Finance Flashcards
What are fixed costs
Costs that don’t change with output
What are variable costs
Costs that increase with output
Examples of fixed costs
Rent
Salary
Insurance
Examples of variable costs
Raw materials
Wage
What is break-even output
Where a firm doesnt make a loss or a profit. It is the point at which costs are covered
Fixed cost line
Always horizontal as it does not change
Total revenue line
Begins at 0 and is the line with the highest gradient
Total costs line
Starts at the fixed costs and rises with variable cost
Variable cost line
Starts at 0 and rises when every unit is sold
Margin of safety
The difference between current level output and break even output
Advantages of break even analysis
Its easy to work out
Can help to persuade bank to give it a loan
It allows a business to predict how changes in sale affect cost and profits
Disadvantages of break even analysis
Assumes all products are sold without any waste
It can be complicated if more than one product is involved
Order of increasing liquidity
Stock
Debtors
Cash
Current Assests
Are assets a business is expected to be sold and used in the next year
Current Liabilities
Are costs that a business has to pay in a one year window
Net current assets equation
Current Assets - Current Liabilities
Share Capital
Momey put into the business when shares were originally issued. Firms can raise capital by issuing new shares
Retained Profits and Reserves
Are all the profit that the firm has mader over the years and decided to keep instead of paying dividends
What are retained profits and reserves used for
To finance future investments
To protect the firm against future problems
Long-Term Liabilities
Are payments that will take more than a year to repay
Capital Employed Equation
Shareholder’s Funds + Long-Term Liabilities. Is equal to net assets
What Stakeholders would be interested in financial analysis
Existing Shareholders Potential Stakeholders Employees The Government Suppliers
What can statements of financial positions be used for
Making Business decisions
How to improve profit and reduce costs
Gross Profit Margin Formula
Gross Profit/Revenue x 100
Net Profit Margin Formula
Net Profit/Revenue x 100
