2.3.1 Profit Flashcards
define amortisation
the writing off of an intangible asset
define cost of sales
the direct costs of a business
define exceptional costs
a one-off cost such as larg bad debt
define gross profit
the difference between revenue and cost of sales
define gross profit margin
gross profit expressed as a percentage of revenue
define operating profit
the difference between gross profit and business overheads like selling and administrative expenses
define operating profit margin
operating profit expressed as a percentage of revenue
define profit for the year (net)
the difference between operating profit and interest & exceptional items
define net profit margin
the net profit expressed as a percentage of revenue
define statement of comprehensive income
a financial document showing a company’s income and expenditure over a particular time period, usually a year.
define revenue
the total income of a business resulting from the sales of goofs/services
gross profit formula
gp = revenue - cost of sales
operating profit formula
op= gp - operating expenses
net profit formula
np=op-interest & exceptional costs
what is meant by net interest?
the different between any interest paid by the business and any interests received by the business
describe a statement of comprehensive income?
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.
how can we measure profitability?
through three profit margins
measure the size of the profit in relation to revenue
formula for gross profit margin
gpm = gross profit / revenue x 100
what do higher profit margins mean?
even if the sales decrease the business will still make profit
more profit is being made per £1 of sales
how can we increase gpm?
raising revenue relative to the cost of sales by increasing price
-increased by cutting the cost of sales
have fast turnover of invenory
formula for operating profit margin
opm= operating profit/ revenue x 100
what is the operating profit margin used for?
measuring a company’s pricing strategy and operating efficiency
formula for net profit margin
npm = net profit / revenue x 100
does the net profit account for all business costs and if so give examples
yes
interest
other non operating costs and exceptional items
what are some methods of improving profitability?
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
what’s the difference between cash & profit?
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
