TWO BASIC CONCEPTS IN FINANCE - ASSETS AND LIABILITIES

TWO BASIC CONCEPTS IN FINANCE - ASSETS AND LIABILITIES

Finance is the management function through which money is effectively obtained and used.

Managing a company's finances means thinking in terms of two opposite categories: assets and liabilities. Assets' are the items 'of value that the company owns (including money itself).Liabilities are debts, the sums that the company owes to other businesses or individuals. If a company subtracts its liabilities from its assets , it knows exactly where it stands financially: the reminder is what belongs to the owner of the business .This is often called owner's equity, or shareholder's equity namely the portion of a company's assets that belongs to the owner after obligations to all other creditors have been fulfilled.

Inmost corporations shareholders' equity consists of common stock shares of ownership of a business) sold to thousand of individual investors through a stock exchange , plus retained earnings- the total net income a company has earned over its life ,minus the funds returned to shareholders as dividends. Dividends are sums of money paid to shareholders of the corporation out of earnings.

There are different kinds of assets and liabilities, each with its own advantages and disadvantages.

The short-term assets are often termed current assets and are defined as the resources that can be turned back into cash within a year. Raw materials, like for instance, steel, cotton, or a warehouse of T-shirts ready to be dispatched to stores are all short-term assets. Cash itself is a short-term asset. Others include a company's accounts receivable, i.e. the money that is owned to the company for items or services it has sold. The faster any asset can be converted into cash, the higher its liquidity. Borrowed money that must be paid back within the year is a prime example of a short -time liability, or a short-time debt. Other short-time liabilities include: rent, salaries, and unpaid bills for raw materials.

Companies that may have excess cash on hand for short periods, must place it in short-term investments.

The financial managers must be informed about interest rates as well as the overall economy in order to time borrowing to their best advantage.

Text comprehension

Answer the following questions

How can you define assets?

Give example of short term assets?

- Why are current assets important for a company?

What does equity consist of?

- Which are the short-term liabilities in a company?

- What are the advantages and disadvantages of long-term assets?

Vocabulary

• assets = active
• accounts receivable = sume de incasat
• liabilities = passiv, datorii
• debt =datorie
• to own = a detine in proprietate
• ownership = proprietate
• equity = capital
• shareholder = actionar
• stock exchange = bursa de actiuni
• earnings = castiguri
• dividend = dividend
• interes rate = rata dobanzii
• short-term = pe termen scurt
• long-term = pe termen lung
• to substract = a scadea