2.4 Calculations

Question 1

Gross profit

Answer 1

Gross profit = Sales revenue - cost of sales

Question 2

Net profit

Answer 2

Net profit = Gross profit - (operating expenses + Interest)

Question 3

Gross profit margin

Answer 3

This shows the proportion of revenue that is turned into gross profit and is expressed as a percentage
gross profit margin=gross profit/sales revenue x 100

Question 4

Net profit margin

Answer 4

net profit margin shows the proportion of revenue that is turned into net profit before tax and is expressed as a percentage
net profit margin= net profit/sales revenue x 100

Question 5

The Average Rate of Return (ARR)

Answer 5

ARR is used when a decision is required about which of two projects should be pursued in order to generate the most profit
ARR= average annual profit/ initial outlay x 100

Question 6

Sales revenue

Answer 6

Sales revenue = price x quantity sold

Question 7

Market share

Answer 7

The market share that a business enjoys is the proportion of the total sales revnue of a product/service compared to the market as a whole
sales revenue of a business/total sales revenue in the market x 100

Question 8

The Use & Limitations of Financial Information to Businesses

Answer 8

Uses:
* To identify trends and make calculations for comparison over time and with other businesses
* To support an application for external finance such as a loan
* To attract potential investors
* To support spending decisions
Limitations:
* Data becomes out of date quickly
* qualitative factors are ignored
* different interpretations of data