2.3 key terms Flashcards
Define gross profit
The difference between revenue and the cost of sales. It shows the profit made on the trading activity before any other costs are taken into account.
Define operating profit
Profit taking into account the other operating expenses on top of gross profit.
Define profit margins
Compares the profit figure to sales revenue - the proportion of sales revenue that had been converted into profit
Define statement of comprehensive income
A document that communicates the revenue generated by the business and then its profit following a series of expenses
Define cost of sales
The direct costs of producing goods sold by a company, e.g. labour, materials etc
Define credit period
The number of days a customer is allowed to wait to pay an invoice
What is a balance sheet?
A financial document that records the assets and liabilities of a business. It gives a snapshot of the value and financial strength of a business.
Define liquidity
The ability of a business to pay its debts and liabilities in cash when they fall due.
What is current ratio?
A liquidity ratio that compares current assets with current liabilities. This assesses whether a business has sufficient working capital to pay it’s short term debts.
What is the acid test ratio?
A more severe measure of liquidity. Does not take into account inventory/stock of a business due to the fact that for many businesses there is no guarantee that inventories can be quickly turned into cash.
Define working capital
The money within a business that is needed to pay for the day-to-day running costs.
Define overtrading
When a business expands or engages in more activity too quickly without the financial support or resources to fund it
Define profitability
The degree to which a business yields profit or financial gain
