2.3.1 Profit

Question 1

Statement of comprehensive income

Answer 1

A financial document that summarises a business’s historic trading activity (sales revenue) and expenses to show whether it has made a profit or loss over a period of time.

Question 2

Profit

Answer 2

Difference between total revenue and total costs.

Question 3

Use of profit

Answer 3

1. To re-invest.
2. As a reward for the business owners.
3. As a measure of performance.

Question 4

Gross profit formula

Answer 4

Revenue - Cost of sales

Question 5

Operating profit formula

Answer 5

Gross profit - Fixed overheads

Question 6

Net profit (profit for the year) formula

Answer 6

Operating profits – (financing + tax)

Question 7

Overheads

Answer 7

Costs not associated with production that are fixed.

Question 8

Ratio analysis

Answer 8

A technique for analysing business financial performance by comparing one piece of accounting information with another.

Question 9

Profitability ratios

Answer 9

Measure performance, a firms efficiency at achieving profit.

Question 10

Gross profit margin formula

Answer 10

Gross profit/Sales revenue x 100
Ignores overheads, useful to assess control direct costs and ability to max sales.

Question 11

Operating profit margin formula

Answer 11

Operating profit/Sales revenue x 100

Question 12

Net profit margin formula

Answer 12

Net profit/Sales revenue x 100
Best measure of quality of profit, sales turnover measures scale.

Question 13

Ways to improve profitability

Answer 13

• Increase quantity sold.
• Increase selling price.
• Reduce variable cost per unit.
• Increase output.
• Reduce fixed costs.

Question 14

Difference between cash and profit

Answer 14

Profit is the money that a business has left from its revenue once costs have been paid.

Cash is the full range of money flowing into and out of a business.