2.3.1 Profit

Question 1

Definition: 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

Statement of comprehensive income

Answer 2

• 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 3

Gross profit formula

Answer 3

GP = SR – Cost of sales

• GP is Gross Profit
• SR is Sales Revenue
• Cost of Sales are costs that vary with output or level of sales, and may include
stock

Question 4

Operating Profit formula

Answer 4

OP = GP - expenses

• OP is operating profit
• GP is Gross Profit
• Expenses are other costs to the business aside from stock e.g. admin, an ad
campaign etc.

Question 5

Net profit formula

Answer 5

NP = OP - interest

• NP is net profit
• OP is operating profit
• Interest are payments due on loans or debts

Question 6

How the statement of comprehensive income helps to measure profitability

Answer 6

• 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 7

Operating profit margin formula %

Answer 7

OP margin = (Operating Profit/ Sales Revenue) x100

Question 8

Net profit margin formula %

Answer 8

NP margin = (net profit / sales revenue )x100

Question 9

Ways to improve profitability – increase revenue

Answer 9

• If profit is TR-TC then it makes sense to say that one of the ways to improve profitability is to increase revenue
• This can be done in a number of ways;
• Have a sale, reduce the prices

Question 10

Ways to improve profitability – reduce costs

Answer 10

• If profit is TR-TC then the other way to improve profitability is the other side of the equation and reduce costs in the business
• This could be done through a number of ways, here are two suggestions:
• Restructuring, delayering and redundancies
• Automating production

Question 11

Profit vs cash?

Answer 11

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