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Business Studies > 2.3 (Done) > Flashcards

2.3 (Done) Flashcards

1
Q

Define profit.

A

The financial gain of a business through trading.

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2
Q

What is the formula for profit?

A

Total revenue - total costs

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3
Q

What is the formula for gross profit?

A

Gross profit = Revenue - Cost of sales

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4
Q

What is meant by ‘Cost of sales’?

A

The direct costs of a business, e.g. for a retailer it’s the cost of buying in stock to re-sell.

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5
Q

What is meant by ‘overheads’?

A

Indirect costs, e.g. selling and administrative expenses.

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6
Q

What is the formula for operating profit?

A

Gross profit - Operating expenses

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7
Q

Define net profit.

A

The profit made by the business for the year.

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8
Q

What is the formula for net profit?

A

Operating profit - Interest (and exceptional costs)

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9
Q

What does the statement of comprehensive income (SOCI) show?

A

The income and expenses of a business during the financial year.

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10
Q

What are the three profit margins?

A
  • Gross profit margin.
  • Operating profit margin.
  • Profit for the year (net profit) margin.
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11
Q

What does the gross profit margin show?

A

The gross profit made on revenue.

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12
Q

What is the formula for gross profit margin?

A

Gross profit
——————X100%
Revenue

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13
Q

Are higher or lower gross margins preferable? Why?

A

Higher gross margins are preferable to lower ones because it means that more gross profit is being made per £1 of sales.

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14
Q

What are two ways the gross profit margin can be increased?

A
  • By raising revenue relative to the cost of sales, by increasing price.
  • By cutting the cost of sales; this might be achieved by finding cheaper suppliers of key materials.
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15
Q

What does the operating profit margin show?

A

The operating profit made on sales revenue.

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16
Q

What is the formula for operating profit margin?

A

Operating profit
————————— X100%
Revenue

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17
Q

What is the formula for the profit for the year (net profit) margin?

A

Net profit before tax
——————————— X100%
Revenue

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18
Q

What are two ways to improve profit margins?

A
  • Raising prices.

- Lowering costs.

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19
Q

Why is raising prices a good option for a business where the demand for its products is not too responsive to changes in price?

A

Because the increase in price will generate more revenue even though fewer units are sold.

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20
Q

What is a problem with raising prices?

A

It’s always risky because it is never certain how competitors will react.

21
Q

What are two ways a business can lower its costs?

A
  • Buying cheaper resources.

- Using existing resources more efficiently.

22
Q

What is a statement of financial position (balance sheet)?

A

A summary at a particular point in time of the value of a firm’s assets, liabilities and capital.

23
Q

Define assets and give three examples.

A

The resources owned by a business, e.g. buildings, machinery, vehicles.

24
Q

Define liabilities and give two examples.

A

The money owed by a business, e.g. to suppliers and banks (overdraft or a mortgage).

25
Q

Define capital.

A

The money put into the business by the owners.

26
Q

What is the formula for assets?

A

Assets = Capital + Liabilities

27
Q

In a statement of financial position, why does the value of assets equal the value of liabilities and capital?

A

Because all resources purchased by a business have to be financed either from capital or liabilities.

28
Q

What are non-current assets (fixed assets)?

A

Long-term resources that will be used by the business repeatedly over a period of time.

29
Q

What are non-current liabilities?

A

Money owed by the business for more than one year.

30
Q

What are current liabilities?

A

Money owed by the business that must be repaid within one year.

31
Q

What are current assets?

A

Liquid assets, i.e. those assets that will be converted into cash within one year.

32
Q

What are three examples of non-current assets?

A

Land, property, vehicles.

33
Q

What is an example of a current asset?

A

Inventories, such as stocks of raw materials and finished goods.

34
Q

Give 2 examples of current liabilities.

A

Bank loans and bank overdrafts.

35
Q

What are two examples of non-current liabilities?

A

Long term bank loans and mortgages.

36
Q

Formula for net assets?

A

Total assets - total liabilities.

37
Q

Define shareholders’ equity.

A

The amount of money owed by the business to the shareholders.

38
Q

What are the two financial ratios that can be used to measure liquidity?

A
  • Current ratio.

- Acid test ratio.

39
Q

What does the current ratio assess?

A

Whether or not a business has enough resources to meet any debts that arise in the next 12 months.

40
Q

Formula for current ratio?

A

Current assets
—————————
Current liabilities

41
Q

What is the acid test ratio?

A

A more severe test of liquidity because inventories (stocks) are not treated as liquid resources.

42
Q

Acid test ratio formula?

A

Current assets - Inventories
———————————————
Current liabilities

43
Q

What is working capital?

A

The amount of money needed to pay for the day-to day trading of a business.

44
Q

Why does a business need working capital?

A

To pay expenses such as wages, and to buy components to make products.

45
Q

Working capital formula?

A

Current assets - current liabilities

46
Q

If a business is experiencing liquidity problems, what are two things the business can do to improve liquidity?

A
  • Raise current assets.

- Reduce current liabilities.

47
Q

What are four measures that might be used to either generate cash or save it?

A
  • A business can increase its cash by borrowing more money on its overdraft.
  • Negotiate additional short term or long term loans.
  • A business might reduce the amount of stocks it holds.
  • Only make essential purchases.
48
Q

What are three difficulties that a business may face when either generating or saving costs?

A
  • Businesses may not be able to borrow any more money from its overdraft if it’s up to its overdraft limit (and can’t be increased).
  • Businesses may find it difficult to negotiate additional loans if it is known that they are short of cash.
  • A problem with reducing stock levels is that a business might not have the stocks to cope with an increase in the demand of its products.

Business Studies (15 decks)

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