2.3.1 - Profit Flashcards
Def profit
The difference between the revenue of a business and the costs generated by the business during a period of time
Why does a business need profit
- to cover costs
- dividends to shareholders
- show financial stability
- reinvest retained profit
- to measure performance
Uses of profit
To reinvest, as a reward for business owners and to measure performance
Ways of improving profit
- increase quantity sold
- increase selling price
- reduce variable costs per units
- reduce fixed costs
What are the 3 types of profit
Gross profit
Operating profit
Profit for the year (net profit)
Def gross profit
Deducts the cost of sales from total revenue to show what is left after taking away costs directly involved in making a product or providing a service
Gross profit formula
Total revenue - cost of sales
Operating profit formula
Gross profit - fixed overheads
What is corporation tax usually charged at
20%
Profit for year formula
Operating profit - (net financing cost and corporation tax)
Def cost of sales
Collective name given to the costs directly associated with making a product such as materials and costs of running the factory
Fixed overheads def
Costs that have to be paid no matter how well the business is performing
Net financing costs def
Is the income from interest on bank deposits minus the interest charged from overdrafts and loans - usually net number
Def statement of comprehensive income
Is a document produced by public limited companies that shows revenues, a breakdown of different types of cost and different types of profit for a year
What companies are required to produce a statement of comprehensive income
All public limited companies
What does statement of comprehensive income measure
Profit and loss
Why do businesses compare comprehensive income with previous years
Allows judgements to be made about the performance of the business for the current financial year
Def profitability
States profit as a percentage of sales revenue
Def ratio analysis
A technique for analysing a businesses financial performance by comparing one price of accounting information with another
Gross profit margin formula
(Gross profit / sales revenue) x 100
Operating profit margin formula
(Operating profit/ sales revenue) x 100
Profit for year margin formula
(Profit for year/ sales revenue) x 100
What is a good profit margin
The higher the profit margin, the better
Two reasons profit isn’t the same as net cash flow
- sales revenue doesn’t equal cash inflows
- costs do not equal cash outflows
