2.3.1 - Profit

Question 1

Define Profit?

Answer 1

• Profit is the financial gain of a business through trading and can be found be deducting expenditure from income; P =TR-TC where TR is total revenue and TC is total costs.

Question 2

What are the three types of profit?

Answer 2

• Gross profit
• Operating profit
• Net profit

Question 3

What is a Statement of comprehensive income?

Answer 3

• PLCs and limited companies (Ltds) need to publish their accounts every year, this is UK law
• As part of those accounts they need to show their profit and loss and this appears in their “statement of comprehensive income (SOCI)”

Question 4

How do you calculate gross profit?

Answer 4

Gross Profit = Sales Revenue - Cost of Sales

Question 5

How do you calculate operating profit?

Answer 5

Operating Profit = Gross Profit - Expenses

Question 6

How do you calculate net profit?

Answer 6

Net Profit = Operating Profit - Interest

Question 7

How does the statement of comprehensive

income measure profitability?

Answer 7

• A business that is profitable will be able to reward its investors with a return on their investment e.g. dividends paid on shares
• A business that is not profitable will not last long unless drastic changes are made
• The statement of comprehensive income helps managers, owners and investors to know how the business is doing by measuring the profitability

Question 8

How do you calculate gross profit margin?

Answer 8

Gross Profit Margin = Gross Profit / Sales Revenue x 100

Question 9

How do you calculate operating profit margin?

Answer 9

Operating Profit Margin = Operating Profit / Sales Revenue x 100

Question 10

How do you calculate net profit margin?

Answer 10

Net Profit Margin = Net Profit / Sales Revenue x 100

Question 11

Name ways to improve profitability?

Answer 11

• Increase revenue

- Reduce costs

Question 12

Name the differences between profit and cash?

Answer 12

Profit
• Profit is recorded straight away
• A business can trade for many years without profit
• To improve profitability a business must either increase their revenue or reduce their costs as:
• P = TR- TC

Cash
• Cash will not be recorded until it is paid out or received which could be in a different trading year
• A profitable business may go bust of it runs out of cash to pay a supplier or wages of staff
• If owners introduce cash via savings or a loan this will not affect the profit figure