Chapter 8 - cash flow, break-even and income statement

Question 1

How will an enterprise predict the amount of money going in and out of the enterprise?

Answer 1

by creating a cash flow forecast

Question 2

Define break-even point

Answer 2

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

Question 3

What information is used to create a cash flow forecast?

Answer 3

cash inflow and cash outflow

Question 4

Why might an enterprise create a cash flow forecast?

Answer 4

• identify if the enterprise will have more or less than expected cash inflow so it can create plans to resolve the situation
• to help enterprise plan for the future
• to set budgets
• to set staff and department goals depending on the cash that is expected to come into the enterprise

Question 5

What does a cash flow forecast not predict?

Answer 5

profit is not predicted

Question 6

Define loss

Answer 6

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

Question 7

How can the break-even point of an enterprise be calculated when having the key information?

Answer 7

fixed costs / (sales price per unit - variable costs per unit)
this will give the number of units the enterprise needs to sell in order to break even

Question 8

Describe revenue

Answer 8

this is all the money that comes into the enterprise from selling goods or services

Question 9

Describe fixed costs

Answer 9

these are costs that stay the same no matter the activity of the enterprise. if the enterprise manufactures more products or fewer products, these costs do not change

Question 10

What are some examples of fixed costs?

Answer 10

• rent
• business taxes
• interest on loans
• staff (not directly linked to the production of the enterprise)
• insurance

Question 11

Describe variable costs

Answer 11

costs that increase and decrease with the activity of the enterprise. if the enterprise manufacture more products or fewer products, these costs change

Question 12

What are some examples of variable costs

Answer 12

• materials
• labor (employees directly linked to the production of the enterprise)
• energy

Question 13

Describe total costs

Answer 13

these are all the costs of an enterprise when producing its goods or services

Question 14

What is the equation for total costs?

Answer 14

fixed costs + variable costs = fixed costs

Question 15

What are the 4 informations needed to calculate the break-even point?

Answer 15

• revenue
• fixed costs
• variable costs
• total costs

Question 16

Define contributions

Answer 16

part of the calculation to work out the break-even point: contribution per unit = variable costs per unit - sale price per unit

Question 17

Define cost

Answer 17

cash that an enterprise spends to produce its goods or services

Question 18

What is an income statement?

Answer 18

a record of finances of an enterprise over a specific period of time. it is produced annually, but managers within the business may produce it more often for their own analysis. It shows profit or loss of an enterprise

Question 19

What is the equation for income statement?

Answer 19

revenue - expenditure = profit or loss

Question 20

Define expenditure

Answer 20

all the money that goes out of an enterprise

Question 21

Why might an income statement be useful?

Answer 21

• gives stakeholders clear understanding of profit or loss of investments
• help assess the enterprise
• allows lenders to assess the enterprise
• allows to see if the enterprise is meeting legal obligations
• helps suppliers assess enterprise

Question 22

What is the equation for gross profit?

Answer 22

revenue - cost of sales

Question 23

What is made clear when gross profit is calculated?

Answer 23

how much profit is being made from each unit or currency being spent to make the product / service

Question 24

What is the equation for net profit?

Answer 24

gross profit - expenditure

Question 25

What would an enterprise have to do to improve profit figures?

Answer 25

• increase sales revenue
• reduce cost of sales
• reduce other expenditure

Question 26

Define cost of sales

Answer 26

the costs that are directly linked to generating sales, such as raw materials and the labor of those directly involved in production

Question 27

Define overheads

Answer 27

net profit - expenditure