2. COST VOLUME PROFIT ANALYSIS
• CVP analysis shows the relationship between costs (both variable and
fixed), volume (the number of units produced and sold), and profit or
loss.
• CVP is a useful management tool; it allows managers to understand
and predict how changes in sales prices, sales volumes, and expenses
will affect an organization’s profitability.
• CVP analysis is an examination of
the relationships of prices, costs,
volume, and mix of products. It
involves the separation of costs into
their variable and fixed categories at
the outset of the analysis.
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3. Assumptions of CVP:
• Revenues and costs are linear throughout the relevant
range.
• Costs can be identified as either fixed or variable.
• Changes in activity levels are the only factors affecting
costs.
• The number of units produced and sold is the same.
• In companies with more than one product, the sales mix
is constant.
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4. COST VOLUME PROFIT ANALYSIS
There are three main tools offered by CVP analysis:
• breakeven analysis, which tells us the sales volume our
need to break even, under different price or cost scenarios
• contribution margin analysis, which compares the
profitability of different products, lines, or services we
offer
• operating leverage, which examines the degree to which
our business uses fixed costs, which magnifies our profits
as sales increase, but also magnifies our losses as sales
drop.
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5. Contribution Margins
• contribution margin is simply the percentage of each sales
dollar that remains after the variable costs are subtracted.
• CM = Selling price - Variable cost
• CM may be shown as a per unit amount or a total amount
at a specific level of sales.
• The contribution margin is the amount available to cover
fixed costs (below the break even point) and the amount to
add to profit (above the break even point).
• The contribution margin may be expressed as a per unit
amount or as a total amount.
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6. Contribution margin ratio
• CMR = Contribution margin / selling price
• The contribution margin ratio is the percent
of each sales dollar that is available to cover
fixed costs (below the break even point) and
the amount to add to profit (above the break
even point).
• The contribution margin ratio is usually
expressed as a percentage.
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7. Contribution margin
= CM Ratio
Sales
Fixed expense Break-even point
=
CM Ratio (in sales dollars)
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8. Contribution Margin Ratio
Total Per Unit Percent
Sales (400 surf boards) $200,000 $ 500 100%
Less: variable expenses 120,000 300 60%
Contribution margin $ 80,000 $ 200 40%
Less: fixed expenses 80,000
Net income $ -
$80,000
= $200,000 sales
40%
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9. Breakeven Analysis
• A second tool for management decision making
• breakeven point can be determined by using the
following formulas:
• Sales Price per Unit — Variable Costs per Unit =
Contribution Margin per Unit.
• Contribution Margin per Unit divided by Sales
Price per Unit = Contribution Margin Ratio.
• Breakeven Sales Volume = Fixed Costs divided
by Contribution Margin Ratio.
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11. The Accounting Cycle
Prepare Record in Post to
Documents Journals Ledgers
Transactions
Occur
Prepare
Unadjusted
Prepare Trial Balance
Closing
Entries Prepare Prepare and
Financial Post Adjusting
Prepare
Statements Entries
Adjusted Trial
Balance
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12. IDENTIFICATION & MEASURMENT ACCOUNTIG
OF TRANSACTION CYCLE
In order to be a transaction, a dealing must satisfy the
following characteristics:-
It involves at least two parties or two aspects
technically termed as accounts.
It results in transfer of or exchange of goods or
services.
It can be measured in terms of money value. In
shorts, if there is a change in the variables of the
fundamental accounting equation, which is,
Assets = Liabilities + Capital, it may be regarded
as a transaction.
For example : Tk. 2000 deposited in bank.
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13. ACCOUNTIG
CYCLE
Journalize transactions in the
journal
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14. ACCOUNTIG
Record (journalize) transactions CYCLE
What is the general ledger?
• It is the book of final entry.
• The information from the journal is transferred to
the ledger in the posting process.
• Debits and credits in the journal remain exactly
the same when posted to the accounts in the
ledger.
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15. ACCOUNTIG
EXAMPLE OF JOURNAL CYCLE
2003 Transaction Tk.
January1 Started business with cash as capital 1,00,000
Journal
L.F
Date Particulars Dr.Tk. Cr.Tk.
.
Cash A/C Dr. 1,00,000 1,00,000
2003 To Capital A/C Cr.
Janu. 1 (Being cash brought in as initial capital)
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16. Journalizing ACCOUNTIG
CYCLE
• Debits are always recorded first.
• Indent, then record the credit below the
debit.
• A short explanation is included on the
second line.
• Leave a space between journal entries.
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17. Journalizing
ACCOUNTIG
CYCLE
• Debits must always equal credits.
• Amounts incurred for items that benefit
future accounting periods are recorded
as assets.
• What are some examples?
– prepaid rent
– prepaid insurance
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19. Posting ACCOUNTIG
CYCLE
• All transactions are recorded in the journal,
then amounts are copied to the ledger
accounts named on the journal line.
• Once the amounts are entered into the
accounts, a posting reference (PR) must be
entered in the journal.
• New balances are computed in the running
ledger accounts.
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21. Preparing the Trial Balance ACCOUNTIG
CYCLE
• The trial balance lists the accounts that have
balances in the same order as they appear in
the chart of accounts.
• The trial balance will show if debits/credits
have been interchanged, or if amounts have
been transposed, or if a debit/credit was
omitted or recorded twice.
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22. Preparing the Trial Balance ACCOUNTIG
CYCLE
• Some errors do not show, such as omissions
or recording to the wrong account.
• Corrections before posting are made in the
journal.
• An audit trail must be left.
• Do not erase – cross out errors and enter
corrections.
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24. ACCOUNTIG
ADJUSTING ENTRIES CYCLE
• Adjustments or adjusting entries are necessary for
transactions that extend over more than one
period. The five main types of adjustments are
Prepaid Expenses, Unearned Revenues,
Depreciation, Accrued Expenses and Accrued
Revenues.
• Adjusting entries are necessary for each of these
so that revenues, assets and liabilities are correctly
reported.
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25. ACCOUNTIG
ADJUSTING ENTRIES CYCLE
There are two general classes of adjustments:
• Accruals - revenues or expenses that have accrued but have
not yet been recorded. An example of an accrual is interest
revenue that has been earned in one period even though the
actual cash payment will not be received until early in the
next period. An adjusting entry is made to recognize the
revenue in the period in which it was earned.
• Deferrals - revenues or expenses that have been recorded
but need to be deferred to a later date. An example of a
deferral is an insurance premium that was paid at the end of
one accounting period for insurance coverage in the next
period. A deferred entry is made to show the insurance
expense in the period in which the insurance coverage is in
effect.
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26. ACCOUNTIG
ADJUSTING ENTRIES CYCLE
• Pass necessary adjustment entries for the
following : -
• 1.Salary TK.1,000 is outstanding.
• 2.Interest accrued on investment TK.200.
• 3.Rent received in advanceTK.400.
• 4.Insurance prepaid TK.300.
• 5.Depreciate furniture by TK.800.
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28. PREPARATION OF ACCOUNTIG
CYCLE
FINANCIAL STATEMENTS
• In order to ascertain the profit or loss of the business concern, it
has to prepare final accounts such as Trading A/c, Profit and Loss
A/C and Balance Sheet or financial statements such as the Income
Statement.
• The Four Financial Statements :
Balance Sheet
Income Statement
Statement of Owner's Equity
Statement of Cash Flows
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29. Different Formats of ACCOUNTIG
CYCLE
the Balance Sheet
• The report format lists assets first, then
liabilities and then owners’ equity.
• The account format reports assets on
the left side and liabilities and owners’
equity on the right side.
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30. The Classified Balance ACCOUNTIG
CYCLE
Sheet
• The debit side
– Current assets
– Long-term assets
• Assets are listed in order of decreasing
liquidity.
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31. ACCOUNTIG
The Classified Balance Sheet CYCLE
• The credit side
– Current liabilities
– Long-term liabilities
• Liabilities are listed in the order of how
soon they must be paid.
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32. Balance Sheet ACCOUNTIG
CYCLE
At 31st December, 2003.
Assets Liabilities
Current Assets Current Liabilities
Cash 12,100 Accounts Payable 1,200
Accounts Receivable 3,050 Salary Payable 1,100
Supplies 150 Unearned Revenue 1,500
Total Current Assets 15,300 Total Liabilities 3,800
Plant Assets Owners’ Equity
Equipment 15,500 Capital 19,300
Less Accum Deprec 7,700 7,800
Total Liabilities and
Total Assets 23,100 Equity 23,100
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33. ACCOUNTIG
Income Statement CYCLE
• The income statement presents the results of the entity's
operations during a period of time, such as one year.
The simplest equation to describe income is:
Net Income = Revenue - Expenses
• The income can be described by:
Net Income = Revenue - Expenses + Gains -Losses
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34. Statement of ACCOUNTIG
CYCLE
Owners' Equity
• The equity statement explains the changes in retained
earnings. Retained earnings appear on the balance
sheet and most commonly are influenced by income
and dividends.
• The following equation describes the equity
statement for a sole proprietorship:
Ending Equity = Beginning
Equity + Investments - Withdrawals + Income
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35. ACCOUNTIG
Cash Flow Statement CYCLE
• The statement of cash flows is useful in
evaluating a company's ability to pay its bills.
For a given period, the cash flow statement
provides the following information:
= Sources of cash
= Uses of cash
= Change in cash balance
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36. ACCOUNTIG
Cash Flow Statement CYCLE
• The cash flow statement represents an analysis of
all of the transactions of the business, reporting
where the firm obtained its cash and what it did
with it. It breaks the sources and uses of cash into
the following categories:
= Operating activities
= Investing activities
= Financing activities
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37. Accounting Work Sheet
• A work sheet is a multi-columned document
used by accountants to help move data from
the trial balance to the financial statements.
• It is an internal document.
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43. Closing Entries
• Closing the accounts is the end of period
process that prepares the accounts for
recording transactions during the next
period.
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44. CLOSING ENTRIES
• It prepares accounts for recording the transactions
of the next period.
• Recording and posting closing entries is to transfer
the end-of-period balances in revenue, expense
and withdrawal accounts to the owner’s capital
account.
• Closing entries are necessary at the end of a period
after financial statements are prepared because
Revenue, expense, and withdrawal accounts must
begin the next period with zero balances.
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45. Closing Entries
• What accounts are closed at the end of the
period?
• Revenue, Expenses and Withdrawals.
• These relate to a specific period and are
called temporary accounts.
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46. Closing Entries
• The Income Summary account is used to
close the temporary accounts.
• This is the ―most temporary‖ account.
• It is used only to facilitate the closing
process.
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47. Closing Entries
• Revenues and Expense accounts are closed
to Income Summary.
• Income Summary is closed to Capital.
• Withdrawals are closed to Capital.
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48. Closing Entries
• Net income will be represented by a credit
balance in the Income Summary.
• Net loss by a debit balance.
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49. Flowchart of Closing Process
(Close Revenue Account) Income
Revenue Summary
28,500 12,000 (Close Expense
7,500 4,450 28,500
Accounts)
9,000 24,050
Salary Exp (Close Income Summary)
1,500 3,300
1,800 Capital
Account
Rent Exp 2,500 24,050
800 800 (Close
Withdrawals Withdrawals
Supplies Exp Account) 2,500 2,500
350 350 4 - 49
51. Post closing Trial Balance
• The accounting cycle ends with the post
closing trial balance.
• The post closing trial balance is dated as of
the end of the period for which the
statements have been prepared.
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52. Post closing Trial Balance
• The aim of post-closing trial balances is to
verify that
(1) total debit equal total credits for permanent
accounts ;&
(2) all temporary a/cs have zero balances. This is
the last step in the accounting process.
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53. Use the current and debt
ratios to evaluate a business.
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54. Comparative Financial Statements...
– are statements that show two or more
consecutive periods.
• They enhance the user’s ability to analyze a
company’s past performance.
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55. Trend Analysis
• Decision makers compare various ratios
over a period of time, looking for improving
trends.
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56. PREPARED BY
• MD. HASNAIN CHOWDHURY
• ROLL NO # 06
• 2ND SEMESTER
• BBA PROGRAM
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