2.3.1 Profit Flashcards
What is gross profit?
Difference between revenue and costs directly related to production
Gross profit can be calculated as Revenue - Cost of Sales.
What is operating profit?
Difference between gross profit and indirect expenses
Operating profit can be calculated as Gross Profit - Operating Expenses.
What is net profit?
Difference between operating profit and interest and one-off costs
Net profit can be calculated as Operating Profit - (Net Interest and One-off Costs).
What is the profit and loss account?
A financial statement that summarizes revenues, costs, and expenses to show net profit or loss.
What are profit margins?
Amount by which revenue exceeded costs.
What is the formula to calculate gross profit?
Revenue - Cost of Sales
What are ways to improve profitability?
- Increase prices
- Reduce variable costs
- Reduce one-off costs and interest
- Reduce expenses
What does liquidity refer to in a business context?
The ability of a business to meet its short term debts.
What is the current ratio?
Current assets divided by current liabilities.
What is the acid test ratio?
Current assets minus inventory divided by current liabilities.
What is the ideal current ratio?
2:1
What is the ideal acid test ratio?
1-1.5:1
What is working capital?
Money a business has to fund day-to-day activities
Working capital can be calculated as Current Assets - Current Liabilities.
What are ways to improve liquidity?
- Reduce credit period offered to customers
- Ask suppliers for an extended repayment period
- Make use of overdraft or short term loans
- Sell off excess stock
- Sell assets and lease fixed assets
Fill in the blank: Working capital is calculated as _______.
Current assets - current liabilities
True or False: Net profit is calculated before deducting interest and one-off costs.
False
