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.