Reet Soosaar (Tartu Ülikool), 2012
E-kursuse
Financial English"
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materjalid
Aine maht 3 EAP
Reet Soosaar (Tartu Ülikool), 2012
Reet Soosaar (Tartu Ülikool), 2012
Introduction
Here's a wholly fictitious story:
Do you know how Rockefeller made his first million dollars? One day, when he was young
and very poor, he was walking along the street and he found a one cent piece. He bought
an apple with it, polished it on his shirt, made it look nice and shiny, and sold it for two
cents. Then he bought two apples, polished them, and sold them both for two cents each,
and so on. After two months, he had enough money to buy a barrow for his apples. After
two years, he was just about to open his first fruit store ... when he inherited a million
dollars from his uncle! This is still the quickest way to get rich.
Think about the following:
If you have money to invest, what are the advantages and disadvantages of:

putting it under the mattress

buying a lottery ticket

taking it all to Las vegas or Monte Carlo

depositing it in a bank

buying gold

buying a painting (Van Gogh, etc.)

investing in property or real estate

buying bonds

buying stocks and shares

investing in a hedge fund

giving it away?
Stocks and shares
The general term securities refers to equities (or shares or stocks) + bonds + money
market instruments.
Equities or stocks (US) or shares (GB) are one of the two main ways by which companies
raise money.
Individual investors and financial institutions can buy stocks (=equities) of
companies listed on a stock exchange. The term "shares" includes both stocks and
privately held stakes in small firms that are not publicly traded.
Reet Soosaar (Tartu Ülikool), 2012
Stocks are bought and sold on a stock exchange (=bourse).
Bonds are certificates of debt issued in order to raise funds. A bond carries a fixed
interest and is repayable with or without security at specified future time.
A third type of market, used by investors with spare cash available for a short time period
only (under a year), is called the money market.
The money market provides very short-term funds to corporations, municipalities and the
United States government. Money market securities are debt issues. Investors can buy
"certificates of deposit" from a bank, or "commercial paper" from a company. These are
all money market instruments — short-term loans that pay interest.
Why do companies issue shares?
A successful, growing public limited companies can apply to a stock exchange to become a
listed company (to be publicly quoted orlisted means to have their shares traded on
Stock Exchange).
The act of issuing shares (GB) or stocks (US) for the first time is known as floating a
company (making a flotation). Companies generally use an investment bank
to underwrite the issue, i.e. to guarantee to purchase all the securities at an agreed
price on a certain day.
Companies wishing to raise more money for expansion can sometimes issue new
shares, which are normally offered first to the existing shareholders at less than their
market price. This is known as a rights issue.
Companies sometimes also choose to capitalize part of their profit, i.e. turn it into capital,
by issuing new shares to shareholders instead of paying dividends. This is known as a
bonus issue.
Buying a share gives its holder part of the ownership of a company. Shares
generally entitle their owners to vote at a company’s Annual General Meeting
(AGM) and to receive a proportion of distributed profits in the form of a dividend.
Reet Soosaar (Tartu Ülikool), 2012
Reading task - Companies
Answer the following questions:
1.
Why do people form limited companies?
2.
Why do companies issue shares?
3.
Why do people buy the shares?
Adapted from Mackenzie, I. English for Business Studies. 2010, Cambridge University
Press.
Bonds
A bond is a form of loan or "I owe you"(IOY): the holder of the bond is the lender
(creditor), the issuer of the bond is the borrower (debtor), and the coupon is the interest.
Bond is a certificate of debt issued in order to raise funds. It carries a fixed interest and
is repayable with or without security at specified future time.
If a government or large company wants to borrow a large sum of money, it issues a
bond and receives the money as a loan from the institution or individual who buys it (=
the bondholder).
The original amount (= the principal) is then paid back over a fixed period of time (=
the maturity/the term of the loan). And of course the bondholder also receives interest
(=the coupon).
Find answers to the following questions:
1. What are the two main ways governments can raise money?
2. What are the two main ways established companies can raise money?
3. What are the advantages and disadvantages of bonds for companies and
investors?
4. What is the difference between bonds and stocks, in terms of income and
repayment?
5. What are the three types of investor clients mentioned?
Reet Soosaar (Tartu Ülikool), 2012
6. Give examples of types of investments that generally carry very low, moderate,
and higher risk. What are they?
7. What causes bonds to appreciate and depreciate in price?
Adapted from Mackenzie, I. English for Business Studies. 2010, Cambridge University
Press.
Venture capital
The success of a country's economy depends to a large extent on the continuous creation
of new companies.
This requires both entrepreneurial people and political, legal, educational and financial
systems that enable them to start new businesses.
The government and the private sector have a role to play here, especially regarding the
availability of venture capital for new enterprises.
New businesses, or start-ups, are private companies that aren't allowed to sell stocks or
shares to the general public.
They either operate on money provided by their founders, or get money from venture
capital firms, which raise money (venture capital or risk capital or start-up capital)
from financial institutions, or occasionally from rich individuals, also known as "angels" or
"angel investors".
Some countries are more successful than others in creating new companies. There are
countries with perfectly good business and engineering schools that produce graduates
who are unable to find jobs for which they are qualified.
Market opportunities
Think about the following:

Have you ever had vague ideas for new products and services, and later seen
them developed by an entrepreneur or an established company? Do you have
ideas for new products right now?

Would you like, one day, to run your own company, and be ultimately
responsible for all aspects of it?
Reet Soosaar (Tartu Ülikool), 2012

Do you think that if you saw a market opportunity you would be able
to develop a strategy, raise finance, set up and manage a company, take care
of marketing, advertising and sales, and beat the competition?
What would be the answers to the following questions?
What kind of start-up is a venture capital firm looking for?
What role does a venture capitalist have in the management of a start-up?
Suddenly a start-up is bought by a larger company. How do people react? Are they happy?
A financier, Ed Coombes, working for a company Cambridge Capital Partners that
raises finance for new businesses in Britain, talks about his work raising funds
for new companies.
Ed Coombes explains what Cambridge Capital Partners do. Answer the following questions:
1. What is the market opportunity that has opened up for investors?
2. Why are pension funds now investing in such companies?
3. How do corporate finance teams get paid?
Complete the contents page of a typical business plan.
Contents
Executive summary
Chapter 1: What the company is going to do
Chapter 2: …
Chapter 3: Strategy: how we will deploy the investment
Chapter 4: …
Chapter 5: …
Chapter 6: …
Chapter 7: …
Chapter 8: …
Reet Soosaar (Tartu Ülikool), 2012
Think about answers to the following questions.
1. Which parts of the business plan are investors most interested in?
2. What do investors need to know about competitors?
3. What do investors need to know about revenue?
4. What kind of managers do investors prefer to see in start-up companies?
5. Why are non-executive directors important to a company?
6. What criticisms does Ed Coombes say can often be made of entrepreneurs?
Reading the text about Equilibrium and entrepreneurship
Decide which paragraphs could be given the following headings.
... Economic equilibrium
... Entrepreneurs and managers
... Ignorance and alertness
... Perceiving opportunities
... The existence of disequilibrium
... The problem of change
Adapted from Mackenzie, I. English for Business Studies. 2010, Cambridge University
Press.
Accounting
Bookkeeping and accounting — recording transactions, elaborating budgets, calculating
costs and expenses, preparing financial statements and tax returns, and so on — are
central to all commercial activity, from the smallest sole trader or self-proprietorship (one
person business) to the largest multinational company. Financial control is equally crucial
for all non-commercial organizations and institutions.
Reet Soosaar (Tartu Ülikool), 2012
Types of accounting
Bookkeeping — writing down the details of transactions (debits and credits).
Accounting — keeping financial records, recording income and expenditure, valuing
assets and liabilities, etc.
Managerial accounting — preparing budgets and other financial reports necessary for
management.
Cost accounting — working out the unit costs of products, including materials, labour and
all other expenses.
Tax accounting — calculating an individual’s or a company’s liability for tax.
Auditing — inspection and evaluation of accounts by a second set of accountants.
“Creative accounting” — using all available accounting procedures and tricks to
disguise the true financial position of a company.
Preparation of accounts
The accounting process starts with inputs, such as

Sales documents (eg invoices)

Purchasing documents (eg receipts)

Payroll records

Bank records

Travel and entertainment records
The data in these inputs is then processed in specialized software:
1.
Entries are recorded chronologically into journals
2.
Information from the journals is posted (= transferred) into ledgers where it
accumulates in specific categories (eg cash account, sales account, or account
for one particular customer)
3.
A trial balance is prepared at the end of each accounting period: this is
summary of the ledger information to check whether the figures are accurate. It
is used directly to prepare the main financial statements (income
statement, balance sheet and cash flow statement).
Reet Soosaar (Tartu Ülikool), 2012
The financial statements of large companies have to be checked by an external firm of
auditors, who „sign off on the accounts“ (= officially declare the accounts are correct).
They are publicly available and appear in the company’s annual report.
Users of financial statements include:

shareholders,

potential shareholders,

creditors (lenders, eg.banks),

customers,

suppliers,

journalists,

financial analysts,

government agencies, etc.
Auditing
A financial audit, or more accurately, an audit of financial statements, is the
verification of the financial statements of a company.
The audit opinion is intended to provide reasonable assurance that the financial
statements are presented fairly, in all material respects, and give a true and fair
view in accordance with the financial reporting framework.
The purpose of an audit is to enhance the degree of confidence of intended users in the
financial statements.
Auditing is important and useful for stakeholders (i.e. shareholders, bankers, investors,
etc) that have an interest in public corporations.
The primary function of external auditors is to provide a credibility to the financial
information that stakeholders need to make sound business decisions.
Valuing assets
Richard Barker, the Director of the MBA programme at the Judge Business School of
Cambridge University, and an expert on international accounting, talks about valuing
assets.
Reet Soosaar (Tartu Ülikool), 2012
Answer the following questions:
1.
What examples does Richard Barker give of assets that are difficult to value?
2.
How does he define a company's annual profit or loss?
3.
Why is the estimated value of an airport runway probably not very objective?
4.
How does he define or explain depreciation?
What would be your answers to the following questions?
1.
Who do auditors now have to interview?
2.
Why might a high price from a supplier be suspicious?
3.
What is "stock taking"?
4.
Why do auditors send out letters to customers to ask them how much
money they owe the company?
5.
Why might a company want to put some of its profit into "provisions"?
Financial statements
Financial statements provide the complete numbers for the company's financial
performance and recent financial history.

Income statement also Profit and loss account; (Statement of earnings US)

Cash-flow statement (Statement of cash flows US)

Balance sheet (Statement of financial position US)
Companies are required by law to give their shareholders certain financial information.
Most companies include three financial statements in their annual reports.
The profit and loss account shows revenue and expenditure. It gives figures for total
sales or turnover, and for costs andoverheads.
The first figure should be greater than the second: there should be generally profit. 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, repay debts, etc.
The balance sheet shows the financial situation of the company on a particular date,
generally the last day of its financial year.
It lists the company’s assets, its liabilities and shareholder’s funds. A
business’s assets consist of its cash investments and property (buildings, machines, etc.),
and debtors - amounts of money owed by the customers for goods or services purchased
on credit.
Reet Soosaar (Tartu Ülikool), 2012
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.
The basic accounting equation, in accordance with the principle of doubleentry bookkeeping, is that
Assets = Liabilities + Owner’s (Shareholder’s) Equity (an alternative term for
shareholder’s equity is Net Assets).
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.
A third financial statement has several names: the cash flow statement, the funds flow
statement, the source and application of funds statement.
This statement shows the flow of cash in and out of the business between balance sheet
dates.
Sources of funds include trading profits, depreciation provisions, borrowing, the
sale of assets, and the issuing of shares.
Applications of funds include the purchase of fixed or financial assets, the payment of
dividends and the repayment of loans, and in a bad year, trading losses.
Annual report
An annual report is prepared by the management of a company whose stock is traded
publicly. It discusses the company's financial affairs.
An annual report performs a useful function in a free market system, transmitting
information from the company to its shareholders and investing public.
Although the report is addressed to shareholders, other people who have a stake in the
business — stakeholders such as employees, suppliers, customers, and lenders — will
find it informative.
The following is included in the Annual report. How would you group and order
the following headings?
Report of management
Auditor's report
Management discussion
Reet Soosaar (Tartu Ülikool), 2012
Financial statements and notes
Selected financial data
Financial highlights
Letter to stockholders
Corporate message
Board of directors and management
Stockholder information
Adapted from Tullis,G.,Trappe,T. New Insights into Business. 2001, Pearson Education
Limited.
Balance sheet
The balance sheet reports the company's financial condition on a specific date. The basic
equation that has to balance is:
Assets = Liabilities + Shareholders' equity

an asset is anything of value owned by a business.

a liability is any amount owed to a creditor.

shareholders'equity (=owners' equity) is what remains from the assets after
all creditors have theoretically been paid. It is made up of two elements: share
capital (representing the original investment in the business when shares were
first issued) plus any retained profit (=reserves) that has accumulated over time.
Income Statement
Income statement or the profit and loss account summarizes business activity over a
period of time. It begins with total sales (=revenue) generated during a month, quarter
or year. Subsequent lines then deduct (=subtract) all of the costs related to producing
that revenue.
Look at the following Google Inc. Income Statement. Which lines on the income
statement refer to the following?
1.
money received from investments
2.
money spent in order to produce income in the future
3.
the expenses specific to providing the companies services
4.
additional expenses involved in running the company.
Reet Soosaar (Tartu Ülikool), 2012
Cash flow statement
Companies need a separate record of cash receipts and cash payments. Why is this?
Firstly, for the reason given above — it shows the real cash that is available to keep the
business running day to day (profits are only on paper until the money actually comes in).
Secondly, there are many sophisticated techniques that accountants can use to manipulate
profit, whereas cash is real money. It's cash that pays the bills, not profits.
There are many reasons why companies can have a problem with cash flow, even if
the business is doing well. Amongst them are :

Unexpected late payments, and non-payments (bad debts).

Unforeseen costs: a larger than expected tax bill, a strike, etc.

An unexpected drop in demand.

Investing too much in fixed assets.
Solutions might include:

Credit control: chasing overdue accounts.

Stock control: keeping low levels of stock, minimizing work-in-progress,
delivering to customers more quickly.

Expenditure control: delaying spending on capital equipment.

A sales promotion to generate cash quickly.

Using an outside company to recover a debt (called "factoring").
Adapted from Emmerson, Business English Handbook. 2007, Macmillan.
Reet Soosaar (Tartu Ülikool), 2012
Financial markets
Broadly speaking, financial markets describes any marketplace where buyers and sellers
participate in the trade of assets such asequities, bonds, currencies and derivatives.
Securities market
Securities refer to stocks, bonds and money market instruments.
Individual investors and financial institutions can buy stocks (=equities) of companies
listed on a stock exchange. Capital in the form of shares/stocks is also called equity.
The term „shares” includes both stocks and privately held stakes in small firms that are
not publicly traded.
If a government or large company wants to borrow a large sum of money, it issues a
bond and receives the money as a loan from the institution or individual who buys it. The
original amount (= the principal) is then paid back over a fixed period of time (= the
maturity/the term of the loan). The bond market is entirely electronic.
Foreign exchange and commodity market
The foreign exchange (= currency) market is bigger than all the securities markets
combined. Here, dealers buy and sell currency pairs such as EUR/USD (= euro against the
dollar). There is a huge amount of speculation in this market.
In the commodity market the dealers trade the future price of such things as:

Energy: crude oil,, natural gas, etc.

Metals: gold, silver, copper, steel, etc.

Soft commodities: coffee, sugar, grains, etc.
Adapted from Emmerson, Business English Handbook. 2007, Macmillan.
Derivatives
A futures contract is an agreement giving an obligation to sell a fixed amount of a
security or commodity at a particular price on a particular future date.
An options contract is an agreement giving the right, but not the obligation, to buy or
sell a security or commodity at a particular price at a particular future time, or in a period
of future time.
Reet Soosaar (Tartu Ülikool), 2012
These contracts are derivatives. Dealers guess how the price of
the underlying security or commodity will change in the future, and use derivatives to
try to buy them more cheaply.
Adapted from Mackenzie, I. English for Business Studies. 2010, Cambridge University
Press.