learning outcome 4 Flashcards
costs
Costs are expenses incurred by a business in the production or delivery of goods and services.
Fixed Costs
Costs that do not change with the level of production or sales.
Examples: Rent, salaries, insurance.
Variable Costs
Costs that vary directly with the level of production or sales.
Raw materials, utility costs tied to production, wages based on hours worked.
Revenue
Revenue is the total income generated from selling goods or services before any costs or expenses are deducted.
what is the revenue formula
Revenue=Selling Price per Unit×Number of Units Sold\text{Revenue} = \text{Selling Price per Unit} \times \text{Number of Units Sold}Revenue=Selling Price per Unit×Number of Units Sold
If a business sells 500 units at £20 each, the revenue is:
500×20=£10,000500 \times 20 = £10,000500×20=£10,000
cash flow
Cash flow refers to the movement of money in and out of a business over a specific period.
Cash inflows
Money coming into the business, such as sales revenue, loans, or investments.
Cash outflows
Money leaving the business, such as payments for supplies, wages, or bills.
Net Cash Flow
Net cash flow is the difference between cash inflows and outflows over a specific period.
formula for net cash flow
Net Cash Flow=Cash Inflows−Cash Outflows\text{Net Cash Flow} = \text{Cash Inflows} - \text{Cash Outflows}Net Cash Flow=Cash Inflows−Cash Outflows
profit
Profit is the financial gain made after subtracting all costs from revenue. It represents the money a business keeps after covering its expenses.
formula for profit
Profit=Revenue−Total Costs\text{Profit} = \text{Revenue} - \text{Total Costs}Profit=Revenue−Total Costs
break even
Break-even is the point where total revenue equals total costs, meaning the business makes no profit or loss. It helps businesses understand the minimum sales needed to cover their costs.
formula for break even
Break-Even point (units) = Fixed Costs ÷ (Sales price per unit – Variable costs per unit)
Margin of Safety
Margin of safety measures how much sales can drop before a business reaches its break-even point.
Differences Between Revenue, Profit, and Cash Flow
Revenue:
Total income from sales.
Example: A bakery earns £10,000 from selling cakes.
Profit:
Revenue minus total costs.
Example: After subtracting £7,000 in costs, the bakery’s profit is £3,000.
Cash Flow:
Tracks actual money movement, including inflows and outflows.
Example: Even if the bakery has £3,000 profit, it may have negative cash flow if it spends £4,000 on equipment upfront without enough immediate inflow
Profit/Loss Calculation
total revenue minus total costs = profit or loss
Break-Even Point/Output Calculation
Break-Even point (units) = Fixed Costs ÷ (Sales price per unit – Variable costs per unit)
Income Statement
An income statement (also known as a profit and loss statement) shows the business’s financial performance over a specific period.
income statement key components
Revenue: Total income from sales.
Cost of Sales (COGS): Direct costs associated with producing goods or services.
Gross Profit: Revenue minus Cost of Sales.
Operating Expenses: Indirect costs, such as rent, utilities, and salaries.
Operating Profit: Gross Profit minus Operating Expenses.
Net Profit (or Loss): Operating Profit minus taxes and interest.
statement of financial position
A statement of financial position (also called a balance sheet) provides a snapshot of a business’s financial health at a specific point in time.
statement of financial position key components
Assets: What the business owns.
Non-current assets: Long-term assets (e.g., buildings, machinery).
Current assets: Short-term assets (e.g., cash, inventory, receivables).
Liabilities: What the business owes.
Non-current liabilities: Long-term debts (e.g., loans).
Current liabilities: Short-term debts (e.g., payables).
Equity: The owners’ stake in the business (Assets - Liabilities).
cash Flow Statement
A cash flow statement records the actual cash inflows and outflows during a specific period.
