2.3 managing finance Flashcards
how to calculate profit:
total revenue - total costs
what are the three types of profit?
-gross profit
-operating profit
-profit for the year/net profit
define gross profit
(+ limitations)
the money made from selling products after the costs of producing have been deducted
(only tells us a little bit about profit as it only includes direct costs)
how to calculate gross profit:
revenue - cost of sales/production
define operating profit:
the money left after all the costs of a
business have been taken from its profits
what are operating expenses / administration expenses
(+ examples)
day to day costs that aren’t directly attributed to the product
(rent, equipment)
how to calculate operating profit
gross profit - other operating expenses
what is profit for the year/net profit?
(+ value)
the actual profit the business has made (taking into account interest and all costs)
(tells us much more, because we have taken away EVERY cost)
how to calculate profit of the year/net profit:
operating profit +/- interest
what are profit margins?
the proportion of sales revenue that has been converted into profit
what is a gross profit margin useful for?
a useful indicator for analysing how a business has performed in terms of its direct trading activity
how to calculate a gross profit margin:
gross profit/revenue x 100
why is an operating profit margin useful?
-it takes into account the performance of a business more fully, as the calculation takes into account direct and indirect costs
-tells us how effectively a business turns its sales into profit
how to calculate an operating profit margin:
operating profit/revenue x 100
how is a net profit margin useful?
-it takes into account all revenues and costs incurred by the business
-it is a good measure of how effectively the business performed over the financial year
how to calculate the net profit margin
net profit/revenue x 100
what is interest?
a percentage of the amount of money borrowed that must be repaid in addition to the original amount borrowed
how to calculate interest
total repayment - borrowed amount/borrowed amount
x100
what is ratio analysis?
the different ratios that are used to analyse how a business is performing
(eg: gross profit margin)
what can a profit and loss account be called?
a statement of comprehensive income
what is the purpose of the statement of comprehensive income?
to list all of the business’s actual income and expenditure for a year
why are statements of comprehensive income done?
-if a profit is made, tax must be paid to the government
-management may want to compare statement to past years
-to compare to rivals
-shareholders/investors may be interested in the profitability
what order are the headings in a profit & loss account?
1) sales revenue
2) cost of sales
3) gross profit
4) operating expenses
5) operating profit
6) interest
7) net profit/profit of the year
what are costs of sales?
the direct costs associated with the production and sale of the product or service