2.3.1 Profit

Question 1

Statement of comprehensive income

Answer 1

-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

Question 2

Profit

Answer 2

Difference between total revenue and total costs

Question 3

Why have different kinds of profit

Answer 3

find out where issue is

Question 4

7 reasons Why does a business need profits

Answer 4

1. costs
2. dividends
3. financial stability
4. retained profit
5. corporation tax
6. performance
7. Reward for business owner

Question 5

Direct costs

Answer 5

Often variable costs

Cost of sales (just stock)

Question 6

Gross profit

Answer 6

Revenue - costs of sales (cost of goods sold)

Question 7

Expenses

Answer 7

Overhead or indirect costs all same

Question 8

Operating profit

Answer 8

Gross profit - fixed overheads

Question 9

Profit before tax

Answer 9

Operating profit - financing costs

Question 10

Corporation tax

Answer 10

tax paid by business out of profit
Charged on operating profit as % flat rate
19%

Question 11

Net profit/ profit for year

Answer 11

Profit before tax -tax + net financing costs

Question 12

Ratio analysis

Answer 12

• analysing financial performance
• compare 1 piece of accounting info with another

-profitability and liquidity ratios use data from SOCI and SOFP

Question 13

Why use ratios

Answer 13

compare different years and different companies

assess performance

Question 14

Profitability ratios

3 considerations

Answer 14

Measure performance a firms efficiency at achieving profit

1-higher % = better
2-relate profit to size of firm
3-nature of business

Question 15

Gross profit margin

Answer 15

Gross profit divided by sales revenue x100

-ignores overheads, useful to asses control direct costs and ability to max sales

Question 16

Operating profit margins

Answer 16

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

Question 17

Profit for the year (net profit) margin

Answer 17

Net profit divided by sales revenue x100

Question 18

4 ways Profitability ratios provide useful insights

Answer 18

1-making profit? profit growing?
2-efficient business revenues -> profit
3-enough to justify investment into business
4-compare with rest of industry

Question 19

3 ways to increase profits

Answer 19

1. sales: increase quantity sold and increase selling price
2. reduce variable cost per unit
   3.. increase output and reduce FC
   all = net profit

Question 20

10 impacts of increasing quantity sold

Answer 20

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)

Question 21

6 impacts of increasing selling price

4 positives 2 negatives

Answer 21

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

Question 22

5 impacts of reduce VCPU

3 positives 2 negatives

Answer 22

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

Question 23

4 ways of profit margin improvement and methods:

Answer 23

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

Question 24

6 impacts of an increase production output

4 positives 2 negatives

Answer 24

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

Question 25

8 positives of reduce fixed costs

Answer 25

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

Question 26

revenue vs cash inflow

Answer 26

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

Question 27

receipts different from revenue

payments different from costs

Answer 27

• 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)

Question 28

difference between profit and cash flow accounts/ are constructed

how do timescale affect relative importance of cash vs profit

Answer 28

• 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

Question 29

profit vs cash flow

Answer 29

1. timing differences
2. way non current assets accounted for (payment= cash, value= profit depreciation = cost)
3. 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

Question 30

opening and closing balance

Answer 30

opening: money at start of month
closing: money at end of month
(statement of comprehensive income)

Question 31

costs vs outflows:

3 examples

Answer 31

-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

Question 32

overtrading

Answer 32

trying to expand too quick = cash flow issue

Question 33

3 accounts

Answer 33

Statement of comprehensive income (PAST)
Statement of financial position (PRESENT)
Cash flow forecast (FUTURE)

Question 34

cost of sales

Answer 34

costs directly associated to making product/service

Question 35

fixed overheads

Answer 35

costs paid regardless of business performance

Question 36

net financing costs

Answer 36

interest received from deposits in bank - interest on loans and overdraft

Question 37

profitability

Answer 37

states profit as a % of sales