2.3 Flashcards
Gross profit
Profit after deducting costs of making/selling a product
= Revenue - cost of sales
GPM = (Gross profit/revenue) x100
Net profit
Amount left after interest is taken from operating profit
=Total revenue - total expenses
NPM = (net profit/revenue) x100
Operating profit
Amount left after expenses are taken from gross profit
= Gross profit - expenses
Difference between cash and profit
Not all cash paid into a business is profit . A business must pay its costs from the money that comes into it. Once all costs have been deducted from all revenue , the amount that is left is the business’ profit
Liquidity
Liquidity: Ability of a business to pay it’s debts and liabilities when due
How to improve:
- Use effective overdraft
- Negotiate additional short term loans
- Credit agreements with suppliers
Current assets: Owned for less than a year
Non-current assets: Owned for a year +
Working capital = Asset liabilities - current liabilities
Value of business = Total assets - Total liabilities
Current ratio = Current assets/current liabilities
Profit and revenue
Fixed costs: Paid regardless of sales e.g. rent/salary
Variable costs: Changes as output changes
= cost per unit x units sold
How to increase profit:
- Increase revenue
- Decrease costs
Operating profit
Profit before taking account for taxes
Total equity
Profit left in the company after subtracting total liabilities from total assets
Calculation = Total assets - total liabilities
Reserves
Profits that are kept for a specific reason
Capital employed
The total amount of capital used for the acquisition of profits
Calculation = (fixed + current assets) - current liabilities
(higher % = better)
Statement of comprehensive income
A financial document showing a company’s income and expenditure over a particular time period, usually one year
Statement of financial position
A summary at a particular point in time of the value of a firm’s assets, liabilities and capital
Current ratio
Assesses whether or not a business has enough resources to meet any debts that arise in the next 12 months
Acid test ratio
Similar to the current ratio but excludes stocks for current assets. A more severe test of liquidity.
Shareholder’s equity
The amount of money owed by the business to the shareholders
