Mini-Lesson Finance and Accounts This mini-lesson covers Unit 3 : sources of finance , costs and revenues , break-even analysis , final accounts , ratio analysis (profitability and liquidity), cash flow and investment appraisal . At HL you also study efficiency ratios , gearing , budgets and depreciation .
Every calculation below is recomputed — work each one yourself before checking. Watch for HL only screens.
Work through each screen, answer the questions as you go and collect ⭐ stars. Press Start when you are ready.
Sources of finance Where the money comes from Finance is internal or external , and short or long term:
Internal: retained profit, sale of assets, owners personal funds.External short-term: overdraft, trade credit, debt factoring.External long-term: share capital, loan capital (debentures), leasing, grants, crowdfunding, business angels, venture capital.Choice depends on cost, control (issuing shares dilutes ownership), risk, and whether the need is short or long term.
Quick check Internal source of finance ? Which of these is an internal source of finance?
A bank overdraft ❌ Retained profit ✅ A long-term bank loan ❌ Issuing new shares ❌
Costs and revenues Fixed, variable and total Fixed costs do not change with output (rent, salaries). Variable costs rise with output (materials). Total cost = fixed + variable . Revenue = price × quantity .
Contribution per unit = selling price − variable cost per unit. It is the amount each unit contributes towards fixed costs and then profit.
Calculate Contribution per unit 1 A product sells for 25 dollars and has a variable cost of 15 dollars per unit. Calculate the contribution per unit .
$ Check ✓
Hint: contribution per unit = selling price − variable cost = 25 − 15.
Break-even analysis The break-even point The break-even output is where total revenue equals total cost — no profit, no loss.
break-even = fixed costs ÷ contribution per unitthe margin of safety = actual output − break-even output
Selling above break-even earns profit; below it makes a loss. A larger margin of safety means more cushion before losses begin.
Calculate Break-even output 2 A firm has fixed costs of 8,000 dollars and a contribution of 10 dollars per unit. Calculate the break-even output in units.
units Check ✓
Hint: break-even = fixed costs ÷ contribution per unit = 8,000 ÷ 10.
Quick check Margin of safety ? A firm breaks even at 800 units and actually sells 1,000 units. Its margin of safety is:
1,800 units ❌ 200 units ✅ 800 units ❌ 1,000 units ❌
Final accounts Income statement and statement of financial position The income statement (profit and loss account) works down from sales:
Revenue − cost of goods sold = gross profit Gross profit − expenses = profit before interest and tax (operating profit) − interest − tax = profit for the period , then retained or paid as dividends. The statement of financial position (balance sheet) shows assets = liabilities + equity at a point in time.
HL — depreciation spreads a non-current assets cost over its life using the straight-line or reducing-balance method.
Calculate Straight-line depreciation (HL) 3 A machine costs 20,000 dollars, has a residual value of 4,000 dollars and a useful life of 4 years. Calculate the annual straight-line depreciation .
$ Check ✓
Hint: (cost − residual value) ÷ useful life = (20,000 − 4,000) ÷ 4.
Profitability ratios GPM, net profit margin and ROCE Profitability ratios judge how well a firm turns sales and capital into profit:
Gross profit margin = gross profit ÷ revenue × 100Net profit margin = profit before interest and tax ÷ revenue × 100ROCE = profit before interest and tax ÷ capital employed × 100Higher margins are usually better, but compare over time and against competitors.
Calculate Net profit margin 4 A firm earns profit before interest and tax of 24,000 dollars on revenue of 200,000 dollars. Calculate the net profit margin .
% Check ✓
Hint: net profit margin = (profit before interest and tax ÷ revenue) × 100 = (24,000 ÷ 200,000) × 100.
Liquidity Current ratio and acid test Liquidity is the ability to pay short-term debts:
Current ratio = current assets ÷ current liabilities (a guide of about 1.5–2 is often healthy).Acid test (quick ratio) = (current assets − inventory) ÷ current liabilities — a tougher test that strips out stock.Working capital = current assets − current liabilities, the day-to-day cash to run operations.
Calculate Current ratio 5 A firm has current assets of 45,000 dollars and current liabilities of 30,000 dollars. Calculate the current ratio .
: 1 Check ✓
Hint: current ratio = current assets ÷ current liabilities = 45,000 ÷ 30,000.
Efficiency and gearing HL ratio analysis (HL only) HL adds ratios that judge how efficiently assets and capital are used:
Stock (inventory) turnover — how quickly stock is sold.Debtor days / creditor days — how fast customers pay / the firm pays suppliers.Gearing ratio = non-current liabilities ÷ capital employed × 100 — the share of capital that is borrowed.Gearing above 50 percent is highly geared: cheaper than equity but riskier if interest rates or sales move against the firm.
Calculate Gearing ratio (HL) 6 A firm has non-current (long-term) liabilities of 120,000 dollars and capital employed of 400,000 dollars. Calculate the gearing ratio .
% Check ✓
Hint: gearing = (non-current liabilities ÷ capital employed) × 100 = (120,000 ÷ 400,000) × 100.
Quick check High gearing (HL) ? A company with a gearing ratio of 65 percent is described as highly geared . This mainly means it:
Has very little debt ❌ Relies heavily on borrowed capital, raising financial risk ✅ Is highly liquid ❌ Pays no interest ❌
Sort it Profitability, liquidity or efficiency? (HL) Tap a measure, then the type of analysis it belongs to.
Cash flow Cash flow is not the same as profit Cash flow is money actually moving in and out; profit is revenue minus costs over a period. A profitable firm can still fail if it runs out of cash. Improve cash flow by chasing debtors, negotiating supplier credit, leasing rather than buying, and managing stock.
Quick check Cash flow vs profit ? Why can a profitable business still go bankrupt?
Profit and cash are always equal ❌ It can run out of cash to pay bills even while profitable on paper ✅ Profit guarantees liquidity ❌ Bankruptcy is impossible if profitable ❌
Investment appraisal Payback and ARR (and NPV at HL) Appraisal compares the returns of an investment:
Payback period — time to recover the initial cost. Example: 50,000 ÷ 12,500 per year = 4 years .Average rate of return (ARR) = (average annual profit ÷ initial investment) × 100.Net present value (NPV) (HL) — discounts future cash flows to todays value; a positive NPV adds value.Calculate Average rate of return (HL) 7 A 40,000 dollar investment returns net cash flows of 15,000 dollars in each of 4 years. Calculate the ARR . (Total profit = total cash flow − investment.)
% Check ✓
Hint: total cash = 15,000 × 4 = 60,000; total profit = 60,000 − 40,000 = 20,000; average annual profit = 20,000 ÷ 4 = 5,000; ARR = (5,000 ÷ 40,000) × 100.
Budgets Budgets and variance analysis (HL only) A budget is a financial plan. Variance analysis compares actual with budgeted figures:
Favourable variance — better than budget (higher revenue or lower cost).Adverse variance — worse than budget (lower revenue or higher cost).Budgets aid planning and control; cost and profit centres make departments accountable.
Quick check Adverse variance (HL) ? A department budgeted 50,000 dollars of costs but actually spent 58,000 dollars. This 8,000 dollar difference is:
A favourable variance ❌ An adverse variance ✅ A profit ❌ Break-even ❌
Match it Match the ratio to its formula Tap a ratio on the left, then its correct formula on the right.
Quick check Payback period ? The payback period of an investment measures:
The total profit over the assets life ❌ The time taken to recover the initial cost ✅ The percentage return each year ❌ The discounted value of cash flows ❌
Recap The big ideas to know Finance: internal vs external, short vs long term.
Break-even: contribution = price − variable cost; break-even = fixed costs ÷ contribution.
Final accounts: income statement (gross → net profit); statement of financial position.
Profitability: GPM, net profit margin, ROCE. Liquidity: current ratio, acid test.
Cash flow: not the same as profit — a profitable firm can still fail.
Appraisal: payback and ARR, NPV; plus HL gearing, efficiency ratios, budgets, depreciation.
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