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FINANCE revision overview
Variable Costs/ Costs which change as a firm's output changes eg raw materials and wages.
Direct Costs VC per unit = Total VC
Total VC = VC x Output/Sales
Fixed Costs/ Costs which do not change as a firm's output changes eg salaries and rent.
Overheads Average FC = FC
Total FC = FC x Output/Sales
Total Costs Total Variable Costs + Fixed Costs
Revenue The income generated from sales of a good or service.
Total Revenue = Price x Sales/Quantity
Price = Total Revenue
Profit The amount a firm has left from sales after all costs have been covered.
Total Revenue Total Costs = Profit
Acid Test A measure of a firm's short term liquidity. Ideally this should be 1.1:1 ie for every £1 of current
liabilities the firm has it also has £1.10 of current assets.
Acid Test Ratio = (Current Assets Stock):Current Liabilities
Quick Ratio This is a measure of a firm's short term liquidity, it also used as a source of finance in a business
Current Ratio if a firm has some working capital it can use it to finance day-to-day expenditure.
Ratio = Current Assets: Current Liabilities
Working Capital = Current Assets - Current Liabilities
Gross Profit This measures the relationship between profit and sales before overheads have been taken
Margin into account. Gross Profit = Sales Turnover Cost of Sales (Direct Costs).
Gross Profit Margin = Gross Profit x 100
If a firm's Gross Profit Margin has fallen relative to the previous year it is because:
Sales have fallen
Direct costs have risen
Net Profit Margin This measures the relationship between profit and sales after overheads have been taken into
account. Net Profit = Sales Turnover Overheads (Indirect Costs).
Net Profit Margin = Net Profit x 100
If a firm's Net Profit Margin is falling relative to the previous year it is because:
The gross profit margin has fallen
A firm's overheads have risen
A business will always want its profit ratios to be as high as possible. To analyse profit you should compare a firm's
performance over time and relative to similar companies.