Unit 3 - Break-Even & Income Statement Flashcards
What is break-even?
Break-even is when a business is making neither a profit nor a loss.
What is the break-even point?
The point at which a company has sold enough products or services to have covered all their costs.
List four examples of business costs
- Cost of raw materials
- Cost of salaries
- Cost of energy
- Cost of advertising
What are fixed costs?
Costs which stay the same no matter how many units are produced, e.g. rent.
What are variable costs?
Costs which change depending on the level of output, e.g. electricity used in production.
What are total costs?
Total costs are the fixed and variable costs added together.
How is contribution calculated?
Contribution = selling price - variable cost
What does the break-even chart show?
The break-even point can be identified as the point where the sales revenue and total costs meet.
How is total profit or loss calculated?
Total profit or loss = sales revenue - total costs
How is selling price calculated?
Selling price = sales revenue ÷ output
What is the formula for break-even point?
Break-even point = fixed costs ÷ (sales - variable costs)
How is variable cost per unit calculated?
Variable cost per unit = (total cost - fixed costs) ÷ sales revenue
What happens if a business produces less than the break-even point?
The business will make a loss.
What happens if a business produces more than the break-even point?
The business will make a profit.
Why is calculating the break-even point important for a business?
It helps determine how many units need to be produced before making a profit.
What does an income statement show?
An income statement shows the income, expenditure, and profit/loss made by a business throughout the year.
What is sales revenue?
Sales revenue is the income a business receives throughout the year by selling to customers.
What is the cost of sales?
The cost of producing a product or buying a product to sell to customers.
What is gross profit?
The profit made from buying and selling goods.
What are expenses?
Items that a business must pay for to keep running, e.g. electricity, wages, loan repayments.
What is profit/loss for the year?
The profit made once expenses have been subtracted. A loss is shown in brackets, e.g., (5,000).
List three reasons why a company would produce an income statement.
- To calculate total costs of expenses
-To calculate the profit/loss made for the year
-For legal reasons (required by law for limited companies). - Calculate tax necessary for payment
- Calculate cost of sales
Why is tax a reason to produce an income statement?
Profit needs to be calculated so businesses can accurately calculate their tax payments.
How can an income statement help with comparisons?
It allows businesses to compare with previous years or other companies.
What does the trading account section of an income statement show?
Sales/income/revenue - cost of sales = Gross profit
What does the profit and loss account section of an income statement show?
Net profit = Gross profit - expenses (fixed costs)
