The document provides an overview of key accounting concepts including costs, revenue, profit, break even analysis, the purpose of accounts, and the profit and loss account and balance sheet. It defines fixed, variable and semi-fixed costs. It explains how to calculate total revenue, average costs, marginal costs, and profit. It describes what a profit and loss account and balance sheet show, such as sales, expenses, assets, liabilities, and the overall financial position of a company.

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Finance and Accounts 1
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Finance and Accounts
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Key Terms
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Costs
• Fixed (Indirect/Overheads) – are not influenced
by the amount produced but can change in the long run
e.g., insurance costs, administration, rent, some types
of labour costs (salaries), some types of energy costs,
equipment and machinery, buildings, advertising
and promotion costs
• Variable (Direct) – vary directly with the amount
produced, e.g., raw material costs, some direct labour
costs, some direct energy costs
• Semi-fixed – where costs not directly attributable to
either of the above, for example, some types of energy
and labour costs
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Costs
• Total Costs (TC) = Fixed Costs (FC)+
Variable Costs (VC)
• Average Costs = TC/Output (Q)
– AC (unit costs) show the amount it costs
to produce one unit of output on average
• Marginal Costs (MC) – the cost of
producing one extra or one fewer units
of production
– MC = TCn – TCn-1
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Revenue
• Total Revenue – also known as turnover,
sales revenue or ‘sales’ = Price x Quantity Sold
• TR = P x Q
• Price – may be a variety of different prices
for different products in the portfolio
• Quantity – could be global sales
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Profit
• Profit (Π) = TR – TC
• Normal Profit – the minimum amount
required to keep a business
in a particular line of production
• Abnormal/Supernormal Profit – the
amount over and above the amount
needed to keep a business
in its current line of production
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Break Even
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Break Even
• Occurs where Total Costs = Total
Revenue
– Start-up costs – fixed costs
– Running costs – variable costs
– Revenue stream depends on price charged
– ‘Low’ price – need to sell more to break-even
– ‘High’ price – lower level of sales required before
breaking even
Fixed Costs
• Break-Even Point = ---------------
Contribution
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Purpose of Accounts
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Purpose of Accounts
• Provide information for stakeholders –
customers, shareholders, suppliers, etc.
• Provides the opportunity for the
business to monitor its own activities
• Provides transparency to enable
the firm to attract investment
• Reduces the chance for fraud –
not 100% successful!!
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Profit and Loss Account - Flow
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Profit and Loss Account
• Shows the flow of sales and costs
over a period
• Shows the level of profit or loss
made
• Shows what has been done
with the profit or loss
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Profit and Loss Account
Consolidated Profit & Loss Account for the year ended 2003 2002 2001
Dividend Loss
Final section –or
Subtract other
Cost andtax
Operatingcalled
Turnover –
Profit of Sales
Subtract
Operating
Gross Profit
Weeks 52 52 52
Currency £ million £ million £ million Subtract
the share of
‘appropriation
costs and
– theto for
Net Profit =
the revenue–
Accountget –
variable
interest –
Expensesshows
= turnover
Turnover 7688.0 8340.0 9278.0
dueprofit
account’
the
expenses
costs, Airways
Grossthe costs
earnedhow
Britishprofit –
profit over
payments/recei
the of on
costfixed
where sales
Cost of sales -7263.0 -8291.0 -8757.0
Gross Profit 425.0 49.0 521.0
returnedcost
operatingto get
incurred
much get
the year iscosts
plc to it togoing
Operating Expenses -130.0 -137.0 -77.0
pts
profit/loss
ordinary
shareholders
profit before
the firm to
Source: http://www.bized.ac.uk/cgi-
profit on
Operating Profit 295.0 -88.0 444.0
Other costs/income 95.0 166.0 -68.0 activities
bin/ratios/ratiodata.pl
tax
produce what
ordinary
Retained
after tax
Profit before interest and taxation 390.0 78.0 376.0
Net interest receivable (payable)
Profit on ordinary activities before taxation
-255.0
135.0
-278.0
-200.0
-226.0
150.0
it has sold –
activities
Profit – the
Tax on profit on ordinary activities -50.0 -71.0 -69.0 not to be
before tax
amount kept
Profit on ordinary activities after taxation
Equity minority interests
85.0
-13.0
-129.0
-13.0
81.0
-14.0
confusedfuture
back for with
Profit for the financial period 72.0 -142.0 67.0 sales revenue!
investment,
Dividends 0.0 -193.0
Retained profit 72.0 -142.0 -126.0 etc.
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Balance Sheet - Snapshot
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Balance Sheet
• A snapshot of the firm’s position
at a point in time
• Shows what a company owns (assets)
and what it owes (liabilities)
• Balance Sheet shows what assets a
company has (use of funds) and where
the money came from to acquire those
assets (source of funds)
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Balance Sheet – Part 1
Consolidated Balance Sheet for the year ended 2003 2002 2001
Weeks 52 52 52 Current Assets: –
Fixed Assets
Fixedassets can
Currency £ million £ million £ million assets that are –
be tangible used
assets not used
Fixed assets
up during
Intangible Assets 164.0 105.0 60.0 i.e. physical
up in production
production and
Tangible Assets 9487.0 10509.0 10662.0 itemsare likely to
or lasting longer
which or
Investments 524.0 489.0 426.0
intangible – –
thancash in the i.e.
yield one year
Total Fixed Assets 10175.0 11103.0 11148.0
coming name,for
brand year –
equipment,
Current assets
Stock 87.0 109.0 170.0
example, stock will
goodwill.
buildings,
be sold and debtors
Debtors due within one year 986.0 1231.0 1444.0
machinery, etc.
owing the business
Short-term investments 1430.0 1155.0 865.0
Cash at bank and in hand 222.0 64.0 71.0 money will pay up!
Total Current Assets 2725.0 2559.0 2550.0
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Balance Sheet – Part 2
Creditors: Amounts falling due within one year -2904.0 -3201.0 -3308.0
Subtracted
The funds to
Net Current Assets (liabilities) -179.0 -642.0 -758.0 It can come
The to these us
And total
those
acquirethe
from share
This leaves
Total assets less current liabilities 9996.0 10461.0 10390.0
from are longer
capital are the
who ‘Net have
assets must
Creditors: Amounts falling due after more than one year -6553.0 -7097.0 -6901.0
assets
with
capital and
come from must
employed
term creditors
money the
Assets’
Provisions for liabilities and charges -1169.0 -1157.0 -1164.0
Net assets 2274.0 2207.0 2325.0
from retained
somewhere – the
be the same as
– loans,
company
next section tells
profit (profit
Capital and reserves
Called-up share capital 271.0 271.0 271.0 the sum of the
mortgage on
owes to
us where it came
Share premium 788.0 788.0 788.0 and assets –
net loss –
property etc
creditors
from.
Other reserves 270.0 270.0 290.0
account) term
hence the for
Profit and loss account 729.0 687.0 772.0
suppliers
Equit shareholders' funds 2058.0 2016.0 2121.0
‘balance’ sheet!
example
Minority interests 216.0 191.0 204.0
Total capital employed 2274.0 2207.0 2325.0
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Balance Sheet
• A guide to the structure of the assets
of a company
• A guide to the level of gearing –
the ratio of loan to share capital
• Gives a guide as to the degree of
working capital – the amount
the company has to be able to pay
its everyday debts (current assets –
current liabilities)
• Shows the total value of a firm
at that moment in time
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