Chapter 8 - cash flow, break-even and income statement Flashcards
How will an enterprise predict the amount of money going in and out of the enterprise?
by creating a cash flow forecast
Define break-even point
the point at which income from sales will cover all the enterprise’s costs
What information is used to create a cash flow forecast?
cash inflow and cash outflow
Why might an enterprise create a cash flow forecast?
- 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
What does a cash flow forecast not predict?
profit is not predicted
Define loss
when the total income of the enterprise is less than the total expenditure of the enterprise
How can the break-even point of an enterprise be calculated when having the key information?
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
Describe revenue
this is all the money that comes into the enterprise from selling goods or services
Describe fixed costs
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
What are some examples of fixed costs?
- rent
- business taxes
- interest on loans
- staff (not directly linked to the production of the enterprise)
- insurance
Describe variable costs
costs that increase and decrease with the activity of the enterprise. if the enterprise manufacture more products or fewer products, these costs change
What are some examples of variable costs
- materials
- labor (employees directly linked to the production of the enterprise)
- energy
Describe total costs
these are all the costs of an enterprise when producing its goods or services
What is the equation for total costs?
fixed costs + variable costs = fixed costs
What are the 4 informations needed to calculate the break-even point?
- revenue
- fixed costs
- variable costs
- total costs
Define contributions
part of the calculation to work out the break-even point: contribution per unit = variable costs per unit - sale price per unit
Define cost
cash that an enterprise spends to produce its goods or services
What is an income statement?
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
What is the equation for income statement?
revenue - expenditure = profit or loss
Define expenditure
all the money that goes out of an enterprise
Why might an income statement be useful?
- 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
What is the equation for gross profit?
revenue - cost of sales
What is made clear when gross profit is calculated?
how much profit is being made from each unit or currency being spent to make the product / service
What is the equation for net profit?
gross profit - expenditure
What would an enterprise have to do to improve profit figures?
- increase sales revenue
- reduce cost of sales
- reduce other expenditure
Define cost of sales
the costs that are directly linked to generating sales, such as raw materials and the labor of those directly involved in production
Define overheads
net profit - expenditure
