – finished goods

  b) to stop variation of stocks of finished goods

  c) to continue in business and to accept an order

7. Marginal costing accepts that in the short run:

  a) certain costs stay permanent and must be paid by the business

  b) certain costs are to be declared and must be paid by the business

  c) no costs are fixed and must be paid by the business

8. Marginal costing ignores:

  a) indirect costs

  b) semi – variable costs

  c) fixed costs

9. The owner of the business would suffer greater losses:

  a) by stopping trading

  b) by continuing trading

  c) by launching a new line in trading goods

10. Standard costs are calculated:

  a) during product life cycle

  b) in advance of production

  c) on completion of production

11. The difference between the standard cost and the actual cost is known as:

a) the overstating of norms

b) the revision of norms

c) the variance

  1.  Write down the names of costing methods and give definitions of these methods without looking into the text.


State one advantage and one disadvantage of each of the costing methods described in the text. Give specific reasons to support your answer.




  1.  Match the following Ukrainian words with their English equivalents. Use your dictionary if necessary.

  1.  придбання
  2.  знаменник
  3.  багатство, достаток
  4.  слухатися, коритися
  5.  вексель
  6.  процентна ставка
  7.  обмежувати
  8.  джерела грошових фондів
  9.   відшкодувати витрати
  10.   тверда заробітна плата
  11.   одержувати, добувати
  12.   витрати
  13.   інвентар
  14.   приладдя
  15.   вважати, розглядати
  16.   нездійсненний
  17.   філія, дочірня компанія
  18.   викуп контрольного пакету акцій компанії її керівниками та службовцями

  1.  розподіл на частини
  2.  кількісний; той, що підлягає обліку
  3.   здоровий глузд
  4.   показник; ознака; вказівка
  5.   впливати, вплинути
  6.   передовий, сучасний
  7.   витрати на навчання
  8.   кваліфікований труд
  9.   спотворювати; перекручувати
  10.   основне обладнання
  11.   податкові поступки, податкові пільги
  12.   дотації, субсидії
  13.   мінімально ефективний
  14.   процвітаючий
  15.   підбадьорювати, заохочувати
  16.   шукати, розшукувати
  17.   спад
  18.   трудозберігаюче обладнання

  1.  indication
  2.  wealth
  3.  quantifiable
  4.  to influence
  5.  training costs
  6.  to distort
  7.  recession
  8.  marginal
  9.  to encourage
  10.  labour saving machinery
  11.  denominator
  12.  judgement
  1.  skilled labour
  2.  flourishing
  3.  capital equipment
  4.  advanced
  5.  acquisition
  6.  source of funds
  7.  set wage
  8.  outgoings
  9.  to restrict
  10.  fittings
  11.  bill

24) impracticable

  1.  management buy-out
  2.  grants
  3.  to seek
  4.  tax concessions
  5.  to obey
  6.  breakdown
  7.  subsidiary
  1.  to regard
  2.  fixtures
  3.  to draw from
  4.  to meet expenses
  5.  interest rate

Pre-reading task

Work in small groups.

Can you answer the following questions?

  •  Do you have any idea of the asset structure of a business?
  •  Why can the asset structure of two businesses in the same industry differ? Express your thoughts.

Preface each answer with one of the following according to what is true for you:

As far as I remember …

I guess I know …

I am uncertain

I am not quite sure that …


  1.  Read text 15 How much of the information did your group already know?

Text 15

The use of funds

A study of finance of a business is concerned with three areas:

  1.  the monetary resources of a business;
  2.  the acquisition of monetary resources by a business;
  3.  the effective management of monetary resources.

The common denominator of each of the three areas is the word monetary. Money, in whatever form a society uses it, represents the claim of an individual, a business, an organization or the state on the collective wealth of the society. In other words how much money you hold is your slice of the cake of national wealth. Whether or not the cake is shared fairly is a problem for politicians and will be decided by the culture of a society We are concerned with how accumulated wealth, that is wealth that has been saved rather than consumed, is shared amongst the people who want it.

In simple terms money is a resource and it obeys market forces. Unlike other goods money is not bought or sold; it is borrowed and lent. The documents which record the transaction of borrowing and lending (referred to as bills and stocks) are bought and sold. The price of using money is the interest rate. If there is a comparatively large amount of money available compared with the demand for it then the interest rate will tend to be low. Should demand rise or the supply of money be restricted then the interest rate will rise.

However, the situation is not quite so simple. Market power operates in the money market just as it does in other markets. The government, for example, is a major borrower and, as a result, is in a position to influence the interest rate.

In this unit we will look at the sources of funds in more detail and examine some of the techniques a business will use in making decisions about the use and management of the funds available.

In the simplest terms a business spends money on acquiring factories and equipment, on buying in the stock to carry on the business and in paying labour and other necessary expenses. Let’s look at the following example:

A couple own and jointly run a small general store in an inner city area. They live in a flat over the shop. Property prices in the area are not high and they were able to buy the leasehold of the shop and flat for £20 000. Stocking the shop needed another £20 000, with a further £5000 each year to meet expenses. In common with many other small businesses the owners did not pay themselves a set wage. Instead they drew enough money from the business each week to meet their immediate expenses and reserved large items of personal expenditure for times when the cash balance of the business was sufficiently high, in their judgment, to cover foreseeable business outgoings and still leave a surplus. At 31 December 2004 the cash balance of the business stood at £15 000.

At 31 December 2004 business employed a total capital of £55 000. Of this approximately 36 per cent was invested in fixed assets (buildings, fixtures and fittings), a further 36 per cent in stock and approximately 27 per cent in liquid assets (cash). The flat in which the couple lived has been regarded as part of the business because it would be impracticable for it to be let or sold separately from the business. Now look at the next example:

A multinational company decided to sell one of its subsidiaries. Three members of the existing management team decided to buy the business. (This is known as a management buy-out). The price was £10m. For this the new owners got the factory, machinery, existing stock and orders and the right to use the trade name under which the products were already being sold. They also raised an additional £1m.

A breakdown of the asset structure of this business gave fixed assets at 60 per cent of the total, stock at 23 per cent and liquid assets at 17 per cent. Which of the two businesses had made the right decisions in deciding how they would use the money they had available to them? The decision about how a business should use its funds and what proportion it should devote to any particular use depends on a number of factors. Some are quantifiable, others depend upon skill and judgment. The following list must be seen only as an indication of the way in which a business might be influenced in the final decision.

1.The technology used A business which uses advanced technology is likely to employ a larger proportion of its total assets as fixed assets. Advanced technology is usually expensive but it can offer savings on labour and materials. If it is easier to use, it can reduce training costs and the need to employ expensive skilled labour.

2 The nature of the business An engineering firm will need the premises and machinery to carry out its work. Stock levels may be kept quite low. A retailer, on the other hand, could have relatively low fixed costs but need to hold a higher level of stock.

3 The size of the business Even within the same industry a small business might show a different asset structure from a large business. It could be that although classified as being in the same industry they are making different products, or that the smaller business cannot afford the technology available to the larger firm. Small firms might have to buy stocks in larger quantities than they need, but a larger business with greater market power can regulate its stocks according to its needs.

4 The stage of development A new or expanding business is likely to have a distorted asset structure compared with a business in the same industry in a more settled phase of its life.

5 The size of the market A business with a large, constant market for its product will be more likely to use production methods that require the use of a lot of capital equipment.

6 Management skill The asset structure of a business may also be affected by the skill of management. Bad management can produce a bad asset structure.

7 The government Tax concessions can affect the asset structure of a business, as can grants. The effect may be marginal but it still exists.

8. The state of the economy and business confidence A flourishing economy will result in an increase in business confidence and is likely to encourage a business to seek available funds for expansion. An economy in recession could result in investment in labour saving machinery.

Influences on the asset structure of a business are shown in Figure 1.

Figure 1.  Influences on the asset structure of a business

  1.  Comprehension check.

Are the following statements true or false? Correct the false ones.

  1.  Money is the demand both of natural and legal persons for the common riches of the community.
  2.  The percentage that a bank charges or pays for utilization of money is the interest rate.
  3.  Demand fluctuations for available money cause changes in interest rate.
  4.  Being the principal lender of money the government can affect the interest rate.
  5.  Up-to-date know-how is costly but economizes on labour and materials.
  6.  Neither a small company nor a large business can adjust its stocks to its needs.
  7.  Poor management of a business has a bad effect on the asset structure.
  8.  The economic regress leads to investments in labour saving machinery.

  1.  Match each word on the left with a correct definition on the right. Use the grid below.

  1.  money
  2.  to save
  3.  to consume
  4.  market forces
  5.  to borrow
  6.  to lend
  7.  bill
  8.  stock
  9.  interest rate
  10.  demand of money
  11.  supply of money
  12.  market
  13.  skill
  14.  management
  15.  confidence
  16.  investment

  1.  a particular ability that involves special training and experience
  2.  commitment of resources to a particular project
  3.  an organizational role which involves planning, organizing, controlling, communicating and co-ordinating in order to achieve set objectives
  4.  represents the claim of an individual, a business, an organization or the state on the collective wealth of the society
  5.  an amount or quantity of money that is available to use
  6.  the price of using money
  7.  to use a good or service not necessarily making the purchase of it
  8.  the economic influences that affect prices, salaries, and the number of jobs available and are not controlled by the government
  9.  the amount of money that people want, or the fact that they want it
  10.  to keep or store something so that you can use it in the future
  11.  the belief that someone or something is good and you can trust them
  12.  to receive or use something that belongs to someone else, and promise to give it back to them later
  13.  a particular place or group of people that a product is sold to
  14.  the total equity capital of a company, held by shareholders in the form of shares
  15.  to give someone something for a short time, expecting that they will give it back to you later
  16.  a written statement showing how much money you owe someone for goods or services you have received



















Write the review of the text 15.


Do you know the meaning of the following words? Try to match up each of them to its Ukrainian equivalent. Use your dictionary if necessary.

  1.  subsequently
  2.  ploughed back profits
  3.  legal proceeding
  4.  bankruptcy
  5.  involuntary liquidation
  6.  interest on debt
  7.  retained profits
  8.  to tie up
  9.  to convert
  10.  stock exchange council
  11.  stringent
  12.  to be aware of
  13.  Unlisted Securities Market

  1.  safeguards
  2.  to dispose of
  3.  prevailing
  4.  rights issue
  5.  to underprice
  6.  tender
  7.  preference share
  8.  rate of return
  9.  to declare a dividend
  10.  cumulative preference shares
  11.  arrears
  12.  redeemable preference shares
  13.  articles of association

а) конвертувати, перебудовувати

б) усвідомлювати

в) міри безпеки, захист

г) укладати гроші у що-небудь

д) кумулятивні привілейовані акції

е) згодом, потім, пізніше

є) борг, заборгованість, несплачена по рахунку сума, недоїмка

ж) статут акціонерної компанії

з) нерозподілений прибуток

и) банкрутство

і) привілейовані акції, котрі можуть бути погашені за рахунок резервів компанії

ї) тендер, заявка на торгах, заявка про підписку на цінні папери

й) недобровільна ліквідація

к) рада фондової біржі

л) ринок цінних паперів, котрі не котируються

м) випуск акцій для розподілу серед акціонерів, що надає їм право придбання нових акцій відповідно до кількості акцій, котрі вони вже мають

н) капіталізований прибуток

о) норма прибутку; норма рентабельності

п) процент по заборгованості

р) проголошувати про виплату дивідендів

с) встановлювати надто низьку ціну

т) привілейована акція

у) переважний, поширений

ф) суворий, скрутний (про гроші), напружений

х) розпоряджатися, продавати, збувати

ц) судовий процес

Pre-reading task

Work in small groups.

Can you answer the following questions?

  •  Do you know anything about sources of finance for any business?
  •  Owners’ capital has some advantages and disadvantages. Do you have any idea about what they are?
  •  Can you identify the difference between ordinary and preference shares?

Preface each answer with one the following according to what is true for you:

I can say that …

I’d like to point out …

It should be noted …

The important thing is …

I am not sure …

I have no idea


  1.  Read text 16. How much of the information did your group already know?

Text 16

Sources of finance

There are three main sources of finance for any business:

  •  owners’ capital;
  •  borrowing from other people or organizations;
  •  obtaining goods on credit.

Owners' capital

In a small business or partnership this is limited to the personal wealth the owners put into the business at the beginning and any profits subsequently re-invested.

Methods of increasing owners' capital are listed below:

  •  sole traders and partners may use some of their private wealth to give an injection of capital to a business.
  •  sole traders may take a partner; partnerships can increase the number of partners.
  •  sole traders or partners could decide to float their business as a company.
  •  existing companies may be able to issue more shares.
  •  profits can be left in the business and used to finance further investment. These profits are sometimes referred to as ploughed back profits.

Advantages of owners' capital

1. Interest has to be paid on borrowed funds. When the interest is not paid the debtors can start legal proceedings that can result in bankruptcy or involuntary liquidation. Shareholders have no right to demand a dividend. Sole traders and partners are not required to make a profit from their business. A high proportion of owner capital can give stability to a business during its initial development and in periods of economic recession when demand might be falling.

2 The interest on debt is a fixed cost during the life of the debt. This reduces the amount of money available for the owners as profit.

3 Shareholders who do not receive the level of dividend they had hoped for can challenge the directors at the annual general meeting of the company. Theoretically shareholders can vote the directors out of office. This seldom happens in practice. A high proportion of share capital, therefore, can give the directors greater power in deciding to finance growth from retained profits.

Disadvantages of owners’ capital

1 The capital is tied up in the business throughout its life. A sole trader can overcome this problem by taking a partner; partnerships may expand in size by taking additional partners. Both sole traders and partnerships can decide to convert to companies. The owners of shares in a company can convert their holding in the company into cash only by selling their shares to somebody prepared to buy them. This is relatively easy if the company is listed on the Stock Exchange. The body that runs the Stock Exchange (the Stock Exchange Council) will accept a company for listing - and therefore for its shares to be bought and sold by members - only if it meets stringent financial requirements. People holding shares in unlisted companies find it more difficult to sell them. Aware of this problem, the Stock Exchange opened another market for shares. This is known as the Unlisted Securities Market (USM). The financial requirements needed to enter this market are less stringent than those required for listed securities but they still provide safeguards for people buying and selling shares on the Stock Exchange.

2 A high proportion of owners' capital increases the owners' risk. They may be shareholders in a listed company but if they wish to dispose of their shares at any time they may have to sell for a lower price than they paid, particularly if the dividends of the company have been low compared with the prevailing rate of interest or the dividends paid by other companies.

3 Raising money by issuing more shares is expensive in administrative costs. A rights issue, where shares are offered to existing shareholders, is the cheapest method. It is also difficult for a company to estimate the market price of its shares and, if underpriced, there is an additional cost to the company. Issuing shares by tender attempts to overcome this problem by stating the minimum price the company will accept for its shares and inviting the public to state how much they are prepared to pay for them.

Apart from the administrative costs of floating a share issue, owner capital appears the cheapest method of acquiring funds. The opportunity cost of using owner capital, that is the earning potential of alternative investment, should not be forgotten.

Preference shares

Between owners' capital and loans there is a less well-defined area of preference shares. The holder of a preference share:

  •  is not an owner of the company.
  •  receives a fixed rate of return but has no legal right to it.
  •  has priority over ordinary shareholders when a dividend is declared.
  •  has priority over ordinary shareholders when the company goes into liquidation.

Apart from these four points the rights of preference shareholders will vary from company to company. Companies design their preference shares to attract investors who do not want to take the risk of holding ordinary shares and who either do not have sufficient capital to lend to the company or wish to spread the risks of lending money. Cumulative preference shares have the right to claim arrears of dividends if the company does not pay a dividend in one year. Redeemable preference shares can be bought back by the company after a stated number of years. Some preference shares carry voting rights, others do not. The rights of the preference shareholders are laid down in the company's articles of association.

  1.  Comprehension check.

Read the text again more carefully. Here are some answers about the main sources of finance for any business. Write the questions.

  1.  __________________________________________________________________

Owners’ capital, borrowing from other people or organizations and obtaining goods on credit.

  1.  __________________________________________________________________

Using some of the private wealth, increasing the number of partners, floating a business as a company, issuing more shares by existing companies, etc.

  1.  __________________________________________________________________

Interest has to be paid on borrowed funds.

  1.  __________________________________________________________________

Shareholders can vote the directors out of office.

  1.  __________________________________________________________________

The capital is tied up in a business throughout its life, a high proportion of owners’ capital increases the owners’ risk, raising money by issuing more shares is expensive in administrative costs.

  1.  __________________________________________________________________

Companies design their preference shares to attract investors who do not want to take the risk of holding ordinary shares and do not have sufficient capital to lend to the company.

  1.  __________________________________________________________________

The rights of the preference shareholders are laid down in the company’s articles of association.


Discuss in pairs. What type of shares would you prefer to have? Why?

Pre-reading task

Work in small groups.

Now you are going to read about borrowings. Do you have any idea about different kinds of borrowings?


  1.  Read text 17 quickly. Were your ideas about borrowings correct?

Text 17


Borrowing money places an obligation on a business to repay specified amounts of the money borrowed when they are due and to meet regular interest payments of an agreed amount. This obligation remains irrespective of the size of the company. Apart from these basic principles, the terms of loan negotiated between businesses and people or organizations prepared to lend money vary according to the needs of the business and the conditions the lenders feel are required to safeguard their money. The following list of definitions will give some indication of the variety of agreements that can be made between those who borrow and those who lend.

1 Secured loans In return for granting the loan the lender insists on some asset of the business being tied to the repayment of the loan. In the event of bankruptcy or liquidation that lender will then have priority on the money from the sale of that asset for the repayment of that loan. A specialized form of secured loan is a mortgage. In this case the asset is always land or property. Unsecured loans are repaid from the fund generated by the sale of all other assets if the firm goes bankrupt or into liquidation. Lenders are less certain they will be repaid. These securities are known as collateral for the loan, i.e. properties pledged by the borrower to provide security for the lender.

2 Syndicated loans A syndicate is a group of people who join together to carry out a certain transaction. Where a great deal of money is borrowed no one person or organization may be able or willing to provide the total sum. In these circumstances a syndicate may be formed to provide the money, with members stating how much they will each lend.

3 Personal guarantee Limited liability protects the owners of a business from the need to repay debts above the amount they have directly invested in a business. A bank lending to a small limited company may demand a personal guarantee that the debt will be repaid. Effectively this removes the advantages of limited liability for the principal shareholders in that they will have to use personal assets to repay the loan if the assets of the business are inadequate.

4 Debentures These are known collectively as stock. A debenture is a long term loan which does not have to be repaid until an agreed date (its maturity). Debenture holders are entitled to a fixed rate of return each year and have priority over all shareholders. Unlike other forms of debt, debentures can be bought and sold on the Stock Exchange. The company will continue to pay the agreed rate of return to the new owner.

Because the rate of return is fixed when the loan is negotiated the price of a debenture will fluctuate according to the rate of interest. A fixed rate of interest of 10 per cent means that for every £100 the company gains from a particular debenture they will pay £10 each year to whoever owns that debenture. Let us assume that the rate of interest paid by a commercial bank on deposit accounts rises to 12.5 per cent. In practical terms it means that if a 10 per cent debenture stock is purchased at the price at which it was first issued buyers would be sacrificing £2.50 for each £100 of stock bought. The maximum price they would be prepared to pay would be one which gave them a return of 12.5 per cent, in this case £80. You should try the same calculation assuming a general interest rate of 8 per cent. The value of stock varies inversely with the rate of interest.

5. Bank loans These are possibly the simplest forms of loans available to business. The average bank manager dealing with a small to medium sized firm and responsible to head office for the performance of the branch uses a set of well-defined criteria when making a loan. Like other loans, a bank loan is for a fixed amount at a fixed rate of interest. There is likely to be a demand for regular repayments.

In practical terms a business may simply see its loans as those which will need to be repaid in the next accounting period (current) and those which have more than a year to run.

  1.  Read text 17 more carefully. Try to guess the words underlined from the context. Then use your dictionary to check the words.

  1.  Comprehension check.

Working in pairs, take turns answering the questions.

  1.  What obligation is placed on a business in case of borrowing money?
  2.  Can you differentiate between secured and unsecured loans?
  3.  What is the procedure of granting syndicated loans?
  4.  What is the main idea of the personal guarantee?
  5.  Why do debenture holders have priorities over all shareholders?
  6.  Why is a bank loan considered to be the simplest form of loan available to business?

  1.  Solve the problem.

What is the minimum opportunity cost to a small business owner who invests ₤10000 in the business when the rate of interest paid on bank deposit accounts is 9,5 per cent? What other sacrifices might be involved in this decision?

  1.  Draw a graph showing the changes in the value of stock with a nominal value of ₤100 when the interest rate changes as follows: 8 per cent, 10 per cent, 12 per cent, 14 per cent, 11,5 per cent.

Pre-listening tasks

  1.  The words and word combinations in A are in the text you will hear. Use your dictionary if necessary and match each of them with a definition in B.


  1.  financial capital
  2.  liquid assets
  3.  cash
  4.  bond
  5.  share
  6.  physical asset
  7.  stock capital


  1.  the money the company has gained from loans
  2.  the most common shares, also known as equities
  3.  to close a business and sell everything it owns, usually in order to pay money that is owed
  4.  the money paid to shareholders out of profits
  5.  money available to purchase capital goods (machinery and equipment), goods which not directly satisfy human wants
  1.  debenture capital
  2.  loan
  3.  dividend
  4.  preference shares
  5.  ordinary shares
  6.  deferred shares
  7.  senior management
  8.  risk
  9.  regular income
  10.  investment
  11.  precedence
  12.  to liquidate

  1.  the status or importance of other people or things
  2.  commitment of resources to a particular project
  3.  assets which can be converted into money (cash) without loss of value
  4.  money that someone regularly gets from working or from investing money
  5.  shares with deferred (later) payment of dividends
  6.  a person or company considered according to how safe it is to lend them money or give them insurance or credit
  7.  notes and coins available for someone when he needs it
  8.  capital received from the company’s stocks
  9.  money provided by a bank to a customer, for an agreed purpose
  10.  the people who control and operate a business or organization
  11.  part of the capital structure
  12.  land, buildings, machinery and equipment
  13.  a document given to someone who invests money in a government or company, promising to pay back the money with interest
  14.  one of the equal parts of a company that you can buy as a way of investing money


Т2  Тhe text you are going to hear explains the essence of financial capital. Listen to it and answer the questions.

  1.  What is financial capital?
  2.  What are the key components of financial capital?
  3.  What is special about debenture capital?
  4.  How is stock capital connected with various types of shares?
  5.  What is the difference between preference and ordinary stocks?
  6.  What is special about deferred shares?
  7.  What makes debentures relatively a safe form of investment?


1. Work in pairs.

Discuss which type of share do you think offers the most advantages to the investor and why?

Work in small groups.

Say what is the difference between shares and debentures? Which do you think is the safer form of investment and why?


  1.  Read text 18 about other sources of funds and fill each gap with one of these words.

benefit   liquidity   loan   less   agreement   remains   lessee   hirer   nominated   obsolete   cause   flexible   terms   same   provide   attract   limited   reduces   account

Text 18

Other sources of funds

Medium-term funds

It is usually accepted that medium-term finance is for a period of one to five years.

1. Hire purchase Under a hire purchase a)___ goods are hired to the user who has the option to purchase them at the end of the hiring period. The ownership of the good remains with the b)___. The funds for hire purchase are provided by specialized financial companies known as finance houses. The usual practice is for the finance company to give the full purchase price to the seller of the good and negotiate repayment c)___ with the buyer. Both the seller and the buyer d)___ the seller because the availability of hire purchase can e)___ buyers; the buyers because the use of the good is immediately available, and not dependent on the accumulation of the necessary capital.

2 Leasing and hiring At first sight leasing and hiring appear to be different terms used to describe the f)___ situation, namely that a business does not own an item of capital equipment but pays to use it for g)___ period of time. This definition describes hiring. A business will lease equipment that it needs for a longer period of time. Under a leasing agreement a finance company will purchase a specific item of equipment for use by a business. The equipment h)___ the property of the finance company but the business has the sole use of it for which it pays an agreed rent. The agreement may be for a given period of time or for the life of the equipment. The terms of each agreement will vary. Specialized equipment might have a maintenance clause. The company leasing it will i)___ maintenance to avoid problems arising from inexpert handling. Where the technology to maintain a piece of equipment is generally available maintenance is more likely to be the responsibility of the j)___, that is the business leasing the equipment.

Advantages of leasing

  •  Leasing can help preserve the k)___of a business.
  •  A time lease can give the business the opportunity of keeping abreast with a changing technology.
  •  Like fixed interest loans the leasing payments are constant and are charged against the income of the business before tax is calculated. This l)___ the cost of leasing to the business and gives it some protection against fluctuations in interest rates.
  •  A servicing agreement may be both an advantage and a disadvantage to the business. A lease might state that servicing must be done by m)___ firms or their own engineers. The cost of such servicing can be high in that the leasing agreement creates a monopoly. To be offset against this are clauses that guarantee substitute equipment during the repair period.
  •  Like all fixed financial obligations, the burden becomes n)___ in real terms during a time of inflation.

Disadvantages of leasing

  •  It is a fixed obligation on the business which may be too great in a recession.
  •  Should the equipment become o)___ before the expiry of the lease it may affect the profitability and competitiveness of the business.
  •  The business has to forgo the advantages of owning the equipment.

In psychological terms, ownership may convey prestige and an impression of stability. In financial terms, assets bought during a profitable time of trading can be a security for loans in less profitable times.

Short-term funds

Funds are generally considered to be short term if they are for less than one year. A bank overdraft is an arrangement between the business and its bank to draw more money from the current p)___ to an agreed limit, than is deposited in it. An overdraft has the advantage of being q)___ and, as the amount of money on which interest is paid is reduced with each deposit, can prove a cheap form of finance. Against this is the ease with which the bank can withhold overdraft facilities. This could r)___ serious cash flow problems for a business which had come to rely on its overdraft.

The owner of a small shop selling consumer durables holds a limited amount of stock, chiefly for display purposes, and buys only when there is a firm order from a customer. The customer does not pay until the purchase is delivered. The capital available to the owner is adequate to cover these transactions for most of the year. Christmas brings a sharp increase in orders. The owner of the shop finances the Christmas trade with an overdraft. The maximum length of time for which it is needed is two months and during that period there is a steady inflow of payments, thus reducing the overdraft.

Trade credit can also be viewed as a short-term s)___. The purchaser does not have to pay for the goods immediately and during that time has the use of the money. No formal interest is paid but the sacrifice of cash discount has the same effect.

  1.  Comprehension check.

Say if the following statements are true or false. Correct the false ones.

  1.  On expiry of the hiring period goods being hired by purchasers can become their property.
  2.  To name the full purchase value of a good and discuss pay back terms is the duty of finance house.
  3.  Maintenance clause is typical both of leasing and hiring agreements.
  4.  A bank overdraft can be a cheap form of finance for a business.
  5.  Servicing a loan is a fixed charge on the business.
  6.  The major advantage of a usual trade credit is an immediate payment for the goods.

  1.  Read the text again more carefully. Make a list of key words from each paragraph.


Work in pairs.

Using the key vocabulary that you have made in the previous task, discuss what you have learnt about leasing and hire purchase.


A small business intends to increase stock levels in anticipation of a seasonal increase in demand. The owner wants to know the relative advantages and disadvantages of financing the purchases by cash, trade credit or a bank overdraft. Write a paragraph advising the owner on the best course of action.


  1.  Read text 19 using your dictionary to help with new words.

Text 19

Management of working capital

Working capital

Working capital is defined as the excess of current assets over current liabilities, otherwise known as net current assets. The current ratio can be defined as:

Current assets / Current liabilities

and thus a frequently quoted ideal ratio is 2:1. It is this excess of current assets over current liabilities that provides the business with the capital it needs to carry on its day-to-day activities. The management of working capital can be crucial to the survival of a business.

Management of working capital

The main objectives in the management of working capital can be summarized as follows:

1 To keep the time lag between the input of resources into production and the payment for goods and services produced as short as possible. This will reduce the amount of current assets (stocks, debtors and cash) the business needs to invest in at any one time. The same amount of investment is working harder.

2 The financing should be kept as efficient as possible to ensure the greatest possible return on capital employed.

The management of working capital is the application of common sense. They are the principles used by any person managing her/his income.

  •  Do not borrow too much money when the ability to repay debts depends upon uncertain income. If a business is relying on people who owe it money to be able to meet its own liabilities, then the failure of one person to pay will cause problems.
  •  Do not borrow on a short-term basis to finance medium- or long-term purchases: the short-term loans might dry up. The technical term for this is overtrading.
  •  Do take into account the opportunity cost. This service/course of action might appear expensive, but what are the hidden advantages (i.e. cost reductions) for the business?
  •  Ultimately, for a business as for an individual, the question is: Will it be able to meet its debts?

The effective management of working capital depends upon the co-operation of all the departments in a business. We can use the control of stock level as an example of this.

The valuation of stocks is usually based on the cost of stocks or their net realisable value (that is what the business would receive if it sold them on the open market), whichever is lower. However, the level of stocks held will also depend on a number of other factors, for example:

  •  the ability of the purchasing department to maintain a flow of necessary supplies at a rate linked to their usage. If purchasing is erratic the business may have to hold higher stocks than is strictly necessary.
  •  the expertise of the marketing department in estimating future demand and the ability of the production department to maintain a steady flow of production to meet that demand. Overestimating demand can lead to a build-up in stocks of finished goods and, if production is reduced, the build-up of raw materials and components.

  1.  Comprehension check.

Working in pairs, answer the questions.

  1.  What is working capital?
  2.  Can you give the main objectives in the management of working capital?
  3.  What principles does any person managing her/his income follow?
  4.  What factors does the efficient management of working capital depend on?

  1.  Read text again. Find and write down words in the text that mean the same as the following words and definitions. They are in the same order as they appear in the text.

a. circulating capital

b. to refer to

c. decisive, determinant

d. expenses

e. to exhaust

f. when a business has expanded in such a way that it lacks sufficient working capital and so suffers liquidity problem

g. the process or result of making something smaller or less in amount size, importance

h. after a process or activity has ended

i. reserve rate

j. changing often or not following a regular pattern, so that it is difficult to know what will happen next

k. accumulation


Work in small groups.


  1.  how can an analysis of the accounts of a business help a potential investor judge the efficiency with which the working capital is managed by a business;

* b) disadvantage(s) of attempting to overcome problems related to working capital by increasing the current liabilities of the business;

  c)  the role of a production department in improving working capital.


Money matters and payment.


  1.  Do you know the meaning of the following words? Try to match up each of them to its Ukrainian equivalent. Use your dictionary if necessary.

  1.  fascinating
  2.  crucial
  3.  medium of exchange
  4.  foremost
  5.  whale’s teeth
  6.  bristle
  7.  nail
  8.  slave
  9.  social invention
  10.  to allow
  11.  bagel
  12.  item
  13.  to escape
  14.  complication
  15.  measure of value
  1.  monetary unit
  2.  yardstick
  3.  worth
  4.  heterogeneous
  5.  gauge
  6.  crayon
  7.  croissant
  8.  to facilitate
  9.  store of value
  10.  to yield
  11.  monetary returns
  12.  real assets
  13.  paper assets
  14.  household

а) засіб накопичення

б) еталон

в) соціальний винахід

г) бублик

д) одиниця товару


є) міра вартості

ж) цінні папери

з) різнорідний

и) головний, насамперед

і) чарівний; той, що зачаровує

ї) засіб обміну

й) раб

к) рятуватися; уникнути

л) грошовий прибуток

м) виміряти, оцінювати

н) нерухоме майно, нерухомість

о) дозволяти, давати, надавати

п)полегшувати , сприяти

р) кольорова крейда, кольоровий олівець

с) сім’я

т) щетина

у) давати

ф)грошова одиниця

х) вирішальний, критичний

ц) гвіздок

ч) зуби кита

ш) круасан

щ)вартість, цінність

Pre – reading task

Work in small groups.

Can you answer the following question:

  •  What is money and what functions does it perform in the economy of the country?

Preface each answer with one of the following according to what is true for you:

We well know that …

To tell the truth …

As for this problem …

I doubt if we know …

I cannot be sure …


  1.  Read text 20. How much of the information did your group already know?

Text 20

money and its functions

Money is a fascinating aspect of the economy and a crucial element of economics. Conceptually anything generally acceptable as a medium of exchange is money. Historically, whales' teeth, elephant tail bristles, circular stones, nails, slaves, cattle, beer, cigarettes and pieces of metal have functioned as media of exchange. In our economy the debts of governments and of commercial banks and other financial institutions are used as money. Money that is everything that performs the functions of money.

There are three functions of money:

  1.  Medium of Exchange. First and foremost, money is a medium of exchange; it is usable in buying and selling goods and services. A worker in a bagel bakery does not want to be paid 200 bagels per week. No does the bagel bakery wish to receive, say, fresh fish for its bagels. Money is readily acceptable as payment. It is a social invention allowing resource suppliers and producers to be paid with a “good” (money) which can be used to buy any one of the full range of items available in the marketplace.

As a medium of exchange, money allows society to escape the complications of barter (barter is the system of paying for goods or services with other goods or services instead of using money). And because it provides a convenient way of exchanging goods, money allows society to gain the advantages of geographic and human specialization.


  (1) Money                                                    (2) Money

 (3) Oranges

 (3) Money

Figure 1. Money facilitates trade where wants do not coincide.

By the use of money as a medium of exchange, trade can be accomplished. By facilitating exchange, the use of money permits an economy to realize the efficiencies of specialization.

  1.  Measure of Value. Money is also a measure of value. Society uses the monetary unit as a yardstick for measuring the relative worth heterogeneous goods and resources. Just as we measure distance in miles or kilometres, we gauge the value of goods and services in dollars, pounds etc. With a money system, we need not state the price of each product in terms of all other products for which it can be exchanged; we need not specify the price of cows in terms of corn, crayons, cigars, Chevrolets and croissants.

This use of money as a common denominator means that the price of each product need be stated only in terms of the monetary unit. It permits buyers and sellers to readily compare the worth of various commodities and resources. Such comparisons facilitate rational decision making. Money is used as a measure of value for transactions involving future payments. Debt obligations of all kinds are measured in the monetary unit.

  1.  Store of Value. Finally, money serves as a store of value. Because money is the most liquid – the most spendable – of all assets, it is a very convenient way to store wealth. The money you place in a safe or checking account will still be available to you months or years later when you wish to use it. Most methods of holding money do not yield monetary returns such as one gets by storing wealth in the form of real assets (property) or paper assets (stocks, bonds etc). However, money does have the advantage of being immediately usable by a firm or a household in meeting all financial obligations.

  1.  Comprehension check.

Are the following statements true or false? Correct the false ones.

  1.  Money is any item which is generally acceptable by sellers in exchange for goods and services.
  2.  The exchange of one good or service for another good or service is barter.
  3.  By promoting exchange the application of money prevents an economy from realizing the efficiencies of specialization.
  4.  Monetary unit is a gauge of the value of goods and services.
  5.  Similar to barter economy the use of money needs to specify the price of each good and service in terms of the others.
  6.  The second major function of money as a measure of value is good for deals drawing in coming payments.
  7.  Being a store of value money is not used in meeting all financial liabilities.

  1.  Read the text once again. Find words in the text that mean the same as the following.

a. decisive

i. to evade

q. to simplify

b. means

j. to procure

r. liabilities

c. establishment

k. to achieve

s. to keep

d. to fulfil

l. priority

t. immovables

e. settlement

m. standard

u. securities

f. manufacturers

n. to measure

v. family

g. article

o. to indicate

h. accessible

p. merchandise


Work in small groups.

Fully evaluate and explain the following statements:

  1.  “The invention of money is one of the great achievements of the human race, for without it the enrichment that comes from broadening trade would have been impossible”.
  2.  “In most modern industrial economies of the world the debts of government and of commercial banks are used as money.”


  1.  Read text 21 using your dictionary to help with new words. Think of the suitable title.

Text 21

Everything that functions as a medium of exchange, a measure of value and a store of value is money. Maintaining the purchasing power of money depends largely on the government’s effectiveness in managing the money supply. The Federal Reserve System recognizes three “official” definitions of the money supply. M1 - the money supply is composed of two items:

  1.  Currency, that is, coins and paper money in the hands of the nonbank public.
  2.  All checkable deposits, meaning deposits in commercial banks and “thrift” or savings institutions on which checks can be drawn.

Coins and paper money are debts of government and governmental agencies. Checking accounts represent debts of the commercial bank or savings institution.

The safety and convenience of using checks have made checking accounts the most important form of money in many countries of the world. In dollar volume, for example, about 90 percent of all transactions are carried out by checks.

A check must be endorsed (signed on the reverse side) by the person cashing it; the drawer of the check subsequently receives the canceled check as an endorsed receipt attesting to the fulfillment of the obligation. Similarly, because of the writing of a check requires endorsement by the drawer, the theft or loss of your checkbook is not nearly as calamitous as losing an identical amount of currency. Furthermore, it is more convenient to write a check than to transport and count out a large sum of currency. People can convert checkable deposits immediately into paper and coins on demand; checks drawn on these deposits are thus the equivalent of currency.

There are some institutions offering checkable deposits:

  1.  Commercial banks – are the mainstays of the system. They accept the deposits of households and businesses and use these financial resources to make available a wide variety of loans. Commercial bank loans provide short-term working capital to businesses and farmers, finance consumer purchases of automobiles and other durables.
  2.  Thrift institutions – are savings and loan associations (S&Ls), mutual savings banks and credit unions.

Savings and loan associations and mutual savings banks marshal the savings of households and businesses which are then used to finance housing mortgages.

Credit unions accept the deposits of “members” – usually a group of individuals who work for the same company - and lend these funds to finance installment purchases. The checkable deposits are known by various names – demand deposits, NOW (negotiable order of withdrawal) accounts, ATS (automatic transfer service) accounts, and share draft accounts.

Near-Monies: M2 and M3

Near-monies are certain highly liquid financial assets such as noncheckable savings accounts, time deposits, and short-term government securities. Although they do not directly function as a medium of exchange, they can be readily and without risk of financial loss converted into currency or checkable deposits. Thus, on demand you may withdraw currency from a noncheckable savings account at a commercial bank or thrift institution. Or, you may request that funds be transferred from a noncheckable savings account to a checkable account.

You can withdraw funds quickly from a money market deposit account (MMDA). These are interest-bearing accounts offered by banks and thrifts, which pool individual deposits to buy a variety of short-term securities. MMDAs have minimum balance requirements and limit how often money can be withdrawn.

As the term implies, time deposits only become available to a depositor at maturity. For example, a 90-day or 6-month time deposit is only available without penalty when the designated period expires. Although time deposits are somewhat less liquid than noncheckable savings accounts, they can be taken as currency or shifted into checkable accounts when they mature.

Or, through a telephone call, you can redeem shares in a money market mutual fund (MMMF) offered through a financial investment company. These companies use the combined funds of individual shareholders to buy short-term credit instruments such as certificates of deposit and U.S. government securities.

M2the monetary authorities offer a second and broader definition of money:


    M1 + noncheckable savings

     deposits + MMDAs + small

Money, M2 =    (less than $100,000) time deposits

      + MMMFs

In other words, M2 includes (1) the medium of exchange items (currency and checkable deposits) comprising M1 plus (2) other items such as noncheckable savings deposits, money market deposit accounts, small time deposits, and individual money market mutual fund balances. These other items can be quickly and without loss converted into currency and checkable deposits.

Money, M3 consists of M2  plus large time deposits (more than $100,000) time deposits.

Money, M3 = M2 + large ($100,000) time deposits

Near-Monies: Implications

Near-monies are important for several related reasons.

  1.  Spending Habits. These highly liquid asserts affect people’s consuming-saving habits.

Usually, the greater the amount of financial wealth people hold as near-monies, the greater is their willingness to spend out of their money incomes.

  1.  Stability. Conversion of near-monies into money or vice versa can affect the economy’s stability. For example, during the prosperity-inflationary phase of the business cycle, converting noncheckable deposits into checkable deposits or currency adds to the money supply which could increase inflation. Such conversions can complicate the task of monetary authorities in controlling the money supply and the level of economic activity.
  2.  Policy. The specific definition of money used is important for monetary policy. For example, the money supply as measured by M1 might be constant, while money defined as M2 might be increasing. If the monetary authorities feel it is appropriate to have an expanding supply of money, the narrow M1 definition would call for specific actions to increase currency and checkable deposits. But the broader M2 definition would suggest that the desired expansion of the money supply is already taking place and that no specific policy action is required.

  1.  Comprehension check.

Working in pairs, answer the questions.

  1.  What items constitute the M1 money supply?
  2.  What is the most important component of the M1 money supply?
  3.  What are near-monies?
  4.  What items constitute the M2 money supply?
  5.  What are the components of the M3 money supply?
  6.  Of what significance are near-monies?


Work in pairs.


  •  What arguments can you make for including savings deposits in a definition of money?
  •  What are the basic functions of commercial banks and thrift institutions?


Put each of the following words or phrases into its correct place in the text below.


savings accounts









exchange rate






paper bills


Money is what people use to … things. People spend money on … and services. Many people save part of their money by … it in a bank. People … money by performing services. They also earn money from … , including government bonds, and from … . … can be anything that people agree to accept in exchange for the things they … or the work they do. Ancient people used such varied things as … , … , and cattle as money. Today, most nations use metal coins and … . Different countries’ … and bills look different and have different names.

A person can … his money for the money of any country according to the … . Usually, such rates are set by the central … of a country. The … of a country’s … may change, depending on the economic and political conditions in that country.


  1.  Read text 22 using your dictionary to help with new words.



Another function of the commercial banks is to provide credit, in the form of:

Overdrafts, where the customer can take out more money than he has in his account up to a certain limit agreed with the bank. He has to pay the money back whenever requested by the bank, and he also has to pay a relatively high rate of interest whenever he is overdrawn. For this reason, an overdraft is not the best option for long-term borrowing.

Banks make a profit by lending out money that has been deposited with them. People borrow money from banks for personal reasons (for instance, buying a house) or for business reasons (as starting a business). Only customers of the bank can get a loan from it because the bank has developed confidence in them as a sound financial investment. When granted, the loan is transferred to the customer’s account. A loan is a fixed amount of money that is at the customer’s disposal for a definite period of time. By the end of that time the money should be paid back.

A loan is cheaper if a large amount of money has to be borrowed over a longer period. The borrower must pay back the principal (the sum of money loaned) plus the interest on it. For business loans, the principal and the interest are due by the end of the term of the loan. Personal loans are more commonly paid back in equal parts (installments) during the full period of the loan.

When somebody applies for a loan, the bank always requests information regarding the purpose of the loan, the amount of money requested, as well as how and when the person or organization plans to pay back the principal and the interest. Since a business loan will be repaid from profits received in the business, the bank will try to estimate whether such profits are realistic or not. Personal loans are repaid out of personal income, so the bank will estimate whether the person’s income is sufficient to make the requested payment.

Some kind of security (usually personal property) will be required for personal loans. For business loans, some assets of the organization applying for a loan will act as security.

Besides these precautions, the bank will estimate whether the sum of money requested is adequate to achieve the purpose of the loan. Banks sometimes prefer to lend more money in order to make sure the project will work and so ensure repayment of the principal and the interest owed them. On the other hand, customers may request less money than they really need because they wish to make repayment easier. But lack of funds may lead to failure of the project, which the bank does not want.

Credit cards such as Visa or American Express are used to buy goods without needing to pay for them immediately. The customer receives a monthly statement and can either pay the entire amount in full (in which case no interest has to be paid) or in monthly installments (plus a fixed rate of interest).

  1.  Comprehension check.

Are the following statements true or false? Correct the false ones.

  1.  Money borrowed from banks for personal or business reasons.
  2.  Anyone can borrow money from a bank.
  3.  Bank loans are given to borrowers in cash from hand to hand.
  4.  Bank loans may be paid back whenever a borrower wants.
  5.  Both the principal and the interest of a loan must be repaid.
  6.  Security is seldom required when you borrow money from a bank.
  7.  Banks try to lend less money than borrowers request.

  1.  On the basis of what you have read make an oral summary of the text, using no more than 6 sentences.


Give your written statements. What kind of credit did each of these bank customers ask for?

  1.  Mr. and Mrs. Garrington sold their old house and bought a new one. However, as the new house was much larger and more expensive, they needed credit to pay the difference.
  2.  Jenny is a student whose income only just meets her expenses. In the winter months her heating and electricity bills are higher, and without credit she wouldn’t always be able to pay them.
  3.  Adam wants to buy a car, but only has enough savings to buy an old one. He would rather make use of his bank’s credit facilities to buy a newer model which hopefully wouldn’t need repairing so often.
  4.  Mrs. Brown has her own company. She travels a lot on business and likes to make use of her bank’s credit facilities to spread her expenses over a longer period.
  5.  Mr. Price has to pay the rent for his apartment on the first day of every month. However, he only receives his salary on the third day of the month. Without his bank’s credit facilities, he wouldn’t always be able to pay the rent.

Unit 8


1.1. Read text 1 and be ready to define:

a) what a business entity is;

b) three main types and forms of business organizations.



A business organization is frequently referred to as a business entity. A business entity is any business organization that exists as an economic unit. Business entities can be grouped according to the type of business activity they perform.

1. Service companies perform services for a fee. This group includes companies such as accounting firms, law firms, repair shops, and many others.

2. Merchandising companies purchase goods that are ready for sale and sell them to customers. They include such companies as auto dealerships, clothing stores, and supermarkets.

3. Manufacturing companies buy materials, convert them into products, and then sell the products to the companies or to the final customer. Examples are steel mills, auto manufacturers, and so on.

The business entity concept applies to all forms of businesses - single proprietorship, a partnership, and a corporation.

 A single (sole) proprietorship is a business owned by an individual and often managed by that same individual. Single proprietors include physicians, lawyers, electricians, and other people who are in «business for themselves». In a single proprietorship, the owner is responsible for all debts of the business. Operating as a proprietorship is the easiest way to get started in a business activity. Other than the possibility of needing a local license, there are not any prerequisites to beginning operations.

A partnership is a business owned by two or more persons associated as partners. Partnerships are created by an agreement. Included in the agreement are such terms as the initial investment of each partner, the duties of each partner, the means of dividing profits or losses between the partners each year, and the settlement to be made upon the death or withdrawal of a partner. Accountants, attorneys, and other professionals frequently operate their firms as partnerships.

A corporation is a business owned by a few persons or by thousands of persons. The owners of the corporation are called shareholders or stockholders. They buy shares of stock. If the corporation fails, the owners lose only the amount they paid for their stock. The personal assets of the owner are protected from the creditors of the corporation. The stockholders do not directly manage the corporation; they elect a board of directors to represent their interests. The board of directors select the president and vice president, who manage the corporation for the stockholders.

1.2. Find in the text English equivalents of these words and phrases:

1. економічна одиниця. самостійна компанія

2. господарська одиниця

3. групувати, класифікувати

4. компанія з обслуговування

5. плата, гонорар

6. ремонтна майстерня

7. торгова компанія

8. посередництво

9. фірма-виробник

10. перетворювати, обертати на щось

11. кінцевий споживач

12. прокатний стан

13. стосуватися

14. лікар

15. передумова

16. вилучення

17. адвокат

18. збанкрутувати

19. особиста власність

20. вибирати

1.3. Are these statements true or false? Correct the false ones.

a) Business companies differ from each other according to the lines of their economic activities.

  1.  An organization that is owned, and usually managed, by one person is called a sole proprietorship.
  2.  When a few people become co-owners of a business, the organization is called a partnership.
  3.  Operating as a partnership requires no prerequisites to starting operations.

e) The shareholders are immediately involved into the management of a corporation.

Use the key-words and retell the text according to the рlan:

1. What is a business entity? (a business organization; to exist; an economic unit; to group; the type of business activity; to perform; service company; services for a fee; merchandising company; to purchase goods; to be ready for sale; manufacturing companies; to convert materials into products; final customer).

2. Three main forms of business organizations:

  •  a sole proprietorship (to be owned by; an individual; a single proprietor; to be in business for themselves; to be responsible for debts; to get started in a business activity; local license);
  •  a partnership (to associate as; to be created by an agreement; initial investment; duties of each partner; the means of dividing profits or losses between the partners);
  •  a corporation (an owner; shareholders or stockholders; to buy shares of stock; the amount paid for their stock; protected from the creditors; to represent one’s interests; to elect the president; to manage the corporation).

2.1. Read  text  2   and be ready   to explain   what the names of companies around the world reflect.




An individual, like Henry Ford, might want to begin a small enterprise and personally retain total responsibility and liability, but once it starts to grow, a partnership or a "company" - such as Ford Motor Company - would need to be formed. The key factor in owning any company is the guarantee called limited liability: the owners of a company never have to pay more than they have invested in the company. Their liabilities are limited. When a company goes bankrupt, the owners can never be required to pay its unpaid bills.

The worst that can happen to investors in a limited liability company is losing their initial investment if the company fails. By limiting the risk for shareholders, companies are able to attract equity investors and raise large amounts of funds called equity capital through sales of shares rather than by borrowing money at potentially high interest rates.

The names of companies around the world reflect this guarantee of limited liability. The abbreviations "GmbH" in Germany, "Inc." in the United States or "Ltd." in most other English-speaking countries indicate that the firm is a limited liability company and investors have nothing more to lose than the money invested in their shares. The "S.A." in French-and Spanish-speaking countries also refers to limited liability by defining shareholders as "anonymous". Since the identity of shareholders can be kept secret, the creditors of a bankrupt company have no right to pursue them for the company's unpaid debts.

Many countries make a clear distinction between public and private companies, with separate designations, such as AG and GmbH in Germany, or Plc and Ltd. in Britain. Generally, "public" companies are those large enough to have their shares traded on stock exchanges, while smaller unquoted companies are said to be "private", even though their shares can be held by the public at large. In some countries, a large company is said to be privately owned if its shares are not available to the general public. In the United States, where little distinction is made between public and private companies, most companies simply bear the title "Incorporated".

2.2. Find in the text English equivalents of these words and phrases.

  1.  утримувати, зберігати
  2.  відповідальність, обов’язок
  3.  грошові зобов’язання
  4.  ключовий фактор
  5.  обмежена відповідальність
  6.  збанкрутувати
  7.  несплачені рахунки
  8.  початкове капіталовкладення
  9.  власник акцій
  10.  залучати фінансові ресурси
  11.  власний капітал
  12.  процентна ставка
  13.  відображати
  14.  скорочення
  15.  вказувати
  16.  тотожність, ідентичність
  17.  переслідувати
  18.  різниця. відмінність
  19.  позначення, назва
  20.  фондова біржа
  21.  компанія, акції якої не зареєстровані на фондовій біржі
  22.  бути доступним
  23.  громадськість
  24.  мати заголовок
  25.  зареєстрований як корпорація

2.3. Are these statements true or false? Correct the false ones.

  1.  Limited liability means that the owners of a business are responsible for losses only up to the amount they invest.
  2.  Investors can never lose their primary investment if an entity goes out of business.
  3.  In French -and Spanish- speaking countries the lenders of capital are obliged under the law to pursue a bankrupt company for the unpaid debts.
  4.  Public companies may offer shares to the public at the stock exchange.
  5.  In some countries private limited liability companies’ shares may not be offered to the public.

2.4. Use the key words and retell the text according to the plan:

  1.  The key factor in owing any company (the guarantee; the owners of a company; liabilities are limited; can never be required to pay).
  2.  Thе best way of attraction equity investors to the companies (by limiting the risk of shareholders; through sales of shares rather than by borrowing money).
  3.  What do the names of companies around the world reflect (the guarantee of limited liability; to have nothing more to lose; the money invested in the shares; can be kept secret; to have no right to pursue for; unpaid debts; to make a clear distinction; to have shares traded; can be held by the public at large; to be privately owned).

3.1. Read text 3 and be ready to speak about the importance of a sound and flexible strategy for a firm in achieving set objectives.



Every company or firm develops its strategy, i.e., its overall method of achieving its objectives. The strategy must be very flexible, because only a flexible strategy permits taking into account market conditions, which are constantly changing.

Strategy depends on long-term and short-term objectives and prospects. The long-term objective is always profits. But a company may be ready to cut its profits for some time to have a greater share of the market to sell its products. Greater market share means greater profits in the future. So, a company may put gaining market share as its short-term objective. To achieve this, the company has to reduce its prices. But then, the margins will be lower. Margins are the differences between what it costs to manufacture a product and the price at which it is sold. Lowering the margins means cutting the profits.

In this case, in order to increase profits over the long term, the company needs to increase production. Gaining market share allows it to increase production, and that increase cuts the unit cost (i.e., the cost to manufacture one unit of what the company produces).

Thus, gaining market share provides the company with a long-term prospect of increasing profits.

On the other hand, increasing production may cut profits as well, because the increased production requires new investments into machinery and technology.

The strategy, then, has to be oriented in two directions - the market and the manufacturing process. If we focus on the market, then the strategy is to gain market share. If we focus on manufacture as a source of profitability, then the quality of products should be improved. In that case, prices may be raised as well, in their turn raising the profits.

But this strategy does not work well if the market is competitive. Price increases, whatever the quality, may result in a drop in sales. A firm that does not increase prices, or that even reduces them, adapts to the market more easily.

To reduce costs without increasing (or even reducing) prices, companies often have to sub-contract some of their production. That means job losses in the company itself, though the remaining jobs become more stable and secure.

It may be said that developing a sound and flexible strategy is very difficult, because every strategy has its advantages and disadvantages. Many factors have to be taken into account.

3.2. Find in the text English equivalents of these words and phrases:

  1.  загальний
  2.  мета
  3.  гнучкий
  4.  перспектива
  5.  частка ринка
  6.  досягати
  7.  прибуток
  8.  скорочувати прибуток
  9.  собівартість одиниці продукції
  10.  довгострокова перспектива
  11.  бути орієнтованим на
  12.  зосереджуватися на
  13.  джерело прибутковості
  14.  конкуруючий
  15.  закінчуватися чимось
  16.  пристосувати
  17.  скоротити витрати
  18.  укладати договір із субпідрядником
  19.  стабільний, міцний
  20.  надійно захищений
  21.  міцний

3.3. Are these statements true or false? Correct the false ones.

  1.  Market conditions are constantly changing.
    1.  A flexible strategy is needed to take into account the market conditions.
    2.  Strategy only depends on short-term objectives and prospects.
    3.  Gaining market share, net profits, is the long-term objective of any company.
    4.  Margins are the costs of manufacturing products.
    5.  Increasing production requires new investments into machinery and technology.
    6.  Price increases often result in increased sales.
    7.  Sub-contracting some of company's  production means employing new workers.

3.4. Use the plan, the key words and phrases to speak briefly about the strategy of a company.

a) The strategy of a company as its overall method of achieving set objectives (flexible strategy; to take into account market conditions; long-term and short-term objectives and prospects; profits; to have a greater share of the market; to reduce prices; lowering the margins);

b) Factors which affect increasing and cutting profits (the company needs to increase production; to cut the unit cost; to require new investments into machinery and technology);

c) The strategy has to be oriented in two directions (the market and the manufacturing process; to focus on manufacture; quality of products; the strategy does not work well; a drop in sales; job losses; every strategy has its advantages and disadvantages; to be taken into account).

4.1. Read text 4 and be ready to prove the importance of financial forecasting for any company.



One of the most important tasks of the Financial Department in any company is to forecast revenues (as from sales), the costs, and expenses that the company will have, as well as its profits. The better the forecast is the more profitable a business may become.

First of all, potential sales are forecast. This is based on both previous results and several other sources of information.

One is industry norms - what sales are typical for businesses of a similar size and type.

A second source is requesting the opinions of key people who invest in the business.

The third source is the expectations of the users. For instance, if a business serves customers that can be identified, they should be asked what they expect to purchase. The firm needs to take those expectations into account in their plans for the future.

The next source is simulated test markets, when some new products are tested in a few stores or outlets. This helps to estimate how well the products may sell. There are other sources of information for forecasting sales as well.

When the sales forecast has been made, the next step is to forecast profits. This is based on the sales forecast. Deducting the costs and expenses from the sales revenue will show the net profit. Then taxes should be deducted, to reveal the net profit after taxes - the final result of forecasting.

The budget is drawn up on the basis of all the forecasts, and it is the most important document used to regulate all the finances of the firm during the budget period.

Another very important document is a balance sheet. This shows the financial position of a business, revealing everything the business has financially: its assets, losses, debts, and profits.

A balance sheet gives a kind of momentary photo, showing what a firm owns and what it owes on an exact date. That is why it must be regularly updated.

4.2. Find in the text English equivalents of these words and phrases:

  1.  прогнозувати доход
  2.  видатки
  3.  прибутковий бізнес
  4.  потенційний продаж
  5.  попередній
  6.  джерела інформації
  7.  промисловий стандарт
  8.  схожий, подібний
  9.  опитування точок зору
  10.  очікування
  11.  моделювати
  12.  пробний ринок
  13.  торгова точка, ринок збуту
  14.  оцінювати
  15.  віднімати
  16.  чистий прибуток
  17.  податок
  18.  виявляти, показувати
  19.  складати бюджет
  20.  балансова відомість
  21.  бути винним, заборгувати
  22.  обновляти

4.3. On the basis of the text you have read, summarize:

  1.  what a sales forecast is and how it is made (previous results; sources of information; sales typical for business; a similar size and type; key people; expectations of the users; some new products are tested in a few stores or outlets);
  2.  what a profits forecast is and how it is made  (to be  based on; sales revenue;  the net profit after taxes; the final result of forecasting);
  3.  what a budget of a firm is defined (the budget is drawn up; on the basis of all the forecasts; document; to regulate finances; during the budget period);
  4.  what a balance sheet is (important document; financial position; assets; losses; debts; profits; momentary photo; on an exact date; regularly updated).

5.1. Read text 5 and make a list of key-words.



Careers in finance vary as widely as the scope of finance itself. Some of these career paths require extensive, highly specialized knowledge and advanced degrees. Others begin with entry level positions open to enthusiastic, hard-working individuals regardless of their undergraduate majors.

The scope of finance has increased so much over the past decade that the field is generally subdivided into three parts. Financial markets and institutions, financial management, and investments are commonly considered to be separate disciplines. The study of financial markets and institutions focuses on those public and private institutions engaged in granting loans, accepting deposits, facilitating securities transfers, raising corporate funds, and regulating both the economy (domestic and global) and its financial institutions.

Financial management is concerned with how firms acquire and allocate funds. It examines how firms obtain short-term and long-term funds and how these funds are spent to acquire selected assets. Decisions regarding dividend policies, merger and acquisitions activities, and leasing, all fall within the realm of the capital budget. Financial management also emphasizes the cash budget and management of its components.

 Investment analysis focuses on how individuals or portfolio managers select appropriate financial and real assets. It examines the markets within which fund raising and security trading take place. It explores the methodologies used by investors, providing insights into criteria for analyzing companies and industries, as well as generating norms of behavior. The study of the markets for stocks and bonds, stock and index options, warrants, and commodities and financial futures are all part of the investments area.

Careers in Institutions and Markets

Entry level positions in financial institutions and markets can include everything from bank teller to credit trainee. A person with a strong finance background would probably begin as an administrative assistant to a loan officer, or as a junior financial analyst in either the credit department or the research department of a depository institution. Positions such as customer service representative or mortgage servicing specialist in an insurance company or a mortgage banking company, respectively, are generally staffed by people with limited finance backgrounds. More experienced individuals would be eligible for loan officer, branch manager, or senior analyst positions.

Careers in Financial Management

Entry level positions for those with associate degrees and limited experience in finance include data processing clerks, investor relations specialists, and accounts payable staff positions. Finance majors find entry level positions as junior accountants in cost or financial accounting departments, budget analysts, or financial planners. Promotion opportunities generally lead to managerial positions such as cash manager, credit manager, or financial accounting manger. Senior financial management positions include CFO, corporate comptroller, and treasurer.

Careers in Investment

Generally it is the investment area that attracts people to finance. They see an appealing opportunity to control multimillion dollar investment portfolios, оr to be part of an investment banking institution engaged in mergers and acquisitions. Most brokerage houses, however, provide entry level positions as registered representatives (for those who quality by passing specific NASD (National Association of Securities Dealers) examinations), or as investment or industry analysts. Clerical and assistant positions are always available with the major brokerage houses for those with limited experience, but excellent self-motivational skills. Senior employment opportunities include portfolio manager, senior investment analyst and investment counselor.

 Answer the questions:

  1.  The scope of finance is generally subdivided into three parts. What are they?
  2.  What does the study of financial markets and institutions focus on?
  3.  What is financial management concerned with?
  4.  What does investment analysis examine?
  5.  What are the parts of the investment area?
  6.  What can entry level positions in financial institutions include?
  7.  Where would a person with a strong finance background begin?
  8.  What can you say about entry level positions and promotion opportunities in Financial Management?
  9.  What are the appealing opportunities in the investment area?

5.3.  Look at the terms in the left - hand column and find the correct definitions in the right hand column:

1. finance     a) an amount of money that you pay

      into a bank account

2. financial market     b) documents showing that you own

      shares in a company

3. securities     c) the process of selecting appropriate

      financial and real assets

  1.  loan      d) a place where something is stored
  2.  deposit      e) money that is  used to pay for

      something such as a large project

6. warrant      f) the process of  controlling and

      managing finance

7. financial management     g) the activities of organizing

      business deals for other people

8. investment analysis    h) institution that brings buyers and

      sellers of financial assets together

9. depository     i) amount of money that a person

                                                                       borrows, especially from a


10.brokerage                                                    j) a document that gives

someone     official permission to do something

5.4. Sum up what the text says about careers in finance.

6.1. Read text 6 and write down the definitions:

  1.  самостійна господарська організація;
  2.  фінансовий звіт;
  3.  зовнішня угода;
  4.  внутрішня угода



The study of accounting begins with the understanding of the way in which accountants see the business enterprise. Accountants frequently refer to a business organization as an accounting entity or a business entity. A business entity is any business organization such as a hardware store or grocery store that exists as an economic unit. As an economic unit, the business enterprise acquires, organizes and transforms factors of production in its activity of producing goods and services. This activity may be presented as the following:

the input factors (land, buildings, equipment, material, labour)

are combined and transferred into

an output flow of goods and services

The accounting interpretation is an abstraction of the reality portrayed above. The business enterprise is viewed as a system of monetary flow, instead of a system of physical flows. In accounting, business activities are associated with transactions and, indeed, are limited to transactions. Thus, unless there is a transaction there is no observable business activity.

A transaction occurs whenever the firm enters into a legal contract for the acquisition of means of production or the sale of goods and services. Business activities which do not refer to transactions remain unrecognized in accounting. Transactions involving the acquisition of factors of production lead either to an outflow of money immediately or an obligation to pay money at a later date. Transactions by which the firm sells goods or services lead to an inflow of money or the right to receive money at a future date. The accounting interpretation of business activities leads to future analysis of these transactions.

First, transactions between the firm and its markets - both its supply markets and its selling markets - are defined as "external transactions". The totality of "external transactions" forms the subject matter of financial accounting. General purpose of financial statements (reports) is to provide most of the information needed by external users of financial accounting. These financial statements are formal reports providing information on a business entity's financial position (solvency), cash inflows and outflows, and the results of operations (profitability). Financial accounting information is historical in nature, reporting on what has happened in the past. Hence the external users rely on relevant and reliable financial statements to make present decisions about future events.

Second, transactions within the firm, consisting of the exchanges which occur between the various departments are defined as "internal transactions". The totality of "internal transactions" forms the subject matter of cost or managerial accounting. Managerial accounting information provides special information for the managers of a business entity. The kind of information used by managers may range from very broad, long-range planning data to detailed explanation of why actual costs varied from costs estimates. The purpose of managerial accounting is to generate information that a manager can use to make sound internal decisions.

6.2. Find in the text and write down English equivalents of the following words and phrases:

1. ділове підприємство

2. обліковий підрозділ, який має самостійний баланс

3. магазин апаратури (обладнання)

4. господарська одиниця

5. змінювати, перетворювати

6. вхідні фактори

7. випуск продукції

8. зображати, описувати

9. операція, справа, угода

10. зримий, помітний

11. придбання

12. відлив готівкових грошей

13. зобов’язання

14. приплив надходжень

15. зовнішня угода

16. загальна кількість

17. платоспроможність

18. отже, таким чином

19. доречний, відповідний до

20. траплятися

21. управлінський облік

22. змінюватися у певних межах

23. дані, відомості

24. фактичні витрати

25. оцінка витрат

6.3. Answer the questions:

  1.  What does the study of accounting begin with?
  2.  In what way may the activity of an organization be presented?
  3.  What is business activity associated with in accounting?
  4.  When does a transaction occur?
  5.  What business activities are recognized in accounting?
  6.  How can transactions be classified?
  7.  What is financial accounting?
  8.  What is managerial accounting?

7.1. Read text 7 and say how many parts it consists of.



 Accounting is shaped by the environment in which it operates. Just as nations have different histories, values and political systems, they also have different patterns of financial accounting development. In a number of countries accounting information is directed primarily toward the needs of investors and creditors, and "decision usefulness" is the overriding criterion for judging its quality. Financial accounting in the US and Great Britain has had such an orientation for many years. Moreover, these countries have large and developed stock exchanges and bond markets. As a result, a great deal of information is disclosed in companies' financial reports; and determining profitability is an objective of financial accounting. However, in other countries, financial accounting has a different focus and performs other roles. For example, in some countries, financial accounting is designed primarily to ensure that the proper amount of income tax is collected by the national government. This is the case in most South American countries. In other countries, financial accounting is designed to help accomplish macroeconomic policies, such as achieving a predetermined rate of growth in the nation's economy. Whether income tax and economic policy information are also useful to individual investors and creditors is somewhat beside the point. In such countries as Switzerland, Germany, and Japan the environment is characterized by a few, very large banks that satisfy most of the capital needs of business. Ownership also tends to be concentrated. The information needs are satisfied in a relatively straightforward way - through personal contacts and direct visits. Not surprisingly, the financial reports tend not to contain as much information as US companies' reports. And since banks are the primary source of capital, financial accounting is oriented toward creditor protection. France and Sweden offer still another orientation of financial accounting. National government plays a strong role in managing the country's resources. Governments also actively ensure that businesses have adequate capital and will lend or even invest in companies if necessary. Financial accounting is oriented toward decision making by government planners.

7.2. Find in the text and write down English equivalents of the following words and phrases:

  1.  фінансова звітність
  2.  створювати(ся), формувати(ся)
  3.  зразок, модель
  4.  першорядний, головний
  5.  оцінювати
  6.  розкривати(ся), виявляти(ся)
  7.  призначатися, створюватися
  8.  податок на прибуток
  9.  виконувати
  10.  попередньо встановлений
  11.  не має відношення до справи
  12.  потреба в капіталі
  13.  власність
  14.  мати тенденцію до чогось
  15.  простий шлях
  16.  утримувати, вміщувати
  17.  першоджерело
  18.  охорона, захист
  19.  гарантувати, ручатися
  20.  достатній капітал
  21.  прийняття рішень
  22.  плановик

  1.  Define the key-sentences of each paragraph and translate them into Ukrainian.
  2.  Use the key-words and sum up what the text says about financial accounting.

8.1. Read text 8



The analysis of the transactions complete, what is the next step in the accounting process? How does an accountant present the results of the analysis? We now look at the financial statements. These business documents report financial information about the entity to persons and organizations outside the business.

The primary financial statements are the (1) balance sheet, (2) income statement, (3) statement of owner's equity, and (4) statement of cash flow.

The balance sheet lists all the assets, liabilities, and owner's equity at a point in time, usually the end of a month or a year. The balance sheet is like a snapshot of the entity. For this reason, it is also called the statements of financial position. A balance sheet is made up of two lists, placed side by side. On the left the company lists everything it owns, such as cash and "fixed assets" called property, plant, equipment, which include everything from buildings and trucks to tools, pencils, and copy machines. This list is labeled assets On the other side, the company lists its liabilities, consisting of all the claims to the company's assets, from creditors and from the company owners. The lists end up being exactly equal-whatever assets are not claimed by the company's creditors belong to the owners.


Balance Sheet

August 31, 20 XX

Assets Liabilities and Owner's Equity

Current assets:


Accounts receivable ……….80,000

Merchandise inventory…….170,000

Total current assets………...284,000

Plant and equipment:


Less: Accumulated


Total assets……………..…320,000

Current liabilities:

Short-term debt……………….20,000

Accounts payable……………..35,000

Other accrued liabilities…........12,000

Total current liabilities……….67,000

Long-term debt……………….50,000

Total liabilities…...………….117,000

Owner’s equity……………....203,000

Total liabilities

and owners’ equity………......320,000

The income statement or profit and loss statement (P&L) measures the performance of an enterprise. It presents a summary of the revenues and expenses of an entity for a specific period of time, such as а month or a year. The income statement, also called the statement of operations, is like a moving picture of the entity's operations during the period. The income statement holds perhaps the most important single piece of information about a business - its net income, which is revenues minus expenses. If expenses exceed revenues, the result is a net loss for the period.

The statement of owner's equity presents a summary of the changes that occurred in the owner's equity of the entity during a specific time period, such as a month or a year. Increases in owner's equity arise from investments by the owner and net income earned during the period. Decreases result from withdrawals by the owner and from a net loss for the period. Net income or net loss comes directly from the income statement. Investments and withdrawals by the owner are capital transactions between the business and its owner, so they do not affect the income statement.

Another tool for understanding a company's activity is to look at its cash flow. This measures the actual flow of funds - real money - flowing into and out of a company during a given period of time. A company's cash flow factors out all of the accounting tricks and looks at what a company really earned, because it excludes accounting tools such as depreciation.


Statement of Cash Flows

For the Year Ended August 31, 20 XX

Cash flow operating activities:

Net income. . 18,000

Add (deduct) items not affecting cash:

Depreciation expense 4,000

Increase in accounts receivable 80,000

Increase in merchandise inventory (170,000)

Increase in current liabilities 67,000

Net cash used by operating activities 161,000

Cash flow investing activities:

Cash paid for equipment 40,000

Cash flows from financing activities:

Cash received from issue of long-term debt 50,000

Cash received from sale of common stock 190,000

Payment of cash dividend on common stock 5,000

Net cash provided by financing activities 235,000

Net increase in cash for the year 34,000

Good record keeping by a business is not only wise but is required by law. Legal and financial questions may be raised by various agencies, banks, and employees. The questions may be accurately answered when written records of business proceedings are kept. By recording daily transactions, the owner can learn from mistakes and avoid errors in the future. Even if profits are not distributed to shareholders, any organization needs a P&L to account for its activities to see whether it is being efficiently and honestly run.

8.2. Find in the text and write down English equivalents of the following words and phrases:

  1.  фінансовий звіт за певний період
  2.  баланс, балансовий звіт
  3.  звіт про доходи
  4.  звіт про власний акціонерний капітал
  5.  звіт про приплив грошових надходжень
  6.  знімок
  7.  маркіровані активи
  8.  претензія, зазіхання на
  9.  оборотний капітал
  10.  рахунки на утримання
  11.  список товарів
  12.  акумульовані списання
  13.  рахунки до сплати
  14.  накопичені зобов’язання, нараховані зобов’язання
  15.  звіт про прибутки та збитки
  16.  продуктивність, ефективність
  17.  чистий доход, чистий прибуток
  18.  відбуватися, траплятися
  19.  виникати, з’являтися
  20.  впливати, діяти
  21.  виключати, вилучати
  22.  амортизаційні відрахування
  23.  звичайна акція
  24.  плата готівкою без знижки
  25.  робота, справи
  26.  звітувати про щось

8.3. Answer the questions:

  1.  What is a financial statement?
  2.  What are the main financial statements?
  3.  What do they show?

 Write the definitions of the following terms:

  1.  financial statement
  2.  balance sheet
  3.  income statement
  4.  statement of owner's equity
  5.  statement of cash flow

8.5. Translate the specimen Balance Sheet and Statement of Cash Flows (p. 101 - 102) in written form.

9.1. Read text 9



The raw data of accounting are the business transactions. A business may be engaged in thousands of transactions during a period of time. The data in these transactions must be classified and summarized before becoming useful information. Making the accountant's task somewhat easier is the fact that most business transactions are repetitive in nature and can be classified into groups having common characteristics.

An account is an element in an accounting system that is used to classify and summarize money measurements of business activities of a similar nature. An account is set up whenever it is necessary to provide useful information about a particular business item. The number of accounts in a company's accounting system depends on the information needed by those interested in the business.

Accountants may differ on the account title (or name) they give for the same item. The account title should be logical to help the accountant group similar transactions into the same account. Once an account is given a title, that same title must be used throughout the accounting records.

Accounts may take on a variety of formats. Some accounts are printed, and entries are written in by hand; others are on magnetic tape, and "invisible" entries are encoded by a computer. Every account format must provide for increases and decreases in the item for which the account was established. Once a business even is recognized as a business transaction, it is analyzed to determine its increase or decrease effect on the assets, liabilities, owner's equity, revenues, or expenses of the business. These increase or decrease effects are then translated into debits and credits. Then the account balance (the difference between the increases and decreases) can be determined.

In each business transaction is the activity that is recorded. The total dollar amount of debits must equal the total dollars amount of credits. The accounting requirement that each transaction must be recorded by an entry that has equal debits and credits is called duality. This double entry procedure keeps the accounting equation Assets=Liabilities - Owner's equity - in balance.

To understand how the increases and decreases in an account are recorded, accountants use the T-account, which derives its name from the fact that it looks like the letter T. The title (name) of the item accounted for, such as cash, is written across the top of the T. Increases are recorded on one side of the vertical line of the T, and decreases on the other side, depending on the type of account. A T-account appears as follows:

Title of account

Debit | Credit

The accountant uses the term debit (or charge) instead of saying "place an entry on the left side of the T-account" and credit for "place an entry on the right side of the T-account". Thus, for any account, the left side is the debit side, and the right side is the credit side. A synonym for "debit an account" is "charge an account".

9.2. Find in the text and write down English equivalents of the following words and phrases:

  1.  рахунок
  2.  необроблені дані, вихідні дані
  3.  бути задіяними, займатися чимось
  4.  повторюваність
  5.  вимірювання
  6.  засновувати
  7.  назва рахунку
  8.  бухгалтерські рахунки
  9.  запис, внесення (у список)
  10.  тримати, держати
  11.  дебет
  12.  кредит
  13.  розрахункова формула
  14.  двоїстість
  15.  походити від
  16.  записати на рахунок, дебетувати

9.3. Answer the questions:

  1.  What is an account?
  2.  When is an account set up?
  3.  What does the number of accounts depend on?
  4.  What must every account format provide for?
  5.  What is debit?
  6.  What is credit?

9.4. Use the key-words and make comments on the fundamental accounting equation given in the text.

10.1. Read text 10 and be ready to speak about different kinds of accounts. While reading make your own list of business terms.



Assets. Assets are rights to use resources that are expected to result in future economic benefit for the accounting entity.  

Cash. The Cash account shows the cash effects of a business’ transactions. Cash means money and any medium of exchange that a bank accepts at face value. Cash includes currency, coins, money orders, certificates of deposit, and checks. The Cash account includes these items whether they are kept on hand, in a safe, in a cash register, or in a bank.  

Notes Receivable. A business may sell its goods or services in exchange for a promissory note, which is a written pledge that the customer will pay the business a fixed amount of money by a certain date. The Notes Receivable account is a record of the promissory notes that the business expects to collect in cash.

Accounts Receivable. A business may sell its goods or services in exchange for an oral or implied promise for future cash receipt. Such sales are made on credit (on account). The Accounts Receivable account includes these amounts.

Prepaid Expenses. A business often pays certain expenses in advance. Pre-paid Expenses are assets because they will be of future benefit to the business. The ledger holds a separate asset account for each prepaid item. Prepaid Rent and Prepaid Insurance are prepaid expenses that occur often in business. Office Supplies are also accounted for as prepaid expenses.

Land. The Land account is a record of the land that a business owns.

Building. A business' buildings - office, warehouse, garage and the like -appear in the Building account.

Equipment, Furniture and Fixtures. A business has a separate asset account for each type of equipment - Office Equipment and Store Equipment, for example. The Furniture and Fixtures account shows the cost of this asset.

Liabilities. Recall that a liability is a debt. A business generally has fewer liability accounts than asset accounts because a business' liabilities can be summarized under relatively few categories.

Notes Payable. This account is the opposite of the Notes Receivable account. Notes Payable records the amounts that the business must pay because it signed a promissory note to purchase goods or services.

Accounts Payable. This account is the opposite of the Accounts Receivable account. The oral or implied promise to pay off debts arising from credit purchases of goods appears in the Accounts Payable account. Such a purchase is said to be made on account. Other liability categories and accounts are added as needed. Taxes Payable, Wages Payable, and Salary Payable are accounts that appear in many ledgers.

Some other accounts may be as follows:

Owner's Equity. The claim that the owner has on the assets of the business is called owner's equity. In a proprietorship or a partnership, owner's equity is often split into separate accounts for the owner's capital balance and the owner's withdrawals.

Capital. This account shows the owner's claim to the assets of the business. After total liabilities are subtracted from total assets, the remainder is the owner's capital. The balance of the capital account equals the owner's investments in the business plus its net income and minus net losses and owner withdrawals. In addition to the capital account, the following accounts also appear in the owner's equity section of the ledger.

Withdrawals. When the owner withdraws cash or other assets from the business for personal use, its assets and its owner's equity both decrease. The amounts taken out of the business appear in a separate account entitled Withdrawals, or Drawing. If withdrawals were recorded directly in the capital account, the amount of owner withdrawals would be merged with owner investments. To separate these two amounts for decision making, businesses use a separate account for Withdrawals. This account shows a decrease in owner's equity.

Revenues. The increase in owner's equity from delivering goods or services to customers or clients is called revenue. The ledger contains as many revenue accounts as needed. If the business loans money to an outsider, it will also need an Interest Revenue account. If the business rents a building to a tenant, it will need a Rent Revenue account. Increases in revenue accounts are increases in owner's equity.

Expenses. The cost of operating a business is called expense. Expenses have the opposite effect of revenues, so they decrease owner's equity. A business needs a separate account for each category of its expenses, such as Salary Expense, Rent Expense, Advertising Expense, and Utilities Expense. Expense accounts are decrease in owner’s equity.

10.2. Check your list of business terms. Can you find the terms with the following meaning in it?

  1.  капітал
  2.  статутний капітал
  3.  залишок
  4.  чистий доход
  5.  зняття з рахунку
  6.  збитки
  7.  витрати
  8.  активи
  9.  пасиви
  10.  готівка
  11.  чек
  12.  номінальна вартість
  13.  депозити
  14.  позика
  15.  платіжне доручення
  16.  рахунок дебіторів
  17.  вексель на отримання
  18.  боргове зобов’язання
  19.  в кредит
  20.  передоплата
  21.  рахунки до сплати
  22.  бухгалтерська книга

10.3. Read the text again. Here are some answers about the main types of account. Write the questions.


The cash effects of a business' transactions.

b) _____________________________________________

Because they will be of future benefit to the business.


A business' liabilities can be summarized under relatively few categories.

d) ________________________________________________

To pay off debts arising from credit purchases of goods.


Equals the owner's investments in the business plus its net income and minus net losses and owner withdrawals.

f) _______________________________

Assets and owner's equity both decrease.


If the business loans money to an outsider.


The business will need a Rent Revenue account.


Salary Expense, Rent Expense, Advertising Expense and Utilities Expense.

10.4. Write the review of the text.

11.1 Read text 11. The answer to the following question can be found in this text: According to the classical economists, how did Say's law, the interest rate mechanism, and downwardly flexible wage and prices ensure that recessions would cure themselves?




The United States suffered very bad recessions, even depressions, in the 1830s, 1870s, and 1890s, but always did eventually recover. If the government tried to get the country out of a recession, said the classicals, it only made things worse.

The classical school of economics was mainstream economics from roughly 1775 to 1930. Adam Smith's The Wealth of Nations, a plea for laissez-faire (no government interference), was virtually the economics bible through most of this period. The classicals believed our economy was self-regulating. Recessions would cure themselves, and a built-in mechanism was always pushing the economy toward full employment.

The centerpiece of the classical system was Say's law: Supply creates its own demand. Everything produced gets sold. Why? Because people work so that they can spend.

What if people save some of their incomes? No problem, said the classicals, because that savings will be invested. With that, they pointed to Figure 1, which shows a graph of saving and investment. The two are equal at an interest rate of 10 percent.


What if the amount of money people wanted to save at 10 percent interest were greater than the amount business people wanted to invest? Still no problem, said the classicals. The interest rate would fall automatically. People would be inclined to save less at lower interest rates, and business people would be inclined to invest more. Eventually, the interest rate would fall far enough so that savings and investment would be equal.

The classicals also assumed downwardly flexible wage rates and prices. If there happened to be a temporary recession and business firms could not sell their entire inventories, they would simply lower their prices until their inventories were depleted. Similarly, if some workers were unemployed, they would offer to work for lower wages and would find new jobs.

Another basic classical tenet was the quantity theory of money. Stated in its crudest version, when the money supply changes by a certain percentage, the price level changes by that same percentage. Thus, when the money supply is increased by 5 percent, the price level rises by 5 percent.

Resorting once again to the equation of exchange


What do these letters stand for? M represents the number of dollars in the nation's money supply - the currency and demand deposits.

The velocity of circulation, or the number of times per year each dollar in our money supply is spent, is represented by V.

P represents the price level, or the average price of all the goods and services sold during the year. Q stands for the quantity of goods and services sold during the year.

If M rises by 5 percent and P rises by 5 percent, that means V and Q remain constant. We shall hold a full-scale debate between the Keynesians and the monetarists about the stability of V and shall conclude that V is stable during nonrecession and peacetime years. And Q? Well, Q, the output of goods and services, rises during nonrecession years and falls during recession years.

Where does all this leave us as regards the quantity theory? In its crude version, which the classicals espoused, we could hardly expect V and Q to stay constant from year to year. So much, then, for the crude quantity theory.

Finally, let's take a closer look at the classical contention that recessions are temporary phenomena, which, with the help of Say's law, the interest rate mechanism, and downwardly flexible wages and prices, cure themselves. This leads to the basic classical macroeconomic policy when there is a recession: Do nothing! If the government attempted to cure a recession by spending more money or cutting taxes, these measures would not get the economy out of the recession. Why not? Because the recession would cure itself. Government intervention could not help, and it might even hurt.

What about monetary policy? If there were a recession, the standard monetary policy would be to increase the rate of growth of the money supply. What would this accomplish? Ask the classicals. Because the recession would be curing itself, output, Q, would go up automatically. Because V would be stable, a rise in M would simply be translated into a rise in P, so the attempt to cure the recession by means of monetary policy would only cause inflation.

The classical school dominated economic thought until the time of the Great Depression. If recessions cure themselves automatically, asked John Maynard Keynes in the 1930s, why is the entire world economy dragging along from year to year in unending depression? And if the economy isn't curing itself, said Keynes, government intervention is in order.

11.2. Are these statements true or false? Correct the false ones.

  1.  According to the classical school of economics recessions cure themselves and push the economy toward full employment.
  2.  Supply generates its demand because people spend as they earn.
  3.  The quantity theory of money says that if the money supply alters by a certain percentage the price level remains unchanged.
  4.  Government can't cure recessions.

11.3. Speak briefly about basic classical tenets. Use the plan and the key words and phrases to help you.

a) Adam Smith’s plea for laissez-faire (mainstream; no government interference; the economics bible; self-regulating; recession; to cure themselves; a built-in mechanism; to push the economy; full employment);

b) Say’s Law (supply and demand; to create; to produce; to save; savings; to invest; to be inclined; to sure; to be equal);

c) Quantity theory of money (tenet; the crudest version; money supply; by a certain percentage; price level; velocity of circulation; average price; stability; no recession; espoused; hardly expect to stay);

d) Government can’t cure recession (to attempt; to cure a recession; government information; rate of growth; output; monetary policy; to cause inflation).

12.1. Read texts 12 and 13. The answer to the following question can be found in these texts: According to John Maynard Keynes, what was the basic problem during recessions, and what was its solution?



(Part I)

John Maynard Keynes wrote his landmark work The General Theory of Employment, Interest, and Money during the depths of the Great Depression. While President Herbert Hoover (perhaps the last political leader to uphold the theories of classical economics) was telling everyone who would listen that recovery was just around the corner, things were going from bad to worse. As the unemployment rate mounted, production plummeted, more and more Americans demanded that the federal government do something. When Franklin Roosevelt defeated Hoover by a landslide in 1932, he had a mandate for the government to do whatever was necessary to bring about recovery.

Keynes provided a blueprint. The problem, he said, was inadequate aggregate demand. People were just not buying enough goods and services to employ the entire labor force. In fact, aggregate demand was so low that only the government could spend enough money to provide a sufficient boost.

Keynes defined aggregate demand as consumer spending, investment spending, and government spending (plus net exports). Consumption is a function of disposable income. When disposable income is low, said Keynes, consumption is low. This was the problem Americans were having during the Great Depression.

Investment, which is largely a function of the marginal efficiency of investment, or the expected profit rate, was also very low during the Depression. So we could not hope that an upturn in investment would lead the way out of the Depression. The only hope was for the government to spend enough money to raise aggregate demand sufficiently to get people back to work.

What type of spending was necessary? Any kind, said Keynes. Quantity is much more relevant than quality. Even if the government employed some people to dig holes, said Keynes, and others to fill up those holes, it would still be able to spend the country out of these economic woes.

Where would the government get the money? There were two choices: print it or borrow it. If the government printed it, wouldn't that cause inflation? Keynes thought this unlikely; during the Depression, the country had been experiencing deflation, or falling prices. Who would even think of raising prices when he was having trouble finding customers?

What about budget deficits? Nothing improper about these, said Keynes. Although the common wisdom of the times was that the government must balance its budget, there was absolutely nothing wrong with deficits during recessions and depressions. It was necessary to prime the pump by sucking up the idle savings that businesses were not borrowing and using those funds to get the economy moving again.

Once government spending was under way, people would have some money in their pockets. And what would they do with that money? You guessed it - they'd spend it. This money would then end up in other people's pockets, and they, in turn, would spend it once again.

That money would continue to be spent again and again, putting more and more people back to work. In the process, the deficit would melt away. The government could cut back on its spending programs while tax receipts swelled, so we could view the budget deficits as a temporary expedient to get the economy off dead center.



(Part II)

But what of the classical automatic mechanism that ensured that the economy always moved toward full employment? In the long run, Keynes conceded maybe it really did work. But in the long run, noted Keynes, "we are all dead”.

Why didn't the classical mechanism work in the short run? Keynes observed that interest rates fell to about 2 percent during the Great Depression, but business firms still were not borrowing all that much to build new plant and equipment. After all, who in his right mind would invest in new plant and equipment when his factory was operating at only 30 or 40 percent of capacity? Besides, said Keynes, at an interest rate of 2 percent, many people would not be willing to lend out their savings. Why tie them up at such a low interest rate? Why not just sit on this money until interest rates rose again?

So much for the interest rate mechanism. With respect to downwardly flexible wages and prices, there were institutional barriers. Labor unions would oppose lowered wage rates, while highly concentrated industries would tend to prefer output decreases to price cuts during recessions.

Keynes also raised some objections to the quantity theory of money. Most significant, he asked what would happen to the money that would be printed if the government did increase the money supply. The classicals had assumed it would be spent, thus pushing up the price level. This could happen, conceded Keynes, but during a bad recession perhaps people would just hold their money, waiting for interest rates to rise before they lent it out.

Wouldn't they spend it, as the classicals suggested? Poor people would. But if they were poor, what would they be doing with money in the first place? If the money supply were increased during a bad recession, said Keynes, that money would simply be held as idle cash balances by relatively well-to-do people. Nothing would happen to the money until the economy was well on its way toward recovery, interest rates rose, and more investment opportunities became available.

By the mid-1930s the classical school of economics had lost most of its adherents. Not everyone became a Keynesian. Conservative economists in particular could never fully reconcile themselves to the vastly increased economic role that the Keynesians awarded to the federal government. In fact, the remaining economic schools to be considered here - the monetarists, the supply-siders, and the rational expectationists - would all rail against the evils of big government.

But big government was here to stay. Although the massive spending programs of Franklin Roosevelt's New Deal did not get the country out of the Depression, the much bigger defense spending during World War II certainly did. There was no question that Keynes had been right, but since the war Americans had been plagued not just by periodic recessions but by almost unending inflation. There was growing feeling among the populace as well as professional economists that perhaps Keynesian economics was just recession and depression economics that it could not satisfactorily deal with curbing inflation.

Keynesian economics may have reached its high point in 1964, when personal income tax rates were cut by about 20 percent. This tax cut, combined with accelerating military spending during the country's escalating involvement in the Vietnam War, brought about a rapid rate of economic growth in the mid-to late 1960s; but this growth was accompanied by increasing inflation.

12.2 Read texts 12, 13 again more carefully and point out the false statements.

  1.  According to John Maynard Keynes, the problem with recessions is inadequate aggregate demand.
  2.  According to Keynes, during the depression the cure for recession was government spending.
  3.  Keynes thought that if the government printed money, increasing money supply, it would cause raising prices.
  4.  Keynes claimed that during recessions and depressions America experienced acute shortages in all spheres of economic life.
  5.  Absorption of the inactive savings that businesses were not borrowing and using enhanced the economy of the country to work again.
  6.  The classicals had conceded that the newly printed money wouldn't be spent, thus pushing up the price level.
  7.  The classical schools of economics had different points of view on the role of the federal government.
  8.  The tax cut of 1964 together with increasing war costs of the Vietnam War primed the pump in the country.

12.3 Find in the text the English equivalents of the following words and word-combinations:

  1.  поворотний пункт
  2.  підтримувати
  3.  різко падати
  4.  різкі зміни в розподілі голосів між партіями
  5.  мандат, наказ
  6.  план, проект, програма
  7.  робоча сила
  8.  підвищення
  9.  споживчі розходи
  10.  державні витрати
  11.  чистий доход
  12.  відповідний
  13.  якість
  14.  нещастя
  15.  невірний, помилковий
  16.  визивати зростання економічної активності
  17.  поглинати
  18.  бездіяльний
  19.  збільшуватися
  20.  цілеспрямований
  21.  допускати, визнавати
  22.  потужність
  23.  заморожувати, накладати обмеження
  24.  опиратися, противитися
  25.  прихильник
  26.  примирити
  27.  надавати
  28.  лаяти, сварити
  29.  бідувати
  30.  маса людей
  31.  стримувана інфляція
  32.  прискорюючий, зростаючий
  33.  втягування, вплутування

12.4. Speak briefly about the main propositions of Keynesian Economics. Use the plan and the key words and phrases to help you.

a) The general theory of employment, interest and money (landmark work; great depression; to go from bad to  worse;   unemployment    rate; to  mount; to plummet; a blueprint; inadequate aggregate demand; to provide a sufficient boost; disposable income);

b) The cure for recession is government spending (marginal efficiency of investment; an upturn in investment; to raise sufficiently; to get back to work; to be much more relevant; choice; to cause inflation; to experience deflation; having trouble finding customers);

c) Budget deficits (nothing improper; to balance budget; nothing wrong; to suck up; idle savings; to get the economy moving again; to melt away; spending programs; tax receipts; to swell; to view; temporary expedient; to get the economy off deal centre);

d) Why invest in new plant and equipment when most of the capacity is idle? (automatic mechanism; long run; concede; short run; to operate at… percent of capacity; to lend out; to tie up at; flexible wages and prices; institutional barriers; labour units; to oppose; lowered wage rates; concentrated industries; output decreases; price cuts);

e) Keynes’ objections to the quantity theory of money (to print money; to push up the level; bad recession; to hold money; to rise interest rate; idle cash balances; well-to-do people; to be on the way toward recovery; investment opportunities; to become available; adherent; to reconcile to; to award to; federal government; the monetarists; to rail against);

f) Keynesian economics is valid during recessions (to deal with; curbing inflation; to reach a high point; personal income tax rates; to cut by; tax cut; accelerating military spending; involvement; rapid rate; economic growth; to be accompanied by).

13.1. Read the text 14. Write down and translate the key words of each paragraph of the text.



Monetarism begins and ends with one obsession: the rate of growth of the money supply. According to monetarists, most of our major economic problems, especially inflation and recession, are due to the Federal Reserve's mismanagement of our rate of monetary growth.

Milton Friedman, an economist who did exhaustive studies of the relationship between the rate of growth of the money supply and the rate of increase in prices, reached a couple of not surprising conclusions. First, the United States has never had a serious inflation that was not accompanied by rapid monetary growth. Second, when the money supply has grown slowly, the country has had no inflation.

In a study of the monetary history of the United States during the period of nearly a century after the Civil War, Friedman and his longtime collaborator Anna Jacobson Schwartz reached this conclusion: "Changes in the behavior of the money stock have been closely associated with changes in economic activity, money income, and prices." Once again, the answer to all important economic questions is the rate of growth of the money supply.

Building on the quantity theory of money, the monetarists agreed with the classicals that when the money supply grows, the price level rises, albeit not at exactly the same rate. But they refuted Keynes's argument that if the money supply were raised during a recession, people might just hold on to these added funds. Like the classicals, the monetarists assumed that to get it is to spend it - not necessarily on consumer goods, but on stocks, bonds, real estate, and other noncash assets.

If people did spend this additional money, the prices of what they bought would be bid up. In other words, the monetarists were saying that the quantity theory basically holds true.

So far, so good. Now for recessions. What causes them? When the Federal Reserve increases the money supply at less than the rate needed by business - say, anything less than 3 percent a year - the economy is headed for trouble. Sometimes, in fact, the Fed does not let it grow at all and may even cause it to shrink slightly.

By and large the facts have borne out the monetarists' analysis. Without a steady increase in the money supply of at least 3 percent a year, there is a high likelihood of a recession.

13.2 Put the given below statements in the same order as they appear in the text.

  1.  Зміни в поведінці грошового запасу тісно пов'язані зі змінами в економічній діяльності, грошовому доході і цінах.
  2.  Сполучені Штати ніколи не мали серйозної інфляції, котра б не супроводжувалася швидким ростом грошової маси.
  3.  Монетаристи стверджували, що більшість економічних проблем, а саме: інфляція та спад виникають через недостатній контроль за ростом грошової маси.
  4.  Коли грошовий запас збільшувався поступово, в країні не було інфляції.
  5.  Без постійного збільшення грошової маси, в крайньому випадку, на 3% в рік, існує висока імовірність зниження економічної активності.
  6.  Подібно до класиків, монетаристи припускали, що отримати додаткові кошти означає витратити їх, не обов'язково на споживчі товари, а на акції, облігації, нерухомість та інші безготівкові активи.

13.3. Sum up the text in 7-8 sentences and present your summary in written form.

Read texts 15 and 16. Write down and translate four basic propositions of monetarism.



(Part I)

(1) The Key to Stable Economic Growth Is a Constant Rate of Increase in the Money Supply. Has our economic history been one of stable growth? No inflation? No recessions? Since World War II alone, we've had at least four waves of inflation and 10 recessions.

The monetarists place almost the entire blame on the Federal Reserve Board of Governors. If only they had been increasing the money supply by a steady 3 percent a year, we could have avoided most of this instability.

Let's trace the monetarist reasoning by analyzing the Fed's actions over the course of a business cycle. As a recession sets in, the Fed increases the rate of growth of the money supply. This stimulates output in the short run, helping to pull the economy out of the recession. In the long run, however, this expanded money supply causes inflation. So what does the Fed do? It slams on the monetary brakes, slowing the rate of growth in the money supply. This brings on a recession. And what does the Fed do in response? It increases the rate of monetary growth.

"Is this stop-go, stop-go monetary policy any way to run an economy?" ask the monetarists. This type of policy inspires about as much confidence as the student driver approaching a red light.

In the first half of the 1940s, the Fed helped finance the huge increase in the national debt (incurred by World War II) by pumping up the money supply by tens of billions of dollars. The 1950s, however, were a time of tight money, marked, incidentally, by three recessions.

In the late 1960s, an accelerating rate of monetary growth was accompanied by a rising rate of inflation, which, in the early 1970s, reached double-digit proportions. In 1973 the Federal Reserve Board put on the brakes, and we went into the worst recession we had suffered since World War II. In 1975 the Fed eased up and we recovered. Then, in late 1979, the brakes were applied. The prime rate of interest soared to more than 20 percent, and in January 1980 we went into a sharp six-month recession. What happened next? You guessed it. The Fed eased up again. Interest rates came down, and economic recovery set in. But in 1981 the Fed, alarmed at the rising inflation rate, stepped on the monetary brakes, and we entered still another recession in August 1981. The prime once again soared to more than 20 percent. This recession proved even deeper than that of 1973-75. In summer 1982 the Fed saw no course but to ease up on the brakes; sure enough, by November of that year the recession had ended.

(2) Expansionary Monetary Policy Will Only Temporarily Depress Interest Rates. In the short run, when the Fed increases the rate of monetary growth, interest rates decline. If the interest rate is the price of money, it follows that if the money supply is increased and there is no change in the demand for money, then its price (the interest rate) will decline.

The monetarists tell us that in the long run an increase in monetary growth will not lower interest rates; the increased money supply causes inflation. Lenders will demand higher interest rates to compensate them for being repaid in inflated dollars.

Let's say, for example, there's no inflation and the interest rate is 5 percent. This is the real rate of interest. The rate of inflation then rises to 8 percent; that means if it cost you $10,000 to live last year, your cost of living is now $10,800. If lenders can anticipate the rate of inflation, they will insist that they be paid not just for the real interest rate of 5 percent but also for the anticipated inflation of 8 percent. This raises the interest rate from 5 percent to a nominal rate of 13 percent.

When the Federal Reserve allows the money supply to grow quickly, interest rates are kept down for a while until lenders realize the rate of inflation (caused by faster monetary growth) is rising. They will then demand higher interest rates. Thus, a higher rate of monetary growth in the short run will keep interest rates low, but in the long run it will lead to higher interest rates.



(Part II)

(3) Expansionary Monetary Policy Will Only Temporarily Reduce the Unemployment Rate. The first two basic propositions partially explain the third. First, when monetary growth speeds up, output is expanded, but in the long run only prices will rise. Because rising output would lower the unemployment rate, in the short run unemployment is reduced. But in the long run, an increase in the rate of monetary growth will raise prices, not output, so the unemployment rate will go back up. We'll come back to why this happens.

The second basic proposition states that expansionary monetary policy only temporarily depresses interest rates. In the short run, more money means lower interest rates. These lower interest rates encourage more investment and, consequently, less unemployment.

But in the long run the added money in circulation causes inflation, which, in turn, raises interest rates. As interest rates rise, investment declines and the unemployment rate goes back up.

The monetarists have explained the temporary reduction in the unemployment rate more directly. As labor union members begin to anticipate inflation, they will demand higher wage rates. New labor contract settlements will reflect the higher cost of living, but these higher wage settlements will price some workers out of the market, thus raising the unemployment rate.

(4) Expansionary Fiscal Policy Will Only Temporarily Raise Output and Employment. Here we have another conflict between the monetarists and the Keynesians. The Keynesians believe fiscal policy, particularly heavy government spending, will pull us out of a recession. But how is this spending going to be financed? By borrowing. The Treasury goes into the market for loanable funds and borrows hundreds of billions of dollars to finance the deficit.

The monetarists point out that such huge government borrowing comes directly into conflict with that of business firms and consumers. Not only will it be harder for these groups to borrow, but interest rates will be driven up. This effect represents, according to the monetarists, a substitution of public for private spending. All we're really doing is spending more on government goods and services and less on consumer and investment goods and services. Aggregate demand is not increased.

How well would a budget surplus restrain inflation? Not very, say the monetarists. The Treasury would not be borrowing now, but rather repaying part of the national debt, which would tend to push down interest rates and make borrowing easier. Private borrowing would replace public borrowing. The hoped-for restraint would not materialize because private borrowers would now be spending these borrowed funds on goods and services. In effect, then, we would still have the same level of spending.

14.2. Find in the text the English equivalents of these words and word-combinations:

  1.  стежити
  2.  міркування, роздуми
  3.  тиснути на гальмо
  4.  політика, подібна до ривка
  5.  надихати, вселяти
  6.  накачувати, підкачувати
  7.  обмежені засоби
  8.  супроводжувати
  9.  подвоєння показників
  10.  прискорити хід
  11.  підстрибувати, стрімко рости
  12.  стривожений чимось
  13.  підвищувати, наганяти (ціну)
  14.  чекати, передбачати
  15.  стримувати, затримувати
  16.  призупиняти, погіршувати
  17.  стимулювати, підтримувати
  18.  розрахунки по контракту
  19.  вартість життя
  20.  установити високі ціни на ринку
  21.  позиковий капітал
  22.  підскочити
  23.  заміна, заміщення
  24.  стримувати, обмежувати
  25.  фактично, по суті
  26.  казначейство
  27.  національний борг
  28.  мати тенденцію

14.3 Read the texts again and answer the questions:

  1.  Why did the monetarists blame the Fed?
  2.  What was the monetarist reasoning with regard to the Fed's action over the course of a business cycle?
  3.  What were the Fed's actions for the period of 1960-1980?
  4.  How will changes in the monetary growth vary inflation and interest rates?
  5.  Why will expansionary monetary policy only temporarily reduce the unemployment rate (according to the monetarists)?
  6.  What is the essence of the conflict between the monetarists and the Keynesians?

14.4. Define the key sentences of each paragraph. Explain your choice.

14.5. Using the key words speak on four basic propositions of monetarism.

15.1 Read text 17.



The policy prescription of the monetarists is simply to increase the money supply at a constant rate. When there is a recession, this steady infusion of money will pick up the economy. When there is inflation, a steady rate of monetary growth will slow it down.

You might ask why the money supply should be increased at all during inflation. There are two answers. First, the monetarists would tell you that if we didn't increase the money supply at all, we would be going back to the old, failed monetary policies of the past - the start-and-stop, start-and-stop policies that only made the business cycle worse. Second, over the long run the economy does need a steady infusion of money to enable economic growth.

The monetarists' steady monetary growth prescription is analogous to the feeding policy of the American Army. Every day, in every part of the world, at every meal, the soldiers walk along the chow line and receive, in addition to the main course and dessert, two pieces of white bread, two pats of butter, and one pint of whole milk. The main course is also dished out in equal portions. The food servers do not dole out portions whose sizes vary with that of the eater. They look from the serving pan to the eater's tray, slopping out serving spoonfuls of whatever it is that the Army decided to cook that day.

So, we have a 6-foot 6-inch 300-pound person getting the same size portion as does a 5-foot 6-inch 130-pound person. My theory is that the Army wants everyone to be the same size - a theory that seems to be borne out by the single uniform size that is issued. If everyone eats the same portion, presumably they will all end up this same size.

Perhaps the monetarists got the idea of increasing the money supply by a constant percentage by observing Army chow lines. They believe our economic health will be relatively good - if not always excellent - if we have a steady diet of money.

15.2. Find in the text the English equivalents of the following words and word-combinations:

  1.  припис, рецепт
  2.  вливання
  3.  піднімати
  4.  сповільнювати
  5.  давати змогу (право)
  6.  аналогічний, подібний
  7.  черга за їжею
  8.  основн