2.3.1 Profits

Question 1

Define profits

Answer 1

The surplus of revenue over costs

Question 2

How do you calculate profit

Answer 2

Total revenue - total costs

Question 3

What are the 3 types of profit

Answer 3

Gross
Operating
Profit of the year

Question 4

What document are the three types of profit on

Answer 4

Statement of comprehensive income

Question 5

Define statement of comprehensive income

Answer 5

A financial document that summarises a business trading activities and expenses to show whether it had made a profit or loss

Question 6

Define sales revenue

Answer 6

Money coming in from sales

Question 7

How do you calculate sales revenue

Answer 7

Quantity sold x selling price

Question 8

Define cost of sales

Answer 8

Costs directly linked to the production of the goods or services sold
Eg raw materials

Question 9

How do you calculate gross profit

Answer 9

Sales revenue - cost of sales

Question 10

Define other operating expenses

Answer 10

All other costs associated with the trading of the business

Eg salaries and marking expenditure

Question 11

How do you calculate operating profit

Answer 11

Gross profit - expenses

Question 12

How do you calculate profit if the year

Answer 12

Operating profit - interest + taxation

Question 13

Define intrest and taxation

Answer 13

Intrest paid on debts or received plus tax payables of profit

Question 14

What is profitability

Answer 14

•Profitability measures the financial performance of a business by comparing profits achieved to a second variable e.g. revenue

Question 15

What are the three types of profitability ratios

Answer 15

Gross profit margin
Operating profit margin
Profit of the year

Question 16

Describe gross profit margin

Answer 16

•Gross profit margin (GPM) is a measure of a firm’s profitability by looking at the relationship between gross profit and sales revenue

• If GPM is low or falling this may indicate that a firm
• is not managing its cost of sales effectively e.g. are the cost of raw materials increasing?

Question 17

How do you calculate gross profit margin

Answer 17

Gross profit / sales revenue x 100

Question 18

Describe operating profit margin

Answer 18

•Operating profit margin (OPM) is a measure of a firm’s profitability by looking at the relationship between operating profit and sales revenue

• If OPM is low or falling this may indicate that a firm
• is not managing its expenses effectively e.g. wages are increasing or overheads are going up

Question 19

How do you calculate operating profit sales

Answer 19

Operating sales profit / sales revenue x 100

Question 20

Describe profit margin of the year

Answer 20

•Profit for the year margin is a measure of a firm’s profitability by looking at the relationship between profit for the year and sales revenue

• If the profit for the year margin is low or falling this may indicate that a firm
• gross profit or operating profit are in decline
• interest rates have changed

Question 21

How do you calculate profit margin of the year

Answer 21

Profit margin of the year / sales revenue x 100

Question 22

Methods of improving profits and profitability

Answer 22

• Increasing profitability is often a major aim for growing businesses
• There are several ways in which this can be achieved
• Sell the same quantity but at a higher price
• Sell more at the current price
• Sell the same at the same price but reduce costs
• Businesses are not limited to one of these options but must realise each option has knock on implications

Question 23

The distinction between cash flow and profit

Answer 23

• Profit exists in financial records when total revenue is greater than total costs
• Cash is the physical existence of money within the business
• Cash flow is the timings of cash flowing in and out of the business
• Profitable businesses can fail because of lack of cash
• Why might cash and profit be different?
• Credit Sales
• Bad debts
• Heavy stock holdings
• Investment in fixed assets
• Seasonality
• Repayment of loans