2.3.1 Profit

Question 1

define amortisation

Answer 1

the writing off of an intangible asset

Question 2

define cost of sales

Answer 2

the direct costs of a business

Question 3

define exceptional costs

Answer 3

a one-off cost such as larg bad debt

Question 4

define gross profit

Answer 4

the difference between revenue and cost of sales

Question 5

define gross profit margin

Answer 5

gross profit expressed as a percentage of revenue

Question 6

define operating profit

Answer 6

the difference between gross profit and business overheads like selling and administrative expenses

Question 7

define operating profit margin

Answer 7

operating profit expressed as a percentage of revenue

Question 8

define profit for the year (net)

Answer 8

the difference between operating profit and interest & exceptional items

Question 9

define net profit margin

Answer 9

the net profit expressed as a percentage of revenue

Question 10

define statement of comprehensive income

Answer 10

a financial document showing a company’s income and expenditure over a particular time period, usually a year.

Question 11

define revenue

Answer 11

the total income of a business resulting from the sales of goofs/services

Question 12

gross profit formula

Answer 12

gp = revenue - cost of sales

Question 13

operating profit formula

Answer 13

op= gp - operating expenses

Question 14

net profit formula

Answer 14

np=op-interest & exceptional costs

Question 15

what is meant by net interest?

Answer 15

the different between any interest paid by the business and any interests received by the business

Question 16

describe a statement of comprehensive income?

Answer 16

aka a profit and loss account
shows income and expenses of a business
used to calculate gross, operating and net profit
has a standard way to be presented -> follow
-always shows the figures for the current trading year and the previous year.

Question 17

how can we measure profitability?

Answer 17

through three profit margins
measure the size of the profit in relation to revenue

Question 18

formula for gross profit margin

Answer 18

gpm = gross profit / revenue x 100

Question 19

what do higher profit margins mean?

Answer 19

even if the sales decrease the business will still make profit
more profit is being made per £1 of sales

Question 20

how can we increase gpm?

Answer 20

raising revenue relative to the cost of sales by increasing price
-increased by cutting the cost of sales
have fast turnover of invenory

Question 21

formula for operating profit margin

Answer 21

opm= operating profit/ revenue x 100

Question 22

what is the operating profit margin used for?

Answer 22

measuring a company’s pricing strategy and operating efficiency

Question 23

formula for net profit margin

Answer 23

npm = net profit / revenue x 100

Question 24

does the net profit account for all business costs and if so give examples

Answer 24

yes
interest
other non operating costs and exceptional items

Question 25

what are some methods of improving profitability?

Answer 25

Raising prices to get more revenue for every unit sold if costs remain.
Lowering costs -> buying cheaper resources from new suppliers which offer better prices or cheaper labour
use existing resources more efficiently

Question 26

what’s the difference between cash & profit?

Answer 26

at the end of the trading it is unlikely that the value of profit = cash balance
differences arise for reasons like:
-selling goods but not receiving payment from some customers e.g. trade credit, profit is larger than cash
-may recieve cash at the beginning of the year from sales made in the previous year, trading costs /= to cash paid out
-sales of fixed assets -> increases cash balance
-owners may introduce more cash into the business -> inc cash but no effect on profit