Week 8 (corporate finance) Flashcards
What do we need to consider about inventory and revenue?
It is most unlikely that all the purchases that have been made during the year will have been sold by the end of it and so there will almost certainly be some goods still left in the stores. In accounting terminology, purchases still on hand at the period end are referred to as inventory (or stock).
When calculating the gross profit for the year, therefore, it is necessary to make some allowance for closing inventory, since we want to match the sales revenue earned for the period with the cost of goods sold and not the cost of all of those goods actually purchased during the year. This means that we have to check the quantity of inventory we have on hand at the end of the year and then put some value on it.
Closing inventory at the end of one period becomes the opening inventory at the beginning of the next period so we have to allow for opening inventory as well.
What does this mean?
the cost of goods sold is made up of three elements: opening inventory, purchases and closing inventory. Expressed as a formula,
Cost of goods sold = (opening inventory + purchases) − closing inventory
What is Companies Acts 1850’s and why did it occur?
Gives legal recognition to a concept known as limited liability which received legal recognition in 1855.
Some businesses operate as a sole trader or as a partnership company. If these businesses run short of funds, the owners may be called upon to settle the businesses’ debts out of their own private resources.
The purpose of Limited Liability
Legal protection to the owners of a company. When a company cannot pay its debts, the shareholders are not liable to contribute more than their initial investment towards that overall debt.
It is because of limited liability we recognise the business and the owners as two separate bodies(especially during DEB).
The law recognises that a business may acquire assets and debts in it’s own right and therefore if the business goes bankrupt, shareholders are not required to pay the deficit; the owners have limited liability
Define Sole traders
one person owns the business. The debts of the business are the debts of the owner, and there is no obligation for the public disclosure of financial information regarding the business.
Define partnerships
Same as sole traders but two owners are involved. At least one of the owners will have liability for the total debt that the company incurs.
Define Private company
a limited company. To form a limited company, it must be registered on Companies House, prepare annual accounts and submit these appropriately
Define public company
Same as private but ‘owned’ through shares which can be purchased by anyone
Define Not for Profit
The majority of sport organisations are interested in providing a service and not for making money. Governments have in place legislation which allows community sport organisations to register as ‘incorporated associations’ – allowing their members to be legally separated from the organisation whilst maintaining a tax-free status
What is tax?
a feature which can distinguish a limited liability company from that of a sole trader entity.
Sole traders do not have … evied on them as entities. Instead, tax is levied on the … during the year
Sole traders do not have tax levied on them as entities. Instead, tax is levied on the amount of profit the owner has made during the year
What is Corporation tax and its features?
Introduced in 1965 for all companies to pay
Corporation tax is a tax levied on the profits of a business
It is the government’s way of taking a slice of the pie from a company’s
earnings, in the same way as the personal tax.
As of April 1st 2023, the corporation tax in the UK is 19% for companies with profits under £50,000 and 25% for companies with profits over £250,000 (marginal relief dependent).
What is required of managers to do short-term?
As a manager, expected to make decisions that will affect future performance on a regular basis
As a manager, there are ways to help you make a quick decision: Marginal costing statements Identify the breakeven point
What is Marginal costing?
the additional cost of making one more in a set period of time
Fixed costs vs Variable costs
Some costs will be volume-of-output sensitive. They will increase or decrease as output increases or decreases = Variable Costs
Some costs will be incurred regardless of the output volume = fixed costs
Marginal and fixed costs are often interchangeable
Fixed costs, doesn’t mean that they cannot change… instead in this case, they won’t alter as
a direct cost of making 1 more unit
