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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 2003 2002 2001

Dividend
Final
Profit
Cost section
Turnover
Operating
Subtractofand –
Sales
other
Loss
–or
Gross
Operating
Subtract Profit
Weeks 52 52 52

Currency £ million £ million £ million Subtract

the
calledshare tax
of=
Account
the
Net
–
costs
= therevenue
Profit
Expenses
interest and
variable
turnover for ––
Turnover 7688.0 8340.0 9278.0
due to get
‘appropriation
the profit
Cost of sales -7263.0 -8291.0 -8757.0
British
earned
Gross
costs,
expenses
cost
the ofprofit
how
Airways
over
payments/recei
fixed sales
–costs
–
Gross Profit 425.0 49.0 521.0 profit
account’
returned on shows
to
plc
the
operating
much
incurred
pts
where year
to it
get
the cost
tocosts
get
Operating Expenses -130.0 -137.0 -77.0
ordinary
shareholders
Operating Profit

Other costs/income
295.0

95.0
-88.0

166.0
444.0

-68.0
the
profitfirmbefore
profit/loss
activitiesontois going
Source: http://www.bized.ac.uk/cgi-
profit
bin/ratios/ratiodata.pl

produce
tax
ordinary
Retained what
Profit before interest and taxation 390.0 78.0 376.0
after tax
Net interest receivable (payable)

Profit on ordinary activities before taxation

-255.0

135.0
-278.0

-200.0
-226.0

150.0
it has sold
activities
Profit – the –
Tax on profit on ordinary activities -50.0 -71.0 -69.0 not
before
amountto be tax
kept
Profit on ordinary activities after taxation

Equity minority interests

85.0

-13.0
-129.0

-13.0
81.0

-14.0
confused
back for future with
Profit for the financial period 72.0 -142.0 67.0 sales revenue!
investment,
Dividends 0.0 -193.0

Retained profit 72.0 -142.0 -126.0 etc.

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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 2003 2002 2001

Weeks 52 52 52 Current
Fixedassets
Fixed Assets:
Assets can–
Currency £ million £ million £ million assets
assets
be that
notare
tangible used
used
–
Fixed assets
up during
Intangible Assets 164.0 105.0 60.0 up
i.e. in
physical
production
production and
Tangible Assets 9487.0 10509.0 10662.0 or
items
lasting
which or likely
are longer
to
Investments 524.0 489.0 426.0
than
intangible
oneinyear
yield cash – i.e.
the –
coming year – for
Total Fixed Assets 10175.0 11103.0 11148.0

Current assets
equipment,
brand name,
Stock 87.0 109.0 170.0
example,
buildings,
goodwill. stock will
be sold and debtors
Debtors due within one year 986.0 1231.0 1444.0
machinery, etc.
owing the business
Short-term investments 1430.0 1155.0 865.0

Cash at bank and in hand 222.0 64.0 71.0 money will pay up!
Total Current Assets 2725.0 2559.0 2550.0

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Balance Sheet – Part 2

Creditors: Amounts falling due within one year -2904.0 -3201.0 -3308.0
Subtracted
The funds to
Net Current Assets (liabilities) -179.0 -642.0 -758.0 It
And
The cantotal
to come
thoseus
from
acquire
This the
these
leaves
Total assets less current liabilities 9996.0 10461.0 10390.0
from
who
capital
assets share
aremustlonger
have
Creditors: Amounts falling due after more than one year -6553.0 -7097.0 -6901.0
assets
with are
‘Net the
capital
term
employed
come and
creditors
from must
money
Assets’ the
Provisions for liabilities and charges -1169.0 -1157.0 -1164.0

Net assets 2274.0 2207.0 2325.0

from theretained
somewhere
–company
be loans, same– theas
Capital and reserves
next
profit section
(profittells
Called-up share capital 271.0 271.0 271.0 mortgage
the
owes sum to of on
the
us where it came
and loss etc
property
net
creditors ––
assets
Share premium 788.0 788.0 788.0

from.
Other reserves 270.0 270.0 290.0
account)
hence the for
term
Profit and loss account 729.0 687.0 772.0
suppliers
Equit shareholders' funds 2058.0 2016.0 2121.0
‘balance’
example sheet!
Minority interests 216.0 191.0 204.0

Total capital employed 2274.0 2207.0 2325.0

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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
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