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Concepts in Financial Management (Costs (Are the monetary value sacrificedβ¦
Concepts in Financial Management
Capital
Is the monetary value of the assets of a business at a specific time
A business needs capital for investment in non-current assets(Fixed capital) & in current assets(working capital)
Business has a permanent need for a certain minimum portion of working capital
The remaining need for working capital will vary according to factors such as seasonal influences & contingencies that result in an increase/decrease in production activities
Income
Income=ππππ‘π π πππΓπππππ πππ π’πππ‘
Income can also be obtained from other sources such as interest earned on investments
The income of a business consists of receipts resulting from the sale of products and/or services
Costs
Are the monetary value sacrificed in the production of products and/ or services produced for the purpose of resale.
Fixed cost-is the portion of cost that remains unchanged regardless of an increase or decrease in the quantity of products & services produced.
Can be subdivided into direct costs, indirect costs, overhead expenses, fixed costs & variable costs
The fixed cost per unit produced will decrease with an increase in the quantity produced
Total costs involved in the production of a specific number of products produced in a particular period consist of the total fixed costs & the total variable costs incurred in the production of these products
Variable cost-is that portion of total costs that changes according to a change in the volume produced.
The variable cost per unit produced remain more or less constant irrespective of the quantity produced.
Profit
A loss-results when the cost exceeds the income
Profit or loss=IncomeβπΆππ π‘
Is the favourable difference between the income earned & the cost incurred to earn the income.
Profit or loss=(πππππΓππππ‘π π πππ)βπΆππ π‘
The statement of financial performance
Gross income(sales)-Returns & cash discounts=Net sales-Cost of products sold=Gross profit-Operating costs=Operating profit-Interest paid=Profit before tax-Provision for tax=Net profit(After tax)
Furnishes details about the manner in which the profit/loss for a particular period was arrived at & how it has been distributed(income statement)
Preference shareholders dividends=Profit attributable to ordinary shareholders-Dividends to ordinary shareholders=Retained profit-reserves=Undistributed profit for one year