Business notes | Dylan Tai

Business notes
1 BREAK EVEN ANALYSIS
Break-even analysis is used to determine the level of sales that needs to be
generated to cover the total cost of production.
Break-even analysis is an important planning tool because management can
determine the level of sales required to obtain a profit. It can also be used to
determine the effect on profit if sales increase or decrease. This planning tool
is used in the strategic planning stage, before budgets are prepared. The
break-even sales quantity can also be calculated by using the formula:
Quantity (Q) =

Total fixed costs

Unit price Variable costs per unit

Break-even is the point where sales equal costs (fixed and variable).

Business notes | Dylan Tai

1.1 TOTAL COSTS

The total cost (TC) of producing a certain number of goods or services is the
sum of the fixed costs (FC) and variable costs (VC) for those units. This can
be represented mathematically as:
FC + VC = TC

Business notes | Dylan Tai

1.2 CASH FLOW STATEMENTS

A cash flow statement shows the movement of cash receipts (inflows, such
as money from sales) and cash payments. Cash flow statements are vital for
the business to assess whether money inflows can match money outflows.
The term liquidity is often used to describe whether a business has a good
or

adequate cash flow.

A business is said to be liquid (or solvent) if it has the cash available to meet
payments as they are due. Generally a business would prefer its sales to be
in cash for precisely this reason it has a need for cash to meet its own

Business notes | Dylan Tai

payments. Why do businesses allow credit sales when they prefer cash? This
is because they need to match their desire for cash with the customers
ability to pay. By allowing customers to purchase on credit, the business will
obtain sales it might otherwise lose. Cash flow statements are closely related
to budgets, which are estimates of anticipated future cash flows. Cash flow
statements, however, are broader than budgets because they are also used
to summarise past information. Cash flow statements are vital for the
information they give on the timing of payments and receipt of income. A
business will keep information on cash movements because this will help it
predict future cash flows and hence make provision for payments.
A business can track its inflows and outflows over a period of time. It can
then use these statements to determine why the inflows and outflows are
taking the pattern they are. By using cash flow statements in this way, a
business is able to both control finances and plan strategies for financial
benefit. Cash flow reporting can be used to plan and predict future cash flow
inflows. Outflows tend to follow trends, with some variations over time.
There are three main financial statements created by accounting processes:
the cash flow statement, the income statement (also called revenue
statement, profit and loss (P&L) statement or statement of financial
performance), and the balance sheet (or statement of financial position). A
cash flow statement shows the movement of cash receipts (inflows) and cash
payments (outflows) over a period of time. Cash flow statements are divided
into three categories: cash flows from operating activities, those from
investing activities and those from financing activities.

1.3 BALANCE SHEETS

The balance sheet, sometimes called the statement of financial position, is
used to help owners keep a watch on their debt and equity levels, compare
their overall financial position with that of previous periods, and assist with
the process of financial decision making. It is a report that shows the overall
financial stability of the business.
There are several things to note about the balance sheet. First, its heading
denotes that it is a snapshot of the businesss financial position as at a
particular point in time. Second, if a line is drawn between the two columns
of figures, the sum of items on the left-hand side assets is equal to, or
balances, the sum of items on the right-hand side (liabilities and owners
equity). This format for a balance sheet is called the T-format because we
can draw a line down the middle and separate the report into two halves by
using the letter T.
4

Business notes | Dylan Tai

Assets are items of value to the organisation that can be given a monetary
value. Assets can be divided into several different types: current and noncurrent, tangible and intangible. Current assets are items whose value is
expected to be used up, or turned over, within 12 months. Non-current
assets are those items that have an expected life of three to five years or
longer. These include large physical items such as buildings, land,
machinery, technology, vehicles, furniture, fixtures and fittings. Intangible
items are also included here. Intangible items are things of worth that have
no physical substance.
Liabilities are items of debt owed to outside parties and/or other
organisations (like suppliers or the banks) and include loans, accounts due to
be paid by the business, mortgages, credit card debt and accumulated
expenses. The business will divide the liabilities into current and non-current
items. Current liabilities are those in which the debt is expected to be repaid
in the short term (12 months or less) and include bank overdrafts, credit card
debts, accounts payable (also called creditors) and accrued expenses. Noncurrent liabilities are long-term debt items such as mortgages, leases,
debentures and retirement benefit funds (money owed to employees upon
their retirement from the business). Some of these non-current liabilities can
last up to 30 years.

Business notes | Dylan Tai

The owners give a business money for it to acquire resources and begin
operating. This money is called owners equity (capital). As the business
operates, it should start to earn an income to cover its costs and then later
earn a profit. The business can hold or retain these profits to target money
for a particular project or it may put money into reserves for distribution
later. The business could also choose to repay the owners who invested their
money in the business at the outset. Over time, a successful business will
have its owners equity amount increase in value. This means that the
owners claim on the business will also increase. This is the owners reward
for risking their money and is also the reason for people investing in the
stock market long term. Owners equity is considered to be a liability from
the point of view of the business, because it is a type of debt the business
carries. However, unlike liabilities, owners equity is a debt owed to owners
because of the risk they took in investing in the business.

1.4 INCOME

STATEMENTS

(REVENUE

STATEMENTS)

Income statement. This report is used to help the business to calculate how
much profit it has made over a period of time by showing profits or losses,
expenses and income. Business owners, will need to be aware of whether the
cash flow through the business is sufficient to allow the business to pay its
debts on time, whether or not the business is trading profitably, and the
financial status of the business.

Business notes | Dylan Tai

A financial
statement that
measures a
company's
financial
performance over
a specific
accounting period.
Financial
performance is
assessed by
giving a summary
of how the
business incurs its
revenues and
expenses through both operating and non-operating activities.

1. Total Sales: Multiply number by sold by cost price

2. Total Variable costs: Multiply variable cost for one product by the
number sold
3. Total Cost: Fixed cost + Total variable cost

Current Assets:
Cash
Accounts Receivable
Stock
Non-current Assets
Equipment

Current Liabilities
Overdraft
Small loans
Accounts payable
Non-Current Liabilities
Mortgage
Rent

Owners Equity= Current Assets Current Liabilities

Business notes | Dylan Tai

For every $___________ of current Assets there are $_________ of current

liabilities

1.5 REVENUE

STATEMENT

COGS = Opening Stock + Purchases Closing Stock

Gross profits= Sales- COGS
Net profit = Gross Profit- Expenses
Expenses = Administrative, financial and selling