Fixed and variable costs are costs that are incurred by companies. Fixed costs remain constant as they are independent of what is produced (output) by a company (Taylor, 2008). Rent is a fixed cost because it does not fluctuate when sales volume or production level changes.
Variable costs depend with output and increase at a continual rate which is relative to capital and labour. Examples of variables costs include inputs such as raw materials and labour (Bannester, 2004).
Breakeven analysis is a financial application applied to determine the point at which a business will be in a position to cover its current expenses and start to make profits (U.S Small Business Administration, 2014). The formula is: Breakeven point = fixed costs/ (unit selling price – variable costs).
Given that the fixed costs are $100,000, variable costs are $10, and the selling price is $110
Breakeven volume = ($100,000/($110-$10)
The company must sell minimum of 1000 units in order to pay expenses and starting making profits.
Financial leverage can be described as the use of debt by a company in order to acquire extra assets (Gallagher & Andrew, 2003; Periasamy, 2009).Financial leverage can also refer to as trading on equity. The presence of fixed financial costs in the income stream in a company results into financial leverage (Gibson, 2012). The drivers of financial leverage include the stock available, income generated, and cash flows. The drivers are usually influenced by interest rates associated with debts financing, and profitability of the company. Notably, a company is expected to debt accrued on the best, regardless of the income generated
In pro forma financial statements, the first component to include is the income statement of the project cash flows (Carlberg, 2001). This is because project cash flows provide a summary of the future status of a company founded on the present financial statements (Weil, Schipper & Francis, 2013)..
In the event of developing the Statement of Cash Flows, the events that create inflows include when funds are transferred from one party to a company because of financing, investments, and core operations (Albrecht, 2007). Other events include legal settlements, sale equipment/plant or property.
On the other hand, the events that create outflows are related to the transfer of funds to another party by a company (Nordmeyer, 2013). Some of the sources of cash outflows include payments made by creditors or suppliers. Other events include acquired, purchased, or invested long-term assets (Maßing, 2003). Stock redemption and cash dividends payments create cash flows.
The Percentage of Sales Method is an approach used in financial forecasting and it is applied when developing a budgeted set of financial statements. It is applied to predict growth sales based on annual basis. The Percentage of Sales Method is used for the income statement because it provides accurate sales forecasts which are required to develop a reliable pro forma income statement (). Moreover, it is a simple method that allows companies to develop an income statement forecast.
Also referred to as the reconciling among, a plug figure is the standard method applied in financial accounting to reconcile both liabilities and equity with assets in a forecasted balance sheet (Arnold, 2011). Thus, a plug figure is used to make sure that both assets and equity and liabilities are equal.
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