2.3.1 Profit Flashcards
Statement of comprehensive income
-summarises a business’ historic trading activity
(sales revenue) and expenses
- show if made a profit or loss over a time period.
plcs - shows revenue, GP, net profit and OP
Profit
Difference between total revenue and total costs
Why have different kinds of profit
find out where issue is
7 reasons Why does a business need profits
- costs
- dividends
- financial stability
- retained profit
- corporation tax
- performance
- Reward for business owner
Direct costs
Often variable costs
Cost of sales (just stock)
Gross profit
Revenue - costs of sales (cost of goods sold)
Expenses
Overhead or indirect costs all same
Operating profit
Gross profit - fixed overheads
Profit before tax
Operating profit - financing costs
Corporation tax
tax paid by business out of profit
Charged on operating profit as % flat rate
19%
Net profit/ profit for year
Profit before tax -tax + net financing costs
Ratio analysis
- analysing financial performance
- compare 1 piece of accounting info with another
-profitability and liquidity ratios use data from SOCI and SOFP
Why use ratios
compare different years and different companies
assess performance
Profitability ratios
3 considerations
Measure performance a firms efficiency at achieving profit
1-higher % = better
2-relate profit to size of firm
3-nature of business
Gross profit margin
Gross profit divided by sales revenue x100
-ignores overheads, useful to asses control direct costs and ability to max sales
Operating profit margins
Operating profit divided by sales revenue x100
Best method of measuring performance as no control over tax
Should be compared with other competitors in same market and over time
Profit for the year (net profit) margin
Net profit divided by sales revenue x100
4 ways Profitability ratios provide useful insights
1-making profit? profit growing?
2-efficient business revenues -> profit
3-enough to justify investment into business
4-compare with rest of industry
3 ways to increase profits
- sales: increase quantity sold and increase selling price
- reduce variable cost per unit
3.. increase output and reduce FC
all = net profit
10 impacts of increasing quantity sold
1- rev
2-production capacity no FC rise (FC marketing rise)
3-MS
4-elasticity of demand
5-EOS = profit, react to demand
6-sales value fall if price fall = increase sales vol
7-capacity?
8-competitors will respond
9-marketing effects fail e.g promotion doesnt = results
10-differentiate? (reduce sppu)
6 impacts of increasing selling price
4 positives 2 negatives
1-increase rev = add value and reduce COS
2-no need for extra production capacity
3-PED (necessary/loyalty) high quality ?
4-loyal, perceive product good value
1-fall, price rise = a bigger fall in quantity
2-competitor respond - lower prices & customers switch
5 impacts of reduce VCPU
3 positives 2 negatives
1-higher profit margin each item
2-customer don’t notice change in price (quality change)
3-supplier = better prices(EOS) = quality = lower wastage, operations = efficient
1-lower input costs = lower quality inputs = more waste
2-fixed overheads could be still high
4 ways of profit margin improvement and methods:
1-sales value per customer = profitable
2-wastage rates = few quantities, past sell by dates
3-fixed overheads = head office smaller cheaper
4-salary bill= dont replace leaving, remaining work
6 impacts of an increase production output
4 positives 2 negatives
1-greater quality = higher rev
2-maximise share of market demand
3-spread FC
4-extra output = new market, lower price (spare capacity?)
1-perishable = lost rev if not sold (no demand?)
2-production quality compromised = produce more
8 positives of reduce fixed costs
1-profits & avoid cash flow issues
2-reduces BE output
3-substantial saving
4-decrease sppu= profit increase & efficient space
5-costs cut = quality/customer service
6-increase sales
7-intangible costs e.g. morale after redundancies
8-reduce marketing costs = slow growth down
revenue vs cash inflow
REVENUE:value of sales made over a specified period
1 source, customers
trade credit = revenue
CASH INFLOW: many sources, part of revenue e.g. bank loan
-SOF = cash in
cash is greater than revenue
both: cash sales made to customer, charge rent on flat upstairs
receipts different from revenue
payments different from costs
- revenues amount earned = result of business activities (selling)
- receipts refers to cash company received
e. g. borrowing $1,000 in cash from bank = receipt not revenue - costs = finance used up or incurred in process of earning revenue/ operating a business
- payment = disbursement of money (check/currency)
difference between profit and cash flow accounts/ are constructed
how do timescale affect relative importance of cash vs profit
- cash accounts just money in - money out (only 1 variable)
- profit = consider revenue and costs = fluctuate more in accounts
not receive cash straight away = credit of 30days = sale contribute to profit
short term vs long term
profit vs cash flow
- timing differences
- way non current assets accounted for (payment= cash, value= profit depreciation = cost)
- cash flows arising from business financed (inflow = selling share/loans/debt factoring,
loans and paying dividends = outflows)
cash =SOF
increase sales = increase profit = more credit = damage cash flow
opening and closing balance
opening: money at start of month
closing: money at end of month
(statement of comprehensive income)
costs vs outflows:
3 examples
-outflows not shown in COS/fixed overheads
e.g. financing costs, tax, dividends
overtrading
profitable business = fail run out of cash
e. g. buy on credit= Profit, sales but, Cash flow inflow when pays
e. g. marketing= Profit from marketing costs, Cash outflow when pay agency
e. g. depreciation of fixed asset= Profit depreciation value included as a cost, Cash no effect
overtrading
trying to expand too quick = cash flow issue
3 accounts
Statement of comprehensive income (PAST)
Statement of financial position (PRESENT)
Cash flow forecast (FUTURE)
cost of sales
costs directly associated to making product/service
fixed overheads
costs paid regardless of business performance
net financing costs
interest received from deposits in bank - interest on loans and overdraft
profitability
states profit as a % of sales
