Introduction to accounting Essay Example | Topics and Well Written Essays - 1750 words

Introduction to accounting - Essay Example Break even analysis is used in showing the relationship between selling prices, sales volume, variable costs, fixed costs and profits at various levels of activity. It is also referred to as cost-volume profit analysis. It used in determining the break-even point. BEP is the level of activity where the total revenue equals the total costs. Therefore, no profits are realized at the BEP. Appendix 2 shows the workings for the break-even point of the energy drink. At the level of production of 4,286 all fixed and variable costs will have been covered by sales revenue.However break even analysis has its limitations. To begin with, breakeven analysis assumes that fixed cost, variable costs and sales revenue behaves are linear. However, this is not the case since some overhead costs may be stepped in nature. As a result, the straight sales revenue line and total cost line tend to curve beyond certain level of productionAnother limitation of break even analysis is that it assumes that all th e stock produced is sold. Therefore, changes in stock levels are not taken into account in the breakeven chart. Finally, breakeven analysis is only suitable in providing information to relatively small companies that produce one type of products. Thus it’s not suitable for companies producing different product.Margin of safetyMargin of safety measures the amount by which sales may decrease before a company incurs a loss. Forecasting is used in estimating future performance of the business.... budgeted sales –break even sales Assume budgeted sales is 20,000 then margin of safety is 9,285 Appendix 3 Forecast Income Statement Pro forma income statement                   2012 2013 2014 2015 2016 sales 20,000 21,600 23,328 25,194 27,210 cost of goods sold 10,000 10,800 11,664 12,597 13,605 Gross profit 10,000 10,800 11,664 12,597 13,605 Expenses (2,000) (2,160) (2,333) (2,519) (2,721) Profit 8,000 8,640 9,331 10,078 10,884 Interest expense (1,500) (1,500) (1,500) (1,500) (1,500)    6,500 7,140 7,831 8,578 9,384 Tax @30% 1,950 2,142 2,349 2,573 2,815 Appendix 4 Forecast Balance Sheet BALANCE SHEET FORECAST                Fixed Assets 2012 2013 2014 2015 2016 Property, plant & Equipment 50,000 50,000 50,000 50,000 50,000                   Current Assets                Inventories 2,500 2,625 2,756 2,894 3,039 Cash 61,196 63,766 66,505 69,425 72,538 Accounts receivables 1,304 1,369 1,438 1,510 1,585 Total Assets 115,000 117,760 120,699 123,829 127,162 Current Liabilities                Accruals 8,000 8,400 8,820 9,261 9,724 Payables 20,000 21,000 22,050 23,153 24,310                                     Equity 40,000 40,000 40,000 40,000 40,000 Debt 30,000 30,000 30,000 30,000 30,000 Retained earnings 8,000 8,640 9,331 10,078 10,884 Dividends 9,000 9,720 10,498 11,337 12,244 Total Equity and liabilities 115,000 117,760 120,699 123,829 127,162 Cash budget Appendix 4    CASH BUDGET                                     January February March April May June July August September October November December Balance brought forward 0 3,400 7,056 10,982 15,193 19,705 24,534 29,697 35,212 41,099 47,378 54,070 Cash inflow 6,000 6,300 6,615 6,946 7,293 7,658 8,041 8,443 8,865 9,308 9,773 10,262 Total inflow 6,000 9,700 13,671 17,928 22,486 27,363 32,574 38,139 44,077 50,407