Chapter #8 - Cash Flow, Break-Even, and Income Statement

Question 1

Break-even point

Answer 1

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

Question 2

What is a cash flow forecast?

Answer 2

A prediction of the amount of cash that flows into and out of an enterprise.

Question 3

Cash inflow

Answer 3

Any cash that comes into the enterprise

Question 4

Cash outflow

Answer 4

Any cash that goes out of the enterprise

Question 5

Surplus

Answer 5

On a cash flow forecast, if the cash that comes into the enterprise is greater than the cash that goes out, there is a surplus of cash.

Question 6

Deficit

Answer 6

On a cash flow forecast, if the cash that comes into the enterprise is less than the energy that goes out, there is a deficit of cash.

Question 7

Profit

Answer 7

When the total income of an enterprise is greater than the total expenditure of an enterprise.

Question 8

What is the purpose of
cash flow forcasting?

Answer 8

• To identify if enterprise will have a surplus or deficit (to help plan to resolve the situation if needed)
• To help the enterprise plan for the future (e.g. can help to see if enterprise will have enough cash to purchase a new piece of equipment)
• To set a budget for individual departments/functions of an enterprise
• To create targets for staff and departments (forecast is devised using assumptions that certain n. of products will be sold and this provides targets for staff to work towards.)

Question 9

Why is it important for an enterprise to keep accurate financial records?

Answer 9

• If not, owners/shareholders will not understand how much profit or loss has been made from their investment and could result in unhappiness and conflicts as they cannot work out how much dividend they should be paid out of the profits.
• If not, may make the work judgements about how well the enterprise is preforming. This could lead to bad decisions being made and result in a deficit.
• If not, they may not be meeting legal obligations (penalized)
• If not, suppliers may not offer trade credit

Question 10

Why is it important to keep an income statement? (state at least 3 examples)

Answer 10

• Gives shareholders/managers a clear understanding of how much profit/loss an enterprise is doing and why. Helps shareholders understand how much dividend they need to be paid from the profit.
• Allows shareholders/managers to make judgements about how well enterprise is doing compared to similar businesses. Helps potrential investors decide if they should invest.
• Allows lenders make judgment on weathe enterprise is making sufficient profit to pay back loans (as well as using cash flow forecast)
• Meets legal obligations to report finances annually. Government wants to know amount of profit to work out how much tax should be payed.
• Suppliers want to know a firm is profitable to be confident supplies will continued to be bought and bills will be paid.

Question 11

Whatr does a cah flow forecast predict and not predict?

Answer 11

The cash flow can predict how much money is in the enterprise’s bank account it does**not **predict the profits of the enterprise.

Question 12

Loss

Answer 12

When the total income of the enterprise is less than the total expenditure of an the enterprise

Question 13

Revenue

Answer 13

All the money that comes into the enterprise by selling goods or services.

Question 14

Fixed costs

Answer 14

Costs that stay the same no matter the activity of the enterprise. If the enterprise manufacture more/less products, these costs do not change.

Question 15

Examples of fixed costs

Answer 15

• rent
• business taxes
• interest on loans
• staff (that are not directly linked to the producton of the enterprise)
• insurence

Question 16

Variable costs

Answer 16

Costs that increase and decrease with the activity of the enterprise. If the enterprise manufacture more/less products, these costs will change.

Question 17

Examples of variable costs

Answer 17

• materials
• labour
• energy

Question 18

Total costs

Answer 18

The total of the variable costs + fixed costs

Question 19

How do you calculate the total costs?

Answer 19

Fixed costs + Variable costs = Total costs

Question 20

Calculation for contribution per unit

Answer 20

variable costs per unit - sale price per unit

Question 21

Cost

Answer 21

Cash that an enterprise spends to produce a good or service.

Question 22

Calculation for profit/loss

Answer 22

revenue - expenditure

Question 23

Expenditure

Answer 23

All the money that goes out of an enterprise

Question 24

What is an income statement?

Answer 24

A record of the finances of an enterprise over a specific period of tim. It is produced anually to provide info. to stakeholders of the enterprise, butmanagers of business may produce it more regularly for their own analyses. It shows the profit (or surplus for charities) or loss of an enetrprise.

Question 25

How does an income statement help owners/stakeholders?

Answer 25

• Stakeholders, like investors, managers, and owners, use income statements to understand how the business is performing financially.
• It helps them see if the business is making a profit or losing money, which is crucial information for decision-making.

Question 26

How does an income statement help lenders?

Answer 26

It allows lenders to make judgements on weather or not the enterprise makes sufficient profits to pay back loans (done in conjunction with cash flow forecast.

Question 27

How does an income statement help suppliers?

Answer 27

Suppliesr will want to know that a firm is profitable so that they are confident that suppliers will continue to be purchased and bills will be paid.

Question 28

Why is making an income statement important for an enterprise?

Answer 28

Because it provides useful information for variouse stakehlders of an enterprise.

Question 29

Gross profit calculation

Answer 29

revenue - cost of sales = gross profit

Question 30

Net profit calculation

Answer 30

gross profit - all other expenditures (ofetn called overheads) that are not directly linked to generating sales.

Question 31

Break-even calculation

Answer 31

Fixed costs ÷ (sales price per unit - variable costs per unit)

= the number of units you need to sell to break-even

Question 32

Overheads calculation

Answer 32

net profit - all other expenditure

Question 33

How can an enterprise improve profit figures?

Answer 33

• Increase sales revenue by either selling more or selling at a higher price.
• Reduce cost of sales
• Reduce other expenditures

Question 34

What does the net profit tell you?

Answer 34

Net profit tells you how much money
the business made after covering all
its costs, including operating expenses
and taxes.