PRX325 Finance

opportunity/alternative costs

• quitting your job/elective unemployment

• withdrawing savings to start a business

• quality of life changes

profitability

organization’s profit relative to expenses

liquidity

ease of converting assets into cash without a big loss in value

cost behavior

how costs reacts to changes in activity level

• variable

• fixed

• mixed

variable cost

costs that vary in total with direct proportion to changes in activity level

• total gas bill is determined by how much gas is used

variable cost per unit

variable cost per unit is constant

• cost of gas per unit remains the same

fixed cost

remains constant in total, regardless of activity level change

• paying the same amount monthly for health insurance

fixed cost per unit

fixed cost per unit varies inversely with activity change

• average fixed cost per visit increases with more visits

• “get your money’s worth”

mixed cost

contains both fixed and variable components

• phone plan with limited data roaming + charge for data over limit

goals of inventory management

• maintain accurate inventory levels

  • keep items in stock while carrying as little inventory as possible

• control costs

• improve turnover rate

• provide adequate/safe patient care

true or false: inventory is an asset. It holds value while on the shelf, but needs to be sold to be “liquid”

true

what is the average inventory rate?

11-12%

inventory turnover

measures how quickly inventory is purchased, sold, and replaced

• shows average how many times inventory sells annually

inventory turnover= cost of good sold/average inventory

profit and loss statement (income statement or earnings statement)

shows flow of money in and out of a business

• valuable in monitoring operations

  • regular statements communicate if changes need to be made to recover losses or decreases expenses

• outsider evaluation of ability to manage resources

• required by the IRS, used to assess taxes on earned profits

net sales (revenue)

total sales during accounting period

costs of goods sold (COGS)

total price paid for products sold during accounting period

gross profit

net sales-COGS

gross margin

([Net sales-COGS]/Net Sales) * 100

• percentage of net sales that exceed COGS

contribution margin

net sales- variable costs

• amount of revenue left after all variable costs deducted from total sales

break even point

level of sales where fixed costs are covered by contribution margin

• point where total net sales equals its total costs

net operating profit

gross profit - expenses

net profit before tax (NBT)

net operating profit + other income

net profit or net loss

NBT - income taxes

selling expenses

costs from directly + indirectly making sales

• includes: salespeople’s salaries, sales office costs, commissions, advertising, warehousing, shipping

general and administrative expenses

operating expenses not directly association with sale of goods

• includes: other salaries, supplies, operating costs needed for overall business administration (rent, utilities, phones, travel)

  • commonly considered “overhead” costs

EBITDA

earnings before interest, taxes, depreciation, and amortization

• amortization: an accounting method that spreads the cost of intangible assets such as goodwill. prescription files (scripts), or software licenses

• calculated using net earnings before interest expenses, taxes, and depreciation and amortization are subtracted

• explains current operating profitability