2.3.1 - Profit

Question 1

Profit - Definition

Answer 1

the surplus (amount) left from revenue after paying all costs

Question 2

Percentage Change in Profit - Formula

Answer 2

% change in Profit = ((current years profit - previous years profit) / previous years profit) x 100

Question 3

Gross Profit - What

Answer 3

is the amount left over when the cost of sales is subtracted from total revenue. cost of sales is the costs directly related to making the product e.g. the cost of raw materials

Question 4

Gross Profit - Formula

Answer 4

gross profit = total revenue - cost of sales

Question 5

Operating Profit - What

Answer 5

considers both the businesses cost sales and operating expenses. If a businesses’ gross profit is increasing but it’s operating profit is decreasing it usually means the business is not controlling it’s costs

Question 6

Operating Profit - Formula

Answer 6

operating profit = gross profit / other operating expenses

Question 7

Profit for the Year (Net Profit) - What

Answer 7

takes into consideration the cost of any interest the business has to pay for borrowing money

Question 8

Profit for the Year (Net Profit) - Formula

Answer 8

net profit = operating profit / interest

net profit = operating profit + other finance income - finance costs - tax

Question 9

Statement of Comprehensive Income - What

Answer 9

known as a profit and loss account - shows how much money has been coming into the business (revenue) and how much has been going out (expenses) over a period of time

Question 10

Statement of Comprehensive Income - Details

Answer 10

• used to assess a businesses financial performance
• covers one whole accounting year, if too short can be misleading
• can contain previous years data for easy comparison
• PLC’s have to publish their accounts

Question 11

Profitability - Definition

Answer 11

the amount of profit relative to revenue or investment

Question 12

Profit Margin - Definition

Answer 12

measure the relationship between the profit made and the revenue. they tell what percentage of the selling price of a product is actually profit

Question 13

Gross Profit Margin - Formula

Answer 13

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

Question 14

Operating Profit Margin - Formula

Answer 14

operating profit margin = (operating profit / revenue) x 100

Question 15

Net Profit Margin - Formula

Answer 15

net profit margin = (net profit / revenue) x 100

Question 16

Profit Margins - What do they show

Answer 16

• shows growth
• profitability
• highlights areas that need to be improved

Question 17

Profit Margins - Ways to Improve

Answer 17

+ increase revenue
+ increase prices (if the demand is price inelastic)
+ reducing prices to increase demand (if demand is price elastic)
+ improve product quality, leads to greater sales volume or higher
selling price - lead to an increase in revenue
+ cheaper supplier
+ staff redundancies
- could lead to poor quality goods - reduce sales volume and revenue
+ reduce operating expenses

Question 18

Profit v.s Cash

Answer 18

profit = the money that a business has left from its revenue once its costs have been payed, profit is not immediate as customers may not pay for their goods straight away or it may have to pay costs straight away

cash = what a business has now to pay its bills, it’s constantly flowing in and out of the business

a business that is making lots of profit may still run out of cash and a business that has lots of cash may still not make a profit