Перевод английских текстов различной тематики

Сторона, для которой создалась невозможность исполнения обязательств по контракту, должна о наступлении и прекращении обстоятельств, препятствующих исполнению обязательств, немедленно извещать другую сторону.

Надлежащим доказательством наличия указанных выше обстоятельств и их продолжительности будут служить справки, выдаваемые соответственно Торговой Палатой страны Продавца или Покупателя.

11. Другие условия

Все сборы (включая портовые и доковые), налоги и таможенные расходы на территории страны Продавца, связанные с выполнением настоящего контракта, оплачиваются Продавцом и за его счет.

Получение экспортных лицензий, если таковые потребуются, лежит на обязанности Продавца.

С момента подписания настоящего контракта все предыдущие переговоры и переписка по нему теряют силу.

Ни одна из сторон не вправе передать свои права и обязательства по контракту без письменного на то согласия другой стороны.

Любые изменения и дополнения к настоящему контракту будут действительны лишь при условии, если они совершены в письменной форме и подписаны уполномоченными на то лицами обеих сторон.

Настоящий контракт составлен в двух экземплярах, причем оба экземпляра имеют одинаковую силу.

12. Юридические адреса сторон

___________________________________

___________________________________

___________________________________

Краткая форма доверенности на управление бизнесом

Гражданин (страна) (Ф.И.О.), проживающий (адрес) настоящим уполномочен в качестве (генерального директора или др.) осуществлять контроль над бизнесом (наименование компании), созданной и существующей согласно законов (национальность компании) которая расположена (адрес, страна).

Управляя бизнесом, Генеральный директор обладает полномочиями:

1. Покупать и продавать любые вещи и собственность, которые используются в связи с бизнесом;

2. Подписывать любые чеки, векселя, платежные поручения, аккредитивы, ценные бумаги и другие документы, связанные с бизнесом;

3. Открывать счета, подавать, принимать и разрешать все претензии и иски, возникшие или могущие возникнуть в связи с бизнесом;

4. Покупать, продавать, закладывать любые векселя, долговые обязательства, арендные права, контракты, гарантии и закладные в связи с бизнесом;

5. Совершать любые иные управленческие акты в связи с ведением бизнеса.

6. Права и полномочия Генерального директора совместно со всеми полномочиями, предоставленными настоящей доверенностью вступают в силу (дата) и остаются в силе до (дата), если не будут продлены или отменены ранее любой из Сторон.

Настоящая доверенность совершена____ (дата) в_______ (город страна). (Подпись, корпоративная печать)

Доверенность (общая форма)

Я, <фамилия, имя, отчество>, проживающий по адресу <…> настоящим назначаю г-на <фамилия, имя, отчество> проживающего по адресу <…> в качестве доверенного лица, представляющего мои интересы для совершения ниже перечисленных действий в пределах моих полномочий:

________________________________________________ ________________________________________________ ________________________________________________ (ОПИСАНИЕ КОНКРЕТНЫХ ПОЛНОМОЧИЙ, ПРЕДОСТАВЛЯЕМЫХ ДОВЕРЕННОМУ ЛИЦУ).

Права и полномочия моего доверенного, представляющего мои интересы для совершения действий в пределах моих полномочий через поверенного вступают в силу <дата> и остаются в силе до <дата>, если не будут продлены или отменены ранее любой из сторон.

Настоящая доверенность совершена <дата> в _____________________

В МОЕМ ПРИСУТСТВИИ подписана настоящая доверенность <дата>, известными мне и лично явившимися в мой офис лицами. Настоящим подтверждаю, что подписавшие вышеупомянутую доверенность лица действовали добровольно и без принуждения, подтверждая выраженные в ней цели.

К ЧЕМУ ПРИЛАГАЮ СВОЮ ПОДПИСЬ, а должностное лицо ставит печать в вышеупомянутый день, месяц и год.

НОТАРИУС

Срок истечения моих полномочий <дата>

Part 1.

The Nature of Merchandising Activities

The first four chapters have described the financial statements and accounting records of Clear Copy Co. Because it provides services to its customers, Clear Copy is a service company. Other examples of service companies in­clude hotels, hospitals, car rental agencies, airlines, theaters, ski resorts, and golf courses. In return for services provided to its customers, a service com­pany receives commissions, fares, or fees as revenue. Its net income for a re-Porting period is the difference between its revenues and the operating ex­penses incurred in providing the services.

In contrast, a merchandising company earns net income by buying and selling merchandise, which consists of goods that the company acquires spe­cifically to be sold. To achieve a net income, the revenue from selling the merchandise needs to exceed not only the cost of the merchandise sold to customers but also the company’s other operating expenses for the reporting period.

The accounting term for the revenues from selling merchandise is sales
and the term used to describe the expense of buying and preparing the mer­chandise is cost of goods sold.
The company’s other expenses are often called operating expenses.
This condensed income statement for Meg’s Mart shows you how these three elements of net income are related to each other:

MEG’S MART

Condensed Income Statement For Year Ended December 31, 19X2

Net sales ........................................... $314,700

Cost of goods sold............................... (230,400
)

Gross profit from sales....................... $ 84,300

Total operating expenses ….... …… (62,800)

Net income.......................................... $ 21,500

This income statements tells us that Meg’s Mart sold goods to its customers for $314,700. The company acquired those goods at a total cost of $230,400. As a result, it earned $84,300 of gross profit, which is the difference between the net sales and the cost of goods sold. In addition, the company incurred $62,800 of operating expenses and achieved $21,500 of net income for the year.

A merchandising company’s balance sheet includes an additional element that is not on the balance sheet of a service company. In Illustration 1, we present the classified balance sheet for Meg’s Mart. Notice that the current asset section includes an item called merchandise inventory. Even though they also have inventories of supplies, most companies simply refer to mer­chandise inventory as inventory. This asset consists of goods the company owns on the balance sheet date and expects to sell to its customers. The $21,000 amount listed for the inventory is the cost incurred in buying the goods, shipping them to the store, and otherwise making them ready for sale.

The next sections of the chapter provide more information about these unique elements of the financial statements for merchandising companies.

Total Revenue from Sales

This schedule shows how Meg’s Mart calculates its net sales
for 19X2:

MEG’S MART

Calculation of Net Sales

For
Year Ended December 31, 19X2

Sales..................................................... $321,000

Less: Sales returns and allowances . . $2,000

Sales discounts.................. 4,300 6,300

Net sales............................................... $314,700

The components of this calculation are described in the following paragraphs.

ILLUSTRATION 1 Classified Balance Sheet for a Merchandising Company

MEG’S MART

Balance Sheet

December 31,19X2

Assets

Current assets:

Cash.................................................................... $ 8,200

Accounts receivable.............................................. 11,200

Merchandise inventory......................................... 21,000

Prepaid expenses................................. 1,100

Total current assets.............................. $41,500

Plant and equipment:

Office equipment..... $ 4,200

Less accumulated depreciation …. 1,400
$ 2,800

Store equipment...... $30,000

Less accumulated depreciation …. 6,000 24,000

Total plant and equipment …..... 26,800

Total assets.................................... . . . $68,300

Liabilities

Current liabilities:

Accounts payable . . ............................ $16,000

Salaries payable........................ . … . . 800

Total liabilities …............. $16,800

Owner’s Equity

Meg Harlowe, capital........................... 51,500

Total liabilities and owner’s equity …. $68,300

Sales

The sales item in this calculation is the total cash and credit sales made by the company during the year. Each cash sale was rung up on one of the company’s cash registers when it was completed. At the end of each day, the registers were read and the total cash sales for the day were recorded with a journal entry like this one for November 3:

Nov. 3 Cash …………………………………….1,205.00

Sales………………………………1,205.00

Sold merchandise for cash.

This journal entry records an increase in the company’s cash for the amount received from the customers. It also records the revenue in the Sales account.

In addition, a journal entry would be prepared each day to record the credit sales made on that day. For example, this entry records $450 of credit sales on November 3:

Nov. 3 Accounts Receivable …………………….450.00

Sales………………………………450.00

Sold merchandise on credit.

This entry records the increase in the company’s assets in the form of the accounts receivable from the customers. It also records the revenue from the credit sales.

Sales Returns and Allowances

To meet their customers’ needs, most companies allow customers to return
any unsuitable merchandise for a full refund. If a customer keeps the unsatisfac­tory goods and is given a partial refund of the selling price, the company is said to have provided a sales allowance.
Either way, returns and allowances in­volve dissatisfied customers and the possibility of lost future sales. Careful managers try to reduce customer dissatisfaction by minimizing returns and allowances. A company’s accountants can help by providing information to the manager about actual returns and allowances. Thus, many accounting sys­tems record returns and allowances in a separate contra-revenue
account like the one used in this entry to record a $200 cash refund:

Nov. 3 Sales Returns and Allowances ……….200.00

Cash ……………………200.00

Customer returned defective merchandise.

The company could record the refund with a debit to the Sales account. Although this practice would provide the same measure of net sales, it would not provide information that the manager can use to monitor the refunds and allowances. By using the Sales Returns and Allowances contra account, the information is readily available. To simplify the reports provided to external decision makers, published income statements usually omit this detail and present only the amount of net sales.

Sales Discounts

When goods are sold on credit, the expected amounts and dates of future pay­ments need to be clearly stated to avoid misunderstandings. The credit terms for a sale describe the amounts and timing of payments that the buyer agrees to make in the future. The specific terms usually reflect the ordinary practices of most companies in the industry. For example, companies in an industry might customarily expect to be paid 10 days after the end of the month in which a sale occurred. These credit terms would be stated on sales invoices or tickets as “n/10 EOM,” with the abbreviation EOM standing for “end of the month.” In other industries, invoices become due and payable 30 calendar days after the invoice date. These terms are abbreviated as “n/30,” and the 30-day period is called the credit period.

When the credit period is long, the seller often grants a cash discount if the customer pays promptly. These early payments are desirable because the seller receives the cash more quickly and can use it to carry on its activities. In addition, prompt payments reduce future efforts and costs of billing custom­ers. These advantages are usually worth the cost of offering the discounts.

If cash discounts for early payment are granted, they are described in the credit terms on the invoice. For example, the terms of “2/10, n/60” mean that a 60-day credit period passes before full payment is due. However, to encourage early payment, the seller allows the buyer to deduct 2% of the invoice amount from the payment if it is made within 10 days of the invoice date. The discount period is the period in which the reduced payment can be made.

At the time of a credit sale, the seller does not know that the customer will pay within the discount period and take advantage of a cash discount. As a suit, the discount is usually not recorded until the customer pays within the discount period. For example, suppose that Meg’s Mart completed a credit sale on November 12 at a gross selling price of $100, subject to terms of 2/10, i/60. The sale is recorded with this entry:

Nov.12 Accounts Receivable …………………100.00

Sales ………………………………… 100.00

Sold merchandise under terms of 2/10, n/60.

.

Even though the customer may pay less than the purchase price, the entry records the receivable and the revenue as if the full amount will be collected. In fact, the customer has two alternatives. One option is to wait 60 days until January 11 and pay the full $100. If this option is chosen, Meg’s Mart records the collection with this entry:

Jan 11 Cash ……………………………………… 100.00

Accounts Receivable …………………… 100.00

Collected account receivable
.

The customer’s other option is to pay $98 within a 10-day period that runs through November 22. If the customer pays on November 22, Meg’s Mart re­cords the collection with this entry:

Nov.12 Cash…………………………………………….. 98.00

Sales Discounts……………………………… 2.00

Accounts Receivable……………………..
100.00

Received payment for the November 12

sale less the discount.

Cash discounts granted to customers are called sales discounts. Because man­agement needs to monitor the amount of cash discounts to assess their effec­tiveness and their cost, their amounts are recorded in a contra-revenue ac­count called Sales Discounts. The balance of this account is deducted from the balance of the Sales account when calculating the company’s net sales. Al­though information about the amount of discounts is useful internally, it is seldom reported on income statements distributed to external decision makers.

Measuring Inventory and Cost of Goods Sold

A merchandising company’s balance sheet includes a current asset called in­ventory
and its income statement includes the item called cost of goods sold.
Both of these items are affected by the company’s merchandise transactions. The amount of the asset on the balance sheet equals the cost of the inventory on hand at the end of the fiscal year. The amount of the cost of goods sold is the cost of the merchandise that was sold to customers during the year.

Two different inventory accounting systems may be used to collect infor­mation about the cost of the inventory on hand and the cost of goods sold. They are described in the following paragraphs.

Periodic and Perpetual Inventory Systems

The two basic types of inventory accounting systems are called perpetual
and periodic.
As suggested by their name, perpetual inventory
systems maintain a continuous record of the amount of inventory on hand. This perpetual record is maintained by adding the cost of each newly purchased item to the inven­tory account and subtracting the cost of each sold item from the account. When an item is sold, its cost is recorded in the Cost of Goods Sold account. Users of perpetual systems can refer to the balance of the inventory account to determine the cost of the items that remain on hand. They can also refer to the balance of the Cost of Goods Sold account to determine the cost of the merchandise sold to customers.

Before the development of inexpensive and easy-to-use computer pro­grams, perpetual systems were generally applied only by businesses that made a limited number of sales each day, such as automobile dealers or major appliance stores. Because there were relatively few transactions, the perpet­ual accounting system could be operated efficiently. However, the availabil­ity of improved technology has greatly increased the number of companies that use perpetual systems.

Under periodic inventory systems,
a company does not continuously up­date its records of the quantity and cost of goods on hand or sold. Instead, the company simply records the cost of new merchandise in a temporary Pur­chases
account. When merchandise is sold, only the revenue is recorded. When financial statements are prepared, the company takes a physical inventory
by counting the quantities of merchandise on hand and determines the invento­ry’s total cost from records that show each item’s original cost. This total cost is then used to determine the cost of goods sold.

Traditionally, periodic systems were always used by companies such as drug and department stores that sold large quantities of low-valued items. Without computers and scanners, it was not feasible for accounting systems to track such small items as toothpaste, pain killers, clothing, and housewares through the inventory and into the customers’ hands.

Although perpetual systems are now more affordable, they are still not used by all merchandising companies. As a result, it will be helpful for you to understand how periodic systems work. In addition, studying periodic sys­tems will help you visualize the flow of goods through inventory without hav­ing to learn the more complicated sequence of journal entries used in per­petual systems.

Calculating the Cost of Goods Sold with a Periodic Inventory System

As mentioned earlier, a store that uses a periodic inventory system does not record the cost of merchandise items when they are sold. Rather, the accoun­tant waits until the end of the reporting period and determines the cost of all the goods sold during the period. To make this calculation, the accountant must have information about:

1. The cost of the merchandise on hand at the beginning of the period.

2. The cost of merchandise purchased during the period.

3. The cost of unsold goods on hand at the end of the period.

Look at Illustration 2 to see how this information can be used to measure the cost of goods sold for Meg’s Mart.

In Illustration 2, note that Meg’s Mart had $251,400 of goods available for sale during the period. They were available because the company had $19,000 of goods on hand when the period started and purchased an additional $232,400 of goods during the year. The available goods were then either sold during the period or on hand at the end of the period. Because the count showed that $21,000 were on hand at the end of the year, we can conclude that $230,400 must have been sold. This schedule presents the calculation:

MEG’S MART

Calculation of Cost of Goods Sold For Year Ended December 31,19X2

Beginning inventory................ $ 19,000

Costof goods purchased........ 232,400

Cost of goods available for sale $251,400

Less ending inventory............. (21,000)

Cost of goods sold.................. $230,400

The following paragraphs explain how the accounting system accumulates the information that the accountant needs to make this calculation.

Measuring and Recording Merchandise Inventory

The merchandise on hand at the beginning of an accounting period is called the beginning inventory
and the merchandise on hand at the end is called the ending inventory.
(Because a new reporting period starts as soon as the old period ends, the ending inventory of one period is always the beginning inven­tory of the next.) When a periodic inventory system is used, the dollar amount of the ending inventory is determined by (1) counting the unsold items in the store and the stockroom, (2) multiplying the counted quantity of each type of good by its cost, and (3) adding all the costs of the different types of goods. The cost of goods sold is found by subtracting the cost of the ending inventory from the cost of the goods available for sale.

Through the closing process described later in the chapter, the periodic system records the cost of the ending inventory in the Merchandise Inventory
account. The balance in this account is not changed during the next accounting period. In fact, entries are made to the Merchandise Inventory account only
at the end of the period. Thus, neither the purchases of new merchandise nor the cost of goods sold is entered in the Merchandise Inventory account. As a result, the account no longer shows the cost of the merchandise on hand as soon as any goods are purchased or sold in the current period. Because the account’s balance describes the beginning inventory of the period, it cannot be used on a new balance sheet without being updated by the closing entries described later in this chapter.

Recording the Cost of Purchased Merchandise

A complete measure of the cost of purchased merchandise must include the effects of (1) any cash discounts provided by the suppliers, (2) the effects of any returns and allowances for unsatisfactory items received from the suppli­ers, and (3) any freight costs paid by the buyer to get the goods into the buyer’s inventory. The net cost of the goods’ purchased by Meg’s Mart for 19X2 is calculated as follows:

MEG’S MART

Calculation of Cost of Goods Purchased
For Year Ended December 31,19X2

Purchases................................................ $235,800

Less:

Purchases returns and allowances . . $1,500

Purchases discounts.................. 4,2005,700

Net purchases........................... $230,100

Add transportation-in............... 2,300

Cost of goods purchased$232,400

The following paragraphs explain how these amounts are found and then ac­cumulated in the accounts.

The Purchases Account
. Under a periodic inventory system, the cost of mer­chandise bought for resale is debited to a temporary account called Purchases
. For example, Meg’s Mart would record a $1,000 credit purchase of merchan­dise on November 2 with this entry:

Nov.2 Purchases ……………………………………… 1,000.00

Accounts Payable………………………… 1,000.00

Purchased merchandise on credit, invoice

dated November 2, terms 2/10, n/30.

The accountant uses the Purchases account to accumulate the cost of all mer­chandise bought during a period. This temporary account is a holding place for information used at the end of the year to calculate the cost of goods sold.

Purchases Discounts.
When stores buy merchandise on credit, they may be of­fered cash discounts for paying within the discount period. These cash dis­counts are called purchases discounts
by the buyer. When the buyer pays within the discount period, the accounting system records a credit to a contra-purchases account called Purchases Discounts
. The following entry uses this account to record the payment for the merchandise purchased on November 2:

Nov.2 Accounts Payable………………………1,000.00

Purchases Discounts………………… 20.00

Cash…………………………………… 980.00

Paid for the purchase of November 2 less

the discount.

By recording the amount of discounts taken, the accountant can help the manager determine whether any discounts are missed. For example, if all pur­chases are made on credit and all suppliers offer a 2% discount, the balance of the Purchases Discounts contra account should equal 2% of the balance of the Purchases account. If the accountant did not use the contra account, the $20 credit entry would be recorded as a reduction of the Purchases account balance. As a result, it would be more difficult to determine whether all discounts were taken.

The accountant uses the balance of the Purchases Discounts account to compute the net cost of the purchases for the period. However, published financial statements usually do not include this calculation because it is useful only for managers.

A Cash Management Technique.
To ensure that discounts are not missed, most companies set up a system to pay all invoices within the discount period. Furthermore, careful cash management ensures that no invoice is paid until the last day of the discount period. A helpful technique for reaching both of these goals files every invoice in such a way that it automatically comes up for payment on the last day of its discount period. For example, a simple manual system uses 31 folders, one for each day in the month. After an invoice is recorded in the journal, it is placed in the file folder for the last day of its – discount period. Thus, if the last day of an invoice’s discount period is Novem­ber 12, it is filed in folder number 12. Then, the invoice and any other invoices in the same folder are removed and paid on November 12. Computerized sys­tems can accomplish the same result by using a code that identifies the last date in the discount period. When that date is reached, the computer automat­ically provides a reminder that the account should be paid.

Trade Discounts
. Cash discounts represent real reductions below the original negotiated prices for merchandise. Thus, they differ from trade discounts offered by sellers in the process of negotiating the selling price. Trade discounts are offered as a percentage reduction in the list price of the goods. Because the list price is only the starting point in setting the final price for the goods, it is not recorded in the buyer’s accounting records as their cost. (Similarly, the seller records the net price as the amount of the sale.) For example, if Meg’s Mart purchased items with a $1,200 list price, net of a 25% trade discount,
the purchase would be recorded as its negotiated price of $900 [$1,200 – (25% x $1,200)]. Any cash discounts on this purchase would be based on the $900 price and would be recorded in the Purchases Discounts account.

Purchases Returns and Allowances
. Some merchandise received from suppliers is not acceptable and must be returned. In other cases, the purchaser may keep imperfect but marketable merchandise because the supplier grants an allowance against the purchase price.

Even though the seller does not charge the buyer for the returned goods or gives an allowance for imperfect goods, the buyer incurs costs in receiving, inspecting, identifying, and possibly returning defective merchandise. The occurrence of these costs can be signaled to the manager by recording the cost of the returned merchandise or the seller’s allowance in a separate contra-purchases account called Purchases Returns and Allowances.
For example, this journal entry is recorded on November 14 when Meg’s Mart returns defective merchandise for a $265 refund of the original purchase price:

Nov. 14 Accounts Payable ……………………………265.00

Purchases Returns and Allowances………….265.00

Returned defective merchandise

As we described for Purchases Discounts, the accountant uses the balance of the Purchases Returns and Allowances account to compute the net cost of goods purchased during the period. However, published financial statements generally do not include this information because it is useful only for managers.

Discounts and Returned Merchandise
. If part of a shipment of goods is returned within the discount period, the buyer can take the discount only on the re­maining balance of the invoice. For example, suppose that Meg’s Mart is of­fered a 2% cash discount on $5,000 of merchandise. Two days later, the com­pany returns $800 of the goods before the invoice is paid. When the $4,200 balance is paid within the discount period, Meg’s Mart can take the 2% dis­count only on that amount. Specifically, the company can deduct only an $84 discount (2% x $4,200).

Transportation Costs
. Depending on the terms negotiated with its suppliers, a company may be responsible for paying the shipping costs for transporting the acquired goods to its own place of business. Because these costs are part of the sacrifice of making the goods ready for sale, generally accepted account­ing principles require them to be added to the cost of the purchased goods.

The freight charges could be recorded with a debit to the Purchases ac­count. However, more complete information about these costs is provided to management if they are debited to a special supplemental account called Transportation-In. The accountant adds this account’s balance to the net pur­chase price of the acquired goods to find the total cost of goods purchased.

The use of this account is demonstrated by the following entry, which re­cords a $75 freight charge for incoming merchandise:

Nov. 24 Transportation-In …………………………….75.00

Cash ……………………………………….. 75.00

Paid freight charges on purchased merchandise

Because detailed information about freight charges is relevant only for man­agers, it is seldom found in external financial statements.

Freight paid to bring purchased goods into the inventory is accounted for separately from freight paid on goods sent to customers. The shipping cost of incoming goods is included in the cost of goods sold, while the shipping cost for outgoing goods is a selling expense.

ILLUSTRATION3 Identifying Ownership Responsibilities and Risks

FOB Shipping Point

Buyer accepts ownership when the goods leave the seller’s place of business; buyer has responsibility for the shipping costs and faces the risk of loss in transit.

FOB Destination

Buyer accepts ownership when the goods arrive at the buyer’s place of business;
seller has responsibility for the shipping costs and faces the risk of loss in transit

Identifying Ownership Responsibilities and Risks.
When a merchandise transac­tion is planned, the buyer and seller need to establish which party will be responsible for paying any freight costs and which will bear the risk of loss during transit.

The basic issue to be negotiated is the point at which ownership is trans­ferred from the buyer to the seller. The place of the transfer is called the FOB
point, which is the abbreviation for the phrase, free on board.
The meaning of different FOB points is explained by the diagram in Illustration 3.

Under an FOB shipping point
agreement (also called FOB factory),
the buyer accepts ownership at the seller’s place of business. As a result, the buyer is responsible for paying the shipping costs and bears the risk of dam­age or loss while the goods are in shipment. In addition, the goods are part of the buyer’s inventory while they are in transit because the buyer already owns them.

Alternatively, an FOB destination
agreement causes ownership of the goods to pass at the buyer’s place of business. If so, the seller is responsible for paying the shipping charges and bears the risk of damage or loss in transit. Furthermore, the seller does not record the sales revenue until the goods ar­rive at the destination because the transaction is not complete before that point in time.

Debit and Credit Memoranda

Buyers and sellers often find that they need to adjust the amount that is owed between them. For example, purchased merchandise may not meet specifica­tions, unordered goods may be received, different quantities may be received than were ordered and billed, and billing errors may occur.

In some cases, the original balance can be adjusted by the buyer without a negotiation. For example, a seller may make an error on an invoice. If the buying company discovers the error, it can make its own adjustment and no­tify the seller by sending a debit memorandum
or a credit memorandum.
A debit memorandum is a business document that informs the recipient that the sender has debited
the account receivable or payable. It provides the notifica­tion with words like these: “We debit your account,” followed by the amount and an explanation. On the other hand, a credit memorandum informs the recipient that the sender has credited the receivable or payable. See Illustration 4 for two situations that involve these documents.

ILLUSTRATION 4 The

Use of Debit and Credit Memoranda

Situation — the buyer finds a $100 overstatement in an invoice from the seller

Debits the account payable Credits the account

to the seller for $100 and sends receivable from

the debit memorandum the buyer for $100

Situation — the seller agrees to give a $250 allowance to the buyer for defective goods

Debits the account payable Credits the account receivable

to the seller for $250 from the buyer for $250

and sends the credit memorandum

The debit memorandum in Illustration 4 is based on a case in which buyer initially records an invoice as an account payable and later discovers anerror by the seller that overstated the total bill by $100. The buyer corrects the balance of its liability and formally notifies the seller of the mistake with debit memorandum reading: “We have debited your account for $100 because of an error.” Additional information is also provided about the invoice, its date, and the nature of the error. The buyer sends a debit
memorandum because the correction debits the account payable to reduce its balance. The buyer’s debit to the payable is offset by a credit to the Purchases асcount.

When the seller receives its copy of the debit memorandum, it records a credit
to the buyer’s account receivable to reduce its balance. An equal debit recorded in the Sales account. Neither company uses a contra account because the adjustment was created by an error.

In other situations, an adjustment can be made only after negotiations between the buyer and the seller. For example, suppose that a buyer claims that some merchandise does not meet specifications. The amount of the allowance to be given by the seller can be determined only after discussion. Assume that a buyer accepts delivery of merchandise and records the transaction with a $750 debit to the Purchases account and an equal credit to Accounts Payable. Later, the buyer discovers that some of the merchandise is flawed, andcan be sold only if it is marked down substantially. After a phone call and brief negotiations, the seller agrees to grant a $250 allowance against the original purchase price.

The seller records the allowance with a debit to the Sales Returns and Allowances contra account and a credit to Accounts Receivable. Then, the seller formally notifies the buyer of the allowance with a credit memorandum. A credit
memorandum is used because the adjustment credited the receivable reduce its balance. When the buyer receives the credit memorandum, it debits Accounts Payable and credits Purchases Returns and Allowances. Contra accounts provide both companies’ managers with useful information about the allowance.

Inventory Shrinkage

Merchandising companies lose merchandise in a variety of ways, including shoplifting and deterioration while an item is on the shelf or in the warehouse. These losses are called shrinkage.

Even though perpetual inventory systems track all goods as they move into and out of the company, they are not able to directly measure shrinkage caused by shoplifting or thefts by employees. However, these systems allow the accountant to measure shrinkage by comparing a physical count with recorded quantities.

Because periodic inventory systems do not identify quantities on hand, they cannot provide direct measures of shrinkage. In fact, all that they can determine is the cost of the goods on hand and the goods that passed out of the inventory. The amount that passed out includes the cost of goods sold, stolen, or destroyed. For example, suppose that shoplifters took merchandise that cost $500. Because the goods were not on hand for a physical count, the ending inventory’s cost is $500 smaller than it would have been. Ultimately, the $500 is included in the cost of the goods sold.

Alternative Income Statement Formats

Within the framework of generally accepted accounting principles, companies have flexibility in selecting a format for their financial statements. In fact, practice shows that many different formats are used. This section of the chapter describes several possible formats that Meg’s Mart could use for its income statement.

illustration
5Classified Income Statement for Internal Use

MEG’S MART

Income Statement

For Year Ended December 31,19X2

Sales.................................................. $321,000

Less: Sales returns and allowances.... $ 2,000

Sales discounts ….... . . …....4,3006,300

Net sales............................................ $314,700

Cost of goods sold:

Merchandise inventory, December 31,19X1 . .$ 19,000

Purchases ....................................................... $235,800

Less: Purchases returns and allowances …. $1,500

Purchases discounts........................... 4,2005,700

Net purchases.................................... $230,100

Add transportation-in.......................................... 2,300

Cost of goods purchased................... 232,400

Goods available for sale …....................................... $251,400

Merchandise inventory, December 31,19X2 . .21,000

Cost of goods sold............................. 230,400

Gross profit from sales.................... . $ 84,300

Operating expenses:

Selling expenses:

Depreciation expense, store equipment ….$ 3,000

Sales salaries expense........................ 18,500

Rent expense, selling space.............. . 8,100

Store supplies expense...................... 1,200

Advertising expense........................... 2,700

Total selling expenses........................ $ 33,500

General and administrative expenses:

Depreciation expense, office equipment …$700

Office salaries expense...................................... 25,300

Insurance expense................................................. 600

Rent expense, office space.................................... 900

Office supplies expense...................................... 1,800

Total general and administrative expenses . .29,300

Total operating expenses................... 62,800

Net income......................................... $ 21,500

In Illustration 5, we present a classified
income statement that would probably be distributed only to the company’s managers because of the details that it includes. The sales and cost of goods sold sections are the same as the calculations presented earlier in the chapter. The difference between the net sales and cost of goods sold is the gross profit for the year.

Also notice that the operating expenses section classifies the expenses into two categories. Selling expenses
include the expenses of promoting sales through displaying and advertising the merchandise, making sales, and deliv­_ulfil goods to customers. General and administrative expenses
support the overall operations of a business and include the expenses of such activities as accounting, human resource management, and financial management.

Some expenses may be divided between categories because they contrib­ute to both activities. For example, Illustration 5 reflects the fact that Meg’s Mart divided the total rent expense of $9,000 for its store building between the two categories. Ninety percent ($8,100) was selling expense and the remaining 10% ($900) was general and administrative expense. The cost allocation should reflect an economic relationship between the prorated amounts and the activities. For example, the allocation in this case could be based on relative rental values.

ILLUSTRATION
6Multiple-Step Income Statement

MEG’S MART

Income Statement For Year Ended December 31,19X2

Net sales…………………………………………………………..$314,700

Cost of goods sold…………………………………… 230,400

Gross profit from sales………………………………$ 84,300

Operating expenses:

Selling expenses:

Depreciation expense, store equipment…………………. $ 3,000

Sales salaries expense…………………………………….. 18,500

Rent expense, selling space………………………………. 8,100

Store supplies expense…………………………………… 1,200

Advertising expense………………………………………. 2,700

Total selling expenses………………………………………. $33,500

General and administrative expenses:

Depreciation expense, office equipment………………… $ 700

Office salaries expense …………………………………… 25,300

Insurance expense………………………………………… 600

Rent expense, office space………………………………. 900

Office supplies expense………………………………….. 1,800

Total general and administrative expenses……………… 29,300

Total operating expenses………………………… 62,800

Net income…………………………………………… $ 21,500

In Illustration 6, we use the multiple-step income statement
format that would probably be used in external reports. The only difference between this format and the one in Illustration 5 is that it leaves out the detailed calcula­tions of net sales and cost of goods sold. The format is called multiple-step because it shows several intermediate totals between sales and net income.

In contrast, we present a single-step income statement
for Meg’s Mart in Illustration 7. This simpler format presents only one intermediate total for total operating expenses.

ILLUSTRATION
7 Single-Step Income Statements

MEG’S MART

Income Statement For Year Ended December 31,19X2

Net sales………………………………………………………….$314,700

Cost of goods sold………………………………………………$ 230,400

Selling expenses……………………………………… 33,500

General and administrative expenses…………………………… 29,300

Total operating expenses……………………………… 293,200

Net income…………………………………………… $ 21,500

In practice, many companies use combination formats that have some of the features of both the single- and multiple-step statements.

Closing Entries for Merchandising Companies

To help understand how information flows through the accounting system into the financial statements, we now discuss the process for closing the tem­porary accounts of merchandising companies. The process is demonstrated with data from the adjusted trial balance for Meg’s Mart in Illustration 8. In addition, the accountant knows from a physical count that the cost of the end­ing inventory is $21,000.

ILLUSTRATION
8

Adjusted Trial Balance for Meg’s Mart at December 31,19X2

Cash............................................................................. $ 8,200

Accounts receivable........................................................ 11,200

Merchandise inventory................................... 19,000

Office supplies.................................................................... 550

Store supplies..................................................................... 250

Prepaid insurance........................................... 300

Office equipment.............................................................. 4,200

Accumulated depreciation, office equipment….......................$ 1,400

Store equipment............................................. 30,000

Accumulated depreciation, store equipment…………………………..6,000

Accounts payable......................................................................... 16,000

Salaries payable............................................. 800

Meg Harlowe, capital..................................... 34,000

Meg Harlowe, withdrawals.............................................. 4,000

Sales........................................................................................... 321,000

Sales returns and allowances.......................... 2,000

Sales discounts............................................... 4,300

Purchases....................................................... 235,800

Purchases returns and allowances ................ 1,500

Purchases discounts....................................... 4,200

Transportation-in........................................... 2,300

Depreciation expense, store equipment.......... 3,000

Depreciation expense, office equipment......... 700

Office salaries expense................................... 25,300

Sales salaries expense ................................... 18,500

Insurance expense.......................................... 600

Rent expense, office space.............................. 900

Rent expense, selling space................... ……… 8,100

Office supplies expense.................................. 1,800

Store supplies expense................................... 1,200

Advertising expense ..................................... 2,700

Totals.............................................................................. $384,900 $384,900

The trial balance includes these unique accounts for merchandising activ­ities: Merchandise Inventory, Sales, Sales Returns and Allowances, Sales Dis­counts, Purchases, Purchases Returns and Allowances, Purchases Discounts, and Transportation-In. Their presence in the ledger causes the closing entries to be slightly different from the ones described in Chapter 4. However, the process still consists of four steps.

Step 1—Record the Ending Inventory and Close the Temporary Accounts That Have Credit Balances

The first step accomplishes two goals: First, it adds the $21,000 cost of the ending inventory to the balance of the Merchandise Inventory account. Sec­ond, it closes the temporary accounts that have credit balances, including the Sales account and the two contra-purchases accounts. The first closing entry for Meg's Mart is

Dec. 31 Merchandise Inventory…………………..21,000.00

Sales.............. ……………….. 321,000.00

Purchases Returns and Allowances…… 1,500.00

Purchases Discounts ………………. 4,200.00

Income Summary ………………. 347,700.00

To close temporary accounts with credit

balances and record the ending inventory

Posting this entry gives zero balances to the three temporary accounts that had credit balances in the adjusted trial balance. It also momentarily increases the balance of the Merchandise Inventory account to $40,000. How­ever the next entry reduces the balance of this account.

Step 2—Remove the Beginning Inventory and Close the Temporary
Accounts That Have Debit Balances

The second step also accomplishes two results: First, it subtracts the cost of the beginning inventory from the Merchandise Inventory account. Second, it closes the temporary accounts that have debit balances, including the ex­pense accounts, the two contra-sales accounts, the Purchases account, and the Transportation-In account. The second closing entry for Meg’s Mart is

Dec. 31 Income Summary.. ………………………326,200.00

Merchandise Inventory……………………… 19,000.00

Sales Returns and Allowances………………. 2,000.00

Sales Discounts..... ……………………… 4,300.00

Purchases ............ ……………………… 235,800.00

Transportation-In.. ……………………… 2,300.00

Depreciation Expense, Store Equipment….. 3,000.00

Depreciation Expense, Office Equipment…. 700.00

Office Salaries Expense 25,300.00

Sales Salaries Expense………………………. 18,500.00

Insurance Expense ……………………… 600.00

Rent Expense, Office Space………………… 900.00

Rent Expense, Selling Space………………. 8,100.00

Office Supplies Expense…………………… 1,800.00

Store Supplies Expense…………………… 1,200.00

Advertising Expense 2,700.00

To close temporary accounts with debit balances
and

to remove the beginning inventory balance

Posting this entry reduces the balance of the Merchandise Inventory account down to $21,000, which is the amount produced by the physical count at De­cember 31,19X2. It also gives zero balances to the 14 temporary accounts that had debit balances.

The following Merchandise Inventory account shows you how the first two closing entries create an ending balance equal to the $21,000 cost provided by the physical count:

As mentioned earlier in the chapter, this account has the $21,000 balance throughout 19X3 until the accounts are closed at the end of that year.

Step 3—Close the Income Summary Account to the Owner’s Capital Account

The third closing entry for a merchandising company is the same as the third closing entry for a service company. Specifically, it closes the Income Summary account and updates the balance of the owner’s capital account. The third closing entry for Meg’s Mart is

Dec. 31 Income Summary………………………………….. 21,500.00

Meg Harlowe, Capital………………………. 21,500.00

To close the Income Summary account

The amount in the entry equals the net income reported on the income statement.

Step 4—Close the Owner’s Withdrawals Account to the Owner’s Capital Account

The fourth closing entry for a merchandising company is the same as the fourth closing entry for a service company. Specifically, it closes the owner’s withdrawals account and reduces the balance of the owner’s capital account to the amount shown on the balance sheet. The fourth closing entry for Meg’s Mart is

Dec. 31 Meg Harlowe, Capital …………………4,000.00

Meg Harlowe, Withdrawals ………………. 4,000.00

To close the withdrawals account

When this entry is posted, all the temporary accounts are cleared and ready to record events in 19X3. In addition, the owner’s capital account has been fully updated to reflect the events of 19X2.

A Work Sheet for a
Merchandising Company

Illustration 9 presents a version of the work sheet that the accountant for Meg’s Mart could prepare in the process of developing its 19X2 financial state­ments. It differs in two ways from the 10-column work sheet described in Chapter 4.

ILLUSTRATION 9

Work Sheet for Meg’s Mart for the Year Ended December 31
19X2

The first difference is the deletion of the adjusted trial balance columns. This simplification has nothing to do with the fact that Meg’s Mart is a retail business. This commonly used format is designed to simplify the work sheet by reducing its size. The omission of the columns causes the accountant to first compute the adjusted balances and then extend them directly into the finan­cial statement columns.

The second difference appears on the line for the Merchandise Inventory account (shown in color). The unadjusted trial balance includes the beginning inventory balance of $19,000. This amount is extended into the debit column for the income statement. Then, the ending balance is entered in the credit column for the income statement and the debit column for the balance sheet. This step allows the cost of goods sold to be included in net income while the correct ending balance is included for the balance sheet.

The adjustments in the work sheet reflect the following economic events:

(a)
Expiration of $600 of prepaid insurance.

(b)
Consumption of $1,200 of store supplies.

(c)
Consumption of $1,800 of office supplies.

(d)
Depreciation of the store equipment for $3,000.

(e)
Depreciation of the office equipment for $700.

9. Accrual of $300 of unpaid office salaries and $500 of unpaid store salaries.

Once the adjusted amounts are extended into the financial statement col­umns, the accountant can use this information to develop the company’s fi­nancial statements.

The Adjusting Entry Approach to Recording the Change in the Merchandise Inventory Account

The previously described closing entry approach to recording the change in the inventory account is widely used in practice. However, it is not the only bookkeeping method that can be applied at the end of the year. One other possible approach records two adjusting journal entries right before the clos­ing entries are prepared. Because these entries are recorded, the first two closing entries do not include changes in the Merchandise Inventory account. This adjusting entry approach is preferred by some accountants. It is also used by computerized accounting systems that allow only temporary accounts to be affected by closing entries.

The Adjusting Entries

Under this adjusting approach, Meg’s Mart removes the beginning balance from the Merchandise Inventory account by recording this adjusting entry at the end of 19X2:

Dec. 31 Income Summary……………………19,000.00

Merchandise Inventory…………. 19,000.00

To remove the beginning balance from

the
Merchandise Inventory account.

This second adjusting entry produces the correct ending balance in the Mer­chandise Inventory account:

Dec. 31 Merchandise Inventory ……………21,000.00

Income Summary …….…………. 21,000.00

To insert the correct ending balance

into the
Merchandise Inventory account.

After this entry is posted, the Merchandise Inventory account has a $21,000 debit balance. In addition, the Income Summary account has a $2,000 credit balance.

The Closing Entries

If the two adjusting entries for inventory are used, the closing entries differ only by not including the Merchandise Inventory account. Thus, Meg’s Mart records the following two closing entries for 19X2 under the adjusting entry approach:

Dec. 31Sales ………………………………321,000.00

Purchases Returns and Allowances …1,000.00

Purchases Discounts ……… 4,200.00

Income Summary.... ……… 326,700.00

To close temporary accounts with

credit balances.

Dec. 31 Income Summary …………………… 307,200.00

Sales Returns and Allowances…………….. 2,000.00

Sales Discounts..... …………………. 4,300.00

Purchases .......... …………………. 235,800.00

Transportation-In. ………………… 2,300.00

Depreciation Expense, Store Equipment….. 3,000.00

Depreciation Expense, Office Equipment… 700.00

Office Salaries Expense ………………… 25,300.00

Sales Salaries Expense ………………….. 18,500.00

Insurance Expense ………………… 600.00

Rent Expense, Office Space……………….. 900.00

Rent Expense, Selling Space……………… 8,100.00

Office Supplies Expense ………………… 1,800.00

Store Supplies Expense…………………… 1,200.00

Advertising Expense ……………….. 2,700.00

To close temporary accounts with debit balances

The third and fourth entries are the same as before, although the amount debited to the Income Summary account is now based on four previous entries instead of two:

Dec. 31 Income Summary…………………………21,500.00

Meg Harlowe, Capital……………………. 21,500.00

To close the Income Summary account.

Meg Harlowe, Capital………………………… 4,000.00

Meg Harlowe, Withdrawals…………… 4,000.00

To close the withdrawals account.

The Adjusting Entry Approach and the Work Sheet. If the accountant uses the adjusting entry approach to update the inventory account, the two adjust­ments are included in the adjustments columns in the work sheet, and a line for the Income Summary account is inserted at the bottom of the work sheet. This procedure is not demonstrated here.

Using the Information— The Acid-Test Ratio

You have learned in this chapter that a company’s current assets may include a merchandise inventory. Thus, you can now understand that a major part of a company’s current assets may not be immediately available for paying its ex­isting liabilities. In effect, the inventory must be sold and the accounts receiv­able must be collected before cash is available. As a result, the current may not provide a complete description of a company’s ability to pay its current liabilities.

To deal with this limitation, financial statement users often calculate the acid-test ratio to assess the company’s ability to settle its current debts with its existing assets. The acid-test ratio is similar to the current ratio, but differs because it focuses on the company’s immediate future.

The acid-test ratio is calculated just like the current ratio except that its numerator omits inventory and prepaid expenses. The prepaid expenses are omitted because they are not usually converted into cash quickly. The remaining current assets (cash, short-term investments, and receivables) are called the company’s quick assets.
The formula for the ratio is

The acid-test ratio for Meg’s Mart is computed as follows:

In contrast, the current ratio (current assets/current liabilities) for Meg’s Mart has this value:

The difference between these two ratio values describes how the company’s inventory and prepaid expenses affect its ability to pay short-term obligations with existing resources.

As an approximate rule of thumb, an acid-test ratio value of at least 1.0 suggests that the company is not likely to face a liquidity crisis in the near future. However, a value lower than 1.0 is not necessarily threatening if the company can generate adequate cash from sales or the accounts payable are not due until later in the year. On the other hand, a value higher than 1.0 may hide a liquidity crisis if the payables are due at once but the receivables are scheduled to be collected late in the year. These possibilities reinforce the point that a single ratio is seldom enough to indicate strength or weakness. However, it can identify areas that the analyst should look into more deeply.

Part 2.

Back to basis

In these less exuberant times, managers need to remember a few old-fashioned virtues, says Tim Hindie.

If bad times make good leaders, America is due for a host of them. The recession that began in March last year and the terro­rist attacks on September 11th
made 2001 an unforgettably awful year. At such times people react strangely. Some are frozen in indecision while others act with unneces­sary haste. Across large corporations, such behaviour, multiplied many times, can be disastrous. At times of crisis, having the right people in the right place is vital. In a boom there is enough fat to absorb some bad judgment; in a recession good man­agement becomes a survival issue.

Dave Young, head of the Boston Con­sulting Group’s Boston office, maintains that for many companies the downturn will turn out to be a blessing. “It means that, increasingly, value in the capital mar­kets will accrue not to irrational exuber­ance’ or to sector hype,” he says, “but to good management.” But what, in such cir­cumstances, constitutes good manage­ment? It is certainly not something that can be conjured up out of the blue. Companies that have it now had it in good times too, and found it useful then; the difference is that in today’s harsher climate it has be­come essential.

This survey suggests that the core of good management is a set of three old-fashioned virtues that were often forgot­ten in the bubble years, when anything seemed to go. At a minimum, good managers have to meet the following criteria:

•be honest;

•be frugal;

•be prepared.

For many managers, that may sound about as exciting as shopping in Wal-Mart when they have become accustomed to Bloomingdale’s. But deep down, they know where they get the better value.

Essential virtues

Being honest, of course, is not just a matter of keeping within the law. Most managers do that, which is why the few who step –outside it receive so much attention. For the law-abiding majority, it is a matter of escaping from self-delusion. That requires setting up systems in which rewards are not related to numbers which can be mas­saged and exaggerated at will.

Above all, it is a matter of being honest about a company’s value and its potential. Warren Buffett, the chairman of Berkshire Hathaway and one of the most successful “value creators” in American business over the past 20 years, wrote in one of his celebrated annual letters to shareholders: “We do not want to _ulfillm the price at which Berkshire shares trade…we wish for them to trade in a narrow range centred at [their] intrinsic business value.” Manag­ers need to think about what is their own company’ intrinsic business Value”. And so do the investment bankers, analysts, consultants and the rest on the merry go-round of business hype.

In a similar vein, being frugal is not just a matter of cutting costs in a downturn. It is a question of being sparing with resources at all times, of continually looking for new ways to cut costs, and of creating an atmosphere in which waste and excess are unacceptable, no matter what the market conditions. The extremes to which Wal-Mart’s managers take this—such as sharing bedrooms on business trips, and being ex­pected to bring back free pens from confer­ences—may be counterproductive, to the point of repelling able managers. But the enduring success of many businesses— from Andrew Carnegie’s and J.P. Morgan’s in the 1900s to Warren Buffett’s and Sam Walton’stoday-have been built on a frugality bordering on stinginess.

Full Dollarization The Pros and Cons

The Pros and Cons of Full Dollarization

Since the end of the Bretton Woods system of fixed exchange rates nearly thirty years ago, the old dilemma facing countries of finding workable currency exchange arrangements has become more challenging, and the choices have become more varied.

The decision about which exchange rate system to adopt has become more difficult as world trade and capital markets have become more integrated. New problems have emerged, and with them, new answers to the question of the best exchange regime to promote each country’s development objectives. The newest of these solutions is full dollarization, under which a country officially abandons its own currency and adopts a more stable currency of another country—most commonly the U.S. dollar—as its legal tender.

From the perspective of any hard currency country, full dollarization may appear more radical than it is: use of the U. S. dollar or another major currency is pervasive to one degree or another in most developing countries, particularly in financial contracts (see Box 1, “What Is Dollarization?”). Full dollarization means taking the next step, from informal, limited dollarization to full, official use of the foreign currency in all transactions.

Box 1. What Is Dollarization?

This pamphlet focuses on full dollarization, or one country officially adopting the currency of another for all financial transactions, except perhaps the need for coins. In considering this choice of exchange regime, two points are important to keep in mind:

· The term dollarization is shorthand for the use of any foreign currency by another country. The issues it raises are identical for the other countries in the region using the South African rand, for example, and they would be for any country of, say, Eastern Europe, considering eventually adopting the euro.

· Most developing countries—as well as transitional economies just adopting market mechanisms—already have a limited, unofficial form of dollarization. To a greater or lesser degree, their residents already hold foreign currency and foreign currency-denominated deposits at domestic banks. In high inflation countries, dollars or some other hard currency may be in widespread use in daily transactions, alongside the local currency.

Such informal dollarization is a response to economic instability and high inflation, and the desire of residents to diversify and protect their assets from the risks of devaluation of their own currencies. It is useful to distinguish between two motives for the demand for foreign currency assets: currency substitution and asset substitution.

In currency substitution foreign assets are used as money, essentially as means of payment and unit of account, and it typically arises under conditions of high inflation or hyperinflation when the high cost of using domestic currency for transactions prompts the public to look for available alternatives. Once the use of foreign currency in transactions becomes accepted, it may not be rapidly abandoned. Remarkably, the increase in dollarization in some Latin American and Asian countries has continued and accelerated in recent years even following successful stabilization.

Asset substitution results from risk and return considerations about domestic and foreign assets. Historically, foreign currency-denominated assets have provided the opportunity of insuring against macroeconomic risks, such as price instability and prolonged depressions in many developing countries. Even under conditions of current stability, foreign currency-denominated assets may still serve this purpose if residents believe there is even a small chance of inflationary relapse.

Important differences exist between informal and full dollarization, presenting transitional problems for governments considering it. All government and private debt under full dollarization is denominated in dollars, and both public and private accounts must be converted to dollars. To make the conversion, countries must set the rate at which old debts, contracts, and financial assets will be converted to dollars.

Finally, the stability promised by dollarization is itself relative, given that the U.S. dollar—or any other hard currency chosen for use by another country—will fluctuate in value against other widely-traded currencies. During the post-Bretton Woods period, these swings have sometimes been large.

Questions About Pegs

Can these advantages offset the costs of a country giving up its own currency? The answers are complex, and in the end turn on each country’s specific circumstances. But more and more countries are seriously considering full dollarization as they deal with the changes in the world economy, particularly over the past 20 years.

During the inflation-plagued 1980s, much of the debate over exchange regimes for developing countries centered on the role of exchange rate “pegs”. Countries generally pick from a range of possibilities, including tying their currencies to baskets of other currencies (such as those of their trading partners), indexing their currencies in some way to their own inflation rates, or even banding together in groups, as many French-speaking African nations have through currency unions tied to the French franc.

In the 1990s, global inflation abated and capital mobility and the scale of capital flows increased sharply. While countries welcomed the investment flows, they faced a new threat, as speculative attacks rose in frequency and severity against currencies that capital markets viewed as vulnerable to devaluation.

Generally, the victims of these currency crises were maintaining some sort of pegged exchange rate regime. Consequently, the belief began to emerge that in a world of high capital mobility, exchange rate pegs might themselves attract speculative attacks and that only extreme choices, such as a free float or a currency board were viable. The currency board regime, under which the domestic currency is fully backed by international reserves, is the strongest form of pegged exchange rate option.

Advocates of full dollarization attack both of these choices. Free floats, they argue, are not viable for many developing countries because they risk excessive exchange rate volatility. So far, only the largest developing economies, with relatively advanced financial systems, such as Korea, Brazil, and Mexico, have attempted floating. While experience is limited, these experiments have worked thus far without major disruption.

Meanwhile, currency boards have fallen prey to costly speculative attacks. Argentina and Hong Kong SAR1
, using currency boards successfully, nonetheless suffered sharp increases in interest rates and recessions in recent years as speculative attacks spread to them from other countries.

The Appeal of Dollarization

Against this background, then-president Carlos Menem of Argentina suggested in 1999 that Argentina adopt the U.S. dollar as the ultimate solution to its long history of difficulties with monetary and exchange rate policy. In January 2000, Ecuador, in the context of a deep economic and political crisis, adopted the U.S. dollar as its legal tender.

Prominent economists have begun to argue that essentially all developing countries should dollarize, and some industrial countries have even been urged to consider it. Partly prompted by the example of European countries giving up their currencies for the euro, some have suggested that Canada should adopt the U.S. dollar as the North American Free Trade Agreement (NAFTA) evolves.

Weighing the pros and cons of full dollarization is complicated by the virtual absence of historical experiences. Panama is the only sizable country with a history of using a foreign currency—the U. S. dollar—as legal tender, and it is fairly small, and has very close historical, political, and economic links to the United States. Even if there were more country experiences to assess, they would have to be over longer periods than is usual for evaluating monetary and exchange rate options. That is because dollarization is nearly permanent, and some of its benefits can be gained only in the long run.

This analysis of full dollarization compares it to its nearest competitor, the currency board. This comparison captures the main implications of dollarization and how its effects differ from those of simply adopting a very firm peg. Furthermore, if the costs and benefits of a currency board turn out to be at least equivalent to dollarization, a currency board would be a simpler and preferable alternative for a country seeking a firmly pegged exchange regime.

The differences between currency boards and dollarization are few, but important. Dollarization’s key distinguishing feature is that it is permanent, or nearly so. Reversing dollarization is much more difficult than modifying or abandoning a currency board arrangement. In fact, the largest benefits claimed from dollarization derive from the credibility it carries precisely because it is nearly irreversible. And yet for some countries under particular circumstances, the irreversibility could come at a very high cost.

A government adopting full dollarization gives up the revenue from the loss of seigniorage (see Box 2, What Is Seigniorage?), whereas a currency board country does not. But a dollarizing country, by completely eliminating the risk of currency devaluation, gains lower interest rates on foreign borrowing.

The analysis below examines these issues in more detail. Quantifying the potential savings from lower interest rates turns out to be more complex than it first appears, but the cost of seigniorage loss can be roughly estimated. Important effects on economic stability and global financial integration resist quantification. Giving up any possibility of devaluation is costly for some countries, negligible for others. And all must consider the implications of a reduced national role in providing lender of last resort facilities and backing for their banking systems.

Is dollarization, then, a better exchange rate regime, especially for developing countries? The answer for each country depends ultimately on its own unique characteristics, but a closer look at the pros and cons of dollarization offers some general guidance.

Box 2. What Is Seigniorage?

The ancient concept of seigniorage as a government’s profit from issuing coinage that costs less to mint than its face value is essentially the same with paper currencies: abstracting from the minor cost of printing paper money, seigniorage is simply the increase in the volume of domestic currency.

Currency can be thought of as non-interest bearing debt, and the ability to issue it as a source of revenue for the monetary authorities. In addition, reserve requirements on banks may also be non-interest bearing (or be remunerated well below market rates levels) and thus contribute to seigniorage. Thus, the annual flow of seigniorage is frequently measured as the increase in base money (the sum of currency plus bank reserves).

As counterpart of the issuance of currency, the central bank acquires assets that do pay interest, such as foreign currency reserves, government securities, and loans to private banks. In a currency board system, for example, the central bank must acquire foreign reserves in an amount equal to the domestic currency issue. As a result of issuing non-interest bearing debt (currency) and holding interest-earning assets (foreign reserves, etc.) the central bank earns a gross profit, which is often also called seigniorage by central banks.

The Risk Premium

An immediate benefit from eliminating the risk of devaluation is reducing the country risk premium on foreign borrowing and obtaining lower interest rates for the government and private investors. Lower interest rates and more stability in international capital movements cut the cost of servicing the public debt, and encourage higher investment and economic growth.

The magnitude of this potential gain is hard to measure. Argentina, now using a currency board under which the peso rate is fixed at a ratio of one-to-one to the U.S. dollar, provides a good example of the difficulties. There, a higher interest rate for borrowing in pesos than for U. S. dollars persists as evidence that lenders see a risk that the exchange rate peg will be abandoned. Yet interest rates on dollar-denominated Argentine government and private securities also exceed those on industrial countries’ debt, reflecting a risk of default by the country, or sovereign risk, on those securities.

With dollarization, the interest premium owing to devaluation risk would disappear, but the premium for sovereign risk would not. Since government and the private sector can choose to borrow in foreign or domestic currency in Argentina’s heavily dollarized economy, they can already eliminate the cost of devaluation risk by borrowing in dollars. The key question, then, is: would full dollarization, by eliminating currency risk, substantially reduce the default risk premium on dollar-denominated debt?

Examining yields on bonds with different features can help disentangle how markets perceive sovereign, or default, risk as distinct from devaluation risk. Sovereign risk can be measured by the spread on dollar-denominated Argentine government bonds over U. S. Treasuries. This spread has tended to come down with time, but has still averaged 3.3 percentage points during 1997­98. Devaluation risk can be measured by the spread between peso- and dollar-denominated Eurobonds, which averaged 2.5 percent over the same period.

Arguments exist on both sides of the question of how much of the sovereign, or default, risk to attribute to devaluation risk. Although sovereign risk and devaluation risk move closely together, this does not establish a causal link from one to the other. In fact, it is plausible that most of both dollar and peso spreads are explained by common factors. For example, a global “flight to quality” would raise both the measured risk of default and risk of devaluation. In this case, dollarization would not help reduce dollar spreads very much.

In fully dollarized Panama, for instance, the absence of currency risk does not insulate the country from swings in market sentiment toward emerging markets generally. Moreover, since movements in Panama’s spreads cannot reflect devaluation risk, the implication is that at least a part of Argentina’s spread also cannot be explained by currency risk alone.

Devaluation risk might increase sovereign risk for several reasons. For example, governments acting to avoid currency crises may be increasing the risk of default. Mexico did this in 1994 by issuing too many dollar-denominated bonds or dollar-indexed bonds in its defense of the peso. Or a government may impose capital controls, causing other debtors to default on dollar-denominated debt, as Russia did in 1998, blocking private debtors’ access to foreign currency, and preventing them from servicing their foreign debt obligations. Conversely, devaluation may reduce default risk by improving the domestic economy and the fiscal position, as it has in the European Monetary System. Even devaluations that initially slow the economy may improve longer-term prospects and thus reduce the risk of sovereign default.

Only by analyzing historical interest rate data for individual countries is it possible to get a sense of the magnitude of the reduction in the risk premium in the event of dollarization, inferring what markets assess as the probability of default on foreign debt in the absence of currency crisis risk.

Seigniorage

A country adopting a foreign currency as legal tender sacrifices its seigniorage, the profits accruing to the monetary authority from its right to issue currency. The immediate cost of this issuance can be significant, and it continues on an annual basis thereafter.

Dollarization involves two kinds of seigniorage loss. The first is the immediate “stock” cost: as the dollar is introduced and the domestic currency withdrawn from circulation, the monetary authorities must buy back the stock of domestic currency held by the public and banks, effectively returning to them the seigniorage that had accrued over time. Second, the monetary authorities would give up future seigniorage earnings stemming from the flow of new currency printed every year to satisfy the increase in money demand.

In the case of Argentina, the first, or stock, cost of dollarization would be the redemption of about $15 billion in domestic currency held outside the central bank, or about 4.0 percent of gross domestic product (GDP). In addition, the loss of seigniorage on account of the increase in currency demand would amount to about another $1.0 billion annually, or about 0.3 percent of GDP.

For countries that do not already have enough foreign reserves to buy up their domestic currency and thereby dollarize, the acquisition of the initial stock could add indirect costs. If the country lacks the credit to borrow the reserves, it would be forced to accumulate them through current account surpluses. The cost of this could be substantial in forgone investment if, as is usual for developing countries, the better policy would otherwise be to run some sustainable level of current account deficit.

The United States would get more seigniorage from dollarization in other countries. There is, therefore, a case for the U.S. authorities to share part or all of these additional seigniorage revenues with countries that adopt the U. S. dollar. A precedent exists in the arrangements between South Africa and three other states that use the rand (Lesotho, Namibia, and Swaziland). While the United States has no sharing arrangement with Panama or any other legally dollarized economy, there have been some initiatives in the U.S. Senate to consider legislation providing for seigniorage reimbursement.

Stability

Important as risk spreads and seigniorage are, dollarization may offer gains that, although not immediately observable, may provide larger benefits over time. In addition to raising developing countries’ borrowing costs, currency crises wreak havoc on the domestic economy. In Mexico, GDP fell by 7 percent in 1995, and the Asian countries affected by currency crises witnessed recessions in the range of 7­15 percent of GDP in 1998. Most of the severely affected countries in recent crises devalued and floated their exchange rate, but even countries with currency boards such as Hong Kong SAR and Argentina suffered fierce speculative attacks that, although weathered successfully, dealt them serious economic setbacks.

Dollarization will not eliminate the risk of external crises, since investors may flee because of problems of weakness in a country’s budget position or the soundness of the financial system. This sort of “debt crisis” can be as damaging as any other, and indeed, Panama has experienced several.

Nevertheless, dollarization holds the promise of a steadier market sentiment as the elimination of exchange rate risk would tend to limit the incidence and magnitude of crisis and contagion episodes. Moreover, large swings in international capital flows cause sharp business cycle fluctuations in emerging economies even when they do not involve balance of payments crises.

Effect on Trade and Financial Links

A powerful but still longer-term argument for full, legal dollarization is that it makes economic integration easier with the rest of the world, and insulation of the domestic financial system correspondingly more difficult. Dollarization may establish a firm basis for a sound financial sector, and thus promote strong and steady economic growth. The argument here is that dollarization is perceived as an irreversible institutional change toward low inflation, fiscal responsibility, and transparency.

Furthermore, dollarization may contribute to greater economic integration than otherwise would be possible with the United States, or any other country whose currency is adopted. A number of studies have found evidence that Canadian provinces tend to be more integrated in trade volume and price level differences among themselves than with U.S. states that are closer geographically, trading in the order of twenty times more among themselves than with nearby U. S. states. The use of a common currency may thus be a vital factor in market integration, given the fairly low transaction costs and restrictions to trade across the U.S.-Canada border.

Dollarization could also bring about a closer integration in financial markets. One of the most profound effects of Panama’s dollarization is the close integration of its banking system with that of the United States and indeed with the rest of the world, particularly since a major liberalization in 1969–70.

Exit Option

With full dollarization, a country completely gives up control of monetary and exchange rate policy. This may seem identical to currency board arrangements, since a country with a currency board cannot devalue. However, there is some scope for exit from the pegged exchange rate with a currency board, if only under extreme circumstances. Indeed, the elimination of this risk of devaluation is the main purpose of full dollarization.

Benefiting from Devaluation. Large shocks, such as a big jump in world oil prices or fall in the price of an important export, may require countries to devalue. Otherwise, they must absorb these shocks through lower nominal wages and adjustments in domestic prices. Substantial recession may then be unavoidable, particularly for economies with rigid labor markets.

Experiences such as departures from the gold standard and the 1994 devaluation of the CFA franc suggest that an exit option may have great value in the presence of extreme, unexpected shocks. During the Great Depression, for example, the industrial countries that fared best were those that exited earliest from the fixed exchange regime of the time—the gold standard. Argentina was one of them, suffering only a relatively minor economic setback by abandoning convertibility early, then actively stimulating the economy through monetary policy to offset the deflationary impact of capital outflows.

The countries of the CFA franc zone of West and Central Africa are recent examples of states with firmly pegged currencies that have successfully devalued to overcome severe external shocks and sluggish growth. The 14-nation franc zone resembles a currency board, with a fully convertible currency and an exchange rate fixed at par with the French franc from 1948 until 1994. From the second half of the 1980s into the early 1990s, output in the CFA franc zone stagnated as the French franc rose in value against the U.S. dollar, the CFA franc appreciated accordingly, the terms of trade deteriorated, and labor costs rose sharply. In 1994, the 14 countries resorted to a 50 percent devaluation, achieving a turnaround in higher output, exports, and investment.

Finally, countries with highly credible policymakers can also be well placed to benefit from devaluation, since the increase in expectations of inflation is likely to be lower than in countries with records of loose fiscal and monetary policies. For example, the CFA franc zone devaluation caused little inflation, occurring, as it did, against a long history of exclusive reliance on internal adjustments to deal with economic shocks.

Devaluations with High Cost. These examples suggest countries may pay a high price for foregoing the option to exit from a fixed exchange rate arrangement. The reverse is true where monetary policy has been poorly managed and expectations of inflation are highly sensitive to the exchange rate. In these countries, devaluation can sharply raise domestic prices, making it hard to achieve changes in the real exchange rate. Similarly, in countries that have become so dollarized that the dollar is often the de facto unit of account, devaluation quickly raises domestic prices, again limiting the effectiveness of devaluations. In fact, these were central reasons why Argentina adopted a currency board.

Countries with a high degree of financial asset dollarization have a further reason to avoid devaluation. If a country’s banks or corporations receive large amounts of dollar-denominated lending, devaluation sharply worsens their balance sheets. Even if banks on-lend to domestic firms in dollars, maintaining matched risks in terms of currency on their books, they still carry a substantial currency risk. A sharp depreciation of the domestic currency would cause a large drop in revenues in dollar terms for the banks’ clients, reducing their ability to service dollar debts.

As the currency crises in Mexico in 1994 and East Asia in 1997 demonstrated, when there are weak banking systems and large foreign exchange exposures in the private sector, the financial health of banks and firms is at such risk following a devaluation that economic activity is severely disrupted. Thus, devaluation as a policy option may be prohibitively costly for highly dollarized economies, and moving to full dollarization would not entail the loss of an important policy tool.

Lender of Last Resort Function and Financial System Stability

While full dollarization eliminates vulnerability of the banking system to the risk of devaluation, it does not eradicate all sources of banking crisis. And when they occur, full dollarization may well impair the country’s lender-of-last-resort function and hence the central bank’s response to financial system emergencies.

The central bank’s role in operating a discount window to provide short-term liquidity must here be distinguished from its role as the ultimate guarantor of the stability of the financial and payments systems in the event of a systemic bank run. Dollarization should not greatly impede the ability of the authorities to provide short-term liquidity to the system or assistance to individual banks in distress. Such facilities are available if the central bank (or its replacement) saves the necessary funds in advance or perhaps secures lines of credit with international banks.

In contrast, the government loses some ability to respond to a sudden run on bank deposits throughout the entire system. In the case of a generalized loss of confidence, the authorities would be unable to guarantee the whole payments system or to fully back bank deposits. Ultimately, the ability to print money as needed is what allows a central bank to guarantee beyond any doubt that all claims (in domestic currency) will be fully met under any circumstances. Once the ability to print money ceases to exist, limits to the lender-of-last-resort function appear.A fully dollarized country that had already spent its foreign currency reserves to redeem its stock of domestic currency might well lack the resources to respond.

A Cushion for Currency Boards. Currency boards can create base money only to the extent that they accumulate reserves, so they are almost as tightly constrained as the monetary authorities would be in a dollarized economy. In important currency board cases, however, the authorities have allowed themselves some flexibility to create money that is not fully backed on the margin, partly to be able to deal with banking crises. In the case of the run on the Argentine peso during the 1995 “tequila” crisis, for example, the Argentine monetary authorities were able to partially accommodate the conversion of peso deposits into dollar deposits held abroad as well as into dollar cash.

By temporarily reducing their reserve coverage of the money base, they could increase the issuance of dollar cash and provide the dollar credits the banks needed to stay afloat. In the wake of the 1997 attack on the Hong Kong dollar, the Hong Kong Monetary Authority introduced in September 1998 a discount window to provide short-term liquidity to banks in a more flexible way and at lower cost than under previous arrangements. The new system is expected to reduce the volatility in short-term domestic interest rates. The maximum volume of rediscounts is limited, however, and the Hong Kong Monetary Authority fully backs rediscounts with foreign exchange.

The scope for accommodation to bank runs in a currency board is inevitably restricted. Indeed, even without the restrictions imposed by a currency board system, the ability of a central bank to find a way out of a financial crisis by resorting to printing money alone is limited. The injection of liquidity into the banking system to keep it from defaulting on deposits may only lead to greater pressure on foreign reserves or the exchange rate.

Conclusions

Summing up, the main pros and cons of dollarization are as follows:

Advantages

· Dollarization avoids currency and balance of payments crises. Without a domestic currency there is no possibility of a sharp depreciation, or of sudden capital outflows motivated by fears of devaluation.

· A closer integration with both the global and U. S. economies would follow from lower transaction costs and an assured stability of prices in dollar terms.

· By definitively rejecting the possibility of inflationary finance through dollarization, countries might also strengthen their financial institutions and create positive sentiment toward investment, both domestic and international.

Disadvantages

· Countries are likely to be reluctant to abandon their own currencies, symbols of their nationhood, particularly in favor of those of other nations. As a practical matter, political resistance is nearly certain, and likely to be strong.

· From an economic point of view, the right to issue a country’s currency provides its government with seigniorage revenues, which show up as central bank profits and are transferred to the government. They would be lost to dollarizing countries and gained by the United States unless it agreed to share them.

· A dollarizing country would relinquish any possibility of having an autonomous monetary and exchange rate policy, including the use of central bank credit to provide liquidity support to its banking system in emergencies.

What is the balance of costs and benefits of full dollarization? The answers may seem frustratingly two-handed. This is inevitable, given the complexity of the issue and the current state of knowledge about it. The potential benefits of lower interest rates and the cost of forgone seigniorage revenues can at least be estimated. But many of the most important considerations, such as the value of keeping an exit option and lender of last resort protections, are virtually unquantifiable.

Which countries are likely to benefit from dollarization? The most obvious are those already highly integrated with the United States in trade and financial relations. Yet most countries in Latin America are quite different from the United States in their economic structure and would probably not benefit greatly from dollarization unless accompanied by deep market integration, as in the European Union.

The current discussion centers on a different group of candidates: emerging market economies exposed to volatile capital flows but not necessarily close, in an economic sense, to the United States. For this group, the more the U.S. dollar is already used in their domestic goods and financial markets, the smaller the advantage of keeping a national currency. For an economy that is already extremely dollarized, seigniorage revenues would be small (and the cost of purchasing the remaining stock of domestic currency also would be small), the exposures of banks and businesses would make devaluation financially risky, and the exchange rate would not serve as a policy instrument because prices would be “sticky” in dollar terms. In such cases, dollarization may offer more benefits than costs.

Part 3.

CONTRACT

Moscow

“_____” _________________ 20____ г.

hereinafter referred to as the Sellers, on the one hand and ____________________________, hereinafter referred to as the Buyers, on the other hand have concluded the present Contract as follows:

1. Subject of the Contract

The Sellers have sold and the Buyers have bought on (FOB)_________________________________ (port) basis the goods to the amount of ____________________________ in the quantity, assortment, at prices and according to technical conditions as stated in Supplements N 1,2… which are the integral part of the present Contract.

2. Price and Total Amount of the Contract

The prices for the goods are fixed in __________________________

(currency)

and are to be understood _______________________________ (FOB, CIF…) packing and marking included.

The Total Amount of the present Contract is ______________________.

6.
Dates of delivery

Delivery of the goods under the present Contract should be effected within the dates stipulated in the Supplement N ____ to the present Contract.

The data of the Bill of Lading and/or the date of frontier station stamp of the Sellers’ country stated in (rail-)way bill to be considered as the data of delivery.

4. Quality of the goods

The quality of the goods should conform to the technical conditions stated in the Supplement N __ .

7.
Packing and Marking

Tare and inner packing should secure full safety of the goods and protect the goods from any damages during transportation by all kinds of transportation means taking into consideration transshipments.

Each case is to be marked with indelible paint as following:

Case N. __________________________

Contract N. ______________________

Consignor ________________________

Consignee ________________________

Gross weight _____________________

Net weight _______________________

6. Delivery and Acceptance of Goods

The goods shall be considered as delivered by the Sellers and accepted by the Buyers:

in respect of quality - according to the Certificate of Quality issued by the Seller; in respect of quantity - according to the number of cases and weight as shown in way-bill or Bill of Lading.

7. Payment

Payment for the goods delivered is effected in ________________________

under an irrevocable, confirmed divisible Letter of Credit established by the Buyer with the Bank ________________________________________________

The Letter of Credit to allow transshipment and partial shipment and to stipulate that all the expenses connected with the opening and the extension of the Latter of Credit and any other banc charges to be for the Buyers’ account. The Letter of Credit is to be valid for _______ days.

The terms and conditions of the Letter of Credit should correspond to the terms and conditions of the Contract; the terms which are not included in the Contract to be not inserted in the Letter of Credit.

The Letter of Credit to be available against presentation of the following documents:

8. Full set of clean on board Bills of Lading issued in the name of ________________________________________________________________

(Buyer)

for shipment of the goods to ___________________________________

(destination port)

2. Invoice in triplicate;

3. Specification in triplicate stating Contract N., Numbers of shipped cases;

4.Quality Certificate issued by the Seller in duplicate confirming that the quality of the goods corresponds to the conditions of the present Contract;

5. Master’s Receipt confirming the receiving for delivery of 4 non-negotiable copies of Bill of Lading and 4 copies of specification together with the goods.

The Sellers should submit the above- said documents to the Bank for payment within ___________________________________ days after loading of the goods.

Should the Seller fails to do this he is to bear the expenses for prolongation of the Letter of Credit.

8. Claims

Claims in respect of the quantity in case of shortage inside the case may be submitted by the Buyers to the Sellers not later than ________ days and in respect of the quality of the goods in case of non-conformity of same to that stipulated by the Contract not later than ______ days after the arrival of the goods at the port of destination.

Contents and ground of the claim should be certified either by Expert’s Report or by a Report made up with the participation of a representative of an uninterested competent organization.

The Sellers should consider the received claim within _____ days counting the date of its receipt. In case of no reply from the Sellers after expiration of the said date the claim will be considered as admitted by the Sellers.

The Buyers have the right to return to the Sellers the rejected goods for their replacement by the goods of proper quality.

All the transport and other expenses connected with delivery and return of defective goods are to be paid by the Sellers.

9. Arbitration

All disputes and differences which may arise out of the present Contract or in connection with the same are to be settled without application to State courts by Arbitration Court at Chamber of Commerce, Moscow in accordance with the Rules of procedure of the above Court the awards of which are final and binding upon both Parties.

10. Force-majeure

Should any circumstances arise which prevent complete or partial _ulfillment by any of the Parties of their respective obligations under the present Contract, namely: fire, acts of God, war, military operations of any kind, blockade, prohibition of export or import or any other circumstances beyond the control of Parties, the time stipulated for the fulfillment of such obligations shall be extended for the period equal to that during which such circumstances will remain in force.

Should the above circumstances continue to be in force for more than _____ months, each Party shall have the right to refuse any further _ulfillment of the obligations under the Contract and in such case neither of the Parties shall have the right to make a demand upon the other Party for the compensation of any possible damages.

The Party for whom it becomes impossible to meet their obligations under the present Contract, shall immediately advise the other Party as regards the beginning and the cessation of the circumstances preventing the _ulfillment of their obligations.

The certificates issued by the respective Chamber of Commerce of the Sellers’ or of the Buyers’s country shall be sufficient proof of such circumstances and their durability.

11. Other Conditions

All dues (including port and dock ones), taxes and customs duties levied in the territory of the Sellers’ country connected with execution of the present Contract are to be paid by the Sellers and for their account.

The Seller is bound to obtain Export Licenses if such are required.

From the moment of signing the present Contract all the previous negotiations and correspondence connected with same are null and void.

None of the Parties has the right to assign their right and obligations under the present Contract without written consent of the other Party.

Any amendments and supplements to the present Contract are valid only if made in writing and signed by duly authorized representatives of both Parties.

The present Contract is made up in two copies both having the same value.

12. Legal Addresses of the
Parties

____________________________

____________________________

____________________________

Short Form of Power to Manage a Business

The citizen of __________ Mr. ___________ residing at ____________ is hereby given the authority to take charge of the business of the undersigned ____________________, organized and existing under the laws of _________________ which is located at ______________________ as ____________ (General Manager or Other).

In managing the business, the General Manager has the authority to:

1. Buy and sell all articles and property that are used in connection with the business;

2. Sign any and all checks, notes, drafts, bills, commercial paper and documents related to the business;

3. State accounts and prosecute, collect, or settle all claims due, that exist or may arise in connection with the business;

4. To buy, sell, pledge or mortgage any notes, bonds, leases, contracts, security agreements and mortgages that are connected with the business;

5. Do all other acts of management that are in connection with running the business.

6. The rights, powers, and authority of the General Manager any and all of the rights and powers herein granted shall commence and be in full force and effect on (date) and shall remain in full force and effect until (date) or unless specifically extended or rescinded earlier by either party.

{signature, commercial stamp}

Power of Attorney (general form)

I, <…> of <…>, hereby appoint <…> of <…>, as my attorney in fact to act in my capacity to do any and all of the following:

________________________________________________ ________________________________________________ ________________________________________________ (DESCRIBE THE EXTENT OF AUTHORITY YOU ARE GIVING TO YOUR ATTORNEY-IN-FACT)

The rights, powers, and authority of my attorney in fact to exercise any and all of the rights and powers herein granted shall commence and be in full force and effect on <date> and shall remain in full force and effect until <date> or unless specifically extended or rescinded earlier by either party.

Dated <date> at _________________

WITNESS my hand and official seal the date aforesaid.

NOTARY PUBLIC

My Commission Expires <date>

BIBLIOGHRAPHY

1. Financial Accounting sixth edition/ Kermit D.Larson University of Texas – Austin Paul B.W.Miller University of Colorado-Colorado Springs. IRWIN, Chicago Bogota Boston Buenos Aires Caracas London Madrid Mexico City Sydney Toronto, 1995. – (pp. 185-207.)

2. Back to Basics/ The Economist// March 9th
, 2002. - (pp. 3-4.)

3. http:// www.imf.ru