Reading Comprehension

G: Comprehension questions

Paragraphs 1, 2, and 3 of this lesson are introductory. They discuss the need for bookkeeping and accounting, and how bookkeeping and ac­counting information is used to construct a balance sheet indicating the financial condition of a business. The remaining paragraphs describe the various sections of the balance sheet and what they show. The balance sheet is really a classification of financial information: similar items are grouped together, and their similarity is explained. Answer the following questions about the balance sheet based on your reading of Paragraphs 4, 5, 6, 7, and 8.

1. Why is merchandise regarded as a current asset?

2. What do companies often do with extra cash?

3. What effect do slow sales have on liquidity?

4. How would machinery and production equipment be listed on the balance sheet?

5. What is one method of determining yearly depreciation of equipment?

6. How can the income tax law affect figures on the balance sheet?

7. What is the difference between calculating the value of land and the value of a building?

8. What is similar between the classification of liabilities and the classification of assets?

9. Where do companies list debts on which they must pay interest?

10. Where do they list the interest they must pay?

11. What is the main difference between a bond and a mortgage?

12. What is a similarity between a bond and a mortgage?

13. How does a company determine its net worth?

14. What is the book value of a stock?

15. Why would a company want to take over another company whose stock was trading at much less than its book value?

Writing

The portion of this lesson describing the balance sheet is written in a method that organizes information. We refer to this method as classification. Just as the account groups together similar financial transactions, the balance sheet groups together similar accounts. Another method of organizing information is called comparison and contrast. If items have some similar characteristics we can compare them; if they have opposite characteristics we can contrast them. If two items are exactly alike, there is no need to compare them. We would simply say that they are exactly alike. On the other hand, if two things are com­pletely different, having no common characteristics or uses, there is no point in contrasting them. The balance sheet provides us with several items which, although they share certain characteristics, in some ways are also different. For example, current assets are both similar to and different from current liabilities. Fixed assets are similar to and different from long-term liabilities. An understanding of these similarities and differences will help us to understand why these items have been placed in their respective categories on the balance sheet.

H: Writing a paragraph

Write a paragraph in which you discuss the similarities and differences between current assets and liabilities or fixed assets and long-term liabilities. First make a list of the similarities between the two groups, and then make a list of the differences. Your conclusion should state that as a result of these similarities and differences, a balance sheet is able to express these characteristics in graphic form.

Vocabulary Review: Rephrasing

I: Rephrasing words and expressions

Rewrite the following sentences. Replace the words and expressions in italics with expressions from the text which have the same meaning.

1. All businesses need to record financial transactions in order to know whether or not they are profitable.

2. In daily business operations figures are first entered in the book of original entry.

3. Periodically, bookkeepers post journal figures in the book containing all the accounts of the company.

4. Accountants use ledger information to construct balance sheets and income expense statements.

5. Management uses financial statements in order to make business decisions and in order to determine how much tax to pay.

6. The value of the company is equal to the amount of money it owes to creditors and the amount it owes to its owners.

7. On the right side of the page are listed the debts and the net worth.

8. Certain items of value to the company are bought and sold on a regular basis; other items are held by the company for a long time.

9. Inventories and receivables are considered current assets.

10. If a company needs to have cash, it can sell some of its securities.

11. The value of machinery is determined by subtracting its decline in value due to use from its original cost to the company.

12. The formula for determining the decline in value may be specified in the tax law.

13. Equipment attached to the building should also show decline in value.

14. Debts are divided into two groups: debts to be paid during the present business year; debts to be paid over many years.

15. This debt is secured by an interest in the property.

16. Investors purchasing these securities believe in the good name of the company.