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Business Theme 2 > 2.3 Managing finance > Flashcards

2.3 Managing finance Flashcards

1
Q

What is gross profit?

A

The profit made by a business after direct costs have been met

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2
Q

What is cost of sales?

A

The cost of inventory bought or produced

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3
Q

How is gross profit calculated?

A

Gross profit = Revenue - Cost of sales

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4
Q

What is operating profit?

A

The difference between gross profit and business overheads

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5
Q

What are overheads?

A

Indirect costs such as selling and administrative expenses

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6
Q

How is operating profit calculated?

A

Operating profit = Gross profit - Operating expenses

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7
Q

What is profit for the year?

A

The profit made by the business for the year, it is the difference between operating profit and interest

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8
Q

How do you calculate profit for the year?

A

Profit for the year = Operating profit - Interest

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9
Q

What does a statement of comprehensive income show?

A

The income and expenses of a business during the financial year

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10
Q

What is a statement of comprehensive income used for?

A

It is used to calculate gross profit, operating profit and profit for the year

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11
Q

How do you measure profitability?

A

By calculating profit margins, which measure the size of profit in relation to revenue

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12
Q

What is gross profit margin?

A

It shows the gross profit made on sales revenue

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13
Q

How is the gross profit margin calculated?

A

Gross profit margin = (gross profit / revenue) x 100

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14
Q

What does a higher gross profit margin show?

A

It means that more gross profit is being made per £1 of sales

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15
Q

How can the gross profit margin be increased?

A
  • By raising the revenue relative to the cost of sales, by increasing price
  • By cutting the cost of sales, by finding cheaper suppliers
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16
Q

What is operating profit margin?

A

It shows the operating profit made on sales revenue

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17
Q

What is the operating profit margin used for?

A

To measure a company’s pricing strategy and operating efficiency

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18
Q

How is the operating profit margin calculated?

A

Operating profit margin = (Operating profit / Revenue) x 100

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19
Q

What is net profit margin?

A

It takes into account all business costs, including interest, other non operating costs and exceptional items

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20
Q

How is the net profit margin calculated?

A

Net profit margin = (Net profit before tax / Revenue) x 100

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21
Q

Are high or low profit margins preferred?

A

Higher margins are usually better than lower ones because more money is made on each £1 of sales

22
Q

What will increasing profit margins do?

A

It will improve business performance. If margins can be raised, the business will make more profit at the existing level of sales.

23
Q

How can profit margins be raised?

A

• Raising prices
• Lowering costs

24
Q

How will raising prices improve profitability?

A

If a business raises its price it will get more revenue for every unit sold. If costs remain the same then profitability should improve.

25
Q

How is raising prices a risky thing to do?

A

It might have an impact on the level of sales as demand will fall. Also it is never certain how competitors will react.

26
Q

How will lowering costs improve profitability?

A

It might be possible to buy resources from new suppliers that offer better prices. Or make better use of current resources to improve efficiency. However, if doing this businesses should be cautious and understand pitfalls.

27
Q

What is a statement of financial position?

A

It is like a photograph of the financial position of a business at a particular point in time, usually produced at the end of a financial year

28
Q

What is an asset?

A

The resources owned by a business. Examples include buildings, machinery, equipment etc.

29
Q

What is a liability?

A

The debts of the business, a source of funds for a business. Examples include an overdraft or mortgage.

30
Q

What is capital?

A

The money put into a business by the owners, it is used to buy assets

31
Q

What do the value of assets and liabilities equal in such statements?

A

The value of assets will equal the value of liabilities and capital. This is because all resources purchased by a business have to be financed from either.

32
Q

What are non current assets?

A

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

33
Q

What are examples of non current assets?

A

• Land
• Property
• Equipment

34
Q

What are current assets?

A

Assets that will be changed into cash within 12 months, they are liquid assets

35
Q

What is liquidity?

A

How easily it can be converted into cash

36
Q

What are examples of current assets?

A

• Inventories
• Trade and other receivables
• Cash/cash equivalents

37
Q

What are current liabilities?

A

Any money owed by a business that must be repaid within one year

38
Q

What are examples of current liabilities?

A

• Loans
• Trade and other payables
• Current tax liabilities

39
Q

What are non current liabilities?

A

Long term loans and any other money owed by the business that does not have to be repaid for atleast a year

40
Q

What are examples of non current liabilities?

A

• Long term bank loans
• Mortgages
• Company pension funds

41
Q

What are net assets?

A

They’re calculated by subtracting the value of total liabilities from total assets. This will be equal to shareholders equity.

42
Q

What is shareholders equity?

A

A summary of what is owed to the owners of the business

43
Q

What are examples of shareholders equity?

A

• Shared capital
• Retained profit

44
Q

How can you measure liquidity?

A

• Current ratio
• Acid test ratio

45
Q

What is current ratio?

A

A liquidity ratio and focuses on the current assets and current liabilities of a business

46
Q

How is current ratio calculated?

A

Current ratio = Current assets / Current liabilities

47
Q

What does a current ratio of 1.5 - 2.0 suggest?

A

Having sufficient liquid resources

48
Q

What does a current ratio of below 1.5 suggest?

A

The business does not have enough working capital, meaning a business may be over-borrowing or overtrading

49
Q

What does a current ratio of above 2.0 suggest?

A

Too much money is tied up unproductively. Money tied up in stocks, for example, does not earn any return.

50
Q

What is acid test ratio?

A

A more severe test of liquidity. This is because inventories are not treated as liquid resources, there is no guarantee that stocks can be sold.

51
Q

How is acid test ratio calculated?

A

Acid test ratio = Current assets-Inventories / Current liabilities

52
Q

What does an acid test ratio of less than 1.0 suggest?

A

Its current assets minus stocks do not cover its current liabilities. This could indicate a potential problem.

Business Theme 2 (6 decks)

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