http://www.bized.co.ukCopyright 2006 – Biz/edCosts• Fixed (Indirect/Overheads) – are not influencedby the amount produced but can change in the long rune.g., insurance costs, administration, rent, some typesof labour costs (salaries), some types of energy costs,equipment and machinery, buildings, advertisingand promotion costs• Variable (Direct) – vary directly with the amountproduced, e.g., raw material costs, some direct labourcosts, some direct energy costs• Semi-fixed – where costs not directly attributable toeither of the above, for example, some types of energyand labour costs
http://www.bized.co.ukCopyright 2006 – Biz/edCosts• Total Costs (TC) = Fixed Costs (FC)+Variable Costs (VC)• Average Costs = TC/Output (Q)– AC (unit costs) show the amount it coststo produce one unit of output on average• Marginal Costs (MC) – the cost ofproducing one extra or one fewer unitsof production– MC = TCn – TCn-1
http://www.bized.co.ukCopyright 2006 – Biz/edRevenue• 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 pricesfor different products in the portfolio• Quantity – could be global sales
http://www.bized.co.ukCopyright 2006 – Biz/edProfit• Profit (Π) = TR – TC• Normal Profit – the minimum amountrequired to keep a businessin a particular line of production• Abnormal/Supernormal Profit – theamount over and above the amountneeded to keep a businessin its current line of production
http://www.bized.co.ukCopyright 2006 – Biz/edBreak Even
http://www.bized.co.ukCopyright 2006 – Biz/edBreak Even• Occurs where Total Costs = TotalRevenue– 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 beforebreaking evenFixed Costs• Break-Even Point = ---------------Contribution
http://www.bized.co.ukCopyright 2006 – Biz/edPurpose of Accounts
http://www.bized.co.ukCopyright 2006 – Biz/edPurpose of Accounts• Provide information for stakeholders –customers, shareholders, suppliers, etc.• Provides the opportunity for thebusiness to monitor its own activities• Provides transparency to enablethe firm to attract investment• Reduces the chance for fraud –not 100% successful!!
http://www.bized.co.ukCopyright 2006 – Biz/edProfit and Loss Account - Flow
http://www.bized.co.ukCopyright 2006 – Biz/edProfit and Loss Account• Shows the flow of sales and costsover a period• Shows the level of profit or lossmade• Shows what has been donewith the profit or loss
http://www.bized.co.ukCopyright 2006 – Biz/edProfit and Loss AccountConsolidated Profit & Loss Account for the year ended 2003 2002 2001Weeks 52 52 52Currency £ million £ million £ millionTurnover 7688.0 8340.0 9278.0Cost of sales -7263.0 -8291.0 -8757.0Gross Profit 425.0 49.0 521.0Operating Expenses -130.0 -137.0 -77.0Operating Profit 295.0 -88.0 444.0Other costs/income 95.0 166.0 -68.0Profit before interest and taxation 390.0 78.0 376.0Net interest receivable (payable) -255.0 -278.0 -226.0Profit on ordinary activities before taxation 135.0 -200.0 150.0Tax on profit on ordinary activities -50.0 -71.0 -69.0Profit on ordinary activities after taxation 85.0 -129.0 81.0Equity minority interests -13.0 -13.0 -14.0Profit for the financial period 72.0 -142.0 67.0Dividends 0.0 -193.0Retained profit 72.0 -142.0 -126.0Profit and LossAccount forBritish AirwaysplcSource: http://www.bized.ac.uk/cgi-bin/ratios/ratiodata.plTurnover –the revenueearned overthe yearGross Profit= turnover –cost of salesOperatingExpenses –the fixed costsOperating orNet Profit =Gross profit –operating costsCost of Sales– the variablecosts, howmuch it costthe firm toproduce whatit has sold –not to beconfused withsales revenue!Subtract othercosts andexpensesincurred to getprofit beforetaxSubtractinterestpayments/receipts to getprofit onordinaryactivitiesbefore taxSubtract taxdue to getprofit onordinaryactivitiesafter taxFinal section called‘appropriationaccount’ – showswhere theprofit/loss is goingDividend –the share ofthe profitreturned toshareholdersRetainedProfit – theamount keptback for futureinvestment,etc.
http://www.bized.co.ukCopyright 2006 – Biz/edSTATEMENT OF FINANCIAL- Snapshot
http://www.bized.co.ukCopyright 2006 – Biz/edSTATEMENT OF FINANCIAL• A snapshot of the firm’s positionat a point in time• Shows what a company owns (assets)and what it owes (liabilities)• Balance Sheet shows what assets acompany has (use of funds) and wherethe money came from to acquire thoseassets (source of funds)
http://www.bized.co.ukCopyright 2006 – Biz/edBalance Sheet – Part 1Consolidated Balance Sheet for the year ended 2003 2002 2001Weeks 52 52 52Currency £ million £ million £ millionFixed assetsIntangible Assets 164.0 105.0 60.0Tangible Assets 9487.0 10509.0 10662.0Investments 524.0 489.0 426.0Total Fixed Assets 10175.0 11103.0 11148.0Current assetsStock 87.0 109.0 170.0Debtors due within one year 986.0 1231.0 1444.0Short-term investments 1430.0 1155.0 865.0Cash at bank and in hand 222.0 64.0 71.0Total Current Assets 2725.0 2559.0 2550.0Fixed Assets –assets not usedup in productionor lasting longerthan one year –equipment,buildings,machinery, etc.Fixed assets canbe tangible –i.e. physicalitems orintangible – i.e.brand name,goodwill.Current Assets:assets that are usedup duringproduction andwhich are likely toyield cash in thecoming year – forexample, stock willbe sold and debtorsowing the businessmoney will pay up!
http://www.bized.co.ukCopyright 2006 – Biz/edSTATEMENT OF FINANCIAL– Part 2Creditors: Amounts falling due within one year -2904.0 -3201.0 -3308.0Net Current Assets (liabilities) -179.0 -642.0 -758.0Total assets less current liabilities 9996.0 10461.0 10390.0Creditors: Amounts falling due after more than one year -6553.0 -7097.0 -6901.0Provisions for liabilities and charges -1169.0 -1157.0 -1164.0Net assets 2274.0 2207.0 2325.0Capital and reservesCalled-up share capital 271.0 271.0 271.0Share premium 788.0 788.0 788.0Other reserves 270.0 270.0 290.0Profit and loss account 729.0 687.0 772.0Equit shareholders funds 2058.0 2016.0 2121.0Minority interests 216.0 191.0 204.0Total capital employed 2274.0 2207.0 2325.0Subtractedfrom theassets are themoney thecompanyowes tocreditors –suppliers forexampleAnd to thosewho are longerterm creditors– loans,mortgage onproperty etcThis leaves uswith ‘NetAssets’The funds toacquire theseassets must havecome fromsomewhere – thenext section tellsus where it camefrom.It can comefrom sharecapital andfrom retainedprofit (profitand lossaccount)The totalcapitalemployed mustbe the same asthe sum of thenet assets –hence the term‘balance’ sheet!
http://www.bized.co.ukCopyright 2006 – Biz/edSTATEMENT OF FINANCIAL• A guide to the structure of the assetsof a company• A guide to the level of gearing –the ratio of loan to share capital• Gives a guide as to the degree ofworking capital – the amountthe company has to be able to payits everyday debts (current assets –current liabilities)• Shows the total value of a firmat that moment in time