Module 4 revision cards - Part 1 Flashcards
What is the definition of revenue
The money a business receives. Measured over a specific period of time (e.g. a year), and in the currency the business operates in
Revenue = Sale price × Number of products sold
What is the definition of separate/business entity concept
A business is a separate entity from the people who own it, therefore the business’s activities should be considered separately from the owners’ activities. Known as the separate entity concept or business entity concept
Any other money that doesn’t relate to the specific business will not be looked at when examining the activities of that business
What are alternative terms for revenue
turnover
sales/net sales
income/gross income
In which ways do businesses generate revenue
sales of goods or services
interest income, also known as interest receivable
royalties
other income e.g. sale of an asset or sale of a business, a change in value of property or land and one off items
What are the definitions of costs/expenditure
Items or services that the business has to pay for
Known as the business’s costs, expenses or expenditure
What are the differences between expenditure, expenses and costs
Expenditure - the action of spending funds
Expense - the cost incurred for an item or service that is being, or has been used in the business. It often refers to a payment that a business makes regularly over a specific time period, like office rent
Cost - the amount that has to be spent to buy or obtain something and not always financial
What are fixed, variable and total costs
Fixed - costs or expenditure amounts that are unchanged regardless of how much work is done or how much output is produced. Rent, insurance etc
Variable - costs that vary with how much work is done or how much output is produced. As activity rises, variable costs increase; and vice versa. E.g raw materials and distribution costs
Semi-fixed costs/semi-variable - costs that have both a fixed part and a variable part (e.g. managers’ wages which have a performance-related bonus element)
Total – the sum off all the fixed and variable costs incurred by the business
What are the differences between direct and indirect costs
Direct - costs or expenses that relate specifically to the production or sale of the business’s products or services such as raw materials, distribution
Indirect - ALSO KNOWN AS OVERHEADS. Costs or expenses that are necessary to operate the business, but which do not relate directly to the production or sale of the business’s products or services such as admin, insurance or accountancy
What is shown on a statement of profit or loss (income statement)
Revenue, expenses and profit
Total revenue (or income) minus total expenses for the period, resulting in a profit or loss
What are cost of sales/cost of goods sold (COGS) and what does it include
Expenses relating directly to the make or manufacture of the products sold by the business in the course of its trade and include:
raw materials
inventory/stock
work(s) in progress
What is depreciation
An allocation of the cost of a tangible asset over its useful life
What is amortisation and goodwill
Amortisation - the allocation of the cost of an intangible asset (e.g. goodwill) over its life
Goodwill - concerns reputation/ IP/ customer base all the intangible items that add value to the business. There is usually a premium paid on goodwill when a business acquires another
What is included in selling, marketing and distribution costs/expenses
All expenses involved in marketing, selling and distributing a business’s goods or services.
What are considered admin expenses
office rent
business rates
telephone costs, postage
stationery expenses,
computer and software expenses
salaries of admin staff
Name items that are considered finance costs/expenses/charges
interest payable
bank charges
other borrowing/financing charges or fees
List what are considered as start up costs/pre trade expenses
rent of premises
business insurance
staff recruitment fees
employee uniforms, if needed
initial stock or materials
fixtures and fittings, e.g. lights, office furniture
legal and accountancy advice
financing costs
marketing costs for launch of the business
What are considered running/operating costs or expenses
Relate to the operating of the business, but not necessarily directly to the manufacture or making of the business’s products or services to be sold.
selling and distribution costs
administrative expenses
and sometimes depreciation or amortisation –
NOT usually finance costs such as interest paid on bank loans or overdrafts
Term often used by service industry businesses in place of cost of sales (or COGS)
Define total costs
Total expenses a business incurs to reach a particular level of output
Made up of fixed costs, which remain constant at any level of output, and variable costs, which change according to the business’s level of output
What is marginal cost
How total costs change as output changes
e.g how total production costs change as extra units or items are produced
Define profit and loss
Profit is the difference between the businesses income and its expenses
If the profit figure is negative (i.e. the business’s expenses exceeded the income it received), then the business is said to have made a loss
What 5 ways do business measure profit (or loss)
Gross profit
Net profit
Operating profit
EBIT
EBITDA
What is gross profit used to show
How much profit a business is making on its products or services before any incidental business costs or expenses are taken into account. It can be used to see how much money is left over for the rest of the business’s operations, and also to calculate the gross profit margin
What is net profit used to show
How well the business is performing overall, once all costs have been taken into account, and will be used in calculating the net profit margin
What is operating profit
The amount of profit that’s left after COGS and what are known as operating expenses are deducted from total income (or revenue, or turnover). Unlike net profit, not all expenses are included when calculating operating profit (e.g. finance costs such as interest expenses are not included)
Usually the same as EBIT - earnings before interest and tax
What is EBITDA and what is its benefit
A way of measuring a company’s profitability without the effects of financing, tax or accounting treatments being taken into account.
By removing depreciation and amortisation (as well as taxation, and the effect of management’s choice of financing) in the EBITDA calculation, it is easier to get a less distorted view of how a business is actually performing
What are profit margins used for
A way of measuring profitability by expressing profilt as a percentage of revenue
What are the 3 types of profit margin
Gross profit
Net profit
Operating profit
All expressed as a percentage of sales or revenue (taken from the P&L statement)
What is financial reporting
The provision of financial information about a business entity (for example, a company) to those outside the entity in a way that’s useful to them
What are the 2 main purposes of financial reporting
Make economic decisions about the entity
Assess how well the entity is being managed
What are the reasons why financial reporting is governed by local and international standards
Have to be presented in a format approved by the government of the jurisdiction the business operates in. Financial reporting, therefore, is governed by national and international accounting standards
Set out proper and standardised accounting practice for the benefit of those who prepare, analyse and use an entity’s financial statements
A common understanding on how particular items should be treated and displayed. Large multinational companies or companies that are listed on a stock exchange, are examples of entities that will need to use international accounting standards
In the UK, all companies are required by law to prepare financial statements and issue these to their shareholders, as well as file them at Companies House and is one of the requirements of limited liability status. Smaller companies can take advantage of reporting exemptions
What are the objectives of financial reporting
To provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions, related to providing resources to the entity’
(International Financial Reporting Standard (IFRS) definition)
Name 2 main types of financial reporting standards
IFRS (International Financial Reporting Standard)
GAAP (Generally Accepted Accounting Practice)
