2.3.1 Profit

Question 1

What 3 types of profit are there?

Answer 1

Gross profit
Operating profit
Profit for the year (net profit)

Question 2

What is gross profit?

Answer 2

The profit made by a business after direct costs have been met - the difference between revenue/ turnover and cost of sales

Question 3

What is the formula for gross profit?

Answer 3

Gross profit = revenue - cost of sales

Question 4

What is the formula for gross profit margin?

Answer 4

Gross profit margin = (Gross profit/ sales revenue) x 100

Question 5

What does the gross profit margin ratio show?

Answer 5

How much of the business sales revenue, as a percentage, it is actually turning into gross profit
The higher the better

Question 6

What does operating profit measure?

Answer 6

Measure of a company’s profitability that ignores non-operating expenses and taxes

Question 7

What is the formula for operating profit?

Answer 7

Operating profit = gross profit - expenses

Question 8

What is the formula for operating profit margin?

Answer 8

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

Question 9

What does operating profit margin measure?

Answer 9

A company’s pricing strategy and operating efficiency –> gives an idea of how much a company makes (before taxes and interest) on each pound of sales

Question 10

What is operating profit margin?

Answer 10

How much of revenue, as a percentage, is being converted into operating profit –> higher the better

Question 11

What is the formula for profit for the year (net profit)?

Answer 11

Profit for the year (net profit) = operating profit - interest and exceptional costs

Question 12

What is profit for the year (net profit)?

Answer 12

The final figure made at the end of the business year before any tax or dividends have been paid

Question 13

Why would investors look at a company’s net profit over any other figure?

Answer 13

Gives the best indication of how much profit a company has made - even if a firms operating profit and gross profit are positive, a negative net profit would look very undesirable to investors

Question 14

What is the formula for net profit margin?

Answer 14

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

Question 15

What does net profit margin show?

Answer 15

How much profit a company makes as a percentage of its revenue

Question 16

What is a statement of comprehensive income (Profit and Loss Account)? - 2 points

Answer 16

-Gives a breakdown of a company’s gross operating profits + is produced at the end of the trading year
-Illustrates amount of sales revenue and costs a business has had to pay over previous 12 months

Question 17

How can a statement of comprehensive income be used?

Answer 17

Figures can be used to calculate how much of a profit or loss the business has made

Question 18

Why are statements of comprehensive income normally shown over 2 years?

Answer 18

So you can compare

Question 19

How can a business improve their gross profit? (3)

Answer 19

Increase price
More marketing - cost relative to benefits
Decrease cost of sales - change supplier

Question 20

How can a business increase their net profit? (2)

Answer 20

Increase gross profit
Increase operating profit

Question 21

What is profit?

Answer 21

The money made after all costs have been met, and belongs to the owners of the business

Question 22

What is opening stock?

Answer 22

The stock the business already has at the start of the financial year

Question 23

What are expenses?

Answer 23

How much money is going out of the business in terms of overheads + indirect costs

Question 24

What is an appropriation account?

Answer 24

The final part of the profit and loss account which shows how the profit is distributed

Question 25

What is retained profit?

Answer 25

Final profit after tax + other outgoings e.g. dividends have been distributed

Question 26

What is dividend?

Answer 26

Amount paid to shareholders as their share of the profit

Question 27

Why can the presentation of profit + loss accounts for unlimited businesses vary greatly?

Answer 27

Sole trader tends to be more straight forward + may not include an appropriation section

Question 28

Who may look at statements of comprehensive income and why?

Answer 28

Stakeholders and managers of a business to look at how the business could improve levels of gross and net profit

Question 29

Why, at the end of a trading year, is it unlikely that the value of profit will be the same as the cash balance? (4)

Answer 29

• Some goods may be paid for on credit –> businesses may not have received payment for all of these goods
• Businesses may receive cash at beginning of trading year, from previous trading year
• Owners may introduce more cash in to the business
• Purchase of fixed assets may reduce cash balance