2.3.1 - Profit

Question 1

Why do businesses aim to maximize profits?

Answer 1

Businesses aim to maximize profits to measure success, compare performance with previous periods, and address declining profits to maintain growth and competitiveness.

Question 2

How is the percentage change in profit calculated?

Answer 2

(Change / Original) x100

Question 3

What are the three measures of profit?

Answer 3

1. Gross Profit
2. Operating Profit
3. Profit for the Year (Net Profit)

Question 4

What is gross profit?

Answer 4

Gross profit is the revenue left after subtracting the cost of sales, which includes direct costs like raw materials.

Question 5

What does operating profit indicate?

Answer 5

Operating profit reflects profit after accounting for both the cost of sales and operating expenses, highlighting how well a business controls its overall costs.

Question 6

What is profit for the year (net profit)?

Answer 6

Profit for the year accounts for operating profit minus interest and includes the impact of one-off events.

Question 7

What is a statement of comprehensive income?

Answer 7

A financial document summarizing revenue and expenses over a period, showing gross profit, operating profit, and profit for the year.

Question 8

Why is the statement of comprehensive income important?

Answer 8

It helps assess a business’s financial health, spot trends, and compare current performance with previous years and industry benchmarks.

Question 9

Why do public limited companies (PLCs) publish their financial accounts?

Answer 9

PLCs are required to publish their accounts to provide transparency to shareholders, potential investors, and competitors.

Question 10

What does retained profit represent?

Answer 10

Retained profit is the profit for the year after tax minus dividends, showing the portion of profit reinvested in the business.

Question 11

How do you calculate gross profit?

Answer 11

Gross Profit = Revenue - Cost of Sales

Question 12

How do you calculate Operating Profit?

Answer 12

Operating Profit = Gross Profit - Operating Expenses

Question 13

How do you calculate Profit for the Year?

Answer 13

Profit for the Year = Operating profit - Interest

Question 14

How do you calculate Profit for the Year After Tax?

Answer 14

Profit for the Year After Tax = Profit for the Year - Tax

Question 15

How do you calculate Retained Profit?

Answer 15

Retained Profit = Profit for the Year After Tax - Dividends

Question 16

Why is it important to compare profits year-on-year?

Answer 16

Comparing profits helps track performance, identify declining trends, and ensure the business remains on a path of growth.

Question 17

How can a statement of comprehensive income help in spotting trends?

Answer 17

By including data from previous years, it reveals patterns in revenue, expenses, and profits, aiding in long-term decision-making.

Question 18

Why should a statement of comprehensive income cover a full year?

Answer 18

A 12-month period ensures seasonal variations like holiday sales are accounted for, giving an accurate financial picture.

Question 19

What are profit margins, and what do they provide insight to?

Answer 19

Profit margins measure profitability, showing what percentage of revenue is profit. They provide insight into a business’s efficiency in generating profit from its revenue.

Question 20

What is Gross Profit Margin?

Answer 20

Gross profit margin measures the percentage of revenue retained as gross profit after deducting the cost of sales. It shows how efficiently a business manages its direct costs.

Question 21

How is Gross Profit Margin Calculated?

Answer 21

(Gross profit ÷ revenue) x 100

Question 22

What Does a High Gross Profit Margin Indicate?

Answer 22

A higher gross profit margin indicates better efficiency in managing direct costs. However, what is considered “high” depends on the industry.

Question 23

How Can a Business Improve Its Gross Profit Margin?

Answer 23

1. Increase prices if possible.
   2.Reduce direct costs, such as finding cheaper suppliers or optimizing production.

Question 24

What is Operating Profit Margin?

Answer 24

Operating profit margin measures the percentage of revenue left after accounting for all operating expenses, including overhead costs like rent and utilities.

Question 25

How is Operating Profit Margin Calculated?

Answer 25

(Operating profit / revenue) x 100

Question 26

What Does Operating Profit Margin Indicate?

Answer 26

A high operating profit margin shows effective control of operating expenses. Comparing it with gross profit margin over time can reveal how well the business manages its costs:

1. Decreasing operating profit margin: Indicates rising operating expenses.
2. Increasing operating profit margin: Indicates better cost control.

Question 27

How Can a Business Improve Its Operating Profit Margin?

Answer 27

1. Increase prices or revenue.
2. Reduce operating expenses, such as cutting rent or eliminating unnecessary administrative tasks.

Question 28

What is Profit for the Year (Net Profit) Margin?

Answer 28

Profit for the year margin measures the percentage of revenue that remains after accounting for all expenses except taxes. It provides the most comprehensive view of profitability.

Question 29

How is Profit for the Year Margin Calculated?

Answer 29

(Profit for the Year / Revenue) x 100

Question 30

Why is Profit for the Year Margin Important?

Answer 30

It gives an overall picture of profitability and is important to shareholders, as higher margins may indicate higher potential dividends.

Question 31

How Can a Business Improve Its Profit for the Year Margin?

Answer 31

1. Increase revenue by improving product quality or adjusting prices.
2. Reduce operating expenses and costs of sales effectively.

Question 32

How Can a Business Increase Revenue to Improve Profit Margins?

Answer 32

Increase prices if demand is price inelastic or lower prices to boost sales if elastic. Improving product quality can also increase sales volume and selling prices.

Question 33

How Can Reducing the Cost of Sales Improve Profit Margins?

Answer 33

Find cheaper suppliers or optimize production processes to lower costs. Avoid lowering product quality, as it might reduce sales.

Question 34

How Can a Business Improve Operating Profit Margins?

Answer 34

Reduce operating expenses like rent or streamline administrative tasks. Focus on efficiency to cut costs without losing productivity.

Question 35

What is Profit?

Answer 35

Cash is the liquid funds a business has to pay bills. It shows the business’s immediate financial position.

Question 36

Why is Profit Not the Same as Cash?

Answer 36

Profit doesn’t account for payment timing differences. Sales might generate profit, but cash isn’t received instantly.

Question 37

Can a Business Have High Profits but Run Out of Cash?

Answer 37

Yes, if customers delay payments or short-term expenses exceed available funds. Cash flow issues can occur despite profits.

Question 38

Can a Business Have Lots of Cash but No Profit?

Answer 38

Yes, if cash comes from loans or investments, not operations. Businesses with losses can still have cash reserves.