Business Test HL - Unit 3

3.4, 3.6, 3.8, 3.9

Depreciation

non-current assets that lose value over time due to age or technological progress

Amortisation

Depreciation of intangible assets

Straight Line Calc Method

If scrap value = 0:

AD = Purchase cost/ Lifespan

If asset has scrap value:

AD= purchase cost - residual value/ lifespan

Units of Production Method

Used to get an accurate depreciation value based on units of output instead of time

1. Depreciation per unit:

Depreciation per unit = purchase cost - scrap value / expected units over lifespan

2. Depreciation expense per time period:

Depreciation expense = dep p/unit X units produced

Efficiency Ratios

A measure of financial stability of the business

ER: Stock Turnover

Indicates how often stock is sold and replenished (higher ratio = usually better)

• A business needs enough stock to meet demand but not too much so its inefficient

ER: Debtor Days Ratio

Measures number of days (average) it takes for businesses to collect debt from customers. Low days = good (30-60 days)

ER: Creditor Days Ratio

Number of days it takes for a business to pay back debt it owes to other businesses

ER: Gearing Ratio

Measures percentage of capital employed that is financed by long-term loans

To improve efficiency ratios:

• Reduce prices so products sell quicker

• Reduce dividends to increase retained profit

• Maintain good relationships with suppliers

• Introduce high penalties for late-paying customers

Insolvency

When a person/business cannot meet debt obligations (declares distress)

Bankruptcy

When a business/person declares they legally cannot pay back debts, so the entity collapses (legal declaration)

NPV: Time value

money is worth more now than the in the future due to inflation

NPV: Present Value

current worth of a future sum of money or stream of cash flow

Net Present Value

Calculates total return on investment

• Negative NPV = future cash inflow wont cover costs in current money

Cost Centres

Division of business that is responsible for its own operational costs.

Doesn’t generate revenue but operations contribute to overall costs of organization

Profit Centers

Division of business that has responsibility for costs and revenues generated within the department

Sell stuff to generate revenue

Roles of cost and profit centers

Financial: Compares costs & profits across areas

Organisational: Helps management and organisation of resources to improve efficiency

Motivational: Targets can be set in each centre to motivate workers

Budgets

A financial plan of expected revenue and expenditure for a period of time. Allocates finance to particular areas

Separated in

Revenues & Costs

• Dividends, interest & sales

• Utilities, rent, production. marketing

Variance

The difference between budgeted figure and actual figure, for costs and sales

Favorable Variance

Difference between planned budget and actual results that positively impacts company’s profits

Adverse Variance

When the difference between budgeted and actual figure is unfavorable , negatively impacting profits

Importance of analyzing budgets and variances

Measuring Performance: allows businesses to see trends in the short & long-term

Allocating Resources: shows where resources are needed

Control: Ensures everyone is following the agreed targets/limits

Limitations of budgeting

• Unknowns - anticipated revenue may drop

• Over-inflation

• Can lead to unnecessary spending

• Time-consuming