1.6.3 Profit and Loss Flashcards
Gross profit
turnover/sales revenue - VC
turnover/sales revenue - VC
Gross profits - FC
Finance expenses
Interest paid on bank and other borrowings, less interest income received on cash balances is shown here; useful figures for shareholders to assess how much profit is being used by the funding structure of the business
Profit for the year
Net profit → operating profit - taxes + interest
Statement of comprehensive income/income statement
Shows a company’s net profit or loss, over a given time period
Profit margin
Tells the business what percentage of its turnover is actually profit
Gross profit margin
Shows how efficiently the business is using its main inputs to the production process
Operating profit margin
Highlights the efficiency of the business as a whole
why do businesses keep financial records
Businesses need to keep financial records for tax returns, planning and monitoring. There is a legal requirement to produce an income statement
gross profit calculation
Gross Profit = Turnover - Variable Costs
operating profit calculation
Operating profit = Turnover - (Fixed costs + Variable costs)
profit for the year calculation
- Net profit = Turnover - Total costs - Taxes - Interest
- The amount of operating profit the business gets to keep and use for investment or dividends
what is an income statement
- Historical record of trading of a business over a period of time (a year)
- Shows profit/loss made by the business → difference between total income and total costs
why are income statements important
- Allows shareholders/owners to see how the business has performed and whether it has made an acceptable profit
- Helps identify whether the profit earned by the business is sustainable (profit quality)
- Enables comparison with other similar businesses and the industry as a whole
- Allows providers of finance to see whether the business is able to generate sufficient profits to remain viable (in conjunction with the cash flow statement)
- Allows the directors of a company to satisfy their legal requirements to report on the financial record of the business
process of an income statement
- revenue /sales/sales revenue/turnover - costs of sales/costs of goods sold/direct costs/VC = gross profit
- Gross profit - expenses/admin expenses/overheads/indirect costs/FC = operating profit
- Operating profit - interest/finance costs = net profit before tax
- Net profit before tax - tax = net profit after tax
gross profit margin
think INPUTS
- = (gross profit / turnover) x 100
- Higher margins show that costs of making the product are relatively low to the selling price → preferred
- Firms with low profit margins may have high overall profits if they have a fast sales turnover (holiday companies)
operating profit margin
= (operating profit margin / turnover) x 100
- A firm’s profit margin is increasing each time, then it is becoming more efficient as it grows
- Firm managers should be more concerned with whether GPM or OPM has decreased the most
- If OPM has reduced, a manager should find ways to reduce expenses, by reducing fixed costs
- however , maybe some of these FC are out of the businesses control (increased fuel power, increased raw materials)
profit margin
Profit margin = (profit / turnover) x 100
how firms increase profit
- Managers will use information to assess how well the business is doing
- An increase over previous figures indicates that they are on the right track
- A decrease is a cause for concern and a signal for something to be done
- Even an increase can be a worry if it not as big as competitors
- Operating profit needs to be higher if the business is risky → short term profits will compensate for running the risks of losses in some years
business increase profits by:
think about competitive advantage
- Adding more value
- Improving reliability
- Repositioning the product
- Energetic market research and promotion
- Cutting costs and prices → more competitive advantage, increasing market share (if elastic)
- Involves how competition is developing and elasticity of demand
profit exam question –> how to increase
Para 1 → can talk about how to increase TR
- Think about what is in demand
Para 2 → can talk about how to decrease total costs
- Using cheaper raw materials, using cheaper VC as they are usually in the firms control
nuance to consider for profit exam questions
- IT DEPENDS ON The elasticity of the product → substitutes, necessity, luxury
- This affects the whether price should go up or down to affect revenue
- Short term versus Long term → Can change VC now and FC later
- What things can the firm actually change → firm cannot change min wage, or inflation in prices etc
