Assignment 221
B123
Chapter 12
Finance
Accounting concepts & principles
- Financial statements are prepared at the end of a period.
- The form and content of such financial statements are often regulated by statute or regulations produced by accounting bodies(e.g. the International Accounting Standards Board).
- There is often general requirement that these statement should give a true and fair view of the affairs of the organization.
Profit or not-for-profit
- Organizations are often differentiated in terms of the sector of the economy to which they belong: pubic or private. They also are classified according to whether or not their primary motive is profit.
Assets & liabilities
- Assets - it is something which the organization owns and which has a market value.
- Liability – it is a debt that the organization owes to another person or organization.
- Net worth – it is the value of the assets less the value of the liabilities as recorded in the books of accounts.
The balance sheet
- It is the financial account that shows the book value of the organization's assets and its liabilities at a particular time, usually on a particular day.
Different types of costs
Fixed Cost , costs are not affected by changes of an organization’s activity ( Rent).
Variable cost , some costs increase or decrease as the level of activity rises or falls (Tel charges).
Direct cost , some times it is possible to attach or attribute a cost to particular activity.
Indirect cost , not all costs can be attributed to particular tasks
Break-even
- Break-even (or break even) is the point of balance between making either a profit or a loss.
- The accounting method of calculating break-even point does not include cost of working capital.
- The financial method of calculating break-even, called value added break-even analysis, is used to assess the feasibility of a project. This method not only accounts for all costs, it also includes the opportunity costs of the capital required to develop a project.
- Break even = Fixed Assets / contribution per unit.
Break-even example
- A company is manufacturing product X and the selling price is $1,000, while the variable cost for each unit is $40, mean while the fixed cost of the operation will be $60,000. Calculate the break-even in units.
- Answer:
- BE= FC/contribution per unit sold
- Contribution per unit sold= unit price – Variable cost
- = $1000-$400=$600
- BE in units= 60,000/600= 100 units
Return on capital employed
- ROCE = operating profit / capital employed
- (Expressed as a %)
- ROCE is used to prove the value the business gains from its assets and liabilities. A business which owns lots of land but has little profit will have a smaller ROCE to a business which owns little land but makes the same profit.
- It basically can be used to show how much a business is gaining for its assets, or how much it is losing for its liabilities.
Margins & mark-ups
- Margins – it describes the profit earned as a percentage of the sales value.
- Mark-up – it describes the amount added on to cost to arrive at the selling price as a percentage of cost.