Chapter #8 - Cash Flow, Break-Even, and Income Statement Flashcards
Break-even point
The point at which income from sales will cover all the enterprise’s costs.
What is a cash flow forecast?
A prediction of the amount of cash that flows into and out of an enterprise.
Cash inflow
Any cash that comes into the enterprise
Cash outflow
Any cash that goes out of the enterprise
Surplus
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.
Deficit
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.
Profit
When the total income of an enterprise is greater than the total expenditure of an enterprise.
What is the purpose of
cash flow forcasting?
- 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.)
Why is it important for an enterprise to keep accurate financial records?
- 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
Why is it important to keep an income statement? (state at least 3 examples)
- 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.
Whatr does a cah flow forecast predict and not predict?
The cash flow can predict how much money is in the enterprise’s bank account it does**not **predict the profits of the enterprise.
Loss
When the total income of the enterprise is less than the total expenditure of an the enterprise
Revenue
All the money that comes into the enterprise by selling goods or services.
Fixed costs
Costs that stay the same no matter the activity of the enterprise. If the enterprise manufacture more/less products, these costs do not change.
Examples of fixed costs
- rent
- business taxes
- interest on loans
- staff (that are not directly linked to the producton of the enterprise)
- insurence
Variable costs
Costs that increase and decrease with the activity of the enterprise. If the enterprise manufacture more/less products, these costs will change.
Examples of variable costs
- materials
- labour
- energy
Total costs
The total of the variable costs + fixed costs
How do you calculate the total costs?
Fixed costs + Variable costs = Total costs
Calculation for contribution per unit
variable costs per unit - sale price per unit
Cost
Cash that an enterprise spends to produce a good or service.
Calculation for profit/loss
revenue - expenditure
Expenditure
All the money that goes out of an enterprise
What is an income statement?
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.
How does an income statement help owners/stakeholders?
- 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.
How does an income statement help lenders?
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.
How does an income statement help suppliers?
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.
Why is making an income statement important for an enterprise?
Because it provides useful information for variouse stakehlders of an enterprise.
Gross profit calculation
revenue - cost of sales = gross profit
Net profit calculation
gross profit - all other expenditures (ofetn called overheads) that are not directly linked to generating sales.
Break-even calculation
Fixed costs ÷ (sales price per unit - variable costs per unit)
= the number of units you need to sell to break-even
Overheads calculation
net profit - all other expenditure
How can an enterprise improve profit figures?
- Increase sales revenue by either selling more or selling at a higher price.
- Reduce cost of sales
- Reduce other expenditures
What does the net profit tell you?
Net profit tells you how much money
the business made after covering all
its costs, including operating expenses
and taxes.
