AP Business with Personal Finance · Summary

Unit 3, Part 2 summary

1. Fixed costs stay the same in total as output changes; variable costs rise with output. Break-even units = fixed costs / (price - variable cost per unit).
2. Straight-line depreciation = (cost - salvage value) / years of use, and book value = cost - depreciation recorded so far.
3. Debt financing is repaid with interest but keeps ownership; equity financing has no required repayment but gives up a share of ownership and future profits.
4. Revenue - cost of goods sold = gross profit; minus operating expenses = operating income; minus interest and taxes = net income. Net profit margin = net income / revenue.
5. Assets = liabilities + owner's equity, so owner's equity (net worth) = assets - liabilities. Working capital = current assets - current liabilities.
6. The cash flow statement sorts cash into operating, investing and financing activities; credit sales, inventory, depreciation and loan principal make profit and cash differ.
7. Honest reporting is protected by shared accounting rules, internal controls and independent audits; any figure that is too high or too low misleads the people who rely on it.