chapter 8

Question 1

what is the break even point?

Answer 1

the point at which income from sales will cover all the enterprise’s costs

Question 2

what is the purpose of a cash flow forecast?

Answer 2

to accurately predict the amount of cash that flows into and out of the enterprise in the planning stages of an enterprise

Question 3

why is it important to know the break even point?

Answer 3

to know how many units of product/service the enterprise will actually have to sell in order to paywall costs

Question 4

what is the income statement?

Answer 4

the key record of a business, because once the business is running it needs to keep records to manage its finances

financial records must be true and accurate

by knowing what’s happening with costs, revenue, and cash flow, entrepreneurs should be better placed to make good decisions to make the business a success

Question 5

what is cash inflow?

Answer 5

any cash that goes INTO the enterprise

Question 6

what is cash outflow?

Answer 6

any cash that goes OUT of the enterprise

Question 7

what is a surplus?

Answer 7

on a cash flow forecast, if the cash that comes into the enterprise is greater than what goes out there is a surplus

this is good

Question 8

what is a deficit?

Answer 8

on a cash flow forecast, if the cash that comes into the enterprise is less than what goes out there is a deficit

this is bad

Question 9

what is a profit?

Answer 9

when the total income of the enterprise is greater than the total expenditure of the enterprise

this is good, this is what the enterprise aims for

Question 10

what does a cash flow do?

Answer 10

uses information about all the cash that comes into an enterprise and all that goes out

it predicts what might happen in its short term financial future

Question 11

what are the reasons the enterprise would want to predict its short term financial future?

Answer 11

• to identify if the enterprise will have a SURPLUS or DEFICIT of cash
• to help the enterprise work out when there will be enough cash in the enterprise to buy new equipment
• to set budgets for departments/functions of the enterprise
• to create targets for staff and departments like performance targets

Question 12

what is loss?

Answer 12

when the total income of the enterprise is LESS than its total expenditure, deficit, basically

Question 13

how do you calculate the break even point?

Answer 13

you will need to know fixed costs, sales price per unit, variable costs per unit

fixed costs/(sales prices per unit - variable costs per unit)

this will give the number of units needing to be sold to break even

Question 14

what is revenue?

Answer 14

the money that comes into he enterprise from selling goods or services

Question 15

what are fixed costs?

Answer 15

costs that stay the same no matter what

• rent
• business taxes
• interest on loans
• staff
• insurance

Question 16

what are variable costs?

Answer 16

the increase/decrease depending on the activities of the enterprise

• materials
• labour
• energy

Question 17

what are total costs?

Answer 17

all the costs of an enterprise
fixed costs + variable costs = total costs

Question 18

what is contribution?

Answer 18

first part of the calculation to work out break even point

contribution per unit = variable costs per unit - sale price per unit

Question 19

what is cost?

Answer 19

cash that an enterprise spends to produce its goods and services

Question 20

what is expenditure?

Answer 20

all the money that goes OUT of an enterprise

Question 21

what is an income statement?

Answer 21

a record of the finances of an enterprise over a specific period of time. it is produced annually to provide information to stakeholders of the enterprise, but managers within the business may produce it more regularly for their own analyses

shows profit or loss of an enterprise

revenue - expenditure = profit/loss

Question 22

what info does the income statement provide for stakeholders?

Answer 22

• gives owners/shareholders an understanding of how much profit/loss had been made from their investment
• allows owners/shareholders and managers to make judgements about how well the enterprise is performing against other similar enterprises
• allows leaders to make judgments on whether the enterprise makes enough profit to pay back loans of not
• meets legal obligations of certain types of enterprises where they are required to report their finances annually
• suppliers will want to know a firm is profitable so they are confident that supplies will continue to be purchased and bills will get paid

Question 23

what is gross profit?

Answer 23

gross profit is revenue MINUS the cost of sales from this figure you can work out how much profit is being made from each unit of currency being spent to make the product/service

Question 24

what is the cost of sales?

Answer 24

the costs that are directly linked to generating SALES such as raw materials and the labour of those directly involved in production

Question 25

what is net profit?

Answer 25

gross profit minus all other expenditures of the enterprise (called overheads, often) that are not directly linked to generating sales

Question 26

what are overheads?

Answer 26

net profit minus all other expenditure

Question 27

what does the net profit show us?

Answer 27

what impact all other expenditure has on the profits of the enterprise, and is also the figure that shareholders are most interested in because it’s what their share is paid from

Question 28

how can a enterprise improve their profit figures?

Answer 28

• increase sales revenue by either selling more or selling at a higher price
• reducing sales costs
• reducing other expenditure (ovefheads)