finance - financial terms and calculations Flashcards
What are costs?
The expenses incurred by a business.
What are fixed costs?
Costs which do not change with output.
What are variable costs?
Costs which change with output.
What is the formula for total costs?
total costs = fixed costs + variable costs
What is the formula for revenue?
revenue = selling price x quantity
What is the formula which links revenue, cost and profit?
profit = revenue - costs
What is profit?
Money a company earns after costs have been deducted.
What is loss?
When sales revenue is not enough to cover costs.
What is an investment project?
When a business spemds funds on long-term activities aimed to increase future revenue.
Give 2 examples of investment projects.
- Machinery
- Buildings
- Vehicles
What does ARR stand for?
Average rate of return.
Why do businesses calculate ARR?
To see if an investment is worthwhile/to compare investments.
What is the formula for ARR?
ARR (%) = (average annual profit/initial investment) x 100
What is break-even output?
The level of output where total revenues are equal to total costs.
How does a business work out break-even output?
By drawing a break-even chart.
What sort of line are fixed costs on a break even chart?
A straight, horizontal line.
What sort of line are total costs on a break even chart?
A stright line which starts at the fixed costs line and slopes upwards at the same gradient as variable costs.
What sort of line are total revenues on a break even chart?
A straight line which starts at zero and slopes upwards.
What is the margin of safety?
The difference between the break even point and the predicted amount of units sold.
Give 2 advantages of break-even analysis.
- 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
Give 2 disadvantages of break-even analysis.
- 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
