2.3.1 Profit Flashcards
What 3 types of profit are there?
Gross profit
Operating profit
Profit for the year (net profit)
What is gross profit?
The profit made by a business after direct costs have been met - the difference between revenue/ turnover and cost of sales
What is the formula for gross profit?
Gross profit = revenue - cost of sales
What is the formula for gross profit margin?
Gross profit margin = (Gross profit/ sales revenue) x 100
What does the gross profit margin ratio show?
How much of the business sales revenue, as a percentage, it is actually turning into gross profit
The higher the better
What does operating profit measure?
Measure of a company’s profitability that ignores non-operating expenses and taxes
What is the formula for operating profit?
Operating profit = gross profit - expenses
What is the formula for operating profit margin?
Operating profit margin = (operating profit/ revenue) x 100
What does operating profit margin measure?
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
What is operating profit margin?
How much of revenue, as a percentage, is being converted into operating profit –> higher the better
What is the formula for profit for the year (net profit)?
Profit for the year (net profit) = operating profit - interest and exceptional costs
What is profit for the year (net profit)?
The final figure made at the end of the business year before any tax or dividends have been paid
Why would investors look at a company’s net profit over any other figure?
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
What is the formula for net profit margin?
Net profit margin = (net profit/sales revenue) x 100
What does net profit margin show?
How much profit a company makes as a percentage of its revenue
What is a statement of comprehensive income (Profit and Loss Account)? - 2 points
-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
How can a statement of comprehensive income be used?
Figures can be used to calculate how much of a profit or loss the business has made
Why are statements of comprehensive income normally shown over 2 years?
So you can compare
How can a business improve their gross profit? (3)
Increase price
More marketing - cost relative to benefits
Decrease cost of sales - change supplier
How can a business increase their net profit? (2)
Increase gross profit
Increase operating profit
What is profit?
The money made after all costs have been met, and belongs to the owners of the business
What is opening stock?
The stock the business already has at the start of the financial year
What are expenses?
How much money is going out of the business in terms of overheads + indirect costs
What is an appropriation account?
The final part of the profit and loss account which shows how the profit is distributed
What is retained profit?
Final profit after tax + other outgoings e.g. dividends have been distributed
What is dividend?
Amount paid to shareholders as their share of the profit
Why can the presentation of profit + loss accounts for unlimited businesses vary greatly?
Sole trader tends to be more straight forward + may not include an appropriation section
Who may look at statements of comprehensive income and why?
Stakeholders and managers of a business to look at how the business could improve levels of gross and net profit
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)
- 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
