LO4

• Total Revenue= Volume (quantity sold) X selling price
• Profit= total revenue- total costs
• Total Costs= fixed costs+ variable costs
• Breakeven= Fixed costs / Selling price- variable cost per unit
• Opportunity cost- a benefit, profit or other advantage that must be given up to acquire or achieve something else
• Costs- the expenses a business incurs when producing and supplying products and services to customers
• Depreciation- the cost of an asset consumed over its useful life e.g. wear and tear
• Fixed costs- these are costs that have to be paid even if the business produces or sells nothing. E.g.

  • Rent
  • Office salaries
  • Advertising (budget)
  • Insurance
  • Depreciation
• Variable Costs - costs that vary directly with the level of output. For example if output doubles the variable cost doubles etc.

  Examples or variable costs are;

  • Direct labour (cost of paying employee involved in production)
  • Raw materials
  • Packaging costs
  • Royalties paid
• Revenue- the money earned the business earns over a period of time, the total revenue is based on both the level of output and the selling price per unit. For example

  • cash sales
  • credit sales
  • interest
• Cash inflow - include all receipts of money. E.g.

  • cash received from selling products/ services
  • loan receipts
  • commission received
  • rent received
• Cash outflows- include all payments made by the business. E.g.

  • wages
  • insurance
  • payments to suppliers
  • loan interest
• Profits are the main objectives for most businesses as it is the reward a business owner or investor gains from risk taking. Businesses use profit to;

  • reward owners in the form of drawings or dividends
  • invest for future growth
  • save for a contingency
• Net cash flow- the difference between money coming into a business and money going out of a business
• Profit- the surplus left over from revenue after paying total costs
• Cash flow- the movement of money into and out of a business
• Loss- the deficit of revenue after paying total costs
• Insolvent- when a business is unable to pay its debts
• Breakeven- The point at which the level of sales allows total costs to equal total revenue. At this point a business makes no profit or loss.
• Break even is used by businesses to

  • calculate the level of sales and unit price of each item needed to cover total costs
  • see how changes in sales or costs affect profits
• Margin of safety- the amount a business sells in excess of its break-even point

  Margin of safety(in units)= Actual output in units- break even output in units
• Income statement- a financial statement that shows the revenue and expenses a business has received and paid over a period of time, it will show the profit the business has made during this time
• Gross profit= revenue - cost of sales
• Cost of sales- total amount the business has paid to create or make available a product or service that has been sold
• Net profit= gross profit- expenses
• Assets- resources owned by a business
• Non- current assets = acquired for use within the business and are likely to be used for a considerable amount of time. E.g. motor vehicles, premises, machinery
• Current assets= part of a businesses operating cycle and are likely to be converted into cash within one year. There are five main categories

  • cash in the bank
  • cash in hand (or stored on the business premises)
  • trade receivables (debtors, people or organisations that owe money to the business)
  • inventory (stock)
  • prepayments (where the business has paid in advance for an item e.g. rent)
• Liabilities- represent the debts owed by an organisation.

  Current liabilities- amounts falling due within one year that arise through day-to-day trading. E.g. bank overdraft, trade payables

  Non- current liabilities- amounts falling due after one year, sources of long-term borrowing and exist for more than 12 months. E.g. long- term bank loan, mortgages
• Equity- describe how much a business is worth, represents how much the owners have invested in the business
• Cash flow forecast- a management accounting report that outlines predicted future cash inflows and outflows per month over a given period of time. Made up of three sections

  • recipients- any money that a business expects to receive
  • payments- any money that a business expects to spend
  • net cash flow- the difference between recipients and payments, gives an indication of how much money is remaining at the end of each month
• Cash flow statement-financial accounting that shows the actual cash inflows and outflows for a business over the previous 12 months