2.2.1 Accounting

Question 1

Define sales volume

Answer 1

The quantity of output sold in a given time period

Question 2

Sales revenue (total revenue)

Answer 2

The value of output sold by a business. Is calculated by price x quantity of output

Question 3

Short run cost

Answer 3

Where at least one factor of production is fixed and other costs are variable

Question 4

Long run

Answer 4

All cost factors can vary including fixed, e.g a landlord changing rent prices after a while.

Question 5

Fixed cost

Answer 5

These are costs which stay the same regardless of a change in level of output or sales

Question 6

Variable cost

Answer 6

Costs that change directly with the level of output or the sales.

Question 7

Total costs

Answer 7

The addition of fixed cost and variable costs. Calculated by variable cost + fixed cost

Question 8

Average cost/unit cost

Answer 8

Cost of unit per production. Calculated by total cost/output

Question 9

Profit

Answer 9

When the difference between revenue and total cost are positive . Profit = tr-tc

Question 10

Loss

Answer 10

When the difference between total revenue and total costs are negative. Calculated by tr- tc

Question 11

What’s the difference between sales vol and sales rev?

Answer 11

Sales revenue is the value of the output whereas sales vol is the quantity of output.

Question 12

What are the two ways profit can be calculated ?

Answer 12

Tr-Tc

Margin of safety x contribution per unit

Question 13

Define contribution

Answer 13

The difference between selling price and total variable cost. Calculated by selling price- variable cost

Question 14

Define total contribution

Answer 14

When more than one unit is sold the total contribution can be calculated. Calculated by either, TR-TVC
Or unit contribution x quantity of units sold

Question 15

In terms of contribution what is the third calculation for profit?

Answer 15

total contribution - fixed costs

Question 16

Margin of safety

Answer 16

The range of output between the break even and the current level of output, over which a profit is made. Calculated by the current output level-break even point

Question 17

Break even definition

Answer 17

When a business generates just enough revenue to cover its total cost

Question 18

The limitations of cash-flow forecasts

Answer 18

• some figures will be based on estimates
• variables are constantly changing and cash flow forecasts should be updated for them to be valid
• cff focus on one variable-cash. They do not consider other important variables, such as profitability or productivity

Question 19

The benefits of cash-flow forecasting

Answer 19

• to support an application for lending (perhaps as part of a business plan)
• to support the budgeting process
• to identify any potential cash flow crisis

Question 20

How to speed up cash inflows

Answer 20

• incentivise early repayment by giving customers a discount for paying early
• reduce trade credit given to customers
• Sell of stock at a discounted price to free up cash
• inject fresh capital into the business

Question 21

How could a business avoid bad cash flow

Answer 21

• a business should always plan to keep a minimum cash reserve in its bank account

Question 22

How to slow down cash flows

Answer 22

• delay repayments to suppliers
• increase trade credit agreements with suppliers
• cut costs, such as finding cheaper alternatives in areas such as training or advertising

Question 23

What’s the best way to make sure a business has a positive cash-flow

Answer 23

Invest time and effort into planning effective cash flow forecasts by research etc

Question 24

The causes of cash flow problems include:

Answer 24

• ovetrading
• allowing too much trade credit to customers
• poor credit control
• inaccurate cash-flow management
• unforeseen costs

Question 25

Strengths of break even analysis

Answer 25

- focuses entrepreneur on how long it will take before the business is profitable - MOS can show how much sales forecasts can prove over optimistic before loses incurred - help entrepreneur understand the level of risk involved in a start up - illustrates importance of minimising fixed costs - calls quick and east- good for quick estimates

Question 26

Limitations of be analysis

Answer 26

- unrealistic assumptions - sales unlikely to be the same as output - variable cost don’t stay the same - most business sell more than one product-harder to calc be - be should be seen as panning rather than a decision tool

Question 27

Budget definition

Answer 27

A budget is a financial plan for the future. An effective budget should drive many of the decisions taken across the functional areas of a business.

Question 28

What is the purpose of budgeting

Answer 28

To ensure efficiency in spending. Setting budgets allow

Question 29

Consumer trends

Answer 29

The habits and behaviours of people who purchase goods and services. They can include how people who purchase goods or services

Question 30

What’s the difference with a cash flow forecasts and a sales forecasts

Answer 30

A cash flow forecasts predicts the movement of cash in and out of a business whereas a sales forecasts only predicts the sales volume the business could generate. A cash flow forecasts can be used to encourage investment in a business but a sales forecast will allow the business to plan the amount of staff needed etc.

Question 31

Limitations of sales forecasting

Answer 31

- fluctuations in economic variables - the data used could be inaccurate which would lead to a inaccurate sales forecasts - volatile markets- some markets are more unpredictable than others - subjective to expert opinion - volatile consumers - human behaviour is often unpredictable

Question 32

What is the relationship between revenue , contribution and profit?

Answer 32

When revenue is generated into the business, its variable costs are deducted to give the contribution , this is then what covers the fixed costs and then remainder of revenue left is now your profits

Question 33

Why does contribution differ to profit?

Answer 33

This is because after paying off all variable costs, the contribution will then cover its fixed costs

Question 34

What is made at the break-even point? Profit or loss

Answer 34

Neither

Question 35

What does the break even chart show? (8)

Answer 35

-the value of revenue over the level of output The amount of profit made after break even The amount of revenue needed to cover the costs The relationship between fixed costs and variable costs as output rises The profit at a particular level of output The level of fixed costs

Question 36

What does a high margin of safety suggest ?

Answer 36

This suggests that the business would be able to make a profit even if they had slight a decrease in the sales revenue

Question 37

What does a small margin of safety suggests?

Answer 37

This suggests that if the business was to undergo a slight decrease in their sales revenue the business would potentially undergo a loss, they are therefore at higher risk of it

Question 38

Outline the uses of break even ananlysis

Answer 38

To asses whether a business idea is profitable and viable To assess the level of production To aid with the pricing of products in comparison to total costs To asses how much output must be sold in order to make a profit

Question 39

How could banks use break even analysis?

Answer 39

In order to issue bank loans, the bank would want to now that the business has the financial stability to cover this, due to this also being found in a business plan

Question 40

What would a decrease in variable costs result in concerning BE

Answer 40

Lowering it

Question 41

Benefits of break even analysis

Answer 41

- use to impart variances (e.g on pricing/costs etc) - simple and easy - useful guideline for decisions

Question 42

Output and stocks concerning limitations of break-even

Answer 42

Assumes that all output is sold, so output equals sales Not the case most of the time Stocks can be held in they are finished goods to cope with the changes in the demand Also times when firms can’t sell products and decide to stockpile in order to not lay off staff

Question 43

List the factors that affect sales forecasting

Answer 43

- actions of competitors - economic variables - consumer trends

Question 44

How do consumer trends affect sales forecasts

Answer 44

- seasonal variations : sales fluctuate dependent on the season and the business goods and services - fashion : esp in the clothing industry , consumers may change their minds on what is considered fashionable - long term variables : when consumer behaviours change over a longer period of time , could be due to ethical reasons for example

Question 45

How can economic variables affect sales forecasts ?

Answer 45

- economic growth : the of the economy will depend on the total sals made in the economy, e.g in a recession less sales are likely to be made - interest rates: if the cost of borrowing is increased, this will lead to more reward to spending than saving , meaning more consumers will be purchasing in the economy, thus increasing sales - inflation: if the value of money decreases then sales are likely to decrease - unemployment : if the level of unemployment increases, the amount of disposable income will relatively decrease - exchange rates: if the cost for purchasing is increased , consumers likely to purchase in their countries plus international trade will increase, leading to increased sales

Question 46

How can actions of competitor affect sales forecasts?

Answer 46

If the competitors change their prices for example this can have a ripple effect an alter the demand for goods for the business itself

Question 47

Why is sales forecasting important?

Answer 47

This is because the business ability to predict this will reduce uncertainty and increase ability to plan more effectively

Question 48

What approaches may a business use to accurately carry out a sales forecasts?

Answer 48

- market research | - time series analysis

Question 49

What is time series analysis

Answer 49

Predicting future sales based on past sales figures, taking into account the trend and seasonal fluctuations