2.3.1. Profit

Question 1

Gross profit

Answer 1

Gross profit=Revenue-Cost of sales

-Difference between revenue and costs directly related to production.

Question 2

Operating profit

Answer 2

Operating profit=Gross Profit-Indirect expenses(fixed overheads)

-Involved in operating the business

Question 3

Net profit

Answer 3

Net profit=Operating profit-Net finance costs(interest)

Question 4

Ways to improve profit

Answer 4

-Increase revenue=Increased profit margin but may decrease overall profit. Ie. For a price inflation product, fall in demand resulting from price rise may be so small as to be outweighed by increased revenue.
-Reduce costs
However trade off usually involved. Reducing costs may result in sacrificing quality or customer service which has a knock on effect on revenue

Question 5

Statement of comprehensive income

Answer 5

-Document by public limited companies showing revenue a breakdown of different types of costs and profit for year

Question 6

Measuring profitability

Answer 6

-GPM=GP/Sales revenue X 100 (turning relatively cheap raw materials into highly priced products= high gross profit margin ie. Coffee shop)
-OPM=OP/Sales revenue X 100 (impact of deducting fixed overheads on profitability)
-NPM=NO/Sales revenue X 100 (profitability after allowing for all business costs apart from tax)

Question 7

Distinction between cash and profit

Answer 7

Profit not same as net cash flow as
-Sales revenue doesn’t equal cash inflows
-Costs doesn’t equal cash outflows

Profit is difference between revenues generated and business costs.
Cash is measured by taking into account full range of money flowing in and out of business over time