Finance and Accounting Report: Breakeven, Ratios, and Fayol Theory

This report delves into key concepts in finance and accounting, offering insights into cost-volume-profit (CVP) analysis, financial ratios, and Henri Fayol's management theory. It begins with an introduction to the importance of accounting systems in business, emphasizing the significance of financial aspects and the tools and techniques employed. The report then explores the assumptions underlying CVP analysis, including cost classification, linear relationships, and inventory considerations, and provides examples of breakeven point calculations. The report also discusses the purpose of financial accounting, highlighting its role in recording, controlling, protecting assets, identifying profitability, meeting legal requirements, allocating resources, and facilitating decision-making. Furthermore, it examines important financial ratios, such as return on net assets, inventory turnover, and revenue per employee, providing context for their application in manufacturing businesses. Finally, the report examines the theory of Henri Fayol and its benefits for medium-sized enterprises.

Running head: finance and accounting 1
Finance and accounting

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Table of Contents
Introduction......................................................................................................................................3
1. Assumptions of cost-volume-profit analysis...............................................................................3
2. Purpose of financial accounting and important financial ratios..................................................6
3. Theory of Henry Fayol and its benefits.......................................................................................8
Conclusion.....................................................................................................................................10
Reference.......................................................................................................................................12

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Introduction
In any business, there is the need to maintain the proper accounting system and with that, all the
requirements shall be fulfilled in the most effective manner. The financial aspects involved in the
enterprise are to be undertaken with due care. For this, there are several tools and techniques
which can be taken into consideration. The attainment of the knowledge in respect of them shall
be made so that they can be used in the time of need for any matter. Accounting for finance is
made with the help of certain approaches and systems and so it is required that they shall be
formulated in a proper way. The report will be consisting of the necessary details about various
aspects involved in medium-sized enterprises. The profits are to be made in the business and for
that, the level at which this will be made possible shall be identified. There is the cost volume
analysis which is performed and in that the relationships that exist between the cost and volume.
By that, the profit is also ascertained and there is the identification of all interrelationships. All
the concepts in relation to that will be discussed in this report. The calculation for the breakeven
point will also be made. The fundamentals of financial accounting will be discussed and with
that, the ratios which are important will be identified. The theory of Henri Fayol will be
discussed in this report and in that all the essential aspects will be considered. The benefits which
will be received by the medium enterprise by the help of this theory will be ascertained.
1. Assumptions of cost-volume-profit analysis
In the process of carrying out of the business, there are various aspects which are required to be
analyzed and for that, it is required that appropriate techniques shall be utilized. It is important
that proper planning is made and for that, all the information and essential aspects shall be
evaluated (Hilton and Platt, 2013). The profit-making is the main aim of any business and by the
help of this, it will be possible to ascertain the amount of profit which will be earned at a certain
level of activity. In this concept of CVP analysis, the main factors which are involved in the
whole process will be identified and then the relation among them will be evaluated. In this, the
manner in which profits and costs are affected by the change in the volume will be identified
(Navaneetha et al., 2017). In the undertaking of this analysis, there are certain assumptions which
are used and an explanation of the same is provided hereunder:

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 Under this analysis, it is assumed that all the costs which are incurred will have to be
classified into two categories which are fixed cost and variable cost. In the business, there
are various expenses but it is a difficult process to identify the type of cost it is. There are
several methods which are used in order to separate the fixed and variable component
from a mixed cost. In this, the variable cost will be the one which will be modified with
the change in the total units which are undertaken (Liu, Forgione and Younis, 2012).
They will be calculated on the per unit basis and will be different at all levels of
activities. On the contrary, the fixed cost is a constant value and will be remaining the
same at every level. It will not be affected by the change in the volume that is being
produced.
 The second assumption is that the relation between the cost and revenue will be
remaining linear for a specified level and after that, the change will be made. It is
considered that the fixed aspect of the cost will be the same and variable will be
proportionate to the volume.
 The change in the inventory is not considered under this and it is assumed that there will
be no starting or closing inventory (Kirlioğlu and Baral, 2012). There will be a sale of
complete stock and then only the concept of CVP will be applied. It is also considered
that the variable costing will be the approach which will be used for the product cost.
 The assumption is made that the price at which goods are sold will be remaining same at
any level of volume which is considered.
In this, there is the calculation of breakeven also which is very relevant for the business. The
understanding of this will be obtained from the two examples provided below.
A company is there in which there are various expenses which are incurred and they are
separated as variable and fixed. The list of expenses is as follows:
Variable expenses:
Direct material: 20 per unit
Direct labor: 10 per hour
Variable administration cost: 2 per unit

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Fixed administration cost: 10000
Selling price: 42 per unit
The breakeven point will be calculated with the help of the formula which is:
Breakeven point = Fixed cost/contribution per unit
Contribution = Selling price – variable cost
So in the given case contribution will be (42-20-10-2) which will come out to be 10 per unit.
Breakeven units = 10000/10
= 1000 units
From this, it can be understood that if the company will be selling 1000 units then it will be able
to cover the total cost only. So there will be no profit or loss which will be made at the given
level of sales. In order to make the profit, there will need to make the sales above the breakeven
point (Oe and Mitsuhashi, 2013).
In school, there are many students taking admission. It has been identified that in total 15000 will
be spent on every student and they will be charged with the fees of 40000. There will be a fixed
cost amounting to 500000 which will be met every year. In order to make the profits, the school
will be required to give admission to students above the breakeven point. The contribution will
be (40000-15000) 25000 per student. In order to cover the fixed cost 20 students will be required
which is the breakeven point.
Breakeven = 500000/25000
=20
So it can be said that profits will start after 20 students and before that only the cost will be
recovered.
From the calculations, it is identified that calculation of the breakeven is highly important as then
only the level at which the performance is to be made is determined. The point tells about the

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volume which the business requires just to balance with the cost which helps in making the
decision (Palia, 2014). With the help of breakeven, planning will be made in such a manner that
required profits are earned which is the core aim of any business. Therefore in order to earn
profits, breakeven is very important for any entity.
2. Purpose of financial accounting and important financial ratios
Financial accounting is the key concept of any business in which there are various processes
which are undertaken. They involve measuring, collecting and recording all the transactions
which are carried in any business. An appropriate system is used under this which helps in
making the proper accounts (Taipaleenmäki and Ikäheimo, 2013). Communication and
summarizing of the accounts are also considered under this process by which the decision-
making process of the company is facilitated. There are various purposes for which this
accounting is made and in that main are the recording and communication of the transactions of
the business. Some of them are as provided hereunder:
Recording and controlling: Under this, the focus is made on the making of the systematic
records by which all the items will be in knowledge. This will be further helping in keeping
control over all the activities and the amounts involved in them.
Protection of the properties of business: The accounting is carried so that properties involved
in the business are protected. There will be proper records and due to them, it will be difficult for
anyone to cheat with the company (Beatty and Liao, 2014). All the expenses and receipts will be
under control and no unauthorized activity will be performed.
Identification of the profitability: In the business, it is required that profit level shall be
evaluated and by the financial accounting it will be possible to determine the profit or loss which
is made. The information about this will be available to the management as well as the investors
who will be using this to make the required decisions.
Meet the legal requirements: Financial accounting is required under law and it is necessary for
any company to prepare the financial statements. The format which is to be used for this purpose
is also described under the law and shall be complied by all.

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Resource allocation: The accounting is needed as then the need for the resources will be
determined and this will be used to make the proper allocation of the available resources (Miller
and Power, 2013). This way there will be the most effective and efficient utilization of all the
resources.
Effective decision making: The financial accounts which are prepared are open for all and are
also provided to the external parties. This will be facilitating the parties to take the proper
decisions as complete information will be available to them. The investors will be analyzing the
financial position of the company before making the investment.
Financial ratios are the ones which are calculated from the financial statements and by the help
of the financial condition of the business is evaluated in an appropriate manner. The managers in
the business use these ratios to take the various internal decisions in the entity in relation to
operations and other aspects (Ongore and Kusa, 2013). Manager will be able to analyze whether
the set targets have been achieved or not. In this, there are various types of ratios which are
calculated and they include profitability ratios, efficiency ratios, and liquidity ratios. All the
elements which are involved in the company are evaluated with the help of them (Pervan and
Kuvek, 2013). In the manufacturing business, there are various operations performed and so the
ratios which will be required under this are as follows:
Return on net assets company: In a manufacturing concern there are many assets which are
used for producing goods. For that, it is required that efficiency of them shall be checked. By the
help of this ratio, it will be possible to identify the level of efficiency with which assets are
utilized. The revenue that is made with the help of them is identified and that way the working of
the business is monitored (Delen, Kuzey, and Uyar, 2013). The calculation of this will be made
by dividing the earnings of the company with the total assets that are possessed by the company.
Inventory turnover ratio: By the help of this it will be possible to determine the effectiveness
with which the inventory of the company is creating the revenue. There will be consideration of
the cost of goods sold under this and by that the ratio is calculated (Beaver, Correia and
McNichols, 2012). Manager will be using this to decide whether the required level of
performance is attained or not.

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Revenue per employee ratio: This is the ratio by which the skills and abilities of the employees
are tested. Their performance is evaluated and the revenue that is made by each employee is
identified. The total revenue is divided by the number of employees and by that this ratio is
calculated (Fitó, Moya and Orgaz, 2013). If the ratio is high then the manager believes that
employee is working with potential.
All of these ratios are used by the manager to measure the performance of the business and then
take the decision accordingly so that further growth is attained.
3. Theory of Henry Fayol and its benefits
In the management there are various theories which are undertaken and one of them is
introduced by Henry Fayol. In that, the manner in which the communication between
management and personnel is created is identified. In this theory of management, all the essential
concepts of the business are considered and by the help of that, it is possible for all the business
to use this theory in their businesses. Under this Fayol has provided the 14 principles by which
the interaction among all will be established. All of the principles are incorporated in such a
manner that business is benefitted from this (Schimmoeller, 2012). The principles and benefits
which are attained due to them are as follows:
Work division: This is the key principle in which it is covered that all the work shall be divided
among the employees as per skills which ate possessed by them. It will be beneficial for the
business as productivity is increased and the small enterprises will be able to have increased
production.
Authority and responsibility: According to Henry the management will be having the power to
give orders to the employees and also the performance will be evaluated afterward. By the use of
this, the enterprise will be able to keep control of the performance of all.
Discipline: Under this, the obedience is considered which is essential to any business as the
working will be carried in a smooth manner by the help of this (Kitana, 2016). This will ensure
that small business does not face any kind of hindrances.

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Unity of command: There will be a rule that one employee will be under a specific manager and
only he will be authorized to order the person. By the help of this, any kind of conflict or
confusion will be avoided.
Unity of directions: All the employees of the enterprise will be responsible to work in one
direction towards the attainment of a common goal. A plan will be made in which all the tasks
will be specified and this way enterprise will be able to maintain the balance and achieve the
required targets.
Individual interest subordination: Under this, it is specified that in the business the priority
shall be provided to the aims of the business and not the personal interest of any person. So this
concept will also be applying to the manager of the company.
Remuneration: It is important that all the employees shall be provided with the appropriate
remuneration which will be providing them the required level of satisfaction and motivation. In
this, all the monetary, as well as non-monetary aspects, are taken into the record (Ehiobuche and
Tu, 2012). This will be useful for the manager as they will have efficient employees for all
operations.
The degree of centralization: There is the proper balance between the authority and
management by which the decisions will be made. The concept of centralization is used in which
all the decisions in the company are taken by the top management. There will be the
establishment of a good system and that will be beneficial for the business.
Scalar chain: There is the system which is followed in all the companies and the work is
performed accordingly. In this, there is the top management and the after that various stages
which are till the lowest level. There shall be the specified authority for all according to the
Fayol (Ferdous, 2016). The work will be managed in an effective manner by this which will be
beneficial for the manager.
Order: There shall be the availability of the appropriate resources for all the employees. In
addition to this, the manager will be responsible to create a safe and secure environment.

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Equity: In the company it is necessary that all the employees shall be treated with equality.
There shall be equal and adequate rights for all and they will be monitored by the manager.
Stability: Under this, all the employees are managed in an effective manner and shall be
provided with required facilities. It shall be the goal of the management that the employee
turnover shall be at a minimum level.
Initiative: The employees in the company shall be given the freedom to express their views and
ideas (Uzuegbu and Nnadozie, 2015). By this there will be an improvement in the value of the
company and staff will also be interested in this.
Esprit de corps: According to this principle there shall be unity which shall be established
among all the employees of the company. There shall be effective communication which is
developed by which the understanding will be established.
All of these are the principles which have been set by Fayol and the manager of the entity will be
required to follow them. By the help of this, it will be possible for the manager of small entity to
establish the proper policies and manage the work in an effective manner. They will be able to
develop a team which will be efficient in dealing with all the aspects (Rahman, 2012). There will
be proper allocation and utilization of the resources by which the cost will be controlled and the
increase in profitability will be attained.
Conclusion
The report presented elucidates about all the aspects which are to be taken into account in the
process of financial accounting. The manner in which this is carried out has been considered.
There is the undertaking of the cost volume profit analysis under which all the assumptions
which are involved in this have been identified. A complete description of all of them is provided
and in that the importance of the same is also included. There is the use of the breakeven also
and the concept involved in that is explained with the help of examples. The manner in which
breakeven is calculated and the importance of the same has been determined. In the process of
financial accounting, there are various purposes for which it is carried and identification of all of
them has been made. The performance of the business is required to be evaluated and for that,
there is the use of the ratios. The main ratios which will be covered for the medium-sized

Finance and accounting 11
enterprise have been ascertained and an explanation of them is provided in the report. The theory
of Henry Fayol has been considered and the description of the same is also provided. In that, all
the principles of the theory have been discussed in an appropriate manner. The manner in which
this will be providing the benefits to the manager of the small business has also been taken into
account. The theory will be beneficial and it has been identified with the help of the information
provided.

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Reference
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