UNIT 8 ACCOUNTING AND FINANCIAL STATEMENTS

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- What is the accounting process? / What are responsibilities of accountants?

- What are advantages of double-entry bookkeeping?
- What are financial statements? What information do they disclose?

PREVIEW

Match the words or phrases from a - j with their definitions from 1 – 10

a. The income statement f. Beginning merchandise inventory
b. The balance sheet g. Gross profit
c. Drawings made by the owner h. Statement of financial position
d. Financial statements i. The accounting period
e. The cost of sales j. Highly skilled employees
1. would not have any effect on the income statement. - C
Draw / Withdraw (v) to get money from a bank or an account so that you can use it: rút tiền
từ ngân hàng (tài khoản) để sử dụng
draw money/cash from sth
- Customers will be charged each time they draw cash from the cash dispensers.
- The company is now able to draw money from the £10m loan it has negotiated with
Royal Bank of Scotland.
2. refer to the report on the results of operations and changes in financial position. D
Common financial statements:
(1) balance sheets (statement of financial position)
(2) income statements;
(3) cash flow statements;
(4) statements of shareholders’ equity
3. provides information about the results of the business operation. – a
the results of the business operation can be shown via:
 Gross profit = (equals) …………….– (minus) cost of goods sold.
A. Gross sales B. net sales C. gross revenue D. net profits
 Operating profit = gross profit – operating expenses.
 EBITDA – earnings before interests, taxes, depreciations and amortization.
  EBIT - earnings before interests, taxes,
 Net income before tax = taxable income
 Net income after tax
4. provides information about the resources (assets) acquired by the firm, including where
the resources come from (sources of assets). – b – a balance sheet
Resources = assets: tài sản
- Current assets:
+ inventory – hàng tồn kho: consisting of raw materials, semi-finished goods (work
in progress, finished goods.
- Fixed assets
+ Intangible asset (n) something that does not exist in a physical way, but which has
value for a business, such as a brand name:
- A large chunk of the acquisition price will be allocated to intangible assets,
including goodwill.

Sources of assets: nguồn hình thành tài sản

- Basically, there are 2 main sources of assets: the owners’ equity and liabilities
5. is the excess net sales (doanh thu thuần) over cost of goods sold for a period. – g – gross
profit – lợi nhuận gộp

Gross profit (n) lợi nhuận gộp

Net profit = profit after tax: lợi nhuận ròng
- The owners of the company enjoy / are eligible to all net profits of the company.
6. refers to price paid for the goods sold – e - The cost of sales
7. is the cost of unsold merchandise at the beginning of the period – f Beginning
merchandise inventory – hàng tồn kho đầu kỳ
Inventory (n) hàng tồn kho
- Finished products = thành phẩm = merchandise inventory
- Raw materials
- Work in progress – sản phẩm dở dang (semi-finished products)

8. is another term for balance sheet – h – statement of financial position

9. is not reported in a company’s financial statements – j - Highly skilled employees
10. may best be described as the time span covered by the income statement. – I - The
accounting period

READING 1
ACCOUNTING PROCESS AND ACCOUNTING BOOKS
 Accounting is the process of identifying, measuring, recording, classifying,
summarizing, analyzing, interpreting and communicating the financial transactions and
events. Accounting helps in keeping systematic records to ascertain (phản ánh) financial
performance and financial position of an entity and to communicate the relevant financial
information to interested user groups. Transactions and events recorded by suitable account
headings are analyzed in terms of debit and credit; and thus, assets become equal to equity
and liabilities. Accounts are classified as personal, real and nominal types. Transactions and
events are first journalized, then posted (transferred) to suitable ledgers accounts and all
accounts are balanced at the end of year. Generally, balances of the nominal accounts are
transferred to profit and loss account for determination of profit or loss and balance of
personal and real accounts are carried to balance sheet.

- Financial transactions = business / economic transactions (activities): nghiệp vụ kinh

tế
- Identify (v) financial transactions: xác định = recognize (v) – ghi nhận
- Record (v) ghi lại records (n) – số liệu ghi chép
- Journal (n) – sổ nhật ký = book of original journalize (v)
- Measure (v) tính toán
- Classify (v) định khoản
- Theo định kỳ nhân viên kế toán phân loại các nghiệp vụ kinh tế thành các nhóm
nghiệp vụ giống nhau
 Periodically, accountants classify different transactions into different groups of
similar ones.
- Bằng phương pháp ghi sổ kép, mỗi nghiệp vụ phát sinh được ghi vào ít nhất 2 tài
khoản.
 By double-entry bookkeeping, each transaction is recorded in at least 2 accounts.
Bookkeeping (n) the activity of keeping records of all the money a company spends and
receives: hoạt động ghi sổ
 The company said many of the problems arose from insufficient controls over its
bookkeeping.
 Auditors uncovered 53 bookkeeping errors.
Double entry bookkeeping (n) - Double-entry bookkeeping or double-entry accounting
means that every transaction will involve at least two accounts.

Single-entry bookkeeping (n) hoạt động ghi sổ đơn

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Phát sinh = take place/ arise

Arising economic transactions

- original (source) documents, including contracts, bills, receipts, etc. – chứng từ gôc
- groups of similar transactions – nhóm các nghiệp vụ giống nhau
 - double entry bookkeeping – hoạt động ghi sổ kép
- summarize (v) – tổng hợp
- analyze (v) – phân tích
- analyst (n) – người phân tích
- analysis (n) sự phân tích
- financial statements – báo cáo tài chính
- three common financial statements are: balance sheets, income statements, cash flow
statements
- financial reports:
- interprete (v) – thuyết minh – notes (footnotes) to the financial statements– phần
thuyết minh cho báo cáo tài chính
- communicate accounting information + to sbd: cung cấp thông tin = provide
- journal (n) sổ nhật ký
- ledger (n) sổ cái
A person's medical records are confidential.
Original documents => Journals => ledgers => financial statements +
financial reports (annual reports)

Original (source) documents: chứng từ gôc

- purchase agreements:
- bills
- invoices
- contracts
- receipts = sales slip (US)
- etc.

Purchase book (n) a record kept by a business of what it buys on credit each day: - sổ ghi
chép mua sắm hàng ngày
- All credit purchases of goods are recorded in the purchase book.
- Her work involves writing out the transactions carried out by a company in a day
book, book-keeping and calculating the staff wages.
Bill (n) a document showing how much money you owe for goods or services you have
received: hóa đơn
big/huge/hefty, etc. bill (for sth)
- The company faces a hefty bill for repairs after the storm.
pay/settle a bill
- I don't have the money to pay this gas bill.
monthly/quarterly/weekly bill
- They can afford their monthly bills for basics such as food and housing but have
little left for luxuries.
pay/pick up a bill
 - The firm picked up the bill for him to be flown by executive jet to Edinburgh.
cut/reduce a bill
- We need to find ways of reducing our energy bills.
- If you prefer you can request an itemized bill and get a list of every call you have
made.
gas/phone/tax, etc. bill

Invoice (n) a document that lists things provided or work done, gives their cost, and asks for
payment: hóa đơn
raise/generate an invoice – lập hóa đơn
- I raised an invoice for work done last year and use last month.
Issue – lập /send/submit – gửi/ nộp - an invoice
- The supplier must issue an invoice for all taxable supplies.
pay/settle an invoice: thanh toán hóa đơn
Receipt (n) a piece of paper that shows the price of something that you have bought and
proves that you have paid for it: Biên lai
get/keep/retain a receipt
- Always get a receipt when you withdraw cash from a machine.
a credit card receipt

Interested user groups include:

+ the management – ban lãnh đạo (The Board of Directors – hội đồng quản trị)
+ investors – nhà đầu tư (shareholders of the company, potential investors, creditors)
+ employees of the entity – nhân viên công ty
+ government authorities – cơ quan ban ngành thuộc chính phủ
+ auditors – kiểm toán viên
+ students majoring in finance and accounting – sinh viên chuyên ngành tài chính –
kế toán
+ journalists – nhà báo

Post (v) - posting (n) kết chuyển

Liquidity (n) -
Resources = assets: Tài sản
Sources of resources / assets: nguồn hình thành tài sản

Basic accounting equation: phương trình kế toán căn bản

Assets (Resources) (tài sản) = Liabilities (Nợ) + Equity (vốn chủ sở hữu)

Basically there are 2 sources of equity and liabilities

Record (v) to keep information for the future, by writing it down or storing it on a
computer:
 - She records everything that happens to her in her diary.
- Unemployment is likely to reach the highest total that has ever been recorded.
- [ + that ] In his journal, Captain Scott recorded that he and his companions were
weakened by lack of food.
Analysis (n) the study of something in detail: - sự phân tích (nghiên cứu cái gì đó chi tiết)
carry out/perform/conduct an analysis
- We carried out an analysis of visitors to the website by age, sex, and region.
scientific/chemical analysis
- Chemical analysis revealed a high content of copper.
detailed/comprehensive/in-depth analysis
- The data can be fed to a computer for detailed analysis.
statistical/structural/numerical analysis

KEY TAKEAWAYS
 A journal is a detailed record of all the transactions done by a business daily.
 Reconciling accounts and transferring information to other accounting records is
done using the information recorded in a journal.
 When a transaction is recorded in a company's journal, it's usually recorded using a
double-entry method, but can also be recorded using a single-entry method of
bookkeeping.
 The double-entry method reflects changes in at least two accounts after a transaction
has occurred; an increase in one and a decrease in the corresponding account.
 Single-entry bookkeeping is rarely used and only notes changes in one account.

A ledger is a book containing accounts in which the classified and summarized information
from the journals is posted as debits and credits. It is also called the second book of entry.

T- account

The ledger contains the information that is required to prepare financial statements. It
includes accounts for assets, liabilities, owners' equity, revenues and expenses. This
complete list of accounts is known as the chart of accounts. The ledger represents every
active account on the list.

Responsibilities of accountants in general

Accountants have to:
- Identify and bookkeep (record) economic (business) transactions (activities) which
arise during the accounting period. On daily basis, these transactions are recorded in
a journal in terms of money based on the original (source) documents.
 - Classify all economic transactions during a certain period of time into similar groups
regularly (monthly/ quarterly). Each group of transactions is recorded in at least 2
accounts in a ledger (this is known as the double entry bookkeeping)
- Summarize and analyze accounting data based on the accounting books to prepare
(construct / produce) financial statements and financial reports at the end of the year.
- Communicate accounting information to interested user groups

Original documents => Journals => ledgers => financial statements +

financial reports (annual reports)

Topic question:
- What are responsibilities of accountants in general?/ What is the accounting process?

Đọc và dịch bài sau sang tiếng Việt

The process of accounting, depicting how information flows from the source
documents up to the stage where final accounts (financial statements) are prepared, can be
shown as:

Source Documents Represent all documents in business which contains financial

records and act as evidence of the transactions which have
taken place. (arise – phát sinh)
Nghiệp vụ kinh tế phát sinh = arising economic transactions

Book of Original These are books which are used in recording the transactions
Entry for the first time. The books are maintained for memorandum
purpose only and will not form part of the double entry system.
Examples include: Purchase day book, Cash book, Sales day
book and purchases return day book.

Ledger Accounts These form (v) part of double entry system and used to record
the transactions for the period. These are accounts where
information relating to a particular asset, liability, capital,
income and expenses are recorded.

Trial Balance Contains the totals from various ledger accounts and act as a
preliminary check on accounts before producing final accounts.

Final Accounts Financial Statements are produced to show the financial

performance and financial position of a business entity.
Book of original = Journal – Sổ nhật ký/ Sổ nhật biên:
 Purchase (day) book = Purchase journal: a record kept by a business of what it
buys on credit each day: Sổ mua hàng (sổ mua chịu)
- All credit purchases of goods are recorded in the purchase book.
 Cash book is a written record of the amounts of money a company receives or
spends: Sổ thu chi/ Sổ tiền mặt
- If you are self-employed you are advised to keep a cash book listing your income and
expenses.
 Sales day book is a record kept by a business of the money it receives from the
goods it sells each day: Sổ bán hàng
- He would write the invoice dates followed by the names of the customers in the first
two columns of his sales day book.
 Sales return book (n) a book in which a company or store records details of all
products that customers have returned – Sổ hàng bán trả lại
 Purchase returns day book: Sổ trả lại hàng mua (When a business returns goods it
has purchased on credit it receives a credit note from the supplier and records
this in the purchases returns day book.)

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What is double entry bookkeeping?

What are advantages of double entry bookkeeping?

BASIC ACCOUNTING PROCEDURES – JOURNAL ENTRIES

1. Double entry system
Double entry system of book-keeping has emerged in the process of evolution of various
accounting techniques. It is the only scientific system of accounting.

Emerge (v) to become known or develop as a result of something: ra đời và phát triển
- New business opportunities will emerge with advances in technology.

According to it, every transaction has two-fold aspects – debit and credit and both the
aspects are to be recorded in the books of accounts. For example, if a business acquires
something then either it must have been given by someone or it must have been acquired by
giving up something.
Acquire = buy
On purchase of furniture either the cash balance will be reduced or a liability to the supplier
will arise. This has been made clear already, the Double Entry System is so named since it
records both the aspects. We may define the Double Entry System as the system which
recognizes and records both the aspects of transactions. This system has proved to be
systematic and has been found of great use for recording the financial affairs for all
institutions requiring use of money.

Acquire (v) = buy = purchase + sth: mua cái gì đó

Give up sth : từ bỏ cái gì
Aspect (n) khía cạnh
financial affairs = financial transactions = financial operations
2. Advantages of Double Entry System
This system affords the under mentioned advantages:
(i) By the use of this system the accuracy of the accounting work can be
established, through the device of the trial balance.
(ii) The profit earned or loss suffered during a period can be ascertained together
with details.
(iii) The financial position of the firm or the institution concerned can be ascertained
at the end of each period, through preparation of the balance sheet.
(iv) The system permits accounts to be kept in as much details as necessary and,
therefore affords significant information for the purposes of control etc.
(v) Result of one year may be compared with those of previous years and reasons for
the change may be ascertained.
It is because of these advantages that the system has been used extensively in all countries.
Purpose of control: phục vụ cho mục đích quản lý
Afford sth: đảm bảo
Do sth in detail (adv) – một cách chi tiết
Permit sth/ sbd to do sth
be compared with : được so sánh với

Viết lại topic: những ưu điểm của hệ thống ghi sổ kép (không chép lại cả đoạn trên)
Tham khảo thêm về ưu điểm của ghi sổ kép

Double-entry bookkeeping (which is sometimes referred to as double-entry

accounting) allows a business to record all its financial transactions in a
structured way. It can then provide the owners or their accountants with the
information they need to deal with all the tax and financial submission
requirements the business will have such as VAT returns, annual accounts, tax
returns and cashflow statements.
It also enables business owners to track their finances on a regular basis,
helping them to understand how the business is performing and supporting key
financial decisions.

Using double-entry bookkeeping to record transactions provides you and your

accountant with a detailed, comprehensive view of your financial affairs.

3. Accounts
Accounts are financial records of an organization that register all financial transactions, and
must be kept at its principal office of business. The purpose of these records is to enable
anyone to appraise the organization's current financial position with reasonable accuracy.
Firms present their annual accounts in two main parts: the balance sheet, and the income
statement (profit and loss account). The annual accounts of a registered or incorporated firm
are required by law to disclose a certain amount of information, and to be certified by an
external auditor that they present a 'true and fair view' of the firm's financial affairs.

Principal office of business refers to the management (ban lãnh đạo) / the Board of
Directors (Ban Quản trị)
Disclose (v) – công bố công khai
Registered firms: công ty niêm yết.
Certificate (n) chứng chỉ/ giấy chứng nhận
Certification (n) sự chứng nhận
Certify (v) chứng nhận, kiểm định
External auditor (n) công ty kiểm toán độc lập

COMPREHENSION QUESTIONS
1. How is accounting defined?
2. What is difference between book-keeping and accounting?
3. In daily operations, which book are transactions of a business firstly recorded in?
4. For what purpose is this book maintained?
5. What does “double entry bookkeeping” mean?
6. Which book forms part of double entry bookkeeping?
7. What are advantages of double entry system?
8. What are accounts?
LG
Trade names/ brands
Current assets – tài sản ngắn hạn
Cash at bank – tiền gửi ngân hàng
Cash on hand – tiền ở quỹ (used for daily expenses)
Cash equivalent (n) money in a company's bank accounts and other assets that can
easily be changed into money: tương đương tiền mặt
- The company believes that its existing cash and cash equivalents are sufficient to
meet their cash requirements during the next twelve months.
Temporary investments – đầu tư ngắn hạn
Short-term investments, also known as marketable securities or temporary investments, are
financial investments that can easily be converted to cash, typically within five years. Many
short-term investments are sold or converted to cash after a period of only three-12 months.
Some common examples of short-term investments include CDs, money market accounts,
high-yield savings accounts, government bonds, and Treasury bills. Usually, these
investments are high-quality and highly liquid assets or investment vehicles.
Accounts receivable – khoản phải thu - the amounts in a company's accounts that
show money that is owed to the company by its customers:
- At the end of the fiscal year, the company had $106 million in accounts receivable.
Inventory: raw materials + unfinished (semi-finished) products/ work in progress +
finished products
Current assets are considered short-term assets because they generally are convertible to
cash within a firm's fiscal year, and are the resources that a company needs to run its day-
to-day operations and pay its current expenses.
Noncurrent assets (fixed assets) are a company’s long-term investments that have a useful
life of more than one year. Noncurrent assets cannot be converted to cash easily. They are
required for the long-term needs of a business and include things like land and heavy
equipment.
Fixed assets are converted to cash in terms of annual depreciations during their lifetime.
Accumulated depreciation: hao mòn lũy kế
Fixed assets: tangible (visible) assets + intangible (invisible) assets (such as reputation,
trademark, brands, patents, invention, etc.)
Tangible asset (n) a physical asset whose value can be easily measured, such as cash,
property, goods, or machinery:
- The pension fund invests the savings of its members in tangible assets such as land
and buildings.
Goodwill (n) part of a company's value that includes things that cannot be directly
measured, for example, its good reputation (uy tín/ danh tiếng) or its customers' loyalty (sự
trung thành của khách hàng):
- The company's assets are worth £200 million, plus goodwill.
Liabilities
Accounts payable refer to the amounts of money owed to the suppliers.
Accounts payable (n) the amounts in a company's accounts that show money that it owes,
for example to suppliers (= companies that have sold them things):
- Accounts payable were $676 million lower as of the middle of this year compared to
a year ago.
Owe (v) to need to pay or give something to someone because they have lent money to you:
nợ
- owe sb $5/$500, etc. I owe you £200.
- How much do we owe the bank?
 - He claims the firm owes him money.
- owe $5/$500, etc. to sb The company owes $618 million to its creditors.
- owe $100/$1000, etc. on sth We still owe $1000 on our car.
- owe $100/$1000, etc. in sth The government alleges that he owes $54 million in
unpaid taxes.
Note payable (n) a document that relates to money that a company owes, especially money
that must be paid back within a year or less: thương phiếu phải trả
- About $111 million in notes payable will be canceled.
Unearned revenues: doanh thu chưa thực hiện
Số tiền đã nhận/ trước khi hàng hóa được bán hoặc một dịch vụ được cung cấp. Doanh thu
chưa thực hiện được phân loại là nợ phải trả ngắn hạn trên bảng cân đối cho đến khi nó
được ghi nhận là nhận được trong kỳ kế toán.
Unearned revenues refer to received amounts of money before goods are sold or services
are provided.
Payment received before a good is sold or a service is provided. Unearned revenue is
classified as a current liability on the balance sheet until it is recognized as earned during
the accounting cycle.
Cổ phiếu quĩ (tiếng Anh: Treasury shares/ stock) là cổ phiếu được mua lại bởi công ty phát
hành bằng nguồn vốn hợp pháp và sẽ được tái phát hành trở lại trong khoảng thời gian theo
qui định của pháp luật về chứng khoán.
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VOCABULARY EXERCISES
Exercise 1: Choose the best answers.
1. Which one of the following is not a short-term asset?
A. Cash reserves of the organization – cash on hand (tiền mặt ở quỹ)
B. Machinery
C. Funds collected from debtors (accounts receivable)
D. Inventories – hàng tồn kho
2. Which of the following equations cannot be derived (k được suy ra từ) from the basic
accounting equation?
A. Assets – Liabilities = Owners’ Equity
B. Liabilities = Assets – Owner’s Equity
C. Owners’ Equity = Liabilities – Assets
D. Assets – Owners’ Equity = Liabilities

Basic accounting equation – phương trình kế toán cơ bản

Assets = Liabilities + Shareholders’ equity
Assets are equal to Liabilities added with Shareholders’ equity

Equal (adj) the same in price, number, size, etc.:

- The values of cross-border and internal sales were about equal over the year.
an equal amount/number/share
- Instead of an equal share, we got only one-fifth of the profits.
equal to sth
- She received a bonus of $15,065, equal to 40% of her salary.
equal in number/value/size
- Sakhalin is an island north of Japan, with oil and gas reserves equal in size to those
remaining in the North Sea.

3. Which of the following transactions causes ‘total assets to increase by $10,000’?

A. Purchasing an automobile for $10,000 cash.
B. Purchasing $10,000 of office furniture on account.
C. Collecting a $10,000 account receivable
D. Paying a $10,000 liability.

D creates a decrease in cash, leading to a decrease in total assets

B creates an increase in fixed assets, leading to an increase in total assets, and an increase
in liabilities at the same time.
A, C doesn’t make any change to the total assets.

4. If assets are $4,000 –

A. Stockholders’ equity must be $4,000.
B. Liabilities must be $4,000.
C. Stockholders’ equity plus liabilities must be $4,000.
D. None of the above.
5. In the balance sheet equation, an increase in an asset –
A. May be accompanied by an increase in a liability.
B. May be accompanied by a decrease in an asset.
C. May be accompanied by an increase in revenues.
D. All of the above.
6. Purchased office supplies for inventory on account.
A. Increase in one asset, decrease in another asset.
B. Increase in an asset, increase in a liability.
C. Increase in an asset, increase in stockholder’s equity.
D. Decrease in an asset, decrease in a liability.

Buy sth on account = buy sth on credit: mua trả góp

7. Paid rent for October in September.

 A. Increase in one asset, decrease in another asset.
B. Increase in an asset, increase in a liability.
C. Increase in an asset, increase in stockholder’s equity.
D. Decrease in an asset, decrease in a liability.
8. Earned service revenue, receiving cash.
A. Increase in one asset, decrease in another asset.
B. Increase in an asset, increase in a liability.
C. Increase in an asset, increase in stockholder’s equity.
D. Decrease in an asset, decrease in a liability.
9. Business obligation
A. Asset
B. Liability
C. Capital
D. None of the above
10. Which of the following is not a current liability
A. Unearned rent
B. Notes payable
C. Mortgage payable (part of long term liabilities)
D. None of the above

Exercise 2: Fill in the gaps in the following passage with suitable words.
FOUR PHASES OF ACCOUNTING
Based on the definition, there are four phases of accounting.
(1) ……Recording……….: This is technically called bookkeeping. Some people confuse
bookkeeping and accounting as one and the (2) …same………. However, bookkeeping is
only a part of accounting – the recording phase. In this phase, business (3) …
transactions……… are recorded systematically (có hệ thống) and chronologically (theo
trình tự thời gian) in the proper accounting books. There are two kinds of bookkeeping: the
single-entry bookkeeping and the (4) …double……. entry bookkeeping. Single entry
bookkeeping does not show the two-fold effects of business transactions. It shows only the
debit or the credit of each transaction. The double entry bookkeeping, however, reflects the
two-fold effects ( tác động hai chiều) of business transactions. It has a (5) ……debit…….
and a credit.
Show = reflect = indicate = ascertain
(6) ………Classifying……...: In this phase, items are sorted and grouped. Similar items are
classified under the same name. They may be classified as asset accounts, liability accounts,
capital accounts, revenue accounts and (7) ……expense……. accounts. This classification
is useful to the needs of management.
(8) ……Summarizing………: After each accounting period, data recorded are summarized
through financial statements. These reports are submitted (nộp) to the management at the
(9) ……end……. of each accounting period or as the need arises. (phát sinh)
Interpreting. Usually, due to the technicality of accounting reports, the accountant’s
interpretation on the financial statement is needed. In this case, (10) ……analysis……
reports are submitted together with the financial statements.

READING 2 FINANCIAL STATEMENTS

There are four main financial statements. They are: (1) balance sheets; (2) income
statements; (3) cash flow statements; and (4) statements of shareholders’ equity. Balance
sheets show what a company owns and what it owes at a fixed point in time. Income
statements show how much money a company made and spent over a period of time. Cash
flow statements show the exchange of money between a company and the outside world
also over a period of time. The fourth financial statement, called a “statement of
shareholders’ equity,” shows changes in the interests of the company’s shareholders over
time.
Let’s look at each of the first three financial statements in more detail.
Balance Sheets
A balance sheet provides detailed information about a company’s assets, liabilities
and shareholders’ equity.
Assets are things that a company owns that have value. This typically means they can
either be sold or used by the company to make products or provide services that can be sold.
Assets include physical property, such as plants, trucks, equipment and inventory. It also
includes things that can’t be touched but nevertheless exist and have value, such as
trademarks and patents. And cash itself is an asset. So are investments a company makes.

physical property = visible assets = tangible assets – tài sản hữu hình
- Plants, buildings, factories, …
- Machines, equipment
- Inventory – hàng tồn kho, including raw materials, work in progress and finished
products
invisible assets = intangible assets – tài sản vô hình
- Brands – nhãn hiệu (gắn với từng loại sản phẩm)
- trademarks

Liabilities are amounts of money that a company owes to others. This can include all kinds
of obligations, like money borrowed from a bank to launch a new product, rent for use of a
building, money owed to suppliers for materials, payroll a company owes to its employees,
environmental cleanup costs, or taxes owed to the government. Liabilities also include
obligations to provide goods or services to customers in the future.
Shareholders’ equity is sometimes called capital or net worth. It’s the money that would be
left if a company sold all of its assets and paid off all of its liabilities. This leftover money
belongs to the shareholders, or the owners, of the company.
The following formula summarizes what a balance sheet shows:
ASSETS = LIABILITIES + SHAREHOLDERS' EQUITY
A company's assets have to equal, or "balance," the sum of its liabilities and shareholders'
equity.
A company’s balance sheet is set up like the basic accounting equation shown above.
On the left side of the balance sheet, companies list their assets. On the right side, they list
their liabilities and shareholders’ equity. Sometimes balance sheets show assets at the top,
followed by liabilities, with shareholders’ equity at the bottom.
Assets are generally listed based on how quickly they will be converted into cash.
Current assets are things a company expects to convert to cash within one year. A good
example is inventory. Most companies expect to sell their inventory for cash within one
year. Noncurrent assets are things a company does not expect to convert to cash within one
year or that would take longer than one year to sell. Noncurrent assets include fixed assets.
Fixed assets are those assets used to operate the business but that are not available for sale,
such as trucks, office furniture and other property.
Liabilities are generally listed based on their due dates. Liabilities are said to be
either current or long-term. Current liabilities are obligations a company expects to pay off
within the year. Long-term liabilities are obligations due more than one year away.
Shareholders’ equity is the amount owners invested in the company’s stock plus or minus
the company’s earnings or losses since inception. Sometimes companies distribute earnings,
instead of retaining them. These distributions are called dividends.
A balance sheet shows a snapshot of a company’s assets, liabilities and shareholders’
equity at the end of the reporting period. It does not show the flows into and out of the
accounts during the period.
Income Statements
An income statement is a report that shows how much revenue a company earned
over a specific time period (usually for a year or some portion of a year). An income
statement also shows the costs and expenses associated with earning that revenue. The
literal “bottom line” of the statement usually shows the company’s net earnings or losses.
This tells you how much the company earned or lost over the period.
Income statements also report earnings per share (or “EPS”). This calculation tells
you how much money shareholders would receive if the company decided to distribute all
of the net earnings for the period. (Companies almost never distribute all of their earnings.
Usually they reinvest them in the business.)
To understand how income statements are set up, think of them as a set of stairs. You
start at the top with the total amount of sales made during the accounting period. Then you
go down, one step at a time. At each step, you make a deduction for certain costs or other
operating expenses associated with earning the revenue. At the bottom of the stairs, after
deducting all of the expenses, you learn how much the company actually earned or lost
during the accounting period. People often call this “the bottom line.”
At the top of the income statement is the total amount of money brought in from
sales of products or services. This top line is often referred to as gross revenues or sales. It’s
called “gross” because expenses have not been deducted from it yet. So the number is
“gross” or unrefined.
The next line is money the company doesn’t expect to collect on certain sales. This
could be due, for example, to sales discounts or merchandise returns.
When you subtract the returns and allowances from the gross revenues, you arrive at
the company’s net revenues. It’s called “net” because, if you can imagine a net, these
revenues are left in the net after the deductions for returns and allowances have come out.
Moving down the stairs from the net revenue line, there are several lines that represent
various kinds of operating expenses. Although these lines can be reported in various orders,
the next line after net revenues typically shows the costs of the sales. This number tells you
the amount of money the company spent to produce the goods or services it sold during the
accounting period.
The next line subtracts the costs of sales from the net revenues to arrive at a subtotal
called “gross profit” or sometimes “gross margin.” It’s considered “gross” because there are
certain expenses that haven’t been deducted from it yet.
The next section deals with operating expenses. These are expenses that go toward
supporting a company’s operations for a given period – for example, salaries of
administrative personnel and costs of researching new products. Marketing expenses are
another example. Operating expenses are different from “costs of sales,” which were
deducted above, because operating expenses cannot be linked directly to the production of
the products or services being sold.
Depreciation is also deducted from gross profit. Depreciation takes into account the
wear and tear on some assets, such as machinery, tools and furniture, which are used over
the long term. Companies spread the cost of these assets over the periods they are used.
This process of spreading these costs is called depreciation or amortization. The “charge”
for using these assets during the period is a fraction of the original cost of the assets.
After all operating expenses are deducted from gross profit, you arrive at operating
profit before interest and income tax expenses. This is often called “income from
operations.”
 Next companies must account for interest income and interest expense. Interest
income is the money companies make from keeping their cash in interest-bearing savings
accounts, money market funds and the like. On the other hand, interest expense is the
money companies paid in interest for money they borrow. Some income statements show
interest income and interest expense separately. Some income statements combine the two
numbers. The interest income and expense are then added or subtracted from the operating
profits to arrive at operating profit before income tax.
Finally, income tax is deducted and you arrive at the bottom line: net profit or net
losses. (Net profit is also called net income or net earnings.) This tells you how much the
company actually earned or lost during the accounting period. Did the company make a
profit or did it lose money?
Earnings Per Share or EPS
Most income statements include a calculation of earnings per share or EPS. This calculation
tells you how much money shareholders would receive for each share of stock they own if
the company distributed all of its net income for the period.
To calculate EPS, you take the total net income and divide it by the number of outstanding
shares of the company.
Cash Flow Statements
Cash flow statements report a company’s inflows and outflows of cash. This is
important because a company needs to have enough cash on hand to pay its expenses and
purchase assets. While an income statement can tell you whether a company made a profit,
a cash flow statement can tell you whether the company generated cash.
A cash flow statement shows changes over time rather than absolute dollar amounts
at a point in time. It uses and reorders the information from a company’s balance sheet and
income statement.
The bottom line of the cash flow statement shows the net increase or decrease in
cash for the period. Generally, cash flow statements are divided into three main parts. Each
part reviews the cash flow from one of three types of activities: (1) operating activities; (2)
investing activities; and (3) financing activities.
Operating Activities
The first part of a cash flow statement analyzes a company’s cash flow from net
income or losses. For most companies, this section of the cash flow statement reconciles the
net income (as shown on the income statement) to the actual cash the company received
from or used in its operating activities. To do this, it adjusts net income for any non-cash
items (such as adding back depreciation expenses) and adjusts for any cash that was used or
provided by other operating assets and liabilities.
Investing Activities
The second part of a cash flow statement shows the cash flow from all investing
activities, which generally include purchases or sales of long-term assets, such as property,
plant and equipment, as well as investment securities. If a company buys a piece of
machinery, the cash flow statement would reflect this activity as a cash outflow from
investing activities because it used cash. If the company decided to sell off some
investments from an investment portfolio, the proceeds from the sales would show up as a
cash inflow from investing activities because it provided cash.
Financing Activities
The third part of a cash flow statement shows the cash flow from all financing
activities. Typical sources of cash flow include cash raised by selling stocks and bonds or
borrowing from banks. Likewise, paying back a bank loan would show up as a use of cash
flow.
Revenues
Gross sales 640
Less: Sales returns 6
Less: Sales discounts 4
(10)
Net sales 630
Costs of goods sold
Purchases 290
Salaries of manual workers 30
Transport costs 30
Cost of goods sold (350)
Gross profit 280
Operating expenses
Selling expenses
Salaries for sales staff 82
Advertising 18
Total selling expenses 100
General expenses
Salaries for administrative staff 52
Insurance 6
Rent 18
Light, heat and power 10
Office supplies 2
Miscellaneous 2
Total general expenses 90
Total operating expenses (190)
Operating profit 90
Non-operating income 5
EBITDA 95
Depreciation (10)
EBIT 85
Interest paid on bank loans (6)
Net income before taxes 79
Less: Income tax (19)
Net income after taxes 60
Dividends (13)
Retained profit €47
Exercise 1: Choose the best answers A, B, C or D.
1. Which of the following statements is correct?
A. Beginning retained earnings + net income – dividends = ending retained earnings
B. Beginning retained earnings - net income + dividends = ending retained earnings
C. Beginning retained earnings + net income + dividends = ending retained earnings
D. Beginning retained earnings - net income – dividends = ending retained earnings
2. The declaration and payment of a cash dividend is reported in the
A. Income statement as an expense
B. Statement of cash flows as a source of cash
C. Statement of retained earnings as a subtraction from beginning retained earnings
D. None of the above
3. A business that prepares quarterly financial statements
A. Must close its accounts quarterly
B. Must adjust its accounts at least quarterly
C. May not issue annual financial statements
D. Must obtain special permission from the IRS
4. Why is cash flow more important than accounting income?
A. Cash can be used to buy finished goods from suppliers
B. Cash can be used to buy raw materials and make into finished goods
C. Accounting methods recognize income at times other than when cash is actually
received or spent.
D. Cash has more liquidity
5. What does cash flow from operation include?
A. Depreciation
B. Net income
C. Increase in current asset
D. Decrease in liabilities
6. The change statements explain changes in a company’s position from one date to another.
The change statements include –
A. Income statement, statement of cash flows, and retained earnings statement.
B. Balance sheet, earnings statement, and statement of cash flows.
C. Income statement, position statement, and statement of cash flows.
D. Income statement, balance sheet, and retained earnings statement.
1A, 2C , 3A , 4C , 5C , 6C , 7A , 8B , 9D , 10D
7. Preparation of financial statements will be made easier with the aid of a
A. Trial balance
B. Worksheet
 C. Ledger
D. None of the above
8. The cost of merchandise bought for the period is
A. Sales
B. Merchandise
C. Purchase
D. None of the above
9. The balance sheet is a statement showing
A. The rights and things of value owned by the business
B. The amounts owed by the business
C. The financial interest of the owner in the assets of the business
D. All of the above
10. The difference between the sales and the cost of the sales is
A. Net sales B. Net purchases
C. Net profit D. None of the above

Exercise 2: Fill in the gaps in the following passage with suitable words.
RELATIONSHIPS BETWEEN FINANCIAL STATEMENTS
In a technical sense, the income statement is subordinate to the (1) ……….. sheet. This is
because it shows in some detail the items that collectively account for most of the period’s
net change in only one balance sheet item, (2) ………… earnings. Nevertheless, the
information on the income statement is regarded by many to be more important than (3)
………….. on the balance sheet. This is because the income statement reports the (4)
…………. of operations and indicates reasons for the entity’s (5) …………….. (or lack
thereof). The importance of the income statement is illustrated by this fact: In situations
where accountants in recording an event must choose between a procedure that distorts the
balance sheet or one that distorts the income statement, they usually choose not to (6)
………….. the income statement.
The balance sheet and income statement are said to articulate because there is a definite (7)
…………….. between them. More specifically, the amount of net income reported on the
income statement, together with the amount of dividends, explains the change in retained
earnings between the two balance sheets prepared as of the beginning and the end of the
accounting period.
Although many consider the balance sheet to be the most fundamental financial statement,
the income statement is also very important because it indicates the profitability of the
business. As you will learn, if a company repeatedly shows a net (8) ……….., when
expenses exceed revenues, the company will not be able to survive unless owners or
creditors are willing to provide more resources.
The retained earnings statement explains the changes that occurred in the retained earnings
portion of stockholder’s (9) ………….. during a period of time due to business operations
(net income) and payments made to owners in the form of dividends which are returns to
stockholders for their investment in the business. Retained earnings are only shown in
statements prepared by corporations.
The statement of cash flows classifies the three major types of business activities –
investing, financing, and (10) ……………. – and shows where the cash came from during a
period, how the cash was used, and the resulting cash balance.