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Finance and Accounts 1

Finance and Accounts

Key Terms

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

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

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

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

Break Even

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

Purpose of Accounts

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!!

Profit and Loss Account - Flow

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

Profit and Loss Account
Consolidated Profit & Loss Account for the year ended 2003 2002 2001
Weeks 52 52 52
Currency £ million £ million £ million
Turnover 7688.0 8340.0 9278.0
Cost of sales -7263.0 -8291.0 -8757.0
Gross Profit 425.0 49.0 521.0
Operating Expenses -130.0 -137.0 -77.0
Operating Profit 295.0 -88.0 444.0
Other costs/income 95.0 166.0 -68.0
Profit before interest and taxation 390.0 78.0 376.0
Net interest receivable (payable) -255.0 -278.0 -226.0
Profit on ordinary activities before taxation 135.0 -200.0 150.0
Tax on profit on ordinary activities -50.0 -71.0 -69.0
Profit on ordinary activities after taxation 85.0 -129.0 81.0
Equity minority interests -13.0 -13.0 -14.0
Profit for the financial period 72.0 -142.0 67.0
Dividends 0.0 -193.0
Retained profit 72.0 -142.0 -126.0
Profit and Loss
Account for
British Airways
plc
Source: http://www.bized.ac.uk/cgi-
bin/ratios/ratiodata.pl
Turnover –
the revenue
earned over
the year
Gross Profit
= turnover –
cost of sales
Operating
Expenses –
the fixed costs
Operating or
Net Profit =
Gross profit –
operating costs
Cost of Sales
– the variable
costs, how
much it cost
the firm to
produce what
it has sold –
not to be
confused with
sales revenue!
Subtract other
costs and
expenses
incurred to get
profit before
tax
Subtract
interest
payments/recei
pts to get
profit on
ordinary
activities
before tax
Subtract tax
due to get
profit on
ordinary
activities
after tax
Final section called
‘appropriation
account’ – shows
where the
profit/loss is going
Dividend –
the share of
the profit
returned to
shareholders
Retained
Profit – the
amount kept
back for future
investment,
etc.

STATEMENT OF FINANCIAL- Snapshot

STATEMENT OF FINANCIAL
• 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)

Balance Sheet – Part 1
Consolidated Balance Sheet for the year ended 2003 2002 2001
Weeks 52 52 52
Currency £ million £ million £ million
Fixed assets
Intangible Assets 164.0 105.0 60.0
Tangible Assets 9487.0 10509.0 10662.0
Investments 524.0 489.0 426.0
Total Fixed Assets 10175.0 11103.0 11148.0
Current assets
Stock 87.0 109.0 170.0
Debtors due within one year 986.0 1231.0 1444.0
Short-term investments 1430.0 1155.0 865.0
Cash at bank and in hand 222.0 64.0 71.0
Total Current Assets 2725.0 2559.0 2550.0
Fixed Assets –
assets not used
up in production
or lasting longer
than one year –
equipment,
buildings,
machinery, etc.
Fixed assets can
be tangible –
i.e. physical
items or
intangible – i.e.
brand name,
goodwill.
Current Assets:
assets that are used
up during
production and
which are likely to
yield cash in the
coming year – for
example, stock will
be sold and debtors
owing the business
money will pay up!

STATEMENT OF FINANCIAL– Part 2
Creditors: Amounts falling due within one year -2904.0 -3201.0 -3308.0
Net Current Assets (liabilities) -179.0 -642.0 -758.0
Total assets less current liabilities 9996.0 10461.0 10390.0
Creditors: Amounts falling due after more than one year -6553.0 -7097.0 -6901.0
Provisions for liabilities and charges -1169.0 -1157.0 -1164.0
Net assets 2274.0 2207.0 2325.0
Capital and reserves
Called-up share capital 271.0 271.0 271.0
Share premium 788.0 788.0 788.0
Other reserves 270.0 270.0 290.0
Profit and loss account 729.0 687.0 772.0
Equit shareholders' funds 2058.0 2016.0 2121.0
Minority interests 216.0 191.0 204.0
Total capital employed 2274.0 2207.0 2325.0
Subtracted
from the
assets are the
money the
company
owes to
creditors –
suppliers for
example
And to those
who are longer
term creditors
– loans,
mortgage on
property etc
This leaves us
with ‘Net
Assets’
The funds to
acquire these
assets must have
come from
somewhere – the
next section tells
us where it came
from.
It can come
from share
capital and
from retained
profit (profit
and loss
account)
The total
capital
employed must
be the same as
the sum of the
net assets –
hence the term
‘balance’ sheet!

STATEMENT OF FINANCIAL
• 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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