Financial Terms

## Financial Terms

There are a range of financial terms with which you should be familiar.

Profit is when the amount of money received is greater than the amount of money it cost eg if it costs 12p to create a widget, and the widget is sold for 15p, then the profit is 3p on each widget.

A loss is if it costs more to create something than is received from selling it.

Cost Price is the amount it costs to buy a product. Selling Price is the amount an item is sold for.

An asset is ownership of a property or an item, and which can be sold at some point in the future. A liability is when money is owed to someone else, such as a loan.

Depreciation is the fall in value of an asset - a car, for example, is worth less each year it grows older.

Balance is a term used when opposite moneys are added together, such as income and expenditure, or assets and liabilities.

Inflation is the result of the cost of items increasing on a year-by-year basis.

## Example 1

A company buys 100,000 widgets in a special deal. The cost price of the widgets is 18p each. It believes that it can sell 80,000 of the widgets at 20p, and the remaining widgets will be discounted to sell at 15p.

How much profit does the company make?

The cost of buying = 100,000 x £0.18 = £18,000

Full price sales = 80,000 x £0.20 = £16,000

Discount sales = 20,000 x £0.15 = £3,000

Profit = £16,000 + £3,000 - £18,000 = £1,000

Answer: £1,000

## Example 2

A company owns 2,000 laptops. The laptops were purchased for £400 each. The total values of the laptops were recorded as an asset by the company.

The laptops were depreciated by 30% for the next year. What is the value of the asset now?

The total cost of the assets was originally 2,000 x £400 = £800,000

Depreciation reduces the value of the assets

frac(30)(100) xx 800,00 = 240,000

800,000 - 240,000 = 560,000

Answer: £560,000