Text III. Mutual and Pension funds
By Kimberly Amadeo
A mutual fund is a collection of stocks, bonds, or other securities. Mutual fund shares are traded continuously, but their prices adjust at the end of each business day. Stock funds focus on corporations that are publicly traded on one of the stock market exchanges. Some mutual funds invest according to the company's size. These are small, mid, or large-cap funds. People should invest in mutual funds instead of stocks if they don't want to research each company's financial statements. Mutual funds also provide instant diversification, they invest into many financial instruments: shares, foreign currency, real estate, governmental, etc. bonds. For that reason, mutual funds are less risky than individual stocks. If one company goes bankrupt, the investment is not lost. For that reason, mutual funds provide many of the benefits of stock investing without some of the risks.
Pension funds are investment pools that pay for employee retirement commitments. Funds are paid for by either employees, employers, or both. Corporations and all levels of government provide pensions. The fund managers invest these contributions conservatively. They must avoid losing the principal but still beat inflation. There are two types of pension funds: Defined Benefit fund and Defined Contribution fund.
It's obligated to pay a fixed income to the beneficiary, regardless of how well the fund does. The employee pays a fixed amount. The fund manager must receive enough of a return on the investment to pay for the benefits. The employer must pay for any shortfall. Employers assume the funds will return 7 to 8 percent annually. Actual returns are 6 to 7 percent. As a result, most employers don't contribute enough.
In the second type of a fund the employee's benefits depend on how well the fund does. The employer doesn't have to pay out defined benefits if the fund drops in value. All the risk is transferred to the employee. The shift in risk is the most important difference between the defined benefit and the defined contribution plan.
Defining the terms_____________________________________________________
| 1. insurance | a) to borrow money to buy a house |
| 2. assets | b) providing protection against possible damage |
| 3. liabilities | c) the sale of goods in large quantities, |
| 4. mortgage | d) a division of a business |
| 5. branch | e) money in use in a particular country |
| 6. currency | f) the sale of goods or commodities in small quantities directly to consumers |
| 7. wholesale | g) debts, obligations to pay |
| 8. retail | h) entire property owned by a person |
Writing __________________________
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1. Many people think that credit cards are very convenient and important in our modern life while others consider they are dangerous.
2. Identifying the future pension needs explain how pension funds can be invested to provide sufficient capital and income in retirement.
3. Describe the situations when it is reasonable for people to take a mortgage.
Unit 3. Accounting, types of financial statements, P&L, cash flow
Learning objectives____________________________________________________
1. Learn about the three fundamental financial statements
2. List the important characteristics for each of these statements, including the essential accounts in each
3. Construct a balance sheet using the offered items and details
4. Identify the major users of these financial statements
5. Discuss the main rules of T-accounts
6. Explain why profit does not equal cash
Terms to learn___________________________________________ __
P&L, balance sheet, cash flow, YTD, A&L, equation, equity, accounts receivable, accounts payable, notes payable, POS, liquidity, cash budget, trial balance, double entry system, T-account, debit side, credit side, balance, ledger
Pre-texts discussions
1. What is the importance of accounting in business?
2. What types of accounting exist?
3. What main financial documents do you know?
4. What are journal entries in accounting?
5. Why does profit not equal cash?
6. What does «liquidity» mean?
Reading___________________________________________________ __
Text I. The Three Main Financial Statements, P&L
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It is important for any business manager to be aware of and understand the financial statements that are used in evaluating the performance of a business. These financial statements are the Profit and Loss statement (P&L), the Balance sheet, the statement of cash flow.
These financial statements are applied in many different ways in describing and evaluating the operations and financial strength of a business. Each of these statements or reports measures a specific aspect of the operation of a business.
Pro fi t and Loss statement
The Profit and Loss (P&L) statement measures the operating success and profitability of a business. It is also known as the Income Statement. This is the main financial report that describes and measures the profitability of the daily operations of a business. Key characteristics of the P&L Statement are as follows:
· It covers a specific time period, for example, monthly, quarterly, or annually.
· It reports the actual financial results for a business for the specific time period.
· It compares the actual performance to other measures such as budget, the previous year, previous months, or previous periods.
· It includes a summary or a consolidated P&L statement and supporting department P&L Statements.
· Consolidated P&L statements summarize revenues and expenses by departments.
· Department P&L statements report in detail revenues, expenses, and profit for specific departments.
A new P&L statement is started each month or period and records information for the current month and year-to-date (YTD). Managers are expected to analyze or critique their monthly P&L Statements to explain variations from the budget or from the previous year, both positive and negative.
The P&L statement is the most important financial report for a manager to understand and work with on a daily basis. This is because managers work with and can affect revenues or they can control most of the costs and expenses. Their daily activities in operating the business produce the numbers reported on the P&L. Consequently, a manager who knows and understands the P&L will provide accurate and timely information that is used in preparing the P&L statement and that gives it credibility. It will be an accurate report that measures the financial profitability of a business. A manager who does not understand the P&L statement might omit important information, provide the wrong information, or miss deadlines that prevent information that should be reported from being included in the proper time frame
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Text II. Balance sheet
The Balance sheet measures the value or worth of a business. It is also known as the Asset and Liability (A&L) statement. This is the main financial report that measures what a company is worth. Key characteristics of the Balance Sheet are as follows:
1. It measures the value or worth of a company at a specific point in time. For example, the Balance Sheet for December 31, 2013, is a snapshot of accounts at that specific point in time and identifies what a company owns (assets), what it owes (liabilities), and how it is owned (owner equity).
2. The fundamental account equation describes the A&L: Assets = Liabilities + Owner Equity
3. It is made up of accounts organized by asset, liability, or owner equity.
4. These accounts are divided into current accounts (under one-year obligations), also referred to as working capital, and long-term accounts (over one-year obligations), which are referred to as capitalization.
5. Each account has a beginning balance, monthly activity, and an ending balance.
6. Unlike the P&L statement, managers are not expected to provide critiques of monthly balance sheet activity. This is done by the accounting department.
7. Accounting managers balance monthly the accounts of a balance sheet.
8. It is important for managers to understand the Balance sheet because they use the current asset and liability accounts (working capital) in the daily operations of their business
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