Accounting for E&BI Flashcards
Profit
Measures the value that an economic activity generates
Revenues
Value of resources obtained from customers in exchange of products and/or services of the organisation
Expenses
Value of resources that the organisation consumes to generate revenues
For profit organisations
Contribute to the wealth of society if profits are larger than expenses. If they consistently generate losses - they fade away.
Non-profit organisations
Serve people who do not have the recourses to pay for the products and services or pursue a mission where profit has little, if any, relevance.
Rely on donations or public sources.
Opportunity cost
Value of the alternative you do not pursue in order to pursue the one you choose
Contribution margin = gross margin
Money left over from sales after paying all variable expenses associated with producing a product.
Price per unit -minus- Variable cost per unit.
Cost behaviour
Attempt to understand how operating costs change in relation to a change in an organization’s level of activity.
Fixed costs
Happen no matter how many products are sold
Variable costs
Change with the level of activity
Semi-variable arba mixed-costs
Jei pasikeičia būdas per laiką
Relevant range
Describes the parameters of production or activity within which a company maintains the same fixed costs.
Step costs, also called stair-step costs
Costs that do not change in direct proportion to increasing levels of activity.
Discretionary costs
Avoidable costs
Committed costs
Costs that cannot be altered in the short run.
Regression
Kaip apskaičiuoti Total contribution margin?
Revenues - variable costs
Kaip apskaičiuoti contribution margin per unit
Price per unit- variable costs per unit
Kaip apskaičiuoti contribution margin ration? (%)
(revenues per unit - variable costs)/revenue = (price per unit - variable costs per unit) / price per unit
What does total contribution margin tell you
What the company generates before having to pay the fixed costs
What does total contribution margin tell you on a per unit basis
How much money a company adds to its profits each time it sells a unit
What is the dream of every business person (but it’s rare)
High CM and low fixed costs
What companies generaly are high contibution margin industries?
PVZ: movie theaters, hotels, utilities, airlines
What do high fixed costs force the companies to do?
Look for high volume
Higher fixed costs are associated with what kind of business models?
Riskier
How do we get operating leverage?
Total fixed costs / total costs
Operating leverage
how much a company’s profits change when its sales change
what does high operating leverage mean?
A company has high fixed costs, so when sales go up, profits rise fast. But if sales drop, losses can be big.
what does low operating leverage mean?
A company has more variable costs, so profits grow more slowly with sales, but losses are smaller when sales fall.
Break even point
Number of units that need to be sold to have 0 profit
or
how much revenues to generate to have no loses
How to calculate break even point
1)Number of units that need to be sold to have 0 profit
VADINASI: break even point in number of units sold = fixed costs / CM per unit
or
2) how much revenues to generate to have no loses
2 VARIANTAI:
2.1) number of units at the break even point * sales price per unit
2.2) use CM ration:
break even point in euros sold= fixed costs / CM ratio (%)
Break even point chart
Vertical axis - money
Horizontal - number of units
Costs line starts on the vertical axis at the level of fixed costs and goes up at the number of units because of the variable costs.
Sales line starts at the origin and goes up at the number of units
Intersection - break even point (no profits, no loses)
How to assess how difficult reaching break even point is?
1) Compare this target with the production capacity of the business or the size of the market:
–> If the break even occurs at or near the capacity ORRRR if a large market share needs to be captured –> the strategy is called into question
2) Changing the values of the equation variables aka “sensitivity analysis” or “what if analysis”
It looks at the change in the break even point when fixed costs, variable costs and prices change (neelaboratino daugiau)
Accounting
Accounting is the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information.
What did Charlie Munger say
“You have to know accounting. It’s the language of practical business life.”
What did Peter Krueger say
“Companies run by engineers don’t make money, but companies run by accountants don’t make anything at all.”
What is strategy?
A series of actions that help achieve one or more goals.
What does Managerial Accounting inform?
Managers’ decisions to select strategies that are most
effective and efficient to reach goals.
What is Financial Accounting
An information-processing system that generates general-purpose financial reports:
» The main focus is on external users (investors, lenders, analysts, regulators)
» Highly aggregated reports
» Governed by law and generally accepted accounting principles
» Typically prepared once a quarter or year
» Mostly based on historical cost (recording past transactions)
What is Managerial Accounting?
An information-processing system that provides managers and other employees with financial reporting information and control to assist in the formulation and implementation of an organization’s strategy.
- The main focus is on internal users (managers, employees)
- Reports are based on information demand of information users
- Not constrained by external reporting rules
- Typically prepared frequently (daily, weekly, monthly, quarterly)
- Mostly based on estimated cost (oriented at the current or future decisions)