Finance, Accounts and Business Records
What this domain tests
This domain covers sources of finance, cash-flow forecasting, break-even and the two main financial statements. Expect calculations of gross and net profit, margins, break-even output and simple cash-flow balances, plus judgement about suitable finance.
Core concepts
- Internal finance: retained profit, sale of assets, owner's capital. External: bank loan, overdraft, trade credit, share issue, debenture, leasing, government or EU grants.
- Short-term sources (overdraft, trade credit) suit working capital; long-term sources (loan, share capital) suit assets.
- Cash flow is money in and out over time; profit is revenue minus total costs. A profitable firm can still fail through poor cash flow.
- Income statement: revenue − cost of sales = gross profit; gross profit − expenses = net profit.
- Statement of financial position: assets = liabilities + capital (owner's equity).
- Break-even output = fixed costs ÷ (selling price − variable cost per unit).
Worked example
Revenue €120,000; cost of sales €72,000; expenses €30,000. Gross profit = €48,000, a gross margin of 40%. Net profit = €48,000 − €30,000 = €18,000, a net margin of 15%. If fixed costs are €30,000, price €20 and variable cost €12, contribution is €8 per unit, so break-even is 3,750 units. Reasoning: margins show profitability per euro of sales, while break-even shows the volume needed before profit begins; both are needed because a high margin with low volume may still lose money.
Traps that cost marks
Treating a loan received as revenue; treating drawings as a business expense; mixing gross and net profit; calling depreciation a cash payment; giving break-even in euros when units are asked for (or the reverse); assuming profit equals cash in the bank.