2.3.1 - Profit Flashcards
Why do businesses aim to maximize profits?
Businesses aim to maximize profits to measure success, compare performance with previous periods, and address declining profits to maintain growth and competitiveness.
How is the percentage change in profit calculated?
(Change / Original) x100
What are the three measures of profit?
- Gross Profit
- Operating Profit
- Profit for the Year (Net Profit)
What is gross profit?
Gross profit is the revenue left after subtracting the cost of sales, which includes direct costs like raw materials.
What does operating profit indicate?
Operating profit reflects profit after accounting for both the cost of sales and operating expenses, highlighting how well a business controls its overall costs.
What is profit for the year (net profit)?
Profit for the year accounts for operating profit minus interest and includes the impact of one-off events.
What is a statement of comprehensive income?
A financial document summarizing revenue and expenses over a period, showing gross profit, operating profit, and profit for the year.
Why is the statement of comprehensive income important?
It helps assess a business’s financial health, spot trends, and compare current performance with previous years and industry benchmarks.
Why do public limited companies (PLCs) publish their financial accounts?
PLCs are required to publish their accounts to provide transparency to shareholders, potential investors, and competitors.
What does retained profit represent?
Retained profit is the profit for the year after tax minus dividends, showing the portion of profit reinvested in the business.
How do you calculate gross profit?
Gross Profit = Revenue - Cost of Sales
How do you calculate Operating Profit?
Operating Profit = Gross Profit - Operating Expenses
How do you calculate Profit for the Year?
Profit for the Year = Operating profit - Interest
How do you calculate Profit for the Year After Tax?
Profit for the Year After Tax = Profit for the Year - Tax
How do you calculate Retained Profit?
Retained Profit = Profit for the Year After Tax - Dividends
Why is it important to compare profits year-on-year?
Comparing profits helps track performance, identify declining trends, and ensure the business remains on a path of growth.
How can a statement of comprehensive income help in spotting trends?
By including data from previous years, it reveals patterns in revenue, expenses, and profits, aiding in long-term decision-making.
Why should a statement of comprehensive income cover a full year?
A 12-month period ensures seasonal variations like holiday sales are accounted for, giving an accurate financial picture.
What are profit margins, and what do they provide insight to?
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.
What is Gross Profit Margin?
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.
How is Gross Profit Margin Calculated?
(Gross profit ÷ revenue) x 100
What Does a High Gross Profit Margin Indicate?
A higher gross profit margin indicates better efficiency in managing direct costs. However, what is considered “high” depends on the industry.
How Can a Business Improve Its Gross Profit Margin?
- Increase prices if possible.
2.Reduce direct costs, such as finding cheaper suppliers or optimizing production.
What is Operating Profit Margin?
Operating profit margin measures the percentage of revenue left after accounting for all operating expenses, including overhead costs like rent and utilities.
How is Operating Profit Margin Calculated?
(Operating profit / revenue) x 100
What Does Operating Profit Margin Indicate?
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:
- Decreasing operating profit margin: Indicates rising operating expenses.
- Increasing operating profit margin: Indicates better cost control.
How Can a Business Improve Its Operating Profit Margin?
- Increase prices or revenue.
- Reduce operating expenses, such as cutting rent or eliminating unnecessary administrative tasks.
What is Profit for the Year (Net Profit) Margin?
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.
How is Profit for the Year Margin Calculated?
(Profit for the Year / Revenue) x 100
Why is Profit for the Year Margin Important?
It gives an overall picture of profitability and is important to shareholders, as higher margins may indicate higher potential dividends.
How Can a Business Improve Its Profit for the Year Margin?
- Increase revenue by improving product quality or adjusting prices.
- Reduce operating expenses and costs of sales effectively.
How Can a Business Increase Revenue to Improve Profit Margins?
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.
How Can Reducing the Cost of Sales Improve Profit Margins?
Find cheaper suppliers or optimize production processes to lower costs. Avoid lowering product quality, as it might reduce sales.
How Can a Business Improve Operating Profit Margins?
Reduce operating expenses like rent or streamline administrative tasks. Focus on efficiency to cut costs without losing productivity.
What is Profit?
Cash is the liquid funds a business has to pay bills. It shows the business’s immediate financial position.
Why is Profit Not the Same as Cash?
Profit doesn’t account for payment timing differences. Sales might generate profit, but cash isn’t received instantly.
Can a Business Have High Profits but Run Out of Cash?
Yes, if customers delay payments or short-term expenses exceed available funds. Cash flow issues can occur despite profits.
Can a Business Have Lots of Cash but No Profit?
Yes, if cash comes from loans or investments, not operations. Businesses with losses can still have cash reserves.
