2.3.1 Profit Flashcards
What is the formula for calculating profit?
P = TR - TC
What are the three types of profit that should be calculated from a statement of comprehensive income?
- Gross profit
- Operating profit
- Net profit
What is the formula for calculating gross profit?
GP = Sales Revenue - Cost of sales
What is the formula for calculating operating profit?
OP = GP - expenses
What is the formula for calculating net profit?
NP = OP - interest
What is the SOCI?
What is the purpose of the statement of comprehensive income?
shows a company’s financial performance over a specific period it details the revenues, expenses, and profits or losses during that time
To measure profitability and show profit and loss, Helps Decision-Making, aids investors and financiers
but does not show overall financial position like assets or liabilities, not cash flow,May Not Reflect Future Sustainability
Required by UK law for PLCs and limited companies.
What does gross profit margin indicate?
Shows how efficiently a business produces and sells goods/services before accounting for operating costs.
A high gross profit margin means strong production efficiency or pricing power.
A low margin may indicate high production costs or pricing pressure from competitors.
What does operating profit margin reflect?
Measures profitability after deducting operating expenses (e.g., rent, salaries, utilities) but before interest and taxes.
Indicates how well a company manages its core business operations.
A declining margin may suggest rising costs or inefficiencies.
What does net profit margin represent?
The final profitability after all expenses, including taxes, interest, and non-operating costs.
A high net profit margin means strong overall profitability and financial health.
A low margin suggests high costs, debt burden, or inefficiencies.
What is the formula for calculating gross profit margin?
GP margin = (Gross Profit / Sales Revenue) x 100
What is the formula for calculating operating profit margin?
OP margin = (Operating Profit / Sales Revenue) x 100
What is the formula for calculating net profit margin?
NP margin = (Net Profit / Sales Revenue) x 100
What are some ways to improve profitability by increasing revenue?
- Raise Prices Strategically – Slight price increases can boost margins without losing customers.
- Expand Product/Service Offerings
- Improve Marketing & Sales Strategies
Enhance Customer Retention – Loyal customers generate repeat sales, reducing acquisition costs. - Explore New Markets – Expand
What are some ways to improve profitability by reducing costs?
- Lower Production Costs – Find cheaper suppliers, negotiate better deals, or optimize inventory.
- Reduce Operational Expenses – Cut unnecessary expenses like excessive utilities, rent, or office supplies.
- Automate & Streamline Processes
- Improve Supply Chain Management – Minimize waste, improve logistics, and optimize stock levels.
True or False: A profitable business can still go bankrupt if it runs out of cash.
True
What is the difference between profit and cash?
Profit is recorded straight away, while cash is only recorded when it is paid out or received
Profit is the difference between revenue and expenses over a period while Cash refers to the actual money available in a business’s bank account or on hand
What is the significance of measuring profitability for a business?
It helps managers, owners, and investors understand how the business is performing.
what is profitability
percentage that shows how many sales revenue has gone on to become profit
what does high profitabilit lead to
Essential for survival
Funds growth
Ability to borrow money
Grows market value of business
Measures the effectiveness of management
Ability to pay down debt
Builds working capital – Businesses that are consistently profitable have consistent improvements in the ability to fund working capital needs
Attracts investors
Hire better employees – Profitability is one of the few things that enable businesses to hire better people. Profit creates cash. Companies that are not profitable don’t have the cash resources to pay or increase the pay of good employees.
Builds cash
Enhances ability to give – builds good reputation
