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18 Cards in this Set
- Front
- Back
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What does the balance sheet provide an overview of? |
Left side: Assets (what does the business own) - Fixed Assets - Current Assets
Right side: Owner's equity and Liabilities (how is that which is owned financed) - Owner's equity - Liabilities |
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What are fixed assets?
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Fixed assets last more than one production period, typically a number of years
Examples: Land Buildings Equipment Furniture Cars
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What are current assets? |
Current assets are used only once in the production process, releasing the invested capital immediately
Examples: Inventory / stock Accounts Receivable Cash and cash equivalents Positive bank balance |
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What is owner's equity?
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Owner's equity is that which is made available by the owner of the business and is invested in the business for an indefinite period of time
Examples: Savings Inheritance Lottery winnings Profit from previous period |
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What are liabilities? |
Liabilities are loaned to the company by a third party. The loan is offered to the company for a limited period of time and must repaid
Examples: Mortgage Loan Accounts Payable Negative bank balance/ Bank overdraft |
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What is depreciation? |
The loss of value of fixed assets due to wear |
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What is the difference between expenses and costs? |
Expenses relate to the purchasing of assets
Costs relate to the use of assets |
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Why are expenses and costs not equal for fixed assets? |
The expenses are made in the period in which the fixed assets are purchased and paid for
The costs are spread across the whole period of use -> depreciation |
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Is depreciation included in the profit/loss account, cash flow or both? |
Only in the profit/loss account |
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Is a loan/mortgage repayment included in the profit/loss account, cash flow or both? |
Only in the cash flow |
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Is a rent payment included in the profit/loss account, cash flow or both? |
Both |
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Is a payment of interest over a loan/mortgage included in the profit/loss account, cash flow or both? |
Both |
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What does the cash flow statement show? |
The result of cash transactions during the financial year. So only the movements of money that really happened!! Accounts payable and accounts receivable are therefore not included, these amounts have not yet been paid/received. Neither is depreciation, since it is a hypothetical decrease in value-> it can not be represented by an actual movement of cash. |
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What is the profit/loss account? |
A statement of revenues and costs in the preceding period |
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What are variable costs? |
Costs that change in direct relation to the activity. Total variable costs are related to the changes in the volume of production |
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What are fixed costs? |
Costs that do not change in relation to the activity of a business |
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What is the break-even point? |
The point at which the company makes neither a profit nor a loss:
The total revenue equals the total cost |
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What is the formula to calculate the break-even sales volume? |
Total revenue = Total costs
p x q = v x q + F - OR- (p x q) - (v x q) = F
p = selling price q = break-even sales volume (amount of products sold to break-even) v = variable costs per unit F = fixed costs
Selling price x sold quantity = variable costs x sold quantity + fixed costs
In the above equation the sales volume (q) is what needs to be calculated
Example:
selling price: 10 euro variable costs per unit: 4 euro fixed costs: 15000 euro
10 x q = 4 x q + 15000 10 q = 4 q + 15000 10 q - 4 q = 15000 6 q = 15000 q = 15000 / 6 q = 2500 units
Check: Total revenue = Total Cost 2500 x 10 euro = 2500 x 4 euro + 15000 euro 25000 euro = 10000 euro + 15000 euro 25000 euro = 25000 euro
So break-even sales volume is 2500 units |
