finance - financial terms and calculations

Question 1

What are costs?

Answer 1

The expenses incurred by a business.

Question 2

What are fixed costs?

Answer 2

Costs which do not change with output.

Question 3

What are variable costs?

Answer 3

Costs which change with output.

Question 4

What is the formula for total costs?

Answer 4

total costs = fixed costs + variable costs

Question 5

What is the formula for revenue?

Answer 5

revenue = selling price x quantity

Question 6

What is the formula which links revenue, cost and profit?

Answer 6

profit = revenue - costs

Question 7

What is profit?

Answer 7

Money a company earns after costs have been deducted.

Question 8

What is loss?

Answer 8

When sales revenue is not enough to cover costs.

Question 9

What is an investment project?

Answer 9

When a business spemds funds on long-term activities aimed to increase future revenue.

Question 10

Give 2 examples of investment projects.

Answer 10

• Machinery
• Buildings
• Vehicles

Question 11

What does ARR stand for?

Answer 11

Average rate of return.

Question 12

Why do businesses calculate ARR?

Answer 12

To see if an investment is worthwhile/to compare investments.

Question 13

What is the formula for ARR?

Answer 13

ARR (%) = (average annual profit/initial investment) x 100

Question 14

What is break-even output?

Answer 14

The level of output where total revenues are equal to total costs.

Question 15

How does a business work out break-even output?

Answer 15

By drawing a break-even chart.

Question 16

What sort of line are fixed costs on a break even chart?

Answer 16

A straight, horizontal line.

Question 17

What sort of line are total costs on a break even chart?

Answer 17

A stright line which starts at the fixed costs line and slopes upwards at the same gradient as variable costs.

Question 18

What sort of line are total revenues on a break even chart?

Answer 18

A straight line which starts at zero and slopes upwards.

Question 19

What is the margin of safety?

Answer 19

The difference between the break even point and the predicted amount of units sold.

Question 20

Give 2 advantages of break-even analysis.

Answer 20

• Easy to work out
• Allows businesses to predict has changes in sales may affect costs, revenues and profits
• Can help persuade a bank to give a business a loan
• Stops businesses from releasing products which may be hard to sell in large quantities

Question 21

Give 2 disadvantages of break-even analysis.

Answer 21

• Assumes the firm can sell any quantity of tje product at the current price
• Assumes all products are sold with no waste
• If the data is wrong, then the results of the analysis will be wrong
• Can be complicated if it involves more than one product
• Only shows how much a business needs to sell, nti how much it actually will sell