Financial Concepts In A Business Environment Flashcards
Income Statement Overview
Income Statement:
Business receives income when services are rendered or goods are sold.
Income earned is shown in the Statement of Comprehensive Income (Income Statement).
Examples of Income
Examples of Income:
Current Income (from services rendered)
Sales (when goods are sold)
Rent income
Interest income (from money saved in the bank)
Business Expenses
Expenses:
Business incurs expenses when paying for services rendered to the business.
Expenses are shown in the Statement of Comprehensive Income (Income Statement).
Calculating Profit
Profit Calculation:
Profit = Income (received from sales) - Expenses
Cash Flow Reminder
Cash Flow:
Not all income and expenses are immediately reflected in cash flow
Owner’s Equity
Owner’s Equity:
Refers to the value of the owner’s money in the business.
Shown in the Statement of Financial Position (Balance Sheet).
Capital and Profit
Capital:
The owner provides capital to start the business.
Profit:
Profits generated by the business belong to the owner.
Profits increase the Owner’s Equity
Drawings
Drawings:
When the owner takes money or assets out of the business.
Drawings decrease the Owner’s Equity.
Assets
Assets:
Possessions of a business used to make money.
Two types of assets:
Non-current (long-term) assets
Current (short-term) assets
Liabilities
Liabilities:
Refers to the debt of the business.
What the business is liable to repay.
Two types of liabilities:
Non-current (long-term) liabilities
Current (short-term) liabilities
Fixed Costs
Fixed Costs:
Remain the same, irrespective of output (units produced).
Examples include:
Insurance
Rent expense
Fixed salary for workers
Variable Costs
Variable Costs:
Vary according to output (units produced).
Increase when production increases.
Examples include:
Water and electricity
Raw materials
Total Cost
Sum of fixed costs and variable costs.
Cost per Unit
Cost per Unit:
Calculated by dividing total costs by the number of units produced.
Break-Even Analysis
Point where income from sales equals total costs.
Neither a profit nor a loss is made.
