Finance 1

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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 (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

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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

2003

2002

2001

52

52

52

£ 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

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

Currency

Other costs/income

Dividends Retained profit

0.0 72.0

-193.0 -142.0

-126.0

Dividend – Final section Profit Turnover Operating Cost Subtract of and Sales other Loss –or Gross Operating Subtract Profit Subtract tax called the share of= Account the Net – costs the revenue Profit and variable for = Expenses interest turnover –– due to get ‘appropriation the profit British earned Gross costs, expenses how Airways over – cost the payments/recei fixed ofprofit sales account’ –costs shows profit on returned to plc the operating much incurred year it cost to get where the pts to get costs ordinary shareholders the profit firm before profit/loss is going profit onto activities produce tax what ordinary Retained after tax it has sold – activities Profit – the not to be before tax amount kept confused with back for future 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 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)

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Balance Sheet – Part 1 Consolidated Balance Sheet for the year ended Weeks Currency

2003

2002

2001

52

52

52

£ million

£ million

£ million

164.0

105.0

60.0

9487.0

10509.0

10662.0

524.0

489.0

426.0

10175.0

11103.0

11148.0

87.0

109.0

170.0

986.0

1231.0

1444.0

1430.0

1155.0

865.0

222.0

64.0

71.0

2725.0

2559.0

2550.0

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

Current Assets: Fixedassets Fixed Assets can – assets that used assets be tangible notare used – up during up i.e. in physical production production and or items lasting or likely longer which are to than intangible oneinyear – i.e. – yield cash the coming year – for equipment, brand name, example, stock will buildings, goodwill. 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

-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

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

2058.0

2016.0

2121.0

216.0

191.0

204.0

2274.0

2207.0

2325.0

Capital and reserves

Equit shareholders' funds Minority interests Total capital employed

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

account) hence the for term suppliers ‘balance’ example sheet!

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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 Copyright 2006 – Biz/ed