http://www.bized.co.uk Copyright 2006 – Biz/ed 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
http://www.bized.co.uk Copyright 2006 – Biz/ed 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
http://www.bized.co.uk Copyright 2006 – Biz/ed 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
http://www.bized.co.uk Copyright 2006 – Biz/ed 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
http://www.bized.co.uk Copyright 2006 – Biz/ed Break Even
http://www.bized.co.uk Copyright 2006 – Biz/ed 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
http://www.bized.co.uk Copyright 2006 – Biz/ed Purpose of Accounts
http://www.bized.co.uk Copyright 2006 – Biz/ed 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!!
http://www.bized.co.uk Copyright 2006 – Biz/ed Profit and Loss Account - Flow
http://www.bized.co.uk Copyright 2006 – Biz/ed 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
http://www.bized.co.uk Copyright 2006 – Biz/ed Profit and Loss Account Consolidated Profit & Loss Account for the year ended200320022001 Weeks52 Currency £ million Turnover7688.08340.09278.0 Cost of sales-7263.0-8291.0-8757.0 Gross Profit425.049.0521.0 Operating Expenses-130.0-137.0-77.0 Operating Profit295.0-88.0444.0 Other costs/income95.0166.0-68.0 Profit before interest and taxation390.078.0376.0 Net interest receivable (payable)-255.0-278.0-226.0 Profit on ordinary activities before taxation135.0-200.0150.0 Tax on profit on ordinary activities-50.0-71.0-69.0 Profit on ordinary activities after taxation85.0-129.081.0 Equity minority interests-13.0 -14.0 Profit for the financial period72.0-142.067.0 Dividends0.0-193.0 Retained profit72.0-142.0-126.0 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/recei pts 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.
http://www.bized.co.uk Copyright 2006 – Biz/ed 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)
http://www.bized.co.uk Copyright 2006 – Biz/ed Balance Sheet – Part 1 Consolidated Balance Sheet for the year ended200320022001 Weeks52 Currency £ million Fixed assets Intangible Assets164.0105.060.0 Tangible Assets9487.010509.010662.0 Investments524.0489.0426.0 Total Fixed Assets10175.011103.011148.0 Current assets Stock87.0109.0170.0 Debtors due within one year986.01231.01444.0 Short-term investments1430.01155.0865.0 Cash at bank and in hand222.064.071.0 Total Current Assets2725.02559.02550.0 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!
http://www.bized.co.uk Copyright 2006 – Biz/ed 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 liabilities9996.010461.010390.0 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 assets2274.02207.02325.0 Capital and reserves Called-up share capital271.0 Share premium788.0 Other reserves270.0 290.0 Profit and loss account729.0687.0772.0 Equit shareholders' funds2058.02016.02121.0 Minority interests216.0191.0204.0 Total capital employed2274.02207.02325.0 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!
http://www.bized.co.uk Copyright 2006 – Biz/ed 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