1.6.3 Profit and Loss

Question 1

Gross profit

Answer 1

turnover/sales revenue - VC

Question 2

turnover/sales revenue - VC

Answer 2

Gross profits - FC

Question 3

Finance expenses

Answer 3

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

Question 4

Profit for the year

Answer 4

Net profit → operating profit - taxes + interest

Question 5

Statement of comprehensive income/income statement

Answer 5

Shows a company’s net profit or loss, over a given time period

Question 6

Profit margin

Answer 6

Tells the business what percentage of its turnover is actually profit

Question 7

Gross profit margin

Answer 7

Shows how efficiently the business is using its main inputs to the production process

Question 8

Operating profit margin

Answer 8

Highlights the efficiency of the business as a whole

Question 9

why do businesses keep financial records

Answer 9

Businesses need to keep financial records for tax returns, planning and monitoring. There is a legal requirement to produce an income statement

Question 10

gross profit calculation

Answer 10

Gross Profit = Turnover - Variable Costs

Question 11

operating profit calculation

Answer 11

Operating profit = Turnover - (Fixed costs + Variable costs)

Question 12

profit for the year calculation

Answer 12

• Net profit = Turnover - Total costs - Taxes - Interest
• The amount of operating profit the business gets to keep and use for investment or dividends

Question 13

what is an income statement

Answer 13

• 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

Question 14

why are income statements important

Answer 14

• 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

Question 15

process of an income statement

Answer 15

• 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

Question 16

gross profit margin

think INPUTS

Answer 16

• = (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)

Question 17

operating profit margin

Answer 17

= (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)

Question 18

profit margin

Answer 18

Profit margin = (profit / turnover) x 100

Question 19

how firms increase profit

Answer 19

• 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

Question 20

business increase profits by:

think about competitive advantage

Answer 20

• 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

Question 21

profit exam question –> how to increase

Answer 21

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

Question 22

nuance to consider for profit exam questions

Answer 22

• 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