Unit 4

FINANCIAL STATEMENTS

Overview
In this unit, students will be learned a brief overview of financial statements: the
balance sheet, the income statement, and the statement of cash flows.

Learning objectives
After this unit, students should be able to:
>> Understand the function of financial statements

>> Know about three main financial statements: the balance sheet, the income
statement, and the statement of cash flows

Think and discuss

1. What is a financial statement in your opinion?
2. What is the role of financial statement in a company’s business activities??

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1. SPECIAL TERMS
Match the words or expressions in the column A with their definition in column
B. You can look it up for more detailed explanations in specialist dictionary.

Column A Column B
A. Money a business owes to suppliers for
1. Balance sheet
purchases made on credit.
B. A security representing a portion of the
2. Income statement
nominal capital of a company.
C. Money realized by selling shares at above
3. Cash flow statement
their par or nominal value.
D. A financial statement that shows a
company’s financial condition (amounts of
4. Shareholder’s equity
debits and credits) on the last day of an
accounting period.
E. A share in the annual profits of a limited
5. Creditors
company, paid to shareholders.
F. A financial statement that shows the profit
6. Debtors or loss made by a company during the
accounting period.
G. Money paid to a lender for the use of
7. Interset
borrowed money.
H. A financial statement that explains how
an organization obtains and spends cash, as
8. Share
well as other factors that may affect cash
positions.
I. The money subscribed to buy share plus a
9. Share premium
company’s retained profits.
J. Sums of money owed by customers for
10. Dividend
goods or services purchased on credit.

2. READING

READING 1

Reading text 1: Financial Statements and do exercise 2.1 below.

FINANCIAL STATEMENTS

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 Companies are required by law to give their shareholders certain financial
information. Most companies include three financial statements in their annual reports.
They are income statements, balance sheets and cash flow statements.
The income statement shows financial results for the period its represents. It’s also
known as a statement of profit or loss (or P&L) – mostly among non-accountants,
particularly small business owners. It gives figures for total sales or turnover (the amount
of business done by the company during the year), and for costs and overheads. If the first
figure exceeds the second, there is a profit - an excess of income over expenses. In contrast,
it demonstrates the company's loss. Part of the profit is paid to the government in taxation,
part is usually distributed to shareholders as a dividend, and part is retained by the company
to finance further growth, to repay debts, to allow for future losses, and so on.
The balance sheet shows the financial position of the company on a particular date,
generally the last day of its financial year. Most accounting textbooks use the cliched
expression that the balance sheet is a “snapshot” of the company’s financial position at a
point of time. This expression means that when you look at the balance sheet as of
December 31, 2021, you know the company’s financial position as of that date. It lists the
company’s assets, its liabilities, and shareholders’ equity. A business’s assets consist of its
cash investments and property (buildings, machines, and so on), and debtors- amounts of
money owed by customers for goods and services purchased on credit. Liabilities consist
of all the money that a company will have to pay to someone else, such as taxes, debts,
interest and mortgage payments, as well as money owed to suppliers for purchases made
on credit, which are grouped together on the balance sheet as creditors. Shareholders’
equity is sometimes called capital or net assets. It’s the money that would be left if a
company sold all of its assets and paid off all of its liabilities. This includes share capital
(money received from the issue of shares), sometimes share premium (money realized by
selling shares at above their nominal value), and the company’s reserves, including the
year’s retained profits.
Cash flow statements show the flow of cash sources (money coming into the
business) and uses (money going out of the business) during a specific period of time. 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. This
information is used by investors and potential creditors to gauge whether the business
should have sufficient cash flow to pay dividends or repay loans. 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 analyzes a company’s cash flow from net
profit or losses; (2) investing activities shows the cash flow from all investing activities;
(3) financing activities shows the cash flow from all financing activities.

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 Although this article discusses each financial statement separately, keep in mind
that they are all related. The changes in assets and liabilities that you see on the balance
sheet are also reflected in the revenue and expenses that you see on the income statement.
Cash flow statements provide more information about cash assets listed on the balance
sheet and are related, but not equivalent, to net profit shown on the income statement. No
financial statement tells the complete story of a company. But combined, they provide very
powerful information for investors. And information is the investor’s best tool when it
comes to investing wisely.
(Source: Ian Mackenzie, 2003, Financial English, Boston, Thomson & Heinle)

2.1 According to text 1 which of the following sentences are true (T) or false
(F)

1. Company profits are generally divided three ways

2. Balance sheets show a company’s financial situation on 31 December.
3. Assets are what a company owns, liabilities are what a company owe.
4. The totals in balance sheets generally includes sums of money that
have not yet been paid.
5. A cash flow statement shows how the company generates cash.
6. A cash flow statement often analyzes the cash flow from three angles.
7. The income statement, balance sheet and cash flow statement have no
relationship with each other.
READING 2

Reading text 2: What is the importance of a company’s financial statements?

and do exercise 2.2, 2.3 below
WHAT IS THE IMPORTANCE OF A COMPANY’S FINANCIAL
STATEMENTS?
A company’s financial statements provide various financial information that
investors and creditors use to evaluate a company’s financial performance. Financial
statements are also important to a company’s managers because by publishing financial
statements, management can communicate with interested outside parties, such as
investors, the news media and industry analysts about their accomplishments in running
the company. Different financial statements focus on different areas of financial
performance.
Financial Conditions
A company’s financial conditions are of major concern to investors and creditors.
As capital providers, investors and creditors rely on a company’s financial conditions for

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both the safety and profitability of their investments. More specifically, investors and
creditors need to know where their money went and where it is now. The financial
statement on the balance sheet addresses such issues by providing detailed information
about a company’s asset investments. The balance sheet also lists a company’s outstanding
debt and equity components, so debt and equity investors can better understand their
relative positions in a company’s capital mix.
Operating Results
Financial conditions shown on the balance sheet are snapshots of a company’s
assets, liabilities and equity at the end of the financial reporting period; they don’t reveal
what happened during the period of operations that may have caused changes to financial
conditions. Therefore, operating results during the period also concern investors. The
financial statement of income reports operating results such as sales, expenses and profits
or losses. Using the income statement, investors can both evaluate a company’s past
income performance and assess the uncertainty of future cash flows.
Cash Flows
A company’s profits reported in the income statement are accounting income and
most likely contain certain non-cash elements, providing no direct information on a
company’s cash exchange during the period. Moreover, a company also incurs cash inflows
and outflows during a period from other non-operating activities, namely investing and
financing. To investors, cash from all sources, not just accounting income from operations,
is what pays back their investments. The importance of the cash flow statement is that it
shows the exchange of cash between a company and the outside world during a period, so
investors can know if the company has enough cash to pay for expenses and asset purchases.
(Source: http://smallbusiness.chron.com/)
2.2 Answer the following questions

1. For which purpose do investors and creditors use financial statements?

2. Why do managers need financial statements?
3. How can investors and creditors know where their money went and where it is
now?
4. When are financial conditions shown on the balance sheet?
5. How can investors know if the company has enough cash to pay for expenses
and asset purchases?
2.3 Decide whether the following statements are True (T) or False (F)

1. Capital providers rely on a company’s financial conditions to know

whether their investments are profit or not.

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 2. Investors are able to have a better understanding of their relative
position thanks to the debt and equity factors on the income statement.
3. Purchases and sales are results operated from financial statements of
income.
4. Non-operating activities are also called investing and financing.
5. Cash is exchanged among many companies.

3. LISTENING

3.1 You are going to listen to what these people say about financial
statements. Listen carefully and fill in the gaps.

Accountant: The financial statements of a company are the most important

documents that a company produces. Investors, (1) ……………, banks,
customers - everybody reads the statements. The accounts show what a
company does with its money, how (2) …………… it is, and also how risk-
worthy it is. And you can see warning signs for the future. Our stock
exchanges depend on properly prepared (3) …………….

Trader: I agree that the accounts of the companies have a lot of

information, but it’s very hard to understand it all. In my job, I need to
know the financial (4) …………… of a company. People interested in
the stock exchanges (5) …………… on experts like me. But there are
also many other (6) …………… of information. As for the accounting
rules, they don’t interest me, or anyone else, at all. That’s stuff for the
(7) ……………

Investor: All those numbers, and I haven’t got a (8) …………… what
they all mean. Pages and pages of them, and apparently they are often
only “estimates”, or they can be (9) …………… in one of many ways.
What’s the (10) …………… when the accountants (11) …………… can’t
agree on how to show the numbers? Most of us need a lot more
information and (12) …………… about a company than what we get in
the accounts.

Managing Director: This is (13) …………… the problem. There are

many ways to change the numbers to give a better (14) …………….
Some of my peers have been guilty of doing just that. The accountants
and auditors have to take (15) …………… for the way that numbers are
reported. Accountants and their work are extremely important, they
just need to make it all a little easier to understand.
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 3.2 Listen again and check your answers.

4. VOCABULARY EXERCISES

4.1 Look at the three descriptions below of financial statements. Substitute

the words in bold with similar words from the box

accrued flow covered expenditure condition

monies held income stockholders snapshot

 The balance sheets

This (1) statement of financial position shows a firm’s financial (2)
situation at a
specific point in time.
 The income statements
This shows a firm’s (3) revenues and (4) expenses for a period, the amount of profit
that is (5) reinvested in the firm (or losses to be (6) funded), dividends paid to the (7)
shareholders, the (8) accumulated net profits from any previous year’s trading and tax
liabilities.
 The cashflow statement
This document shows the (9) movement of (10) funds for a period of time.

4.2 Complete the paragraph with the corret words from the box.

in the middle lost investing revenue records

whether or not assets particular movement expenses

Financial statements are (1) …………… that provide an indication of an

individual’s, organization’s, or business’ financial status. There are three basic types of
financial statements: balance sheet, income statement, and cash-flow statement. Typically,
financial statements are used in relation to business endeavors. Balance sheets are used to
provide insight into a company’s (2) …………… and debts at a (3) …………… point in
time. Information about the company’s shareholder equity is included as well. Typically,
a company lists its assets on the left side of the balance sheet and its debts and liabilities

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 (4)
on the right. Sometimes, however, a balance sheet has assets listed at the top, debts
……………, and shareholders’ equity at the bottom.
Income statements present information concerning the (5) …………… earned by a
company in a specified time period. Income statements also show the company’s (6)
…………… in attaining the income and shareholder earnings per share. At the bottom of
the income statement, a total of the amount earned or (7) …………… is included. Often,
income statements provide a record of revenue over a year’s time.
Cash-flow statements provide a look at the (8) …………… of cash in and out of a
company. These financial statements include information from operating, (9) ……………,
and financing activities. The cash-flow statement can be important in determining (10)
…………… a company has enough cash to pay its bills, handle expenses, and acquire
assets. At the bottom of a cash-flow statement, the net cash increase or decrease can be
found.

4.3 Match the words form a-j with their definitions from 1-10

a. cash flow f. net assets

b. creditor g. profit
c. loan h. debtor
d. shareholder i. expense
e. income j. loss
1. all the money received by a person or company during a given period
2. an excess of revenues over expenses
3. the money spent on buying assets
4. the net amount of cash being transferred in and out of a company
5. a person or an organization to whom money is owed
6. something lent (usually money) that will have to be given or paid back (usually with
interest)
7. the value of an entity's assets minus the value of its liabilities
8. a person or an organization that has borrowed money
9. an excess of expenses over revenues
10. the owner of a share or stock
1….2….3….4….5….6….7….8….9….10….

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 4.4 Complete the following passage with the correct form of the word in
parentheses.

A corporation is (1) …………… (REQUIRE) to issue annual financial statements,

but it is common for a corporation to prepare monthly financial statements for its (2)
…………… (MANAGE). Financial statements (3) …………… (ISSUE) between the
annual financial statements are known as interim financial statements. Interim financial
statements could be prepared for periods such as one month, four weeks, three months, 13
weeks, eight months, eleven months.
Many corporations have (4) …………… (ACCOUNT) years that begin on January
1 and end on December 31. This one-year period of time (or time interval) is referred to as
a calendar year. Financial statements (5) …………… (PREPARE) for a period of one year
are called financial statements and are required to be audited by an (6) ……………
(AUDIT) (a chartered accountant or a (7) …………… (CERTIFY) public accountant).
Annual financial statements are normally (8) …………… (PUBLISH) in an annual report
that also includes a directors’ report (also called (9) …………… management (DISCUSS)
and analysis) and an overview of the company, its (10) …………… (OPERATE) and past
performance.

4.5 The U.K and the U.S.A often have different terms for the same thing.
Match up the following British and American terms:

British American
1. creditors a. stockholder
2. debtors b. accounts receivable
3. overheads c. income statement
4. shareholder d. statement of financial position
5. profit and loss account e. accounts payable
6. balance sheet f. inventory
7. share premium g. paid-in surplus
8. stock h. overhead
9. share i. real estate
10. property j. stock

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5. SPEAKING

5.1 Individual work

Based on the information in two texts above, answer the following questions
with your own words.
1. What does a balance sheet provide?
2. What does an income statement show?
3. What are reported in a cash flow statement?
4. How do the financial statements relate to each other?

5.2 Pair work or group work

Work with your partner(s) and discuss your answers.

Being an effective group member

 Interruption
Sorry, but…
May I say something?
May I add something?
May I ask a question?
I’d like to say something about that…

 Holding the floor

Hold on
Hold on a second
Sorry, I haven’t finished yet.

6. WRITING

6.1 Rearrange the following words to make complete sentences

1. provides/ information/balance sheet/the/detailed/about/the company’s/liabilities/

and/shareholders’/assets/equity/.
………………………………………………………………………………………
2. of/ consist/ money/ the/liabilities/ all/ company/ that/ pay/someone else/a/ to/
have/to/will/.
………………………………………………………………………………………

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 3. particular/income statement/ financial/statements/ revenue/ shows/ which/
expenses/ time/ and/ is/ the/ company/ company’s/ during/ one/ of/ of/ a/ the/ a/.
……………………………………………………………………………………
4. cash/inflows/ tells/ about/ accounting/ an/ occurred/ outflows/cash flows/
statement/ the/ of/ and/ that/ period/ us/ during/.
………………………………………………………………………………………
5. most/include/companies/financial/three/statements/reports/their/in/annual/.
………………………………………………………………………………………

6.2 Complete the following sentences using the given words.

1. Companies/required/law/give/shareholders/certain/financial/information.
………………………………………………………………………………………
2. Financial/information/regularly/transferred/the journal/a book/containing/all/the
accounts/.
………………………………………………………………………………………
3. Management /analyze / the financial / statements / and /use /them / basis / for /
allocate financial /resources/.
………………………………………………………………………………………
4. Small/business/owner/could/keep/own/books/and/make/decision/based/the
information/found/there/.
………………………………………………………………………………………
5. balance sheet/ show/ company’s financial situation/ particular date/ general/ last
day/ financial year
………………………………………………………………………………………

6.3 Translate the following passage into Vietnamese

1. The objective of financial statements is to provide information about the
financial position, financial performance and cash flows of an entity that is useful to a wide
range of users in making economic decisions.
………………………………………………………………………………………
……………………………………………………………………………………………...
2. Many entities present, outside the financial statements, a financial review by
management that describes and explains the main features of the entity’s financial
performance and financial position, and the principal uncertainties it faces.
………………………………………………………………………………………
……………………………………………………………………………………………...

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 3. To help users of financial statements to identify and assess changes and trends,
financial statements also provide comparative information for at least one preceding
reporting period.
………………………………………………………………………………………
……………………………………………………………………………………………...
4. Financial statements provide information about transactions and other events
viewed from the perspective of the reporting entity as a whole, not from the perspective of
any particular group of the entity’s existing or potential investors and creditors.
………………………………………………………………………………………
……………………………………………………………………………………………...
5. A corporation is required to issue annual financial statements, but it is common
for a corporation to prepare monthly financial statements for its management.
………………………………………………………………………………………
……………………………………………………………………………………………...

6.4 Translate the following sentences in to English

1. Báo cáo tài chính là việc ghi chép một cách chính thức về hoạt động và tình
hình tài chính của một doanh nghiệp, cá nhân hoặc các chủ thể kinh tế khác.
………………………………………………………………………………………
……………………………………………………………………………………………..
2. Mục tiêu của báo cáo tài chính là cung cấp các thông tin về tình hình tài chính
và những sự thay đổi về tình hình tài chính của một doanh nghiệp.
………………………………………………………………………………………
……………………………………………………………………………………………..
3. Báo cáo tài chính phải đáp ứng nhu cầu quản lý của chủ doanh nghiệp, cơ quan
nhà nước và nhu cầu của những người sử dụng trong việc đưa ra các quyết định kinh tế.
………………………………………………………………………………………
……………………………………………………………………………………………..
4. Báo cáo tài chính được sử dụng như là cơ sở để đưa ra các quyết định tài chính
như: phân bổ các nguồn lực tài chính, phát triển các sản phẩm mới và mở rộng hoạt động
sản xuất kinh doanh.
………………………………………………………………………………………
……………………………………………………………………………………………...
5. Bảng cân đối kế toán báo cáo về tài sản, nợ phải trả và vốn chủ sở hữu của một
doanh nghiệp tại một thời điểm cụ thể.
………………………………………………………………………………………
……………………………………………………………………………………………...

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