UNIVERSITATEA TIBISCUS DIN TIMIOARA

FACULTATEA DE JURNALISM, COMUNICARE I LIMBI MODERNE

LUCRARE DE DIZERTAIE

COORDONATOR lect. univ. dr. Andrea Kriston

CANDIDAT
ALINA STANCI

TIMIOARA

2010

UNIVERSITATEA TIBISCUS DIN TIMIOARA

FACULTATEA DE JURNALISM, COMUNICARE I LIMBI MODERNE

GENERAL ASPECTS ON THE BUSINESS ENVIRONMENT AND USEFUL TERMINOLOGY

COORDONATOR lect. univ. dr. Andrea Kriston

CANDIDAT
ALINA STANCI

TIMIOARA
4

2010

Introduction

Economics is part of our life, either we are students at the Faculty of Languages, a banker or a simple tax payer, we all deal with economics, some of as more aware than others of this aspect. For instance, although I study languages, I confront myself with economics in my day-to-day life; I must bear in mind the financial responsibilities I have to meet, such as paying a rent. Although I am not an economist, I must keep track of some economic factors such as currency, depreciation of the Romanian national currency due to inflation or other factors. Or, at a certain point we all depend on banks and the services they provide, we must be aware of the maturity date for paying instalments, the interest we are charged on loans and so on. This field is not totally unknown to me as I got familiarized with it from a linguistic point of view by studying it for a semester. Because a semester is not enough to cover such a large field, I chose to elaborate my paperwork around the business domain, namely to focus on companies, in order to enrich my vocabulary with specific terms of this domain. This choice is also related to the fact that, on entering the labour market, by getting a job in a multinational company, the research for this paper may be a useful tool to learn more about the business environment. As a consequence the purpose of this paper, as the title suggests, is to bring into light a part of the English terminology used in business. The core of the paper is represented by the business entities and I try to focus on the classification of business entities according to the type of ownership, to present the general aspects each business entity implies, and to also focus on the key departments and the financial institutions companies rely on for different purposes. In addition to the theoretical aspects of the points above mentioned, the paper provides useful terminology for each chapter in bilingual mini-dictionaries.

General Aspects on the Business Environment and Useful Terminology is organised in four chapters covering some key features of companies, completed by a mini-dictionary providing terms of economics, which appear in the corpus of the paper, or are related to that specific topic developed in the chapter, their English definition and the Romanian Equivalent of each term. The glossaries aim is to help the reader understand easily the terminology used in the paper. The first chapter is called Legal Forms of Business Organizations and focuses on the business entities. I will refer to the English business entities, as well as to the Romanian ones. The chapter begins with a short introduction on the evolution of business through history, referring especially to the key moments in the development of the English business field. The business entities will be identified further on, on the basis of a classification according to the type of ownership. Words like sole proprietorship, partnership, public limited companies or trusts, are often used in the first chapter as I try to define each business entity, to compare them according to their characteristics. Corporate objectives is a subchapter which reveals the objectives a firm may have and the last part of this firs chapter focuses on the Romanian business entities and the differences between them. The second chapter, Companies from Raising Capital to Liquidation, brings into light the stages a company faces through its life, highlighting the steps to be followed in order to set up firm, the means of raising capital, the importance of shares, bonds and borrowings in raising funds, etc. Further on, once a company has begun its activity, it is subject to corporate taxation and I will talk about corporate tax and expanses which are tax deductible. Unfortunately, business is not a secure field, because factors which may interrupt its activity may influence its performance. As a consequence, the last part of the chapter is designated to defining terms such as liquidation, winding up or bankruptcy, as well as the procedure which needs to be followed in such cases. The third chapter, Business Accountancy and Financial Reports refers to the most important department of a company, the accountancy department, dealing with the activities afferent to this department. Beginning with a short introduction on the appearance of accountancy, the chapter also contains concepts such as financial and management accounting, balance sheet, account, accounting plan, defining these concepts

and giving a general presentation of the accounting activity and its importance to companies. I approach the accounting field by focusing on the general accounting principles, on the chart of accounts used in financial accounting submitted both in Romanian and English, on the key entries in the balance sheet such as assets and liabilities. A classification and description of assets and liabilities is also included in the chapter. In order to complete the chapter, in the last part I will talk about audit and the influence of auditors on companies. Banking Services and Means of Payment is the last chapter. I chose to talk about banks, because they are a very important entity of the external environment of businesses. Business could not exist without banks, they are vital to the well performance of companies thanks to the services they provide such as carrying out transactions, or offering borrowings. The chapter commences with a classification of banks and continues with the services they provide. In this part, terms such as current accounts, cheques, credit cards or pledges and liens will be defined. Further, I will focus on the means of payment available through banks by highlighting some of the most important means of payment used in local, as well as in international banking. The terminology to this chapter will be further on presented and explained in the glossary afferent to the Banking chapter. This paper provides general features of the business environment by combining the theoretical aspects on the topics presented herein, with the useful terminology for each chapter.

1. Legal forms of Business Organizations

1.1 Short history on the evolution of business

The business world is a moving target. It has changed rapidly over the years and is continuing to do so at an accelerating rate. In the past, slower communication and local, rather than international competition meant that companies were under less time pressure. In the present, companies, banks, service providers and manufacturers alike, all exist in a huge global market place, thanks to the continuous technology development. Given the limitation of individual resources and initiative, the tendency to associate with others to do business is as old as trade itself; either they are family, associates whose number increases the influence and the bargaining power of the group, or partners that provide money or specific skills. These groups evolved during the past centuries. In the Middle Age there were guilds of merchants to protect and extend the interests of the individual trader. During the Renaissance period, in order to benefit from the natural wealth of recently discovered regions, merchant associated with sailors. However, the losses were borne individually by the partners in the venture. In the sixteenth and seventeenth century, chartered companies were granted trading monopolies, and raised money in the form of joint-stock provided by investors who were not necessarily merchants or sailors, but who wanted to share in the profits. (According to Graham Donnely, 1981) According to Marcheteau & co, the concept of limited liability, the limitation of the liability of financial contributors to the amount of their contribution, had actually existed since Roman Law but it was not clearly recognized legally, and commercial practice had do without it by combining partnerships and trusts, in which the property of the partnership was vested, thus creating screen between the partners and their individual 8

liabilities. It was The South Sea Bubble Act (1720) that put a temporary end to the evolution towards limited liability. The failure of a company founded in 1711 to deal with Spanish America, entailed such a financial disaster that Parliament, fearing the renewal of such speculations, passed an Act prohibiting actions as corporate bodies and made the raising of transferable stock illegal. (2005:421) However, it would take a century of legal and political squabbling to fully arrive at the legal notion of limited liability as we know it today. The groundwork for this was laid by a succession of Acts of Parliaments that culminated in the 1862 Companies Act which created the modern form of joint-stock, limited liability companies.
Winners of the future will be those who can best understand the environment in which they operate and who have the ability to exploit changing market conditions by anticipating correctly future trends and demands. [] In modern business, information is vital in decision-making. The quality of any decision depend on the relevance, accuracy and timeliness of the information available. [] Information is the essential word in business environment and the key to progress.

(According to The Times and Business Planning, by Bill Richardson, Roy Richardson, 1992, p.122) As world competition heats up, and as customs barriers are lowered, large firms which used to be dominant on their home market have to face foreign companies. In order to remain or become a key player in todays business world implies operating abroad and dealing with foreign partners.

1.2 Types of Business Organizations

Business is a legally-recognized organizational entity existing within an economically free country designed to sell goods and/or services to consumers, usually in an effort to generate profit, according to The American Heritage Desk Dictionary. In predominantly capitalist economies, where most businesses are privately owned, businesses are typically formed to earn profit and grow the personal wealth of their owners. The owners and operators of a business have as one of their main objectives the generation of a financial return in exchange for their work and their acceptance of risk. Notable exceptions to this rule include cooperative businesses and government

institutions. This model of business functioning is contrasted with socialistic systems, which involve government, public, or worker ownership of most sizable businesses. According to Martin Buckley, the features characteristic to the enterprise system are private ownership, freedom of choice, competition and free market. The first feature, the private ownership refers to the right of anyone to purchase any kind of production, equipment, buildings or shares in order to carry on business or for any other private purpose. By freedom of choice, the author means that business may use whatever resources they wish, as they wish to, and enter those markets they believe to be most profitable. Further, firms compete with other firms for their business. Unless they provide goods and services that the consumer likes at competitive prices, they will very quickly go out of business. Lastly, it is the free market in which businesses and individuals buy and sell goods and services that prices are determined. (Buckley, 1990:3)

1.2.1. Sole Proprietorship

A sole proprietorship is a business enterprise exclusively owned, managed and controlled by a single person with all authority, responsibility and risk, as defined by www.businessdictionary.com. The sole proprietor or the sole trader organizes the resources in a systematic way and controls the activities with the sole objective of earning profit. William H. Peterson talks about the main characteristics of a Sole Proprietorship which are as follows: Single ownership The individual owns all assets and properties of the business. Consequently he bears alone all the risks. Thus, the business can come to an end at the owners will or upon his death. No sharing of profit and unlimited liability The sole proprietor, on one hand benefits of the entire profit arising from the business, on the other hand bears all the losses and all debts from personal resources in case of company insolvency. One mans capital and control The entire capital is provided by the single owner who also has full autonomy with regard to business decisions. However some disadvantages may appear as the owner will likely have a hard time raising

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capital since it has to make up for all the business's funds as well as in the situation where the business becomes successful and the risks accompanying it tend to grow. To minimize those risks, a sole proprietor has the option of forming a corporation, or a Limited Liability Company. Less legal formalities Easy to set up, a sole proprietor has to comply with almost no legal formalities except for those businesses where require license from local authorities or the health departement of government. (Peterson, 1990) Referring to sole proprietorship Graham Donnelly said (1991: 46):
A sole proprietorship is a one-man business in which one person is alone responsible for decision-making and the raising capital, though, there may be several other people working in the firm/ It is in this type of business that the entrepreneur, the organiser of production, can be the most easily identified as it is here that the functions of the entrepreneur are united in one person those of innovation, risk-taking and profitearning. Not all sole proprietors are innovators, many take over established businesses, but they all risk their own capital and reap either the profit or losses which result from their efforts. Though the sole proprietor enjoys the unity of prupose and flexibility of a small organisation, the price of failure can be very high.

1.2.2. Partnership
A partnership represents a bussiness relationship in which two or more persons agree to furnish a part of the capital and labour for an enterprise and to share the profits or losses. (According to The American Heritage Desk Dictionary). In order to start a partnership business, at least two members are required, but the number should not exceed 10 in case of banking business and 20 in case of other types of business. There are two categories of partnership. In an ordinary partnership, a general partnership, all the partners are jointly and severaly liable for the debts of the firm. In a limited partnership, limited partners are only liable to the extent of their own financial contribution. But they do not take an active part to the running of the business. However, there must be at least one general partener or an active, or acting partner whose liability for the debts of the firm is not limited. He may be called upon to settle such debts to the extent of his real and personal property. Partners may have a partnership agreement, or declaration of partnership which in some jurisdictions may be registered and available for public inspection. This agreement should refer to the amount of capital invested by each partener, the profit or loss sharing

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ration, salary or comission payable to the partner, duration of business, the duties and powers of each partner etc. As in the case of sole proprietorship, the unlimited liability feature applies as well to partnership. All parteners share the business risks and are jointly or separately liable for the companys debts and may cover them from personal resources. As for the transferability of share, a partener may transfer his share to an outsider only with the consent of the others . According to William H. Peterson (1990), the partnership has the advantage of pooling managerial talent. While one partner may be qualified in production, another may be qualified in marketing. Another advantage, in the United States is that the partnership, like individual ownership, has favourable tax position when compared with corporations. On the other hand, a major disadvantage is that decision-meking is shared. However, in America, the partnership is a vital part of the overall business economy. The partnership differs from a company or corporation in the sense that the latter is considered as a legal person or entity, in its own right, separate and apart from its shareholders, whereas the partnership is viewed as an aggregation of separate individuals doing business under a common name. This is why, unless specified otherwise in the partnership agreement, the death of one of the partners will bring the partnership to an end.

1.2.3 Companies
A company is the primary legal entity through which business activity is carried out in most market-based economies. Companies maintain a different legal personality from those of their shareholders who have limited power to directly manage the corporation. The shareholders are granted limited liability protection, which means that they can only lose the full amount of their investement but not their personal assets. In most jurisdictions, companies are divided in public limited companies (joint stock or share) and private limited companies (companies limited by shares or guarantee).

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Certain legal requirements must be met before a company comes into existance. Its name, object and proposed capital must be set out in what is called the Memorandum of Asociation to which there must be at least two subscribers or shareholders if it is to be a private company and at least seven if it is to be a public one. The rules for running it, dealing with profits, paying dividends, calling meetings of shareholders and other matters which affect their interests and the management are laid down in the Articles of Asociation. Everything must be registered with a government official, The registrar of Companies, before he will issue a registrar permitting the Company to start business. Copies of these documents together with various returns which must be annualy or when there are changes in the capital, changes of directors or other vital matters, are put into a file which is available for public inspection at the Company Department of the board of tradeat Companies House. 1.2.3.1. Private limited company This type of a company organization allows the business to be privately owned and managed. It is thus particularly suitable for a medium-sized commercial or industrial organization not requiring finance from the public or for a speculative venture where a small group of people wishes to try out an idea and is prepared to back it financially to a definite limit before floating a public company. (According to Rachmand, 1990:39) Considerably more numerous than public companies, private limited companies are much smaller. They encounter difficulties when they want to expand, as neither their shares nor debentures can be offered for sale to the public. Thus, in order to find additional investors, it is usually necessary to convert the business into a public company with its shares quoted on a Stock Exchange. David J. Rachmand states that before embarking on such an issue, the company must have a fairly substantial size and arrange for a life insurance company or an investment trust to purchase shares or debentures. Help may be obtained from the new-issue market, where both issuing houses and merchant banks may help firms to raise capital. But in order to obtain a loan, it has to pass first a searching investigation regarding its present financial position and business prospects. (Richmand, 1990:39)

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1.2.3.2. Public limited company (plc) This type of company rests on two main principles: the joint-stock principle, that is the provision of capital through the individual contributions of a large number of investors, and the limited liability principle which refers to the limitation of the shareholders liability to the nominal value of their shares. (According to Rachman, 1990:40) However, the limited liability principle facilitates capital investments as it is the most flexible medium for raising capital. The liability of the investor is limited to the amount he has agreed to contribute into the capital. It carries the letters plc after its name and is the largest of all types, and at least two shareholders own it, but most of them have hundreds or even thousands of shareholders. As opposed to private limited companies its shares can be issued to the public and can be sold through the Stock Exchange. A private company can go public and apply to the Stock Exchange to be listed or quoted in order to become a public limited company. The company will have to satisfy the council of the Stock Exchange that is soundly based and a reasonable investment for the public. The members must agree to take some, or all, of the shares when the company is registered. The Memorandum of Association must show the names of the people who have agreed to take shares and the number of shares each will take. These people are called the subscribers. Rachmand mentions that there is a minimum share capital for public limited companies. Before it can start business, it must have allotted shares to the value set by the state, the company is set up in. Each allotted share must be paid up to at least one quarter of its nominal value together with the whole of any premium. (Rachmand, 1990:40) A company can increase its authorised share capital by passing an ordinary resolution, unless its articles of association require a special or extraordinary resolution. A company can decrease its authorised share capital by passing an ordinary resolution to cancel shares which have not been taken or agreed to be taken by any person. Notice of the cancellation, must reach Companies House within one month. A company may have as many different types of shares as it wishes, all with different conditions attached to them. The shares of a public limited company are freely

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transferable and there are no limits on the number of shareholders. This two features enables public limited companies to issue registered or bearer shares, offer them to the public or trade them on a stock exchange. In exchange for such flexibility, plc submit themselves to rigurous regulation and supervision such as frequent and deatiled financial disclosure and enhanced accountability at the board level. A public limited company has access to capital markets and can offer its shares for sale to the public through a recognised stock exchange. It can also issue advertisements offering any of its securities for sale to the public. In contrast, a private company may not offer to the public any shares in itself. Formation of a public limited company requires a minimum of two directors. In general terms anyone can be a company director,as Martin Buckley (1990) says, provided they are not disqualified on one of the following grounds: in case of public limited companies or their subsidiaries, the person is over 70 years of age or reaches 70 years of age while in office, unless they are appointed or re-appointed by resolution of the company in general meeting of which special notice has been given. the person is an undischarged bankrupt, or disqualified by a Court from holding a directorship, unless given leave to act in respect of a particular company or companies.

1.2.4. Trusts
A trust is a right of property, real or personal, held by one party for the benefit of another or others. (According to www.businessdictionary.com) In a trust, the original owner of the property, the settlor, places his propriety in confidence, or trust, into the hand of a person, with a view that this person, the trustee, shall hold the property for the benefit of another. According to M. Marchetean & co. the law of trusts dates back to the Middle Ages, deriving from the feudal use invented to soften the hardship on the common law rules preventing land from being devised, left by will, and to alleviate the feudal burdens imposed on freehold tenants. On a freehold tenants death his son and heir had to pay the lord of the manor very high feudal dues. Through the use by which the freehold tenant

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enfeoffed one or several friends, these friend became the legal owners of the land in the eye of common law, and they gave the tenant the revenue of his land. On the tenants death , the heir did not have to pay any feudal dues, because the land still belonged officially to the friends who had been enfoeffed, and who gave the new beneficiary the revenue of the land. The common law regarded the feoffes as the legal owners of the land, in order to prevent them from using the land in a way that was a breach of their obligations, The Court of Chancery intervened in equity and protected the rights of the beneficiary. Later, uses were called trusts. (Marcheteau&co., 2005: 467) Nowadays, trusts are used for various purposes: to allow minors or other persons incapable of law to benefit from the revenues of the land; to allow settlemnts by which property can benefit several persons in succession; to enable two or more persons to hold land; to establish charitable foundations; to avoid oe minimise liability to taxation. The main characteristic of a trust is that it creates dual ownership. The trustee is the legal owner and the beneficiary is the equitable owner, which means the equity compells the trustee to respect his obligations under the trust and to serve the profits of the property to the beneficiary. Business trusts are an extension of the trust system, it represents an association or organization of persons or corporations having the intention and power to create monopoly, control production, interfere with the free course of trade or transportation, or to fix and regulate the supply and the price of commodities. The trust was originally a device by wich several corporations engaged in the same general line of business for their mutual advantage, in the diretion of eliminating destructive competition, controlling the output of their commodity, and regulating and mantaining its price, but at the same time preserving their separate individual existance and without any consolidation or merger. (According to Marcheteau&co., 2005: 468)

1.2.5. Joint Ventures

A joint venture on a continuing basis is a contractual business undertaking. It is similar to a business partnership, with two differences: the first, a partnership generally involves an ongoing, long-term business relationship, whereas an equity-based joint venture comprises a single business activity. Second, all the partners have to agree to

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dissolve the partnership whereas a finite time has to lapse before the joint venture automatically comes to an end or is closed by the Court due to a dispute. The term joint venture refers to the purpose of the entity and not to a type of entity. Therefore, a joint venture may be a corporation, a limited liability enterprise, a partnership or other legal structure, depending on a number of considerations such as tax and tort liability. They are normally formed both inside one's own country and between firms belonging to different countries. Within one, they usually combine different strengths in a field or are formed because of legal restrictions within a country; for example an insurance company cannot market its policies through a banking company. Many joint ventures are also formed because the law of a country allows dispute settlement, should it occur, in a third country. They are also formed to minimize business, tax and political risks. It represents an alternative to the parent-subsidiary business partnership in emerging countries, discouraged, on account of ignoring national objectives, slowgrowth, parental control of funds, and disallowing competition. Today, the term applies to more occasions than the choice of joint venture partners. For example, an individual normally cannot legally carry out business without finding a national partner to form a joint venture. Also, it may be an easier first-step to franchising. M. Marcheteau & co. mentions some of the reasons for forming a joint venture the further benefits which may be taken into account: reduction of 'entry' risks by using the local partner's assets; inadequate knowledge of local institutional or legal environment; access to local borrowing powers; perception that the goodwill of the local partner is carried forward; in strategic sectors, the county's laws may not permit foreign nationals to operate alone; access to local resources through participation of national partner; influence of local partners on government officials or 'compulsory' requisite; access by one partner to foreign technology or expertise, often a key consideration of local parties; again, through government incentives, job and skill growth through foreign investment, and incoming foreign exchange and investment. (Marcheteau&co., 2005: 433)

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However, downsides of a joint venture are also to be considered: differing philosophies governing expectations and objectives of the joint venture partners; an imbalance in the level of investment and expertise brought to the joint venture by the two parent organizations; inadequate identification, support, and compensation of senior leadership and management teams or conflicting corporate cultures and operational styles of the joint venture partners. (According to M. Marcheteau & co. 2005:434) A joint venture can terminate at a time specified in the contract, upon the death of an active member or if a court so decides in a dispute taken to it.

1.3. Corporate Objectives

Objectives are the end results to be achieved. In this context the term corporate objectives has been used broadly to cover the objectives for an organisation as a whole and for each business unit as a part of that whole. Performance objectives consist of the financial requirements for the organisation and other key result areas, which are critical for the organisations short-term and longterm success. These include profitability, return on investment (ROI), return on assets (ROA), earnings per share (EPS), dividends and cash flow. They are usually determined on the basis of satisfying the needs of the stakeholders, which includes shareholders and others who might have a stake in the business such as management, employees, customers, suppliers and creditors. The driving force underpinning financial performance in the majority of cases is shareholder value. If the organisation performs well financially, share prices are maintained or increased. If financial performance is below expectations, share prices drop, limiting the organisations ability to attract equity financing to underwrite future operations and growth while also exposing the organisation to the danger of a takeover. Poor financial performance, particularly cash flow, also limits an organisations ability to attain debt financing. (According to Graham Donnely, 1991) However, the use of financial performance objectives alone is a dangerous preoccupation for top management. Shareholder value can be enhanced in the short term by cost-reduction strategies such as downsizing and the reduction of product quality. In the long term this might cause customers to become dissatisfied with the organisations

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products or services, which in turn could lead to a loss of market share, reduction of profitability and eventual decline in share price. That is, a focus on short-term shareholder value can lead to the diminution of customer value with a resultant loss of competitive advantage and a decrease in long-term financial performance. In order to provide a broader perspective of the organisations direction a number of non-financial performance objectives should be included as either corporate or business objectives: improvement in innovativeness, improvement in operational efficiency, improvement in product quality, improvement in customer satisfaction, social responsibility and employee welfare.

1.4. The Romanian Business entities

In Romania, commercial companies exist under the following business entities: general partnership s.n.c (societate n nume colectiv) ; limited partnership s.c.s. (societate n comandit simpl):; p.l.c (public limited company) S.A. (Societate pe Aciuni): ; limited partnership by shares s.c.a. (societate n comandit pe aciuni); Ltd. (limited liability company) S.R.L. (societate cu rspundere limitat).

1.4.1. General Partnerships

A general partnership can involve two or more partners. The partnership relationship is based upon a contract and any person who is capable of entering a binding contract may enter a partnership. Following this agreement, the parties must register their partnership with the National Trade Register Office. Partners are jointly liable for the debts and obligations of the partnership and each partner can be personally liable for the overall debts and liabilities, which are not satisfied by assets of the partnership. The capital of the partnership is formed of the partners contributions which may include cash, real estate, equipment, or other property. Contributions become assets of the

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partnership and comprise its registered capital. Romanian laws do not set maximum or minimum limits on capital, nor does it indicate how much must be in cash or assets. These decisions are left with the partners. A general partnership must select a name for itself, included in this name must be the name of one individual partner, the nature of the partnership, and disclosure of the general partnership status of the enterprise. If a person who is not a partner permits his or her name to be used in the name of the partnership, that person then becomes liable for the debts and obligations of the partnership together with the general partners. General partnership matters are determined under a written partnership agreement. Where the agreement is silent or unclear, decisions are made by partners on the basis of their relative capital contributions. If a partnership seeks to have a formal management, perhaps because of its large size, a vote of the partners representing a majority of the registered capital is required.

1.4.2. Limited Partnerships

A limited partnership consists of one or more general partners who manage the business of a partnership and one or more limited partners who contribute capital to a partnership but do not participate in its management. Generally, limited partners are not liable for the debts and obligations of the partnership beyond their contributions, to the registered capital. The liability of the general partner is the same as the liability of partners in a general partnership. For an investor, therefore, being a limited partner is similar to having an investment in a corporation. Limited partners share the profits or other compensation by way of income in proportion to their partnership contributions. However, no such income or other distribution can be made if it would reduce the assets of the limited partnership to an amount insufficient to discharge its liabilities to persons who are not partners. While the limited partners cannot manage the business, they may examine the state and progress of the partnership business and advice on its management. A limited partner may also act as a contractor for, or an employee of, the limited partnership. Company Laws generally set out the rights, powers and obligations of limited partners. For example, a limited partner may be held liable as a general partner if the 20

limited partnership legislation is not strictly complied with; When a limited partner participates in the management of the partnerships business without having been mandated to that effect by companys representatives, by means of a special power-off attorney, registered with the trade register, or allows his or her name to be used in the name of the limited partnership. A limited partnership is a practical form of organization for a pooled investment where the investors would not normally participate in the control of the investment. Investors are limited partners while the general partner provides the professional management of the investment. In this way, investors share the profits but, as limited partners, their financial risk is limited to the capital they have contributed.

1.4.3. Limited Liability Companies

A limited liability company is a company formed by a limited number of partners (no more than 50). It is based on the constitutive documents. The registered capital of a limited liability company cannot be less than 200 RON (Romanian LEU). The registered share capital of a limited liability company is normally divided into social parts/shares with a registered value of not less than 10 RON. Shares cannot be freely traded, making limited liability companies similar to what are known as private companies in other legal systems. Shares of these companies cannot be pledged as collateral for loans. Decisions are made by majority vote in the General Meeting of the Shareholders (1 share = 1 vote). Decisions involving changes in the constitutive documents must be agreed by all shareholders if these documents do not state otherwise. One or more Directors/Managers are appointed in the constitutive documents or by the General Meeting and are put in charge by the management of the company. The majority of companies registered in Romania, whether domestic or foreignowned, are limited liability companies.

1.4.4. Public Limited Companies

A public limited company is a limited liability corporation with registered capital of a minimum of 25.000 EURO, equivalent RON and with at least five shareholders.

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When an SA is established, at least 30% of the share capital, or 100% in respect of contributions in kind, must be immediately contributed upon formation of the company and all registered share capital must be fully paid up within twelve months of formation. Shares could be nominative shares or bearer shares and can be freely traded or pledged. A joint stock company may be set up privately or by public subscription. The Registrars office will certify compliance with Romanian legislation and will authorize the release of the prospectus. Establishing of a p.l.c. by prospectus is only possible if the entire registered capital outlined in the prospectus has been subscribed and half of the prices of the shares subscribed for have been paid up into a bank account. If public subscriptions exceed the registered capital, as outlined in the prospectus, or are less than the amount sought therein, a meeting of the shareholders should be held to approve any revisions of the capital structure. Within 15 days from closing of the subscription, a founding meeting must be held. This meeting receives evidence that capital has been subscribed and sets the value of any contributions in kind, approves the basis for profit-sharing among the founders of the company and other shareholders and appoints directors and auditors.

1.3.5. Limited partnership by shares

A limited partnership by shares is a rare form of limited partnership. It has characteristics of both a public limited company and a limited partnership. At the same as in a limited partnership there are general and limited partners. The registered capital is represented by shares. The general partners may be liable for the debts and obligations of the company beyond amounts they have contributed. The limited partners, not active in the management of the company, have their liability limited to their share stake.

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Useful Terminology
TERM affiliated company DEFINITION Entity holding less than a majority of the voting common stock of another related company, or in which both companies are subsidiaries of a third company. Often the same management oversees and operates both companies. Interrelationships exist between the activities of the entities. Part of an amount of shares that is given to someone Gathering of the directors and shareholders of every incorporated firm, required by law to be held each calendar year whose main purpose is to comply with legal requirements, such as the presentation and approval of the audited accounts, election of directors, and appointment of auditors for the new accounting term etc. Two or more people are found liable for damages Share owned by the person who holds the share certificate, and transferable by delivery. In comparison, a registered share can be transferred only through an instrument of transfer. Governing body of an incorporated firm. Its members are elected normally by the shareholders of the firm to govern the firm and look after the subscribers' interests. Certificate indicating part of property of a debt due by a company issuing it Free shares of stock given to current shareholders, based upon the number of shares that a shareholder owns. Cash coming in less the cash going out during a given period Wealth in the form of money or property ROMANIAN EQUIVALENT companie afiliat

allotment of shares annual general meeting (AGM)

repartizarea aciunilor adunare general anual

be jointly and severally liable for bearer share

a rspunde solidar pentru aciune la purttor

board of directors

consiliul de administraie obligaiune aciune gratuit flux de numerar capital

bond/debenture bonus share cash flow capital

23

chartered companies

Companies House commodity

convertible bonds

debt financing demerger divestiture/divestment

dividend equity financing franchise

general partnership go public

insurance company

issued capital

owned by a person or business and human resources of economic value. Associations for foreign trade, exploration, and colonization that came into existence with the formation of the European nation states and their overseas expansion. Organization that is legally responsible for making sure that the official list of companies in a country A physical substance, such as foods, grains, and metals, which is interchangeable with another product of the same type, and which investors buy or sell, usually through futures contracts. A corporate bond, usually a junior debenture, that can be exchanged, at the option of the holder, for a specific number of shares of the company's preferred or common stock. Financing by selling bonds, bills or notes to individuals or institutions. Separating firms that had previously merged, or in turning a previously acquired firm into a subsidiary. 1.Disposition of an asset by sale, liquidation etc; 2.Case when a company has to redistribute the shares it dad invested in another company. The share of a companys profit paid to the investor or shareholder. Financing by selling ordinary shares or preferred shares to investors. Licence granted by a franchiser to a franchisee to operate a business under the formers corporate name against payment of a royalty and compliance with certain standards. A partnership in which all partners are general partners. To offer the stock in a privately held company for sale to the public for the first time either as a means of raising funds or in order to become a publicly traded company A company that offers insurance policies to the public, either by selling directly to an individual or through another source such as an employee's benefit plan. An amount of capital which is formed of

companii autorizate

Camera de Comer marf, produs

obligaiuni convertibile

finanare prin imprumut sciziune cesiune de active

dividend finanare prin aciuni franciz

societate n nume colectiv a se transforma n societate public

firm de asigurri

capital subscris

24

joint stock company

joint venture

limited liability company limited company by shares limited partner limited partnership Memorandum of Association merger/amalgamation monopoly

redemption of bonds registered capital return on investment (ROI) return on assets (ROA)

money paid for shares issued to stockholders A company which has some features of a corporation and some features of a partnership. The company sells fully transferable stock, but all shareholders have unlimited liability A contractual agreement joining together two or more parties for the purpose of executing a particular business undertaking. All parties agree to share in the profits and losses of the enterprise. A type of corporation that is owned by a limited number of shareholders in a small business Business entity with shareholders with Limited liability whose shares may not be offered to the general public, unlike those of a Public limited company A partner who has limited legal liability for the obligations of the partnership. A partnership that includes one or more partners who have limited liability. Document that regulates a firm's external activities and must be drawn up on the formation of a registered or incorporated firm. Combination of two or more companies by combining accounts or by consolidation; Market situation where one producer controls supply of a good or service, and where the entry of new producers is prevented or highly restricted. Monopolist firms, in their attempt to maximize profits keep the price high and restrict the output, and show little or no responsiveness to the needs of their customers. The repurchase of bonds by the issuer of the bonds Maximum value of securities that a firm can legally issue. A measure of a corporation's profitability, equal to a fiscal year's income divided by common stock and preferred stock equity plus long-term debt. A measure of a company's profitability, equal to a fiscal year's earnings divided by its total assets, expressed as a percentage.

societate pe aciuni

societate mixt

societate cu rspundere limitat societate anonim pe aciuni comanditar societate n comandit simpl act constitutiv

fuziune monopol, organizaie deintoare al unui monopol

rambursarea obligaiunilor capital nominal randamentul investiiilor randament al capitalurilor curente

25

Registrar of Companies shareholder/stockholder share warrant sleeping partner

sole proprietor/owner/trader statutory meeting

The registrar responsible for recording and maintaining certain details of the new and existing firms within his or her jurisdiction Individual, group, or organization that holds one or more shares in a firm, and in whose name the share certificate is issued. Document which says that someone has the right to a number of shares in a company Partner who shares risks and rewards of an enterprise or venture with other partners, but does not take part in its day-to-day management. Sole owner of a business Shareholders' meeting that an incorporated or registered firm must have within the specified period under corporate legislation. An exchange on which shares of stock and common stock equivalents are bought and sold. External entity that supplies relatively common, off the shelf, or standard goods or services, as opposed to a contractor or subcontractor who commonly adds specialized input to deliverables Debt to a government incurred by a tax payer as accrued or assessed taxes. A legal arrangement in which an individual (the trustor) gives fiduciary control of property to a person or institution (the trustee) for the benefit of beneficiaries. Annual sales volume net of all discounts and sales taxes. Number of times an asset (such as cash, inventory, raw materials) is replaced or revolves during an accounting period.

registrul comertului acionar titlu la purttor partener pasiv

proprietar unic adunare statutar/constitutiv Bursa de schimb furnizor

Stock Exchange supplier

tax liability trust

taxe datorate statului act de mandat/drept de uzufruct/trust

turnover

cifr de afaceri

26

2. Companies from raising capital to liquidation

2.1. Setting up a company

Setting up of a company begins with lodging a Memorandum of Association and the Charter of the company or Articles of Association with the Registrar of Companies. According to Martin Buckley (1990), the Memorandum generally contains clauses stating: the name of the company and its logo. The company is free to choose its name, within certain bounds. The Department of Trade will not allow a name which is too similar to that used by an existing company, especially one in the same type of business. the country in which the registered office is located. limitation clause which shows whether the company is limited by shares or by guarantee, as commercial companies are limited by shares, or non-profit bodies, such as professional associations, are limited by guarantee. the objects for which the company was constituted; this states the type of business that the company will undertake, in order to protect investors from putting their money into a company which would then use it in a different manner. the capital clause which gives details about the amount of the authorized capital and its division into shares as well as the different categories of shares. the association clause which states the names of the founder members and

27

the number of shares they each subscribed for. rules of dissolution and liquidation of the company. Lodged together with the Memorandum, The Articles of Association represent a contract between the company and its members comprising rules and regulations for the internal activity of the company and specifying such things as: the voting power of its members; the appointment of directors; the distribution of the profits, etc. After the Memorandum and the Articles of Association have been registered and the necessary fees have been paid, the Registrar issues the Certificate of Incorporation and the company can start doing business. Here are the Governmental institutions that a company should be registered with: Notary Office, The Court of Commerce, The Registrar of Commerce, Tax/Fiscal Office, The Gazette. (According to http://www.legi-internet.ro/index.php?id=10&L=2) Within 15 days from the date of registration of the Articles of Association, the founders or the administrators of the company will request the incorporation of the company in the Commercial Register in the area where the head office of the company will be located. The court may declare nullity of the company register with the Trade Register if the Articles of Incorporation are missing or were not concluded in authentic form, or the activity of the company is illegal or against public order. This may happen also if the decision of the delegate judge to incorporate, or the legal administrative authorization to incorporate the company are missing, the Articles of Incorporation do not stipulate the companys name, activity object, contribution of the associates and the subscribed capital or if the legal stipulations regarding the minimum capital, subscribed and paid have been broken.

2.2. Raising capital

Large corporations have grown to their present size in parts because they have found innovative ways to raise capital for further expansion. In order to raise new capital, companies use some primary methods as: issuing of bonds, sales of ordinary

28

shares, issuing preferred shares, borrowings and using profits. According to Olea Ciuciuc and Eugenia Tnsescu (2001, p.178):
Before a company can commence operations it requires start up capital [] no prudent bank or lending institution would consider financing a business in which the owners did not have a personal stake, and shared some of the risks. It is also unwise for a company to operate with too much debt. [] It is also imprudent for a company to finance itself totally with equity, as the initial proprietors would have to fund the entire business. It is usual for a business to finance itself with both debt and equity []

Financial decisions are crucial. The secret of success in financial management is to increase value. The problem is how to do it. The financial manager has two broad responsibilities: what investment should the firm make and how should it pay those investments. The first involves spending money; the second involves raising it. (According to Ciucuc, Tnsescu, 2001) Companies need an almost endless variety of real assets. To obtain the necessary money, the company sells financial assets or securities. Their value consists in their claim on the firm's real assets and the cash they produce. If the company borrows money from the bank, the bank has a financial asset that gives it a claim to a stream of interest payments and to repayment of the loan. The company's real assets need to produce enough cash to satisfy these claims. Financial assets include not only bank loans, but also shares of stock, bonds, lease financing obligations, and so on. (According to Violeta Negrea, 2005) The financial manager stands between the firm's operations and the financial markets, referred at as sources where the investors hold the financial assets issued by firms. He traces the flow of cash from investors to their firm and back to investors again. The flow starts when securities are issued to raise cash to purchase real assets to generate cash inflows later, to repay the initial investment. The cash is then either reinvested or returned to the investors who purchased the original security issue. The shareholders are made better off by any financing decision of the financial management that increases the value of their stake in the firm. A good capital budgeting decision is one that results in the purchase of a real asset that makes a net contribution to value. Financial decisions cannot be separated from financial markets either. The financial manager must know whether the value of the firm would increase through

29

an issue of shares to stockholders. He must have considered the interest rate on the loan and concluded that it was not too high. He must also cope with time and uncertainty. The investment, if undertaken, may have to be financed by debt that cannot be fully repaid for many years. The financial manager has to decide whether the opportunity is worth more than its costs and whether the debt burden can be safely borne. The financial manager is anyone responsible for a significant corporate investment or financing decision. But usually responsibility is spread out throughout the firm. The engineer who designs a new production facility, the marketing manager who commits to a major advertising campaign, but also the top manager is, of course, continuously involved in financial decisions. Nevertheless, there are managers specialized in finance: the treasurer - the most directly responsible for obtaining financing, managing the firm's cash accounts and its relationship with banks and often financial institutions in the financial market, and making sure the firm meets its obligations to the investors holding its securities. Violeta Negrea mentions that larger companies usually have a controller who checks that the money is used efficiently. He manages budgeting, accounting, auditing. There can be a chief financial officer appointed to oversee both the treasurer' and the controller's work. He is involved in financial policy making and corporate planning but he also can have managerial responsibilities beyond strictly financial issues and may also be a member of the Board of Directors. (Negrea, 2005: 88) But the ultimate decision often rests by law or by custom with the Board of Directors. Only the Board has the legal power to declare a dividend or to sanction a public issue of securities. Boards usually delegate decision-making authority for small or medium sized investment outlays, but the authority to approve large investment is almost never delegated. According to Violeta Negrea a commodity exchange is the market where commodities are traded. Some commodities are dealt with at auctions, each lot being sold having been examined by dealers, but most dealers deal with goods that have been classified according to established quality standards. In these commodities both actual and future contracts are traded on commodities exchange in which dealers are

30

represented by commodity brokers. Many commodity exchanges offer option dealing in futures, and settlement of differences on futures through a clearing house. As commodity prices fluctuate widely, commodity exchanges provide users and producers with hedging facilities with outside speculators and investors helping to make an active market, although amateurs are advised not to gamble on commodity exchanges. (Negrea, 2005:85) The fluctuations in commodity prices have caused considerable problems in developing countries, from which many commodities originate, as they are often important sources of foreign currency, upon which the economic welfare of the country depends. Various measures have been used to restrict price fluctuations but none have been completely successful. (According to Violeta Negrea, 2005: 86)

2.2.1 Shares
Shares are products that enable their holders to participate in the company's activities and benefit from its success or failure. The conditions for ownership of shares can differ according to the rights they give the shareholders. The risk involved in buying shares is linked to how the company is expected to behave and, in particular, what its net profits are expected to be. Indicators have been created to relate predictions of the company's behavior the market price, by which we can assess the market's appraisal of the company. Shares are securities representing a public limited company's share capital. Each share represents a part of the company in the hands of the shareholders. All shares represent equal parts into which the company's capital is divided. All shares have the same par value. Shares are not divisible, though they can be issued in blocks of number of shares (5, 10, 50, 100, etc). When a company is formed, i.e. when the Articles of Association and the Memorandum of Association are drawn up, they define the classes of share that can be issued.

31

The different classes of shares differ with regard to the rights they confer on their holder, as Constantin Milea sustains. Generally share types are divided into the following categories (According to Milea, 1997): Bearer shares Are a legal instrument denoting company ownership, and are usually in the form of share warrants. A share warrant is a document which states that the bearer of the warrant is entitled to the shares stated in it. If authorised by its articles, a company may convert any fully paid shares to "share warrants". These warrants are easily transferable without any need for a transfer document; that is, they can simply be passed from hand to hand. When share warrants are issued, the company must strike out the name of the shareholder from its register of members and state the date of issue of the warrant and the number of shares to which it relates. Subject to the articles, a share warrant can be surrendered for cancellation. If so, the holder is entitled to be re-entered into the register of members. Vouchers are usually issued with the share warrants in order that any dividends may be claimed. Cumulative preference These shares carry a right that, if the dividend cannot be paid in one year, it will be carried forward to successive years. Ordinary As the name suggests these are the ordinary shares of the company with no special rights or restrictions. They may be divided into classes of different value. Preference These shares normally carry a right that any annual dividends available for distribution will be paid preferentially on these shares before other classes.
Redeemable These shares are issued with an agreement that the

company will buy them back at the option of the company or the shareholder after a certain period, or on a fixed date. A company cannot have redeemable shares only. Violeta Negrea also refers to ordinary shares saying that they confer the right to call a shareholders' meeting; to vote at the meetings, to elect and to be elected to the company's bodies. The company's Articles of Association may, however, establish the number of preferred shares a shareholder must have to be entitled to vote. He receives new shares in the event of capitalization of reserves and they are preferred in subscribing new shares when they are issued to raise capital or in subscribing

32

convertible bonds. Each shareholder is entitled to subscribe the same number of shares as he already holds. However, the shareholders' meeting that decides on the issue may limit or suppress this right to preference. He is also free to transfer shares or to sell his shares at will. This right is one of the ways of obtaining a return of the investment, i.e. a gain from the favorable difference between the selling and buying price. (Negrea, 2005:86) The dividend is the return on shares. It represents a part of the distributable profit that is paid on each share. This return is variable as it depends on whether there are profits in each financial year and on whether the Annual General Meeting agrees to their distribution, as proposed by the Board of Directors. A company's dividend policy is represented by the percentage of the profits generated by the company in a particular financial year that it decides to distribute to the shareholders. The dividend is important because it represents a source of income for the investor and it is an important indicator to current or potential investors of the company's future profitability. It gives information on the company's projected growth, thus influencing share prices. The validity of ordinary shares is indefinite, i.e. it is not established in advance. The shares exist as long as the company that issues them exists. The secondary market is the only way shareholders have of getting back the capital they invested, as they cannot demand a refund of their investment. This is the main reason why shares are quoted on the stock exchange.

2.2.2. Bonds
Violeta Negrea defines bonds as institutionalized borrowings by governments or business, with the date of repayment, and the annual rate of interest to be paid meanwhile, fixed at the time of issue. (Negrea, 2005:87) There are irredeemable government and corporate bonds, where the interest rate is fixed but no date for

33

repayment. There are floating rate bonds, where the interest rate paid is related to the changing rate in the market. There are also zero coupon bonds which pay no interest at all but which are issued at a price very much lower than the repayment due on a particular date, so that income effectively takes the form of capital gains. There are index-linked bonds, which pay a small or no rate of interest but whose repayment, at some fixed date, includes compensation for the interim rise in the cost of living. There are convertible bonds, which carry the right of conversion into corporate equities. (According to Negrea, 2005:88) Bonds are desirable for the company because the interest rate is lower than in most other types of borrowing. Also, interest paid is a tax deductible business expense for the corporation. The disadvantage is that interest payments are ordinarily made on bonds even when no profits are earned. For this reason, a smaller company can seldom raise capital much capital by issuing bonds. (According to Ciucuc and Tnsescu, 2001: 137) The new economy based on the Internet should be called the "nude economy" because the Internet makes it more transparent and exposed. The potential for electronic bonds trading seems to be less than in on-line futures and options. A reason for this might be that individual investors aren't as interested in bonds as they are in shares, because unlike some share prices, bond prices rarely double in 12 months. Moreover, bonds are much less liquid than shares. Investors, such as insurance companies that hold them to maturity, often buy them. Even though the holders of bonds have lent money to the company, they have no voice in the affairs of the business, nor do they share in profits or losses. However, when the bond reaches maturity, the company must pay back the principal at its face value.

2.2.3. Borrowing
Companies can also raise shot-term capital, usually working capital to finance inventories, in a variety of ways, such as borrowing from lending institutions: banks, insurance companies, and savings and loan establishments. The borrower must pay

34

the lender interest on the loan at a rate determined by competitive market forces. The rate of interest charged by a lender can be influenced by the amount of funds in the overall money supply available for loans. If money is scarce, interest rates will tend to rise because companies seeking loans will be competing for funds. If plenty of money is available for loans, the rates will tend to move downwards. (According to Ciucuc, Tnsescu, 2001:138) If the corporate borrower finds that it needs to raise additional money, it can refinance an existing loan. In this transaction the lender is essentially lending money more money to its debtor. But if interest rates have gone up during the period, since the original loan was secured, borrowers pay a higher rate in order to hold additional funds. Even if the rate has gone down, the lender benefits by having increased in size of its original loan at a lower rate of interest.

2.2.4. Using profits

Regarding some of the companies, Olea Ciuciuc and Eugenia Tnsescu say that they pay out most of their profits in the form in the form of dividends to their shareholders. Investors buy into these companies because they want a high income on a regular basis. But other corporations, called growth companies prefer to take most of their profits and reinvest them in research and expansion. People who own such shares accept a smaller dividend or none at all, if by rapid growth the shares increase in price. (Ciuciuc, Tnsescu, 2001:138) A corporation prefers to keep a balance among these methods of raising capital for expansion, frequently plowing back about half of the earnings into the business and paying out other half as dividends.

2.3. Taxation of companies

Companies may be taxed on their incomes, property, or existence by various jurisdictions. Some jurisdictions impose a tax based on the existence or equity structure of the corporation. Other jurisdictions instead impose a tax based on stated 35

or computed capital, often including retained profits. However, most jurisdictions tax corporations on their income. Generally, this tax is imposed at a specific rate or range of rates on taxable income as defined within the system. Some systems have a separate body of law or separate provisions relating to corporate taxation. In such cases, the law may apply only to entities and not to individuals operating a trade. Such laws may differentiate between broad types of income earned by corporations and tax such types of income differently. Many systems allow tax credits for specific items. Such direct reductions of tax are commonly allowed for foreign taxes on the same income and for witholding tax. Often these credits are the same as those available to individuals or for members of flow through entities such as partnerships. Both domestic and foreign companies are subject to taxation. Often, domestic corporations are taxed on worldwide income while foreign corporations are taxed only on income from sources within the jurisdiction. Corporations are also subject to property tax, payroll tax, withholding tax, excise tax, customs duties, value added tax, and other common taxes, generally in the same manner as other taxpayers. These, however, are rarely referred to as corporate tax.

2.3.1. Corporation tax

Corporation tax is the tax payable on a companys income or gains at the statutory rate. Corporate tax or company tax refers to a tax imposed on entities that are taxed at the entity level in a particular jurisdiction. Such taxes may include income or other taxes. The tax system impose an income tax at the entity level on certain type(s) of entities (company or corporation). Many systems additionally tax owners or members of those entities on dividends or other distributions by the entity to the members. The tax generally is imposed on net taxable income. Net taxable

36

income for corporate tax is generally financial statement income with modifications, and may be defined in great detail within the system. The rate of tax varies by jurisdiction. The tax may have an alternative base, such as assets, payroll, or income computed in an alternative manner. (According to Peterson, 1990) Most income tax systems provide that certain types of corporate events are not taxable transactions. These generally include events related to formation or reorganization of the corporation. In addition, most systems provide specific rules for taxation of the entity and/or its members upon winding up or dissolution of the entity. William H. Peterson (1990) noted that in systems where financing costs are allowed as reductions of the tax base (tax deductions), rules may apply that differentiate between classes of member-provided financing. In such systems, items characterized as interest may be deductible, subject to interest limitations, while items characterized as dividends are not. Some systems limit deductions based on simple formulas, such as a debt-to-equity ratio, while other systems have more complex rules. Most systems also tax company shareholders on distribution of earnings as dividends. A few systems provide for partial integration of entity and member taxation. This is often accomplished by "imputation systems" or franking credits. In the past, mechanisms have existed for advance payment of member tax by corporations, with such payment offsetting entity level tax. Many systems impose a tax on particular corporate attributes. Such nonincome taxes may be based on capital stock issued or authorized, either by number of shares or value, total equity, net capital, or other measures unique to corporations. Corporations, like other entities, may be subject to withholding tax obligations upon making certain varieties of payments to others. These obligations are generally not the tax of the corporation, but the system may impose penalties on the corporation or its officers or employees for failing to withhold and pay over such taxes.

2.3.2. Deductible expenses

37

An expense is tax deductible provided that it is incurred with the purpose of generating taxable revenues including that which is provided by legal enactments in force. According to the Fiscal Code the following expenses are considered to be incurred for the purpose of obtaining incomes:

expenses for labour protection and expenses effected for the prevention of contributions for insurance against labor accidents and professional advertising and publicity expenses effected in order to promote the firm,

labor accidents and professional illness;

illness, as well as professional risk insurance premiums;

products or services, based on a written contract, as well as costs associated with the production of materials necessary for dissemination of publicity messages;

transport and accommodation expenses within the country and abroad

performed by employees and directors, provided that the company records profit either in the current and/or the previous years;

subscription fees, dues and mandatory contributions, as regulated by legal

enactments in force, as well as contributions to the fund for negotiating the collective labor agreement;

professional training expenses; expenses for marketing, market research, promotion on existing or new

markets, participation in fairs and exhibitions, business missions, publication of own informative materials;

research expenses as well as development expenses which are not expenses for the improvement of management, IT systems,

considered intangible assets;

implementation, maintenance and improvement of quality management systems, obtaining certifications of conformity with quality standards;

expenses for the protection of the environment and the conservation of losses incurred in result of writing-off non-cashed receivables, in the the bankruptcy procedure of the debtors has been closed based on

resources;

following cases:

38

a court decision; the debtor has deceased and the receivable can not be cashed from the successors; the debtor is dissolved in case of the limited liability company with a sole shareholder or is liquidated without successor; the debtor encounters major financial difficulties which affect its entire patrimony.

2.4. Insolvency, winding-up and bankruptcy

Insolvency represents the incapacity of a company to pay debts upon the date when they become due in the ordinary course of business. (According to www.ldoceonline.com). The insolvency procedure is regulated in line with modern standards, based on two significant commercial principles for any free market economy, as follows: the attempt to recover the company through reorganization and/or commencement of liquidation procedure based on a general or simplified insolvency procedure; the organization of bankruptcy proceedings in a manner enabling all creditors to recover their receivables. The mandatory conditions, which need to be cumulatively met in order for the creditors to commence the insolvency procedure against their debtor are: the debts must exceed a certain sum, according to each legal system of each country or 6 national average salaries for debts arisen from labor relations; the debtor should face an impossibility to pay its debts; the debtor should be in an impossibility to pay its mature debts with cash, for over 30 days as of the maturity date. The liquidities shortage refers to the balance in the debtors bank account and the available cash. Should the conditions stated above be cumulatively met, the debtor itself is compelled to file with the tribunal a motion for the commencement of the general or simplified insolvency procedure. The term winding up is one which encompasses both a creditors voluntary liquidation and also a compulsory winding up. The creditors voluntary liquidation is by far the most used corporate insolvency procedure. It is initiated by the directors, who advise the shareholders (in a small company) usually the same people, that the 39

company is insolvent and that there is no possibility of saving the company and that it needs to be closed down. The creditors at a meeting are advised of the financial state of the company and asked to vote to place it into liquidation. The creditors are allowed to question the directors at the meeting as to the reasons for failure of the business. Sometimes this can be distressing for a director especially when the creditors are persistent in their questioning, but more often than not, creditors do not even attend in person at the meeting and instead vote by proxy to liquidate the company. A professional should advise directors who seek their advice to take steps to wind up their own businesses, rather than sit and wait for a creditor to do it as it shows the liquidator that one is complying with the obligations of a director. A compulsory liquidation is begun by petition by a creditor and follows the service of a statutory demand. A petition is issued out of the local county court in which the registered office is situated, if it has bankruptcy jurisdiction. There are not many of these issued every year and those that are, are usually started by the Inland Revenue. Bankruptcy is commonly referred to as "liquidation," meaning that the business assets are liquidated, or sold, to pay the debts of the business. (According to www.ldoceonline.com). In this type of bankruptcy, a trustee is appointed by the court to oversee the process and make sure that creditors are treated equitably. The assets are sold and divided between creditors, after the fees and costs of the trustee are paid. Bankruptcy usually signifies the end of a business. The bankruptcy process begins with a petition to the court, including financial information and a list of creditors with the amounts owed to each. If the court grants the petition, a bankruptcy trustee is appointed to oversee the process. The trustee meets with creditors and attempts to work out arrangements for repayment of debts. The bankruptcy procedure becomes applicable in the following cases according to M. Brookes and B. Horner (1999:263) : the debtor expresses the wish to enter into the simplified procedure or does not express the intention to reorganize its activity or, upon the creditors request to

40

commence the bankruptcy procedure, the debtor objects and its objection is rejected by the syndic judge or none of the persons in charge proposes a reorganization plan or the plan proposed is not accepted; the debtor wishes to reorganize its activity, but does not propose a reorganization plan or the plan proposed is not accepted.. There are several stages to be observed in a bankruptcy procedure starting with the identification of debts and creditors, followed by the liquidation and the distribution of the proceeds obtained from liquidation. The main stages of the bankruptcy procedure are as follows: lifting the debtors right to administer its property and sealing the debtors assets, with a view to put together an inventory and to preserve the same; appointing a temporary liquidator within the general procedure and the confirmation, as liquidator, of the receiver within the simplified procedure; establishing liabilities: drawing up the list of creditors, the list of debtors assets and the profit-and-loss account for the year prior to the date of filing the bankruptcy application, verifying the creditors claims and drawing up the list of claims, settlement by the syndic judge of any objections, drawing up and posting the final chart of the debtors liabilities; carrying out liquidation: sale of the debtors assets by auction or by direct sale (wholesale or retail), payment of taxes, stamp duties and all sale-related expenses, payment of secured creditors (the secured creditors are such creditors who have mortgages, pledges, or retention rights on debtors assets); distributing the amounts resulted from liquidation: covering the expenses related to the liquidation procedure, drawing up the final report and balance sheet by the liquidator, settlement of the objections thereof and approval of the same by the syndic judge and final distribution of the debtors funds; closing the liquidation process, upon the liquidators request, conveyed in a decision of the syndic judge. In reorganization, creditors are encouraged to continue to work with the company to keep it going. Also in reorganization, one or more committees may be appointed to oversee the interests of the employees, shareholders, and creditor. 41

A liquidation bankruptcy process ends when all assets have been liquidated and all creditors paid and the company no longer exists.

Useful Terminology
TERM bankruptcy DEFINITION Legal procedure for liquidating a business (or property owned by an individual) which cannot fully pay its debts out of its current assets. A stock certificate which is the property of whoever happens to be in possession of it at any given time. A debt instrument issued for a period of more than one year with the purpose of raising capital by borrowing. An individual, organization or company that is using funds, materials or services on credit Money owed by a business, country, or organization An itemized forecast of an individual's or company's income and expenses expected for some period in the future. A central collection place where banks exchange checks or drafts; participants maintain an account against which credits or debits are posted Open and organized marketplace where ownership titles to standardized quantities or volumes of certain commodities (at a specified price and to be delivered on a specified date) are traded by its members Sale of the assets of a firm on court orders, issued at the request of the ROMANIAN EQUIVALENT faliment

bearer shares bond

aciune la purttor crean, ipotec

borrower borrowings budget

persoan care ia cu mprumut mprumuturi buget

clearing house

oficiu de cliring

commodity exchange

burs de mrfuri

compulsory liquidation

lichidare obligatorie

42

controller convertible bonds

corporate planning

corporate tax currency discharge of bankruptcy equity

equity ratio fluctuation franking credits income

insolvency

Inland Revenue Services

firm's creditors. In a compulsory liquidation, the unsecured creditors generally have the right to choose and appoint the liquidator. A company's chief accountant A corporate bond, usually a junior debenture, that can be exchanged, at the option of the holder, for a specific number of shares of the company's preferred stock or common stock. The process of drawing up detailed action plans to achieve an organization's goals and objectives, taking into account the resources of the organization and the environment within which it operates. A tax that must be paid by a corporation based on the amount of profit generated. Money in any form when in actual use as a medium of exchange, especially circulating paper money. A court order terminating bankruptcy proceedings, usually relieving the debtor of his/her obligation. Ownership interest in a corporation in the form of common stock or preferred stock. It also refers to total assets minus total liabilities, in which case it is also referred to as shareholder's equity or net worth or book value. A financial ratio indicating the relative proportion of equity used to finance a company's assets. Change or variation in a quantity over time A nominal unit of tax paid by companies paying tax in countries that have dividend imputation system Flow of cash or cash-equivalents received from work (wage or salary), capital (interest or profit), or land (rent). The situation where an entity cannot raise enough cash to meet its obligations, or to pay debts as they become due for payment Agency responsible for

ef contabil obligaiuni convertibile

planificare pe termen lung a obiectivelor firmelor

impozit pe corporaie valut absolvire de faliment capital al acionarilor ntr-o companie, aciuni i alte titluri de valoare ale unei companii, capital propriu

fluctuaie

venit

insolvabilitate

fisc

43

IRS

investment investor

lender

liquidation

liquidity

marketing manager maturity of bonds money supply nude economy ordinary shares

premium par value

administering and enforcing the Treasury Department's revenue laws, through the assessment and collection of taxes, determination of pension plan qualification, and related activities Money committed or property acquired for future income. Person whose primary objectives are preservation of the original investment (the principal), a steady income, and capital appreciation Entity that advances cash to a borrower for a stated period and for a fixed or variable rate of interest, with or without a security other than the borrower's signatures Winding up of a firm by selling off its free (un-pledged) assets to convert them into cash to pay the firm's unsecured creditors. Measure of the extent to which a person or firm has cash to meet immediate and short-term obligations. A manager whose primary task is to manage the marketing resources of a product or business. Any length of time, although typical bond maturities range from one year to 30 years. The total supply of money in circulation in a given country's economy at a given time An economy that has become more transparent and exposed thanks to the Internet Type of security that serves as an evidence of proportionate ownership, imparts proportionate voting rights, and gives its holder unlimited proportionate claim on the assets and income of the firm (after the claims of lenders, and other obligations, are satisfied). The amount by which a bond or stock sells above its par value. nominal value shown on the principal side of a bill of exchange, currency, security (stock/share,

investiie investitor

creditor

lichidare a unei ntreprinderi

lichiditi

manager de marketing scadena obligaiunilor mas monetar trasparena economiei aciuni obinuite

obligaiuni cu prime, recompens valoare nominal

44

preferred shares

profit profitability redeemable shares security

bond), or other type of financial instrument. Capital stock which provides a specific dividend that is paid before any dividends are paid to common stock holders, and which takes precedence over common stock in the event of a liquidation. The positive gain from an investment or business operation after subtracting for all expenses. Ability of a firm to generate net income on a consistent basis. Shares that may be redeemed at the option of the issuer and/or the shareholder. An investment instrument, other than an insurance policy or fixed annuity, issued by a corporation, government, or other organization which offers evidence of debt or equity.

aciuni prefereniale

profit rentabilitate aciuni amortizabile/rambursabile tiltlu de valoare

tax deduction

treasurer

winding-up

compulsory winding-up voluntary winding-up

An expense subtracted from adjusted gross income when calculating taxable income, such as for state and local taxes paid, charitable gifts, and certain types of interest payments. The employee at a company who is responsible for the collection, maintenance, investment, and disbursement of funds. Method of dissolving a business by selling off its assets and satisfying the creditors from the proceeds of the sale. Sale of the assets of a firm on court orders, issued at the request of the firm's creditors. liquidation procedure initiated by the management of a firm following a special or extraordinary resolution to the effect.

reducere din venitul impozabil

administrator, gestionar

lichidarea unei societi

desfiinare obligatorie desfiinare voluntar

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3. Accounting and Financial Reports

3.1. Introduction
Accountancy is a branch of mathematical science useful in discovering the causes of success and failure in business by recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events of financial character, and interpreting the results thereof. The financial information applied to business entities in accounting, bookkeeping and auditing divisions are further on provided to users such as shareholders and managers. Acording to Constantin Milea accounting is thousands of years old. The author says that the earliest accounting records date back more than 7,000 years. Accounting evolved, improving over the years and advancing as business advanced. Earlier forms of accounting were inadequate for the problems created by a business entity involving multiple investors, so double-entry bookkeeping first emerged in northern Italy in the 14th century, where trading ventures began to require more capital than a single individual was able to invest. (Milea, 1999:45) The development of joint stock companies created wider audiences for accountants, as investors without firsthand knowledge of their operations relied on them to provide the requisite information. This development resulted in a split of accounting systems for internal (i.e. management accounting) and external (i.e. financial accounting)

46

purposes, and subsequently also in accounting and disclosure regulations and a growing need for independent attestation of external accounts by auditors.

3.2. The Accounting department

The Accounting department is referred to as the core of a business as every act or transaction of the company is entried in its books. Not only do letters telegrams come into this department but the cheques and bills are also received and paid out. The permanent flow of incoming and outgoing goods can be noticed in the invoices and advice notes it dealt with. Also known as the Ledger Department (according to Milea, 1999), it keeps books where information referring to every legal or natural person from whom goods are bought or to whom they are sold is stored. The supplier is credited for his commodity in the Purchases Ledger while the customer is debited for the goods sold to him in the Sales Ledger. These two books comprising personal accounts are known as Personal Ledgers as distinct from the Impersonal Ledgers holding accounts for goods, capital, plant, interest, rent, depreciation, amortisation, profits and loss, etc. In some respect, the Ledger is a more complete picture of the company then the Journal is. Each year the Journal indicates what happened or changed during that year, while the Ledger contains not only the current years events but it also tells the companys situation at the beginning of the new year. The Ledger accounts start the year with balances from the Balance Sheet of the previous year-end. The changes that occur are recorded as Journal entries and are used to update the Ledger accounts. Every time a Journal entry is made, the amount in at least two accounts is changed in order to keep the basic equation of accounting in balance. A basic principle of modern bookkeeping is the double entry (i.e. for every debit in one account, another account must be credited and vice versa) referring that it is not possible to change one number in an equation without changing at least another one. It is only necessary to calculate the control sheets on which all the entries for the day were made and, if the total of the debit columns equals the total of the credit ones, the head bookkeeper is sure that all his postings are correct. Any possible error in posting is easily 47

traced by comparing the original documents with the Journal Sheet. (According to Milea, 1999) A normal accounting practice for revenues and expenses is the accrual accounting. As distinct from the cash accounting which accounts only for cash receipts and payments, the accrual accounting applies for revenues in the period of in which they are earned and for expanses in the period in which they are incurred. A transaction is accrued even if the cash has not been received yet. The Ledger Department not only keeps the books but is also responsible for the collection of accounts. The careful management of accounts results in both the prevention of losses and punctual return of the capital giving the firm its use for new transaction. The earning capacity of the money used by the firm depends greatly on its turnover. The prompt receiving of money by a firm facilitates the prompt payment of its own debts and enables it to benefit by the highest possible cash discount for prompt payment.

3.3. Financial accounting

As a main area of accounting, the financial accounting is responsible for the recording of business in monetary values, the accounts of the company and their presentation in quarterly or annual statements. It is designed to record the financial history of a business entity and report historical data accordingly, therefore it looks backward if there are different ways of recording transactions, calculating profits or losses, or giving values to assets and liabilities in order to provide an accurate view of the companys finance, to make entries in a single monetary unit, to consider business as being continuous, to report the financial information periodically, and to apply the principle of the historical cost and state revenues only after the goods were sold and services accomplished. The fundamental need for financial accounting is to reduce principal-agent problem by measuring and monitoring agents' performance and reporting the results to interested users. All accounts and financial statements should be presented in conformity with General Accepted Accounting Principles (GAAP), (According to Marcheteau &co, 2005:478) : 48

 Going concern. True basic assumption that the concern has no intention or obligation to liquidate or curtail operations. True and fair view, or air presentation. The word fair goes beyond the simple notion of accuracy since accounts may be accurate while concealing some facts or failing to disclose some aspects of a firms economic and financial position. Prudence. Caution and circumspection, so that there should not be any extrapolation or over or under estimation of results. In particular, only profits realised at the date of financial statements should be included, and losses which have arisen, or are likely to arise in respect of the financial year concerned, should be mentioned. Consistency. This implies that similar operations should be dealt with in the same manner (consistency) from fiscal year to fiscal year. Matching principle. Charges and revenues must be correctly matched with the accounting periods to which they belong. Historical Cost. Recording assets in the books at their initial cost, at the time of acquisition, as opposed to replacement cost. Accrual basis. This means taking into account income and expenses when earned and incurred (commitments) regardless of when cash is actually received or disbursed. Materiality. An item should be regarded as material if there is reason to believe that knowledge of it would influence the decision of an informed investor. In the event of any failure to meet the above principles, the reasons for it and its effects on the accounts must be set out clearly in the notes to the financial statement. Given the multiplication of international operations, mergers, takeovers and consolidations involving companies of different nationalities and the interlocking structure of multinationals a strong movement towards the homogenization of accounting practice appears, and the profession is active in promoting this trend through its international norm- and standard-setting institutes.

3.3.1. The Chart of Accounts

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The chart of accounts or accounting plan, as a systematic method of accounting, comprises a limited number of accounts divided into classes, sub-classes and subsidiary accounts. It differs from one country to another due to the accounting tradition, practice, legislation and macro economic considerations. The basic classification of accounts commonly covers four major categories of transactions including financing, investments, revenues and expanses. In the UK, according to Constantin Milea (1999), each business is allowed to divide its own accounting system and the model chart of accounts can be modified in accordance with each companys financial requirements. The most common chart of accounts in the UK refers to five classes comprising assets, liabilities, shareholders equity, revenues and expanses which can be divided into sub-classes and subsidiary accounts. For example, Class 1 referring to assets has three sub-class accounts: Current Assets (11), Fixed Assets (12) and Deferred Assets (13), while the sub-class (11) has subsidiary accounts such as Petty Cash (1101), Cash in Bank (1102), Creditors or Accounts Payable (1105) and Stocks or Inventory (1107). In Latin Countries the accounting rules, regulations and decree laws are imposed by governments rather than professional bodies. The French accounting plan, also used in Romania comprises seven classes: Class 1 of Capital Accounts Capital and reserves (10), Profit or loss brought forward (11 Profit or loss for the financial year (12) Investment grants (13) Provisions for tax purposes (14) Provisions for liabilities and charges (15) Loans and similar creditors (16) Debts related to participating interests (17) Debts related to participating interests (17) Class 2 of Fixed Assets Intangible assets (20) Tangible assets (21 Fixed assets under concession (22) Fixed assets in course of construction (23) Participating interests and debts relating there to (26) Other financial assets (27) Clasa 1 Conturi de Capitaluri 10 Capital i rezerv 11 Profit sau pierderi evideniate n devans 12 Rezultatele exerciiului 13 Subvenii pentru investiii 14 Provizioane reglementate 15 Provizioane pentru riscuri i cheltuieli 16 mprumuturi i datorii asimilate 17 Datorii lagate de participaii 18 Conturi pentru filiale i tranzacii ntre uniti i subuniti Clasa 2 Conturi de Imobilizri 20 Imobilizri necorporale 21 Imobilizri corporale 22 Concesiuni 23 Imobilizri n curs 26 Dobnzi 27 Alte titluri imobilizate 50

Provisions for depreciation of fixed assets (28) Provisions for loss in value of fixed assets (29). Class 3 of Stock and Work-in-Progress Raw materials (31) Other consumables (32) Work-in-progress goods (33) Work-in-progress services (34) Finished goods (35) Goods for resale (37) Provisions for loss in value of stocks and work-in-progress (39) Class 4 of Personal Accounts Suppliers and related accounts (40) Trade debtors and related accounts (41), Employees and related accounts (42) Social protection and similar accounts (43) Government and other public bodies (44) Group companies and proprietors (45) Sundry debtors and creditors (46) Suspense accounts (47) Prepayments and accruals (48) Provisions for loss in value on personal accounts (49) Class 5 of Financial Accounts Trade investments (50) Banks, financial and similar institutions (51) Cash (53) Imprest accounts and credits (54) Internal Transfers (58) Provisions for loss in value on financial accounts (59) Class 6 of Expense Accounts Purchases (60) External Services (61) Other external services (62)

28 Amortizri privind imobilizrile 29 Provizioane pentru deprecierea imobilizrilor Clasa 3 Conturi de Stocuri i Producie n curs de execuie 31 Materii prime 32 Alte consumabile 33 Produse n curs de execuie 34 Lucrri i servicii n curs de excuie 35 Produse finite 37 Mrfuri n custodie sau consignaie la teri 39 Provizioane pentru deprecierea stocurilor i produciei n curs de execuie Clasa 4 Conturi de teri 40 Furnizori i conturi asimilate 41 Clieni i conturi asimilate 42 Personal i conturi asimilate 43 Asigurri sociale, protecia social i conturi asimilate 44 Bugetul statutului, fonduri speciale i fonduri asimilate 45 Grup i asociai 46 Debitori i creditori diveri 47 Conturi de regularizare i asimilate 48 Cheltuieli i venituri nregistrate n avans 49 Provizioane pentru deprecierea creanelor Clasa 5 Conturi de Trezorerie 50 Titluri de plasament 51 Conturi bancare 53 Casa 54 Avansuri de cas i acreditive 58 Viramente interne 59 Provizioane pentru deprecierea conturilor de trezorerie Clasa 6 Conturi de Cheltuieli 60 Cheltuieli cu achiziiile 61 Cheltuieli cu lucrrile i serviciile executate de teri 62 Cheltuieli cu alte servicii executate de teri

51

Taxes, direct and indirect (63) Personnel costs (64), Other operating charges (65) Financial costs (66), Extraordinary charges (67), Depreciation, amortisation, transfers to provisions (68) Profit sharing by employees, taxes on profits and similar items (69) Class 7 of Revenue Accounts Sales of goods and services (70) Stock variation (71) Work from own purposes and capitalised (72) Net income recognised on long-term contracts (73) Operating subsidies (74) Other operating income (75) Financial income (76) Extraordinary income (77) Depreciation and provisions written back (78) Charges transferred (79)

63 Cheltuieli cu impozitele, taxele i vrsmintele asimilate 64 Cheltuieli cu personalul 65 Alte cheltuieli de exploatare 66 Cheltuieli financiare 67 Cheltuieli excepionale 68 Cheltuieli cu amortizrile i provizioanele 69 Cheltuieli cu impozitele pe profit Clasa 7 Conturi de Venituri 70 Venituri din vnzri de produse, mrfuri, servicii prestate i din alte activiti 71 Venituri din producia stocat 72 Venituri capitalizate din activitatea de exploatare 73 Venituri nete din contrecate pe termen lung 74 Venituri din subvenii de exploatare 75 Alte venituri din exploatare 76 Venituri financiare 77 Venituri excepionale 78 Venituri din amortizri i provizioane 79 Venituri din cheltuieli

3.4. Management Accounting

Management accounting may be defined as a process of accumulation, analysis and communication of both financial and operating data used by the management to plan, evaluate, and control within the organisation to assure accountability for its resources. The management accounting is an integral part of the management process and, consequently, the information that it provides is used for controlling the current activities of the company; for planning its future strategies, optimising the use of resources; for valuing performance, reducing subjectivity in the decision making process and for improving both the internal and external communication. Constantin Milea mentions that the principles necessary to create the framework within the management accounting practices and techniques applied are: accountability,

52

controllability, reliability, interdependency and relevancy. (Milea, 1999:46) Therefore, Management Accounting is important not only for the decision making process, but it also provides the framework for the management process. Unlike financial accounting, the management accounting makes use of the management accounts belonging to Class 9 in the Chart of Accounts, namely Internal Settlements (90), Calculation Accounts (92) and Production Costs (93). In contrast to financial accountancy information, management accounting information is designed and for use of managers within the organization, whereas financial accounting information is designed for use by shareholders and creditors. It provides is confidential rather than public oriented and is rather forward-looking, than historical. Consistent with other roles in today's corporation, management accountants have a dual reporting relationship. As a strategic partner and provider of decision based financial and operational information, management accountants are responsible for managing the business team and at the same time having to report relationships and responsibilities to the corporation's finance organization. The activities management accountants provide inclusive of forecasting and planning, performing variance analysis, reviewing and monitoring costs inherent in the business are ones that have dual accountability to both finance and the business team. Examples of tasks where accountability may be more meaningful to the business management team than the corporate finance department are the development of new product costing, operations research, business driver metrics, sales management scorecarding, and client profitability analysis. (According to Milea, 1999:47) Therefore, the preparation of certain financial reports, reconciliations of the financial data to source systems, risk and regulatory reporting will be more useful to the corporate finance team as they are charged with aggregating certain financial information from all segments of the corporation. One widely held view of the progression of the accounting and finance career path is that financial accounting is a stepping stone to management accounting. Consistent with the notion of value creation, management accountants help drive the success of the business while strict financial accounting is more of a compliance and historical endeavor.

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3.5. Financial reports

Movements of goods, services and economic means constitute economic flows which are analysed in terms of sources and applications of funds. A picture of how funds are obtained and how they are applied in the business, thus showing the strengths and weaknesses of the internal financial situation, is given by the Sources and Applications of Funds Statement. According to Constantin Milea the concepts of Sources and Applications should meet two conditions. Firstly all sources are known as liabilities which are divided into: permanent sources, the capital contributed by the owner operator, partners or shareholders and profit made by the firm, and temporary sources, credit extended by suppliers, creditors and bankers. Secondly, all applicants of funds are known as assets which are analysed in terms of: permanent applications land, buildings, long term investments, inventories, and temporary applications, accounts receivable, shortterm investments, cash. (Milea, 1999:55) The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions. Financial statements should be understandable, relevant, reliable and comparable. Reported assets, liabilities and equity are directly related to an organization's financial position. Reported income and expenses are directly related to an organization's financial performance. Financial statements are intended to be understandable by readers who have a reasonable knowledge of business and economic activities and may be used by those for different purposes. Owners and managers require financial statements to make important business decisions that affect its continued operations. Financial analysis is then performed on these statements to provide management with a more detailed understanding of the figures. These statements are also used as part of management's annual report to the shareholders. Employees also need these reports in making collective bargaining agreements with the management, in the case of labor unions or for individuals in discussing their compensation, promotion and rankings. Prospective investors make use of financial

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statements to assess the viability of investing in a business. Financial analyses are often used by investors and are prepared by financial analysts, thus providing them with the basis for making investment decisions. Financial institutions (banks and other lending companies) use them to decide whether to grant a company with fresh working capital or extend debt securities (such as a long-term bank loan or debentures) to finance expansion and other significant expenditures. Government entities (tax authorities) need financial statements to ascertain the propriety and accuracy of taxes and other duties declared and paid by a company. Vendors who extend credit to a business require financial statements to assess the creditworthiness of the business. Media and the general public are also interested in financial statements for a variety of reasons. There are three basic reports that the business organizes on a regular basis: the income statement, the statement of capital for sole proprietorships and partnerships or the retained earnings statement for corporations and the balance sheet.

3.5.1 Profit and Loss Account

According to Consatantin Milea (1999:56) it represents a statement of the companys business activity and the expanses relative to that business for a certain financial period. It indicates the sales figure achieved less the expenses incurred in obtaining the sales (production costs, administrative expenses, depreciation, etc). It also shows the gains or losses from the companys own long and short term investments and the sale of company assets. The tax due to be paid on the net result (sales and other gains less expanses and losses) are specified in the statement. If dividends are to be paid to stockholders from the profits earned, the sum is indicated as a deduction. If profits are to be transferred to retained earnings it is also mentioned in the statement. After all deductions have been taken, the net profit/loss figure or bottom line is transferred to the balance sheet.

3.5.2 Statement of Capital or Retained Earnings

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a) Sole proprietorship the proprietorships capital account represents his ownership in the assets of the business. The net income the business earns belongs to the owner who has the right to withdraw the profits that the business earns or to reinvest the income in the business. If the letter approach is chosen, the profits are added to the proprietors capital record. In the case where the proprietor withdraws from the company more than the business earns, the result is a decrease in the proprietors capital. The statement of capital shows the changes that take place in the proprietors capital over a period of time. b) Partnership Although the statement of capital for a partnership is prepared in the same manner as for a proprietorship, the accountant must show changes in capital for each partner. c) Corporations since the ownership of a corporation is in the form of shares of stock, no statement of capital is prepared. Income earned by a corporation and dividends paid are reflected in an account entitled retained earnings which register all the changes from the beginning of the accounting period to the end of the accounting period.

3.5.3 The Balance Sheet

It is an important report for any company as it shows its financial position on a particular date providing a detailed listing of three categories: the various assets of the business, its liabilities and the capital section. In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset.(According to Milea, 1999:60) Assets represent ownership of value that can be converted into cash, although cash itself is also considered an asset. The balance sheet of a firm records the monetary value of the assets owned by the firm. Two major asset classes are tangible assets and intangible assets. Tangible assets contain various subclasses, including current assets and fixed assets. 3.5.3.1. Assets

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a) Current Assets include cash and all the assets that can be turned into cash in the reasonably near future, usually within a year from the date of the balance sheet. (According to Marcheteau & co, 2005:481) Cash which consists of bills and silver in the till (petty cash fund) and money on deposit in the bank. Marketable Securities which represent temporary investment of excess or idle cash which is not needed immediately in stocks, bonds, and Government securities for the purpose of earning dividends and interest. Accounts Receivable which are amounts not yet collected from customers who are usually given 30, 60 or 90 days to pay their debts. Inventories which become accounts receivables when sold. b) Fixed Assets referred to as property, plant and equipment represent those assets which are not intended for sale, but used to manufacture a product, display it, warehouse it and transport it. The method for valuation is cost less accumulated depreciation based on cost to the date of the balance sheet. According to Marcheteau & co (2005), these assets are described from the point of view of: Depreciation which is the decline in useful value of a fixed asset due to destruction as a consequence of use and passage of time, or to obsolescence which makes the present equipment out of date. However land is not subject to depreciation whose cost should remain unchanged from year to year. Net property, Plant and Equipment is the valuation for balance sheet purposes of the investment in fixed assets. It consists of the cost of the variation assets diminished by the depreciation accumulated to date. Prepayments represent payments in advance for insurances or rentals and Deferred Charges represent a type of asset similar to prepayments. c) Intangible assets may be defined as assets that have no physical existence but with substantial value to the company, such as leasehold, copyright, patent, licence or goodwill. 3.5.3.2. Liabilities a) Current Liabilities refer to the debts that fall due within the year to come.

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Accounts payable stand for the amounts that the company owes to its regular business creditors as well as salaries, interests for the funds borrowed from banks, fees, insurance premiums etc. Income Tax Payable is the tax due to the Inland Revenue. b) Long term liabilities represent debts due after one year from the date of the financial report such as mortgage bonds. 3.5.3.3. Shareholders Equity It represents the total equity interest that the shareholders have in the corporation, being separated into three categories, according to Marcheteau & co.(2005:482): capital stock representing the owners shares in the company, preferred stock which refer to those shares that have some preference over other shares such as dividends or in distribution of assets in case of liquidation and common stock.

3.6 The Audit

After the formation of a company, a major step is the appointment of an auditor or auditors, sometimes a reputable auditing firm to hold office until the next annual meeting. The regular examination of a companys books and accounts is a legal obligation and, for the carrying out of the audit, the auditors are responsible for the shareholders by whom they are appointed. The general definition of an audit is an evaluation of a person, organization, system, process, enterprise, project or product, as cited by www.businessdictionary.com . The term most commonly refers to audits in accounting, but similar concepts also exist in project management, quality management, and for energy conservation. Every auditor is granted the right of access to the books and accounts of the company at all times and can request all the information that he feels necessary for the carrying out of his activity as his work is a legally independent examination. When the Balance Sheet and Profit and loss account are presented at the Annual General Meeting they have to contain the auditors report certifying that they are in agreement with the books of account, comply with the regulations and represent a correct view of the companys business.

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The Auditors certificate assures shareholders, partners and creditors of the accuracy of book accounts, being also a guarantee against possible errors and a deterrent against fraud. In many companies, especially in medium or small ones, an auditor can prepare the final accounts and make the Balance Sheet, situation where he acts as an accountant of the company and not in his capacity as Auditor under Statute. (According to Milea, 1999) Audits are performed to ascertain the validity and reliability of information; also to provide an assessment of a system's internal control. The goal of an audit is to express an opinion on the person, organization or system in question, under evaluation based on work done on a test basis. Due to practical constraints, an audit seeks to provide only reasonable assurance that the statements are free from material error. Hence, statistical sampling is often adopted in audits. In the case of financial audits, a set of financial statements are said to be true and fair when they are free of material misstatements - a concept influenced by both quantitative and qualitative factors. Audit is vital for accounting. Traditionally, audits were mainly associated with gaining information about financial systems and the financial records of a company or a businness.(According to Milea, 1999) However, recent auditing has begun to include other information about the system, such as information about security risks, information systems performance, and environmental performance. As a result, there are now professionals conducting security and environmental audits. In Cost Accounting, it is a process for verifying the cost of manufacture or production of any article, on the basis of accounts. In simple words the term cost audit means a systematic and accurate verification of the cost accounts and records and checking of adherence to the objectives of the cost accounting. Such systems must adhere to generally accepted standards set by governing bodies regulating businesses; these standards simply provide assurance for third parties or external users that such statements present a company's financial condition and results of operations fairly. As a general rule, audits should always be an independent evaluation that will include some degree of quantitative and qualitative analysis.

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3.6.1. Types of auditors

Auditors of financial statements can be classified into two categories: a) External auditor is an independent public accounting firm engaged by the client subject to the audit, to express an opinion on whether the company's financial statements are free of material misstatements, whether due to fraud or error. For publicly-traded companies, external auditors may also be required to express an opinion over the effectiveness of internal controls over financial reporting, according to Milea (1999). Auditors may also be engaged to perform other agreed-upon procedures, related or unrelated to financial statements. Most importantly, external auditors, though engaged and paid by the company being audited, are regarded as independent auditors. b) Internal auditors of internal control are employed by the organization they audit. Internal auditors perform various audit procedures, primarily related to those over the effectiveness of the company's internal controls over financial reporting. Internal auditors of publicly-traded companies are required to report directly to the board of directors, or a sub-committee of the board of directors, and not to management, in order to reduce the risk that internal auditors will be pressured to produce favorable assessments. c) Consultant auditors are external personnel contracted by the firm to perform an audit following the firm's auditing standards. This differs from the external auditor, who follows their own auditing standards. The level of independence is therefore somewhere between the internal auditor and the external auditor. The consultant auditor may work independently, or as part of the audit team that includes internal auditors. Consultant auditors are used when the firm lacks sufficient expertise to audit certain areas, or simply for staff augmentation when staff are not available. d) Quality auditors may be consultants or employed by the organization to verify the effectiveness of a quality management system.These type of auditors are essential to verify the existence of objective evidence of processes, to assess how successfully processes have been implemented, for judging the effectiveness of achieving any defined target levels, providing evidence concerning reduction and elimination of problem areas and are a hands-on management tool for achieving continual improvement in an organization. (According to Milea, 1999) To benefit the organization, quality auditing

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should not only report non-conformances and corrective actions but also highlight areas of good practice. In this way, other departments may share information and amend their working practices as a result, also enhancing continual improvement. None of the business organization can operate without accountancy. Either in case of small business, , or in case of large businesses, accounting is a vital element as it is responsible with recording the way a business has grown and, after analyzing figures, suggesting the way it should go in the future.

Useful Terminology

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TERM account

DEFINITION A record of financial transactions for an asset or individual, such as at a bank, brokerage, credit card company, or retail store. clerk in charge recording business transactions and entering them in the accounts book Accumulate or increase Short-term liabilities (such as interest, taxes, utility charges, wages) which continually occur during an accounting period but are not supported by an invoice or a written demand for payment. System of accounting based on 'accrual principal' under which revenue is recognized (recorded) when earned, and expenses are recognized when incurred. Evaluation by a qualified appraiser to (1) assess the current market value of a property, (2) estimate the extent of damage to an insured property and cost of repairs, or (3) determine if a total loss occurred Something valuable that an entity owns, benefits from, or has use of, in generating income. In accounting, an asset is something an entity has acquired or purchased, and which has money value (its cost, book value, market value, or residual value). an amount determined as payable; evaluation A bond or preferred stock which is selling at a price equal its face (or par) value. Systematic examination and verification of a firm's books of account, transaction records, other relevant documents, and physical inspection of inventory by qualified accountants An individual qualified to conduct audits. Amount available in an account for withdrawal or use. Computed by summing up all cleared or credited deposits, and deducting all withdrawals, debits, and service charges. Condensed statement that shows the financial position of an entity on a specified date (usually the last day of an accounting period). Year used as the beginning or the reference year for constructing an index, and which is usually assigned an arbitrary value of 100 A book in which accounts are kept tern used in capital budgeting 62 representing the cash the cash coming in less the cash going out during a given period.

ROMANIAN EQUIVALENT cont, calcul

accountant/ bookkeeper accrue accruals

contabil a efectua o nregistrare contabil tranzitorie cumulri

Accruals basis

appraisal

Principii de anualitate, contabilitate bazat pe angajamente estimare

asset(s)

bun/ active

assessment at par audit

tax/evaluare la valoare nominal audit

auditor balance

auditor, cenzor situaia contului, balan

balance sheet

bilan contabil

base year

anul de baz

Book of accounts Cash flow

Registru de conturi Fluxul numeralului

4. Banking Services and Means of Payment

4.1. Introduction
For the existence of business entities, banks and the services they provide are a major element in the development and high performance of the business activity. Not only as a funding possibility by the granting of loans, are banks vital, but also by the transactions between companies they facilitate. On these grounds, in this chapter I will talk about banks and their importance for the existence of the business environment. Banks can be defined as establishment authorized by a government to accept deposits, pay interest, clear chequess, make loans, act as an intermediary in financial transactions, and provide other financial services to its customers, as cited by www.businessdictionary.com According to M. Marcheteu & co. (2005:250) banks date back to the days when religious people lent their assets, i.e. perishable goods, to the people who needed them in return for a promise to be paid back the goods under consideration along with a slight increase in the amount lent, a fee of sorts to pay for the service provided. People used to think that their belongings would be safest in temples or shrines, that is why religious people used to collect deposits from the public. Today, the banking sector still performs such tasks and bankers have now become key participants in the economic activity.

4.2. Types of Banks

For the existence of business entities banks are vital. In accordance with the type of customers they cater for, G. Lipscombe (1990) mentions the following types of banks: Commercial banks are the privately-owned institutions seeking for profit which develop services according to the general public needs, such as the use of a cheque book, the provision of credit cards, etc. These banks accept funds from customers, have 63

extensive branch networks and are major participants in the clearing system, settling of banks between banks. Regarding the financial profitability for the economy, they inject large amounts of money through cheques, payments made by direct debit, standing order or credit cards. Concerning their activity related to companies, commercial banks fill firms short-term needs by providing businesses with loans, consumer and instalment credit, mortgage loans and other more specialized services. Central Banks which have as a main responsibility to implement the countrys monetary policy, as they are the only banks allowed to issue banknotes. A Central Bank is the Governments banker, the government may borrow from the Bank when short of money, but it is also in charge of keeping the countrys gold reserves. Central Banks represent the Bankers Bank as all the other banks have large sums deposited here. They are crucial to the country as they regulate the flow of capital into and out of the country, the amount of credit available in the country, all other financial and commercial institutions being influenced by the Bank Rate settled by the Central Bank. Investment Banks or Merchant Banks are concerned with sophisticated, innovative transactions that most often involve corporate customers. They participate in large pools of capital and financial syndications, often working together to provide their clients with large-scale financing, which may include international credit facilities. They provide corporate finance services to companies: mergers and acquisitions, takeover bids, floatation on the Stock exchange, medium-term loans, export finance, leasing etc. Savings Banks are the institutions which receive savings accounts and pay interest to the depositors. Generally, the rates of interest vary in relation to the length of the notice of withdrawal. Building Societies (UK) which obtain funds from private investors by issuing shares, taking deposits, and lending money for the purchase of commercial premises. The loan is secured by mortgage. Even though they are a relatively minor factor in long-term industrial finance, they have provided many small businesses with capital. Savings and Loan Associations (US) which are cooperative associations formed under federal or state law, which solicit savings in the form of shares, invest their funds in mortgages and permit deposits in the withdrawal from shareholders accounts similar to those allowed for savings accounts in banks.

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Hybrid Financial Institutions are finance companies or credit institutions which facilitate business transactions between buyer and seller by directly financing the buyer. Credit Unions representing associations formed by trade groups which manage and invest large pools of capital contributed by its members. The members of a credit union may also save there for their retirement and take out loans at competitive interest rates. Financial Services Companies which exist in various forms and offer a wide range of services that may include insurance programs, investment and brokerage services, mutual funds and tax-shelters.

4.3. Banking Services

Banks provide a wide range of services to their clients, either they are individuals or companies, such as: acceptance of deposits, provision of loans, collection of cheques, demand drafts, bills of exchange, promissory notes and foreign documentary and clean bills; purchase of local and foreign currency documentary bills, negotiation of bills under inland and foreign letters of credit, advising of inland and foreign letters of credit; carrying out standing instructions for payments; issuance of performance and financial guarantees; keeping in safe custody deeds and securities; purchase and sale of securities; remittance of funds; collection of interest on securities, dividend on shares and collection of bills; credit transfers; issue of travelers cheques and gift cheques; acting as executors and trustees; issuance of credit cards; underwriting, acting as bankers to new issues and as bankers for refunds.( According to Constantin Milea, 1999) Deposits are opened by those who have funds in hand. These include: individuals, sole proprietorships, partnerships, trusts or limited companies. 4.3.1 Current Accounts and Cheques

Current Accounts or demand deposit accounts are bank accounts in which both individuals and companies keep money. These accounts serve two purposes: firstly, they provide an efficient system of payment between buyers and sellers, and secondly they represent a safe place to keep excess cash.

65

Anyone may open a current account by providing proof of identity and a signature, which the bank keeps in its files. In the case of companies, one or more authorised signers sign all the cheques. After making the initial deposit into the account, customers are expected to permanently maintain sufficient funds in the account to cover any cheques they write except in the case of authorised overdraft. A current account is opened usually for commercial or business purposes where a large number of transactions is involved. As it represents a running and active account and no restrictions on the number and the amount of transactions are implied. If due diligence is carried out on the request of a prospective customer who is a corporate or large borrower enjoying facilities from more than one bank, the banks may inform the consortium leader, if under consortium and the concerned banks, if under multiple banking arrangement. An account holder will deposit cash or cheques into his account. The details are entered in a paying in book/ slip and then the book/ slip along with the cheques or cash is handed over to the teller. The teller verifies the amount and stamps the customers copy confirming receipt. Customers can also deposit cheques/ cash in drop in boxes/ ATMs but they do so at their risk as they would not receive a confirmation of the deposit. There is no restriction on the amount that may be deposited in a current account. Third party cheques and cheques with endorsements may also be deposited in current accounts, as well as there are no restrictions on the number of withdrawals that may be de in a period. Cheques represent a demand draft drawn on a bank against its maker's funds, to pay the stated amount of money to the bearer or named party, on presentment (demand) on a stated date or after, according to www.businessdictionary.com. The account holder is the drawer, the bank where the account is held represents the drawee bank and the cheque is made payable at the payees or beneficiarys order. Only the payee has the right to endorse a cheque, except the situation where the cheque is a bearer cheque which may be cashed by the person who presents it to the paying bank. However, most cheques are order cheques, made payable to the order of a specific payee.

66

Once a month on the closing date, determined by the bank, the customer receives a bank statement which details all of the transactions affecting the account in the previous month.

4.3.2 Deposit Accounts: Savings and Passbook Accounts

For customers who wish to save money, banks provide savings accounts which pay interest on the funds deposited. The procedure for opening such an account is the same as for a current account. Despite passbook accounts, savings accounts pay interest at a lower rate. On the other hand, passbook accounts, so named due to the fact that each transaction affecting the account is recorded by the bank clerk in a small account register, or passbook, pay interest only every three months, while regular savings accounts pay interest every month. Also, the passbook accounts have a withdrawal restriction, money can be withdrawn only at the end of every quarter, at any other time of the year, withdrawals will incur penalty charges including loss of interest.

4.3.3. Time deposits

Time deposits, also called fixed deposits represent a depository institution [] account that pays higher than savings account interest rates but imposes conditions on the amount, frequency, and/or period of withdrawals. (According to www.businessdictionary.com) They also include deposits such as recurring, cumulative, annuity, reinvestment, cash certificates and so on. The minimum period a fixed deposit may be placed is 7 days. The maximum period a deposit may be placed is 120 months. Banks can accept deposits for a longer period if ordered to do so by the courts, such as in the case of minors who have more than 10 years to become majors. However, it is unusual for deposits to be placed for more than 5 years.

67

The rates offered on these accounts are higher than on savings accounts as the banker knows in advance when repayment has to be made. A variation is represented by the notice deposit which is a term deposit for a specific period but withdrawable on giving at least one complete days notice. Changes in rates are to be decided by the board of directors or a group authorized by the board. Banks must disclose in advance the schedule of interest rates that they offer on deposits. Banks are free to determine the rate of interest that may be paid on fixed deposits, but he rates must be approved by the board or a body to whom the board has delegated this responsibility to. However, banks may offer deposits on a floating rate which must be clearly tied to a base rate. Interest is normally paid on the maturity of the deposit which is calculated on the daily balance. Most banks offer certificates of deposits, in varying amounts, as a form of shortterm investment. These certificates are receipts issued by a depository institution to a depositor who opens time deposit account, stating the amount deposited, the rate of interest, and the minimum period for which the deposit should be maintained without incurring early withdrawal penalties.

4.3.4. Credit cards

Credit Cards are a system of payment involving electronic transfers of payment. They may be issued by banks or other commercial organizations. For the credit cards, two payment systems are available: the cardholders bank account which may be automatically debited for the amount of the purchase and the merchants account credited; or the customer is assigned a credit limit and each month he pays a percentage of the total purchases, also called a revolving charge account. The card issuer determines the minimum payment which must be made monthly, interest being charged on every amount over this minimum. This interest is added to the next months bill. (According to Marcheteau & co. 2005) Nowadays, people may turn not only to banks for the issuance of credit cards, but also to credit cards companies. Referring to these type of companies, G. Klein & J. Lambert (1987) show that: 68

Credit card companies, though wholly owned by banks, are independent separate companies and encourage card-holders to borrow money from them. It is true that the interest rates charged are greater than those available from banks on overdrafts and loans, nevertheless a lot of people maintain large loans from credit card companies.

4.3.5. Security, guarantees, pledges and liens

Security, guarantees, pledges and liens are all related to loans. A loan refers to written or oral agreement for a temporary transfer of cash from its owner (the lender) to a borrower who promises to return it according to the terms of the agreement, usually with interest for its use. (According to www.businessdictionary.com) If the loan is repayable on the demand of the lender, it is called a demand loan, if repayable in equal monthly payments, it is an installment loan or if repayable in lump sum on the loan's maturity date, it is a time loan. (According to G. Klein & J.Lambert, 1987) Depending upon the loan, financial institutions may require some sort of tangible safeguard from their customers for the loans they provide them. Secured loans are supported by transferable securities (stocks, debentures) or other negotiable financial instruments which become the possession of the lender if the borrower defaults on the loan. A guarantee may be provided as a loan safeguard. The borrower and the guarantor are different parties. For instance, a parent company may guarantee the loan of its subsidiary. In the case of default of the subsidiary, the parent company must assume the loan. The pledge is another loan safeguard, involving cash deposit or personal property as a security for a loan. A pledge agreement entitles the pledge to retain the object of property until the borrower satisfies the debt, and to sell the goods to recover the debt in case of non-performance. Lien means the right of a creditor to retain goods and securities owned by the debtor bailed to the bank, until the loan due from the debtor is repaid. The creditor has the right to retain the security of the debtor but not to sell it. The party having the lien, the lienor, may sell the property.

4.3.6. Bills of Exchange

69

Defined by www.businessdictionary.com as a written, unconditional order by one party (the drawer) to another (the drawee) to pay a certain sum, either immediately or on a fixed date, for payment of goods and/or services received, bills of exchange may be discounted by a third party for an amount lower than the party will receive when the bill matures. The party discounting the bill gains by receiving money at an earlier date. The amount of discount the banker deducts from the total amount of the bill will vary according to the risks the purchaser takes. A sound bill is one which is backed or countersigned by a well-known finance house or bank. This is another way for banks to lend money, this way businessmen may replenish their working capital quickly. 4.3.7. Other Banking Services Banks issue travellers checks in various denominations to customers travelling abroad. These may be used to pay accommodation and restaurant bills and may also be exchanged for the local currency of the country visited. Banks may also act as trustee and executors for both individuals and corporate customers. All banks have vaults and most rent safety deposit boxes to customers that wish to keep their important documents, stock certificates, jewellery or other valuables in guarded environment. Most banks also offer money orders and cashiers checks for purchase as an alternative payment method to cheques. The customer pays the face value of the money order or cashiers check purchased plus a small commission or fee. Money orders and cashiers checks are drawn in three copies, one retained by the bank, the second kept by the purchaser and the third given to the payee. In the international or foreign trade, banks play a crucial role by acting as intermediaries for the collection and transfer of payments in different currencies between buyers and sellers located in different countries. The services that banks provide in foreign trade are: handling shipping documents; observance of buyers conditions of purchase; discounting bills of exchange; loans to exporters; collecting payments, etc.

70

The payments may be done by: cash with order, foreign bill of exchange, documentary bill, documentary letter of credit, bankers draft and transfer.

4.3.

Means of Payment

Bill of exchange or draft. It represents an order requiring the person to whom it is addressed to pay on demand or at some future date a stated sum of money to, or the order of a specified person, or to bearer. Consequently, bills of exchange include three parties: the creditor, who draws the bill (drawer), the debtor upon whom the bill is drawn (drawee), the person to whom the money is to be paid (payee), who may be the drawer himself or a third party to whom the drawer is indebted.

Promissory note. A promissory note, referred to as a note payable in

accounting, or commonly as just a note, is a contract where one party (the maker or issuer) makes an unconditional promise in writing to pay a sum of money to the other (the payee), either at a fixed or determinable future time or on demand of the payee, under specific terms. They differ from IOUs in that they contain a specific promise to pay, rather than simply acknowledging that a debt exists. The terms of a note usually include the principal amount, the interest rate if any, the parties, the date, the terms of repayment (which could include interest) and the maturity date. Sometimes, provisions are included concerning the payee's rights in the event of a default, which may include foreclosure of the maker's assets. Demand promissory notes are notes that do not carry a specific maturity date, but are due on demand of the lender. (According to G. Lipscombe, 1990) Historically, promissory notes have acted as a form of privately issued currency. In many jurisdictions today, bearer negotiable promissory notes are illegal because they can act as an alternative currency. An IOU (abbreviated from the phrase "I owe you") is usually an informal document acknowledging debt. It differs from a promissory note in that an IOU is not a negotiable instrument and does not specify repayment terms such as the time of repayment. IOUs usually specify the debtor, the amount owed, and sometimes the creditor and may be signed or carry distinguishing marks or designs to ensure 71

authenticity. In some cases, IOUs may be redeemable for a specific product or service rather than a quantity of currency. Bankers draft is a draft drawn by a bank upon another bank or ordering one of its own branches or agents to pay on demand a certain sum of money to a specified person.(According to www.businessdictionary.com) Bank drafts are commonly used by banks in dealings with other banks, or when a creditor or seller is unwilling to accept an ordinary check from a debtor or buyer in another city or country. When a customer (the drawer) requests a draft, the bank withdraws the amount of the draft from his or her account and holds it to honor the draft on its presentment by the drawee. Because, in normal circumstances, a draft is certain to be paid, it is generally accepted as a cash equivalent. A letter of credit is a document issued mostly by a financial institution, used primarily in trade finance, which usually provides an irrevocable payment undertaking. The letter of credit can also be source of payment for a transaction, meaning that redeeming the letter of credit will pay an exporter. Letters of credit are used primarily in international trade transactions of significant value, for deals between a supplier in one country and a customer in another. (According to G.Lipscombe, 1990) The parties to a letter of credit are usually a beneficiary who is to receive the money, the issuing bank of whom the applicant is a client, and the advising bank of whom the beneficiary is a client. Almost all letters of credit are irrevocable, i.e., cannot be amended or cancelled without prior agreement of the beneficiary, the issuing bank and the confirming bank. In executing a transaction, letters of credit incorporate functions common to Traveler's cheques.

4.3.

Means of payment in foreign business

Foreign bill of exchange. The bill of exchange looks like a cheque which is drawn on an overseas buyer, or even on a third party as designated in the export contact, for the sum agreed as settlement. An exporter can send a Bill of Exchange for the value

72

of goods for export through the banking system for payment by an overseas buyer on presentation. (According to G. Lipscombe, 1990) The Bill is called a sight draft if it is made out payable on demand. If it is payable at a fixed or future time it is called a term draft, because the buyer is receiving a period of credit, known as the tenor of the Bill. The buyer signifies and agreement to pay on the due date by writing an acceptance across the face of the Bill. Bankers draft - a banker's draft is a cheque where the funds are taken directly from the financial institution rather than the individual drawer's account. The online business dictionary provides the following definition: bill of exchange drawn by a bank on itself, or on a correspondent bank in another city or country. (According to www.businessdictionary.com ) Bank drafts are commonly used by banks in dealings with other banks, or when a creditor or seller is unwilling to accept an ordinary check from a debtor or buyer in another city or country. In local transactions a certified check or a cashier's check serves the same purpose. When a customer (the drawer) requests a draft, the bank withdraws the amount of the draft from his or her account and holds it to honor the draft on its presentment by the drawee. Because, in normal circumstances, a draft is certain to be paid, it is generally accepted as a cash equivalent. In contrast, when an individual requests a banker's draft they must immediately transfer the amount of the draft (plus any applicable fees and charges) from their own account to the bank's account. Because the funds of a banker's draft have already been transferred they are proven to be available; unless the draft is a forgery or stolen, or the bank issuing the draft goes out of business before the draft is deposited and cleared, the draft will be honoured. Like other types of cheques, a draft must still be cleared and so it will take several days for the funds to become available in the payee's account. Documentary letter of credit The letter of credit is the most used method of payment in foreign trade to settle debts. It represents a document issued by a bank which guarantees the payment of a customer's drafts for a specified period and up to a specified amount. The Documentary Letter of Credit provides a more secure way of carrying out transactions in import-export trade than by documentary bills collection. A letter of credit

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when transmitted through a bank, usually in the exporters country, becomes the means by which the exporter obtains payment. (According to Marcheteau &co. 2005:271)

Useful Terminology
TERM accrued interest ATM base rate DEFINITION Interest earned but not received (realized). Cash dispensers that have replaced tellers in banks and are to be found in most busy streets and shopping areas. The prime lending rate or best rate at which bankers agree to lend money for top borrowers. It sets the annual interest rate and serves as a reference for the credit terms granted by banks. Business activity of accepting and safeguarding money owned by other individuals and entities, and then lending out this money in order to earn a profit. Bill of exchange drawn by a bank on itself, or on a correspondent bank in another city or country Check marked 'Cash,' 'The bearer' or other words to the effect, but without the name of the entity to whom it is to be paid (its payee). Such checks (and drafts) are payable to anyone who presents them, usually over the counter of the paying bank. Written, unconditional order by one party (the drawer) to another (the drawee) to pay a certain sum, either immediately (the sight bill) or on a fixed date (the term bill), for payment of goods and/or services received. Debt instrument which certifies a contract between the borrower (bond issuer) and the lender (bondholder) as spelled out in the bond indenture. Debt instrument issued by banks that usually pay interest Non interest-bearing bank account which allows the accountholder to write checks against the funds in the account. A method adopted by banks to settle their mutual indebtedness by ROMANIAN EQUIVALENT dobnd intermediar acumulat distribuitor automat de bancnote rat de baz a dobnzii

banking

Activitate bancar

bankers draft Bearer cheque

trat bancar Cec la purttor

Bill of Exchange

Cambie, trat

Bond

certificate of deposit checking account clearing

Obligaiune (mprumut pe termen lung cu dobnd fixatla termenele de plat specificate, cu scaden precis) certificat de depozit cont curent compensare

74

collateral Current account

debenture Deposit account

Disbursement documentary bill

draft

drawee

drawer

Due date face value

financial lease

exchanging cheques and bills held by each against the other before settling the cash balance. Property offered as a guaranty to obtain a loan or the extension of a credit line. The type of bank account the general public is most familiar with as its aim is to serve customers needs for their dayto-day operations. Charge, claim, or lien on asset or property, usually as a result of a loan. Interest earning account at a bank or other depository institution the withdrawals from which are limited to the amount of the account's credit balance. Payment or outlay by cash, check, or voucher. In international trading, a bill of exchange or commercial draft that is presented for payment with the required documents such as a clean bill of lading, certificate of insurance, certificate of origin Bill of exchange which is a written payment order from one party (the drawer) to another (the drawee) to pay a stated sum to a third party (the payee) either immediately (in case of a sight draft) or on or before a specified date (in case of a time draft). Entity that is expected to accept and pay a bill of exchange (check, draft, letter of credit, etc.) on presentation or on a certain date (called due date or maturity date Maker or writer of a bill of exchange (check, draft, letter of credit, etc.) who directs the drawee (such as a bank) to pay the stated amount to a third party (the payee). Date on which a bill of exchange (check, draft, letter of credit, etc.) is payable. Apparent worth or the nominal value shown on the principal ('face' or 'head') side of a bill of exchange, currency, security (stock/share, bond), or other type of financial instrument. Fixed-term (and usually non-

garanie cont curent

Titlu de crean Cont pentru depuneri

Efectuare de pli trat documentar

Trat

Instituie financiar care execut plata, tras

Trgtor, persoan care dispune palta,

Data scadenei valoare nominal

acord de garantare credite

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instalment interest

letter of credit

lien

mortgage

mortgage debenture overdraft perishable goods pledge

promissory note

safe deposit

savings account

cancelable) lease that is similar to a loan agreement for purchase of a capital asset on installments. Money paid in regular amounts, at regular intervals when paying back a loan. Payment made by a borrower for the use of money lent to him by a bank or financial institution, calculated as a percentage of the capital borrowed. Written commitment to pay, by a buyer's or importer's bank (called the issuing bank) to the seller's or exporter's bank (called the accepting bank, negotiating bank, or paying bank). Creditor's conditional right of ownership (called security interest) against a debtor's asset or property that bars its sale or transfer without paying off the creditor Debt instrument by which the borrower gives the lender a lien on his property as a security as a repayment of the loan. Corporate loan collateralized by mortgage on the specified assets of the issuing firm. A bank account from which money has been overdrawn. Goods such as food products that must be used within a short period of time. Cash deposit or placing of owned property by a debtor (the pledger) to a creditor (the pledgee) as a security for a loan or obligation Written, signed, unconditional, and unsecured promise by one party (the maker or promisor) to another (the payee or promisee) that commits the maker to pay a specified sum on demand, or on a fixed or a determinable date The act of putting important documents or valuable things in a special room or metal box, usually in a bank, in order to keep them safe A bank account into which a the account holder pays money not to be spent for some time and which earns interest more than an ordinary

rat dobnd

acreditiv

gaj

ipotec

obligaiune ipotecar descoperire de cont bunuri perisabile gaj, garanie

bilet la ordin

depozit n seif

cont de economii

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securities

secured loan

sight deposit statement of account

standing order

travellers cheque

trustee

unsecured loan

withdrawal

account. Financing or investment instruments (some negotiable, others not) bought and sold in financial markets, such as bonds, debentures, notes, options, shares (stocks), and warrants Loan agreement under which a borrower pledges a specific asset or property which the lender can seize in case of default. a bank deposit which can be withdrawn on demand. The list of debts and credits which is printed out at regular intervals so that customers may know how much money is left in their account. Type of preauthorized-payment under which an accountholder instructs a bank to pay a specified amount, directly from his or her account balance, to a named party on a regular basis. Bill of exchange designed specially for a business or vacation traveler, it is actually a sight draft with the security of a letter of credit. Person or organization (such as a trust company) named in trust agreement by the trustor or a court (the first party) as a trusted third party to nominally own, and protect and handle, trustproperty for the benefit of one or more beneficiaries (the second party) in accordance with the terms of the trust agreement A loan against which no collateral or security is pledged and which constitutes an uncovered risk for the lender. A removal of funds from an account.

titluri de valoare, garanie, acoperire

credit pe baz de garanii

extras de cont

ordin de plat permanent

cec de cltorie

gestionar, garant, girant,

mprumut negarantat

retragere de numerar

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Conclusions

General Aspects on the Business Environment and Useful Terminology puts the stress on business organizations, identifying and describing them, highlighting key steps to be followed such as raising capital, stating up or bankruptcy and focusing on the importance of accounting and financial institutions. Organised in four chapters covering some key features of companies, the papers aim is also to provide the terminology related to the field. Therefore, the theoretical aspects are completed by a mini-dictionary after each chapter, providing terms of economics, which appear in the corpus of the paper, or are related to that specific topic the chapter is related to, their English definition, and the Romanian Equivalent of each term. In the first chapter, Legal Forms of Business Organizations, I have tried to identify the English and the Romanian business entities and describe each of them focusing on the type of ownership, type of liability and presenting the advantages and the disadvantages each business organization implies. Herein I have intended to point out that people tend to associate with others to do business in order to increase the influence 78

and the bargaining power of the group, or to provide money or specific skills. Consequently different types of business organizations appear, such as partnerships, limited liability companies, public limited companies, corporations and trusts. After describing each of these entities, some differences have been noticed between them. A sole proprietorship is exclusively owned, managed and controlled by a single person with all authority, responsibility and risk, while in a partnership two or more persons agree to furnish a part of the capital and labour and to share the profits or losses. In case of companies, shareholders and liability are key words. While a public limited company is a firm whose securities are traded on a stock exchange and can be bought and sold by anyone, a private limited company is a type of incorporated firm which offers limited liability to its shareholders but which, unlike a public firm, places certain restrictions on its ownership. The enterprise system has as essential features private ownership, freedom of choice, competition and free market. In Romania, the majority of companies registered, whether domestic or foreignowned, are limited liability companies. In the second chapter, Businesses from Raising Capital to Liquidation, I have focused on the steps a company has to follow from starting up until liquidation. After financing themselves with borrowings, equity, allotment of shares and bonds or using profits, the next step is to focus on the main objectives, such as obtaining profitability, return on investment, return on assets, earnings per share, dividends and cash flow. After starting their activity, companies must also comply with the liabilities to the government, namely taxation. They may be taxed on their incomes, property, or existence by various jurisdictions. One of the taxes, companies must pay is the corporation tax which is payable on a companys income or gains at the statutory rate. However, cases where some expanses are tax deductible appear as well provided that it is incurred with the purpose of generating taxable revenues including that which is provided by legal enactments in force. In the last part of this chapter I have pointed out the consequences of a companys incapacity to pay out its debts, namely insolvency, liquidation, and bankruptcy. The third chapter is about Accounting and Financial Reports, as none of the business organizations can operate without accountancy as it is a vital element, being

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responsible with recording the way a business has grown and, after analyzing figures, suggesting the way it should go in the future. However, accounting must be based on some general accepted principles such as going concern, true and fair view, or air presentation, prudence, consistency, matching principle, historical cost, accrual basis and materiality. Responsible with providing stakeholders legal information such as financial accounts in trading account and balance sheets, financial accounting is useful in producing financial statements for all purposes, and also specifying the information of a business unit production for selection and also for performance opinion. The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions. Therefore they should be understandable, relevant, reliable and comparable as they are relevant for vendors, government entities, financial institutions, investors, employees and managers. In contrast to financial accountancy, management accounting is designed and intended for managers within the organization, being usually confidential rather than publicly reported and forward-looking, instead of historical. However, in order to ascertain the validity and reliability of information in financial statements, audits are appointed, also to provide an assessment of a system's internal control. The auditors certificate assures shareholders, partners and creditors of the accuracy of book accounts, being also a guarantee against possible errors and a deterrent against fraud. The last chapter puts the stress on Banking Services and Means of Payment, as I tried to focus on one of the most important components of the external environment of business. For the existence of business entities, banks and the services they provide are a major element in the development and high performance of the business activity. Not only as a funding possibility by the granting of loans, are banks vital, but also by the transactions between companies which they facilitate. Therefore services such as: acceptance of deposits, provision of loans, collection of cheques, demand drafts, bills of exchange, promissory notes and foreign documentary and clean bills; remittance of funds; collection of interest on securities, dividend on shares and collection of bills; credit transfers; issue of travelers cheques and gift

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cheques; acting as executors and trustees; issuance of credit cards, make them important to both companies and individuals. The papers aim is to provide general features of the business environment by combining the theoretical aspects on the topics presented herein, with the useful terminology.

Rezumat

Nucleul acestei lucrri l constituie mediul afacerilor, mai exact societile comerciale, lucrarea furniznd aspecte teoretice despre cteva realiti economice companiile, punnd n acelai timp accentul pe terminologia englez specific domeniului. Cele 4 capitole ale lucrrii prezint aspecte teoretice corespunztoare att mediului intern ct i celui extern al unei companii. Pentru ca terminologia s fie ct mai accesibil, fiecare capitol este ncheiat printr-un mic dicionar cu termeni specifici capitolului, ce precizeaz definiia termenului respectiv n limba englez i echivalentul n limba romna. Primul capitol este conceput n jurul entitilor comerciale englezeti, dar i a realitilor corespondente romneti, precum societile pe aciuni, societile n comandit simpl, societile cu rspundere limitat sau trusturile. Se urmrete aici, clasificarea si definirea societilor comerciale, prezentarea caracteristicilor de baz, avantajele sau dezavantaje lor, ct i obiectivele urmrite de companii. Cel de-al doilea capitol vine n completarea celui dinti oferind mai multe informaii cu privire la nfiinarea unei companii, paii de urmat n aceste privine, condiiile care trebuie ndeplinite, ct i la metodele de finanare. Cu alte cuvinte, capitolul surprinde etapele prin care trece o companie de la fondare pn la faliment, 81

scond n eviden termeni precum aciuni la purttor, crean, impozite sau insolvabilitate i lichidare. Capitolul trei se refer la unul dintre cele mai importante departamente din cadrul unei firme pentru buna funcionare ct i pentru evaluarea ei, partea de contabilitate. Capitolul definete concepte precum plan de conturi, bilan contabil, bunuri mobile i imobile, i prezint importana evalurilor externe efectuate de ctre audit. Cel de-al patrulea capitol este consacrat domeniului bancar, o component a mediului extern al ntreprinderilor, vital pentru desfurarea activitii acestora. Prezint aici o clasificare a instituiilor fianciare, a serviciilor furnizate i a metodelor de plat, prezentnd o scurt descriere i definindu-le totodat pe fiecare n parte.

REFERENCES
1. Buckley, Martin, The Structure of Business, Pitman, 1990; 2. Brookes M., Horner B., Business English, Bucureti, Teora, 1999; 3. Chiriacescu, Adriana, Murean, Laura, Bargiel, Virginia, Hollinger, A, Coresponden n afaceri n limbile romna i englez, Bucureti, Teora, 2003; 4. Ciucuc, Olea, Tnsescu, Eugenia, English for business purposes,Teora, Bucureti, 2001 5. Donnelly, G, The Firm in Society, London, Longman Group ltd, 1991; 6. Klein, G. & Lambert, J., The business of Banking, London, 1987; 7. Lipscombe, G., Banking: The Business, Pitman, 1990; 8. Marchetean M., Berman, J.B, Savio, M., Daube,J.P., Delbard, O., Demazet, B., Englez pentru economie, , Bucureti, Teora 2000; 9. Milea, Constantin, Commercial, Financial and Management English, a practical course, , Bucureti, ALL Educational 1997. 10. Milea, Constantin, Commercial, Financial and Accounting English a practical course, ediia a II-a, revizuit i adugit, , Bucureti, ALL 1999; 11. Nstsescu, Violeta, Dicionar Economic englez-romn, romn-englez, , Bucureti, Niculescu 2007; 12. Negrea, Violeta, Top Management Language, 2005; http://facultate.regielive.ro/engleza/top_management_language-61464.html consultat aprilie 2010 13. Petreson, William H., An outline of American Economy, USIA, 1990; 14. Rachmand David J. and co., Business Today, 1990; 15. http://www.businessdictionary.com/ consultat iunie 2010 16. http://www.investorwords.com/ consultat iunie 2010 17. http://www.macmillandictionary.com/ consultat iunie 2010

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