account basic

http://www.bized.co.uk

Copyright 2006 – Biz/ed

Finance and Accounts 1



Finance and Accounts



Key Terms



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



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



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



Profit

• Profit (Π) = 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



Break Even



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



Purpose of Accounts



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!!



Profit and Loss Account - Flow



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



Profit and Loss AccountConsolidated Profit & Loss Account for the year ended 2003 2002 2001

Weeks 52 52 52

Currency £ million £ million £ million

Turnover 7688.0 8340.0 9278.0

Cost of sales -7263.0 -8291.0 -8757.0

Gross Profit 425.0 49.0 521.0

Operating Expenses -130.0 -137.0 -77.0

Operating Profit 295.0 -88.0 444.0

Other costs/income 95.0 166.0 -68.0

Profit before interest and taxation 390.0 78.0 376.0

Net interest receivable (payable) -255.0 -278.0 -226.0

Profit on ordinary activities before taxation 135.0 -200.0 150.0

Tax on profit on ordinary activities -50.0 -71.0 -69.0

Profit on ordinary activities after taxation 85.0 -129.0 81.0

Equity minority interests -13.0 -13.0 -14.0

Profit for the financial period 72.0 -142.0 67.0

Dividends 0.0 -193.0

Retained profit 72.0 -142.0 -126.0

Profit and Loss Account for British Airways plcSource: http://www.bized.ac.uk/cgi-bin/ratios/ratiodata.pl

Turnover – the revenue earned over the year

Gross Profit = turnover – cost of sales

Operating Expenses – the fixed costs

Operating or Net Profit = Gross profit – operating costs

Cost of Sales – the variable costs, how much it cost the firm to produce what it has sold – not to be confused with sales revenue!

Subtract other costs and expenses incurred to get profit before tax

Subtract interest payments/receipts to get profit on ordinary activities before tax

Subtract tax due to get profit on ordinary activities after tax

Final section called ‘appropriation account’ – shows where the profit/loss is going

Dividend – the share of the profit returned to shareholders

Retained Profit – the amount kept back for future investment, etc.



Balance Sheet - Snapshot



Balance Sheet

• A snapshot of the firm’s 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)



Balance Sheet – Part 1

Consolidated Balance Sheet for the year ended 2003 2002 2001

Weeks 52 52 52

Currency £ million £ million £ million

Fixed assets

Intangible Assets 164.0 105.0 60.0

Tangible Assets 9487.0 10509.0 10662.0

Investments 524.0 489.0 426.0

Total Fixed Assets 10175.0 11103.0 11148.0

Current assets

Stock 87.0 109.0 170.0

Debtors due within one year 986.0 1231.0 1444.0

Short-term investments 1430.0 1155.0 865.0

Cash at bank and in hand 222.0 64.0 71.0

Total Current Assets 2725.0 2559.0 2550.0

Fixed Assets – assets not used up in production or lasting longer than one year – equipment, buildings, machinery, etc.

Fixed assets can be tangible – i.e. physical items or intangible – i.e. brand name, goodwill.

Current Assets: assets that are used up during production and which are likely to yield cash in the coming year – for example, stock will be sold and debtors owing the business money will pay up!



Balance Sheet – Part 2

Creditors: Amounts falling due within one year -2904.0 -3201.0 -3308.0

Net Current Assets (liabilities) -179.0 -642.0 -758.0

Total assets less current liabilities 9996.0 10461.0 10390.0

Creditors: Amounts falling due after more than one year -6553.0 -7097.0 -6901.0

Provisions for liabilities and charges -1169.0 -1157.0 -1164.0

Net assets 2274.0 2207.0 2325.0

Capital and reserves

Called-up share capital 271.0 271.0 271.0

Share premium 788.0 788.0 788.0

Other reserves 270.0 270.0 290.0

Profit and loss account 729.0 687.0 772.0

Equit shareholders' funds 2058.0 2016.0 2121.0

Minority interests 216.0 191.0 204.0

Total capital employed 2274.0 2207.0 2325.0

Subtracted from the assets are the money the company owes to creditors – suppliers for example

And to those who are longer term creditors – loans, mortgage on property etc

This leaves us with ‘Net Assets’

The funds to acquire these assets must have come from somewhere – the next section tells us where it came from.

It can come from share capital and from retained profit (profit and loss account)

The total capital employed must be the same as the sum of the net assets – hence the term ‘balance’ sheet!



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

account basic

Economy & Finance

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