Question 1

what is amortisation?

Accepted Answer

the writing off of an intangible asset

Question 2

what is cost of sales?

Accepted Answer

the direct costs of a business

Question 3

what is meant by exceptional costs?

Accepted Answer

a-one-off costs such as a large bad debt

Question 4

what the definition of by gross profit?

Accepted Answer

the difference between revenue/turnover and cost of sales

Question 5

what is the definition of by gross profit margin?

Accepted Answer

gross profit expressed as a percentage of revenue/turnover

Question 6

what is the definition of meant by operating profit?

Accepted Answer

the difference between gross profit and business overheads, such as selling and administrative expenses

Question 7

what is the definition of by operating profit margins?

Accepted Answer

operating profit expressed as a percentage of revenue/turnover

Question 8

what is the definition of profit for the year or net profit?

Accepted Answer

the difference between operating profit and interest and exceptional item

Question 9

what is the definition of profit for the year margin or net profit margin?

Accepted Answer

net profit before tax, expressed as a percentage of revenue/turnover

Question 10

What is meant by statement of comprehensive income/

Accepted Answer

a financial document showing or company's income and expenditure over a particular time period, usually one year

Question 11

What is meant by revenue or turnover?

Accepted Answer

the total income of a business resulting from sales of goods or services

Question 12

What is gross profit?

Accepted Answer

- gross profit is the measure of how efficiently the business sells it goods and service - you want this to be as high as possible

Question 13

How do you calculate gross profit?

Accepted Answer

gross profit = revenue (turnover) - lost of sales

Question 14

What are some examples of cost of sales?

Accepted Answer

costs of sales is the direct costs associated with the production of the product or service. that would be raw materials, wages and other costs what you may refer to as variable costs

Question 15

What is operating profit?

Accepted Answer

-operating profit measures how much profit a business makes after all the business's costs have been deducted

Question 16

How do you calculate Operating Profit?

Accepted Answer

Operating profit = Gross Profit - Operating Expenses

Question 17

what are operating expenses?

Accepted Answer

- operating expenses are the indirect costs of the business - indirect costs are the equivalent of the businesses fixed costs and include expenses such as rent, office, heating and salaries of directors

Question 18

What is meant by net profit?

Accepted Answer

bet profit measures the businesses final profit, before any taxes is calculated or dividend paid to shareholders

Question 19

How do you calculate net profit?

Accepted Answer

Net Profit = Operating profit - interest and exceptional costs - interest will be the difference between and interest paid by the business (on loans and overdrafts) and interest received (from savings for example) - Exceptional items are large one off items, such as a bad debt

Question 20

what is Statement of comprehensive income (profit and loss account)?

Accepted Answer

a financial document showing a company's expenditure over a particular time frame, usually a year

Question 21

How do you calculate Gross profit margin?

Accepted Answer

gross profit margin = gross profit / revenue x 100 in this case the higher the ratio the better, it shows how much gross profit is made for each £1 of sales

Question 22

how can you improve gross profit margin?

Accepted Answer

to improve the gross profit margin a business would look to: - increase revenue by increasing the price. if costs stay the same GPM will increase - Reduce costs, Reducing the costs of sales by reducing raw material or utility cost for example would mean an increase in GPM

Question 23

why will Gross Profit Margin be different in different industries?

Accepted Answer

as a rule, product with shorter lifespans have a lower GPM, a supermarket for example would make small GPM per item than a car sales dealership however the super market will generate its large profits through sales volume

Question 24

how do you calculate operating profit margin?

Accepted Answer

operating profit margin = operating profit/ revenue x 100 the higher the ratio the better. its shoes how much operating profit is mad for each £1 of sales. It shows a good measure of the business' true trading profitability, before exceptional item are taken off

Question 25

why might Operating Profit be different in different industries?

Accepted Answer

- differences here are linked to the business' overheads or fixed costs - manufacturing industries will more likely have high overhead costs than office business due to large machinery costs compared to renting a office and buying a new computer every few years

Question 26

How do you calculate net profit margin?

Accepted Answer

net profit margin = net profit/ revenue x 100 -this calculation shows the business' profitability having taken account of ALL the costs over a course of the year

Question 27

What is the most basic way of improving profitability?

Accepted Answer

profit = total revenue - Total Costs - increase revenue - lower costs

Question 28

How can you increase revenue?

Accepted Answer

- increase price --> PED - Increase value e.g. packaging, customer service --> increases costs? - increase sales --> increase costs? - improving Brand image --> increase costs? not necessarily going to increase sales - Increasing productivity --> reduce staffing, not necessarily increase sales, staffing may want a raise -->increases costs --> staffing, training, machinery

Question 29

How to reduce costs?

Accepted Answer

- Cheaper costs --> reduce quality, negotiate better pricing with original supplier - Less waste suppliers --> efficiency, buying in bulk may still have extra waste - Reducing packaging --> better for environment, PR, R+D--> new design increases cost - Reduce Storage --> JIT --> not have enough, cant impulse buy, cant handle demand spikes - reduce labour --> reduce morale - reduce wages --> reduces morale

Question 30

What is the distinction between cash and profit?

Accepted Answer

- its important that you understand the difference between cash and profit . - Profit figures and bank balances are rarely the same

Question 31

Why are profit figures and bank balances rarely the same?

Accepted Answer

this is because: - credit sales - timing differences - purchasing of assets - Owner cash injections - Selling assets - Opening balances

Question 32

What is a statement of financial position?

Accepted Answer

a balance sheet

Question 33

What is liquidity?

Accepted Answer

-liquidity is the ease with which a business' assets can be converted into cash it is vital that the business is able to meet its short-term debts -this means they must have enough liquid resources (cash) to pay these debts as required

Question 34

What is current ratio?

Accepted Answer

the measures the ratio of the business current assets to its current liabilities

Question 35

How do you calculate current ratio?

Accepted Answer

current ratio = current assets/ current liabilities

Question 36

What would a business like its current ratio to be?

Accepted Answer

- Generally a business would like its current ratio to be somewhere between 1.5:1 and 2:1 - Less than 1.5:1 and the business may struggle to meet its requirements to make payments as they fall due - More than 2:1 and the business may be accused of not using its assets effectively

Question 37

What is acid test ratio?

Accepted Answer

- similar to the current ratio, the acid test measures the business' ability to meet its liabilities but uses a more severe - it assumes that the business' stock is worth less and so discounts it from the calculation

Question 38

How do you calculate acid test ratio?

Accepted Answer

acid test ratio = current assets - inventories/current liabilities

Question 39

What does a business want its asset test ratio value at?

Accepted Answer

- generally, a business would like its current ratio to be somewhere between 0.75:1 and 1:1 - Less than 0.75:1 and the business would struggle to meet its requirement to make payments as the fall due - more than 1:1 and the business may be accused of not using its assets effectively

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2.3 Managing Finance Flashcards

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