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

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 = TC n – TC n-1

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 = TC n – TC n-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

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

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

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!!

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

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 Account Profit and Loss Account for British Airways plc Source: 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. Consolidated 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

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)‏

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 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! 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

Balance Sheet – Part 2 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! 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

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

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