Fixed costs are costs that are that do not change over a long-term period.
Overheads
In business the overheads are the on going expenses of a business. They group all of the expenses that go to the operation of a business, and generally do not produce profits. Overhead costs appear on the income statement. They consist of accounting, advertising, depreciation, indirect labor, insurance, interest, legal fees, rent, repairs, supplies, taxes, telephone, travel and utilities.
Depreciation
Depreciation is term used in finance and accounting and is used to asses how much assets have gone down in value in a given business, this is usually due to wear and tear.
Semi Variable Cost
Semi Variable costs are cost that contains a fixed cost factor and a variable cost factor. The variable part is proportional to the level of activity for example a gas bill is a fixed cost because it could be paid in monthly instalments. The variable factor is that it could change due to the level of usage of the gas.
Budgets
Budgets are used to examine the income and the expenditure of a business over a long period of time. It also helps to get the best out of resources. Helps measure cash flow and maintains a focus for those involved within a business.
Budgets go into four different categories:
Flexible Budgets: is a budget that shows various output levels. A budget that presents various scenarios of revenue and expense projections
Operating Budgets: is a budget that contains and estimate of all the resources a business will need to operate annually. It also has an estimate of the workload needed in terms of total work units identified by cost accounts
Revenue
Revenue is the income that a business receives due to the sales of goods in more formal usage; revenue is a calculation or estimation of periodic income based on a particular standard accounting practice or the rules established by a government or government agency. Two common accounting methods, cash basis accounting and accrual basis accounting, do not use the same process for measuring revenue. Corporations that offer shares for sale to the public are usually required by law to report revenue based on or .
Breakeven
In relation to Cadbury Schweppes, breakeven is when all costs and exp
nses are equal. One of the most important things in break even is to work out the contribution made from the sale of each unit
Pass 2
Introduction:
In pass 2 I am going to describe the performance of Cadbury Schweppes as illustrated by its trading, profit and loss, appropriation accounts and balance sheet.
The trading, profit and loss account records the difference between carphone warehouse income and the cost of running Cadbury Schweppes over the period of one year. It has 3 sections.
The profit and loss account
The profit and loss account records all the indirect cost of running Cadbury Schweppes. It only includes the cost using its assets.
The money left after paying all the costs of funning the business is called operating profit.
Assets wear out with use and eventually need a replacement when needed. This is treated as a business expense and is called depreciation.
Any interest paid of received is included. Net profit is what is left.
Turnover: turnover records the value of all products sold during the year.
From looking at the profit and loss account for Cadbury Schweppes I can see that the value of products sold in 2007 has increased from the previous year. The gross profit from 2007 was 5298000 and in 2006 it was 4960000, so this is an increased by 338000.
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Cost of sales: Records how much it cost Cadbury Schweppes to make its products that were sold during the year. This includes direct costs.
Gross profit: is the difference between the income from selling it products and the cost of making it. From looking at the profit and loss account I can see that the overall gross profit has increased over a period of 1 year.
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Retained Profit: is the money that is reinvested back in to a business. It’s the money that is retained after the shareholders have been paid their dividends. According to Cadbury Schweppes profit and loss account it shows that the retained profit has decreased.
The retained profit in 2006 was 429000 and the retained profit in 2007 was 427000. This is contrasting with the turnover because the turnover has increased over the year, so it means that the retained profit should increase. The decrease is due to too much money being given to shareholders as dividends.
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Operating Profit: is the money that a firm has made after paying all the costs associated with producing and selling their product. It is also known as the earnings before tax and interest. The operating profit has increased over the 1 year period.
07 06
The Appropriation Account
The appropriation account is only included for limited company accounts. It records where the profit has gone – to the government as tax, to shareholders as dividends, or kept in the business as retained profit.
The Balance Sheet
Fixed assets: are assets that a firm owns which cannot be easily converted into cash.
Fixed assets normally include land and buildings, motor vehicles, furniture, office equipment, and computers.
Pass 3
In pass 3 I am to prepare a simple set of final accounts using information form the accounting systems of a given business.
Trial balance
Profit & Loss account
Balance Sheet
Pass 4
In pass 4 I am going to describe the performance of Cadbury Schweppes using key financial ratios.
Profitability Ratios
Return on total assets ratio:
For Cadbury Schweppes the ratio will be
= 11.7%
Dividends payout ratio
The payout ratio provides an idea of how well earnings support the dividend payments to the shareholders. More established companies will tend to have a high payout ratio.
Dividends payout ratio is calculated as:
Dividends / Net income
For Cadbury Schweppes
-240000 /
Return on capital employed
The most useful indicator of how well a business has performed is the return on capital employed (ROCE). This ratio compares the profit made in a year to the size of the business, as shown by the value of the funds invested funds and the significance of the level of profit relative to the size of the business.
ROCE is calculated as:
Operating profit / Capital employed x 100 = % ROCE
924000 / 3286000 x 100 = 28.119
= 28%
A figure of 28 per cent means that for every £1 of funds used by carphone warehouse, 28p profit has been earned. Some of this will have to be paid in tax, some may be paid in dividends to shareholders and some may be retained. This indicates a return of funds borrowed or invested, so the higher the ROCE the better.
For me to know if 28% indicates a good performance I will compare it to the previous year’s ROCE to see if it has increased.
ROCE is calculated as:
Operating profit / Capital employed x 100 = % ROCE
888000 / 3183000 x 100 = 27.898
=27%
After comparing the ROCE of 2007 to the ROCE of 2006 I can see that the ROCE of 2007 indicates a good performance because the previous year had a lower ROCE.
Gross and net profit margins
To help a business understand how and why it earned the profit it did, it can examine its profit and loss account more closely. This will show managers and investors what type of costs the business has had to pay and how much gross and net profit left were from the sales turnover. A profit margin expresses the level of profit as a proportion of the original sales turnover.
Gross profit / Sales turnover x 100 = % Gross profit margin
For Cadbury Schweppes in 2007 this was:
983000 / 5298000 x 100 = 18.55
=18% Gross profit margin
The gross profit margin shows what proportion of turnover is left after the direct costs of production have been paid. A figure of 18% shows that only 82% of the turnover has had to be spent on the cost of sales. Cadbury Schweppes will want a higher margin but the main determinant on gross profit margin will be the type of industry that the business operates in. in some industries such as food retailing the costs of buying stocks are high so gross profit margins are typically low. In other industries such as air travel, the cost of taking each passenger on each flight is only a very small proportion of the ticket price. For Cadbury Schweppes to know how well or bad the figure of 18% is, carphone warehouse will have to compare it with figures for competitor businesses and its own business in previous years.
Net profit margin is calculated as:
Net profit / sales turnover x 100 = % Net profit margin
For Cadbury Schweppes in 2007 this was:
427000/ 5298000 x 100 = 8.059
=8% Net profit margin
The net profit margin shows what proportion of the turnover are left after all costs, including overheads have been deducted. A figure of 8 per cent shows that out of every £1 sales revenue, 8p is left as net profit. But once again, this figure needs to be compared with competitors and with previous years. A higher net profit margin would be preferable. Given that 18p in every £1 was left as gross profit, to produce an 8 per cent net profit margin a further 10p in every £1 must have been spent on overheads. Overheads therefore make up a bigger proportion of the businesses costs that the cost of sales. This might reflect the nature of the industry, or it might indicate that the business has a problem in controlling its overheads. Comparisons of each type of expense over time will help determine whether it is a growing problem for the business.
Operating profit margin
Operating margin is a measurement of what proportion of a company's revenue is left over after paying for variable costs of production such as wages, raw materials, etc. A healthy operating margin is required for a company to be able to pay for its fixed costs, such as interest on debt. If a company's margin is increasing, it is earning more per pound of sales. The higher the margin, the better.
Operating profit margin is calculated as:
For Cadbury Schweppes:
= 17%
Cadbury Schweppes has an operating margin of 17%; this means that £0.17 (before interest and taxes) for every pound of sales.
Retained profit margin
= 8.05%
Productivity Ratios
Stock Turnover ratio
To analyse stocks a little further it is possible to use ratio analysis. The STOCK TURNOVER RATIO shows how many times over the business have sold the value of its stocks during the year.
Stock turnover ratio is calculated as:
Cost of goods sold / Stock = stock turnover ratio
For Cadbury Schweppes:
-4315000 / 825000 =
Solvency Ratios
Liquidity is how much possible cash a business can raise
Current ratio
The current ratio shows whether a business has sufficient current assets to cover all of its current liabilities in the next 12 months. This is also known as the liquidity of a business, as it indicates whether the business has sufficient assets in cash and in stock or debtors that could soon be turned into cash. A business that cannot pay its current liabilities may be forced to close.
Current ratio is calculated as:
Current assets / current liabilities = current ratio (expressed as x: 1)
For Cadbury Schweppes in 2007, the current ratio is:
2052000 / -2585000 = -0.79381
= -0.79:1
Acid Test
The acid test ratio is a tougher test of liquidity. Given that stock is not easily converted into cash, so it may not prove a very liquid current asset, it is excluded form the acid test. The acid test shows whether current liabilities can be paid from the most liquid current asset: cash and debtors.
Acid test is calculated as:
(Current assets – stock) / Current liabilities = quick (acid test) ratio (x: 1)
For Cadbury Schweppes in 2007, the acid test ratio is:
(2052000– 825000) / -533000
= 1227000 / -533000 = -2.302063
= -2.30:1 quick (acid test) ratio
Gearing ratio
Gearing show the proportion of a business’s funds that have come from long term borrowing rather than from share capital and reserves. This then indicates how risky investment in this business will be, and the higher the level of debt the greater the risk. A business that has borrowed a high proportion of its funds is more at risk from higher interest rates, as it will be more affected by higher interest payments. In addition, if sales are falling – due to a recession or increased competition – a firm will find it very difficult to make a profit given that interest payments must be maintained. So the risk of insolvency is much greater where gearing is high.
Gearing ratio is calculated as:
Long term liabilities / Capital employed x 100 = % Gearing
For Cadbury Schweppes:
Company: Cadbury Schweppes
Merit 1
For merit 1 I will list the advantages and limitations of Cash flow, budgets and break even.
Cash flow
A cash map shows the amount and timing of a firm’s cash recipes and cash distributments of time. This is very helpful for Cadburys Schweppes because it will predict the amount of cash it will need to operate efficiently
Good cash flow management will increase the amount and speed of cash flowing into Cadburys Schweppes, reduce the amount and speed of cash flowing out, develop a strong borrowing and repayment system. It will also show a good image for lenders and investors and reduce borrowing cost by only borrowing when necessary.
The main causes that could affect Cadbury Schweppes cash flow problems are weak sales, unexpected variation in sales and difficulty collecting accounts receivable.
Budgets
The advantage that Cadbury Schweppes will get from using budgets is that they will be able to estimate the number of units that must be manufactured in order to meet the sales goals. It will measure Cadbury Schweppes business performance as well. Budgets will keep the managers focused on the financial implication of their business decisions. In addition budgets will help the Cadbury Schweppes managers communicate expectations and quickly spot deviation from expectations. The production budget also estimates the various costs involved with manufacturing those units, such as labor, material, and other expenses.
The cash flow budget is a prediction of future cash receipts and expenditures for a particular time period. It usually covers a period in the short term future. The cash flow budget helps Cadbury Schweppes determine when income will be sufficient to cover expenses and when the company will need to seek outside financing.
The problems with budgets are that they are estimates and not 100% accurate. The execution of a budget is not automatic lots of procedures must be made. Budgets cannot take the place of good management and most of all good budgeting requires a lot of time and patience.
Breakeven analysis
Breakeven analysis provides Cadbury Schweppes simple means of measuring profits and losses at different levels of output. Sales revenues and total costs are analysed for each different level of production. The analysis is done on a break even chart.
Cadbury Schweppes can use break even analysis to calculate the minimum amount of sales required in order to be able to break even. To see how changes in output, selling price or costs will affect profit levels. Cadburys will also be able to calculate the level of output required to reach a certain level of profit and to aid forecasting and planning.
The limitation of break even analysis is that its accuracy depends upon the accuracy of the data used. Forecasting the future will be very difficult for Cadbury Schweppes, especially in the long term. It assumes there is a simple relationship between variable costs and sales. Sales income does not necessarily rise in a constant relationship to sales volume. In addition external constraints have to be recognised.
Merit 2
I did not know how to find the Net income
What should I write about this?
I cannot see the long term liabilities in the balance sheet.