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Finance and Accounts 1

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Finance and Accounts

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Key Terms

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Costs
Fixed (Indirect/Overheads) are not influenced by the amount produced but can change in the long run e.g., insurance costs, administration, rent, some types of labour costs (salaries), some types of energy costs, equipment and machinery, buildings, advertising and promotion costs Variable (Direct) vary directly with the amount produced, e.g., raw material costs, some direct labour costs, some direct energy costs Semi-fixed where costs not directly attributable to either of the above, for example, some types of energy and labour costs

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Costs
Total Costs (TC) = Fixed Costs (FC)+ Variable Costs (VC) Average Costs = TC/Output (Q)
AC (unit costs) show the amount it costs to produce one unit of output on average

Marginal Costs (MC) the cost of producing one extra or one fewer units of production
MC = TCn TCn-1

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Revenue
Total Revenue also known as turnover, sales revenue or sales = Price x Quantity Sold TR = P x Q Price may be a variety of different prices for different products in the portfolio Quantity could be global sales

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Profit
Profit () = TR TC Normal Profit the minimum amount required to keep a business in a particular line of production Abnormal/Supernormal Profit the amount over and above the amount needed to keep a business in its current line of production

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Break Even

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Break Even
Occurs where Total Costs = Total Revenue
Start-up costs fixed costs Running costs variable costs Revenue stream depends on price charged Low price need to sell more to break-even High price lower level of sales required before breaking even

Fixed Costs Break-Even Point = --------------Contribution

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Purpose of Accounts

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Purpose of Accounts
Provide information for stakeholders customers, shareholders, suppliers, etc. Provides the opportunity for the business to monitor its own activities Provides transparency to enable the firm to attract investment Reduces the chance for fraud not 100% successful!!

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Profit and Loss Account - Flow

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Profit and Loss Account

Shows the flow of sales and costs over a period Shows the level of profit or loss made Shows what has been done with the profit or loss

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Profit and Loss Account

Consolidated Profit & Loss Account for the year ended Weeks Currency Turnover Cost of sales Gross Profit Operating Expenses Operating Profit Other costs/income Profit before interest and taxation Net interest receivable (payable) Profit on ordinary activities before taxation Tax on profit on ordinary activities Profit on ordinary activities after taxation Equity minority interests Profit for the financial period Dividends Retained profit 2003 52 million 7688.0 -7263.0 425.0 -130.0 295.0 95.0 390.0 -255.0 135.0 -50.0 85.0 -13.0 72.0 0.0 72.0 -142.0 2002 52 million 8340.0 -8291.0 49.0 -137.0 -88.0 166.0 78.0 -278.0 -200.0 -71.0 -129.0 -13.0 -142.0 2001 52 million 9278.0 -8757.0 521.0 -77.0 444.0 -68.0 376.0 -226.0 150.0 -69.0 81.0 -14.0 67.0 -193.0 -126.0

Dividend Loss Final section or Subtract other Cost andtax Operating Turnover Profit of Sales Subtract Operating Gross Profit Subtract calledProfit = the share of costs variable the and Net to for the revenue Accountget interest Expenses = turnover due appropriation the profit expenses costs costs, onshows Gross Airways earnedhow Britishprofit payments/recei the of sales costfixed account profit over returnedcost incurred much it operating costs the year to plc tothe to get where get pts ordinary shareholders profit before the firm to going profit/loss is profit on activities tax produce what ordinary Retained after tax it has sold activities Profit the not to be before tax amount kept confusedfuture back for with sales revenue! investment, etc.
Source: http://www.bized.ac.uk/cgibin/ratios/ratiodata.pl

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Balance Sheet - Snapshot

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Balance Sheet
A snapshot of the firms position at a point in time Shows what a company owns (assets) and what it owes (liabilities) Balance Sheet shows what assets a company has (use of funds) and where the money came from to acquire those assets (source of funds)

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Balance Sheet Part 1

Consolidated Balance Sheet for the year ended Weeks Currency Fixed assets Intangible Assets Tangible Assets Investments Total Fixed Assets Current assets Stock Debtors due within one year Short-term investments Cash at bank and in hand Total Current Assets 87.0 986.0 1430.0 222.0 2725.0 109.0 1231.0 1155.0 64.0 2559.0 170.0 1444.0 865.0 71.0 2550.0 164.0 9487.0 524.0 10175.0 105.0 10509.0 489.0 11103.0 60.0 10662.0 426.0 11148.0 2003 52 million 2002 52 million 2001 52 million

Current Assets: Fixed Assets Fixedassets can assets that are be tangible used assets not used up during i.e. physical up in production production and itemsare likely to or lasting longer which or intangible thancash in the i.e. yield one year coming name,for brand year equipment, example, stock will goodwill. buildings, be sold and debtors machinery, etc. owing the business money will pay up!

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Balance Sheet Part 2

Creditors: Amounts falling due within one year Net Current Assets (liabilities) Total assets less current liabilities Creditors: Amounts falling due after more than one year Provisions for liabilities and charges Net assets Capital and reserves Called-up share capital Share premium Other reserves Profit and loss account Equit shareholders' funds Minority interests Total capital employed 271.0 788.0 270.0 729.0 2058.0 216.0 2274.0 271.0 788.0 270.0 687.0 2016.0 191.0 2207.0 271.0 788.0 290.0 772.0 2121.0 204.0 2325.0 -2904.0 -179.0 9996.0 -6553.0 -1169.0 2274.0 -3201.0 -642.0 10461.0 -7097.0 -1157.0 2207.0 -3308.0 -758.0 10390.0 -6901.0 -1164.0 2325.0

Subtracted The funds to It can come The to these us And total those acquirethe from share This leaves from are longer capital are the who Net have assets must assets with capital and come from must employed term creditors money the Assets somewhere the from retained be the same as loans, company next section tells profit (profit the sum of the mortgage on owes to us where it came and assets net loss property etc from. creditors

account) term hence the for suppliers balance sheet! example

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Balance Sheet
A guide to the structure of the assets of a company A guide to the level of gearing the ratio of loan to share capital Gives a guide as to the degree of working capital the amount the company has to be able to pay its everyday debts (current assets current liabilities) Shows the total value of a firm at that moment in time

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