2.4 - Making financial desicions

Question 1

2.4.1 - What is Gross profit?

Answer 1

A measure of the profit a business makes exclusing fixed costs

Question 2

2.4.1 - What is the formula for a gross profit margin (GPM)

Answer 2

(GPM) is a measure of how well the business is doing by seeing how much of their sales revenue is profit. The higher, the better.

Question 3

2.4.1 - What is Net Profit?

Answer 3

Regular profit. Revenue - total sales

Question 4

2.4.1 - What is the formula for a net profit margin (NPM)

Answer 4

(NPM) is a measure of how well the business is doing by seeing how much of their sales revenue is profit. The higher, the better.

Question 5

2.4.1 - What is Average rate of return (ARR)?

Answer 5

When a business wants to analyse the profitablility of a potential project they will use ARR to see how quickly the investment costs will eb paid off and how much profit is made per year

Question 6

2.4.1 - How do you calculate ARR?

Answer 6

(Average annual profit ÷ Initial capital outlay) x 100

Firstly, to find the average annual profit, add up all profits given and divide by the number of profits given. [You may be given yearly revenue instead of profit, in which case you would need to take away the initial capital outlay]

Initial capital outlay is the money spent on the investment and is usually given in the question

ARR is a percentage

Question 7

2.4.2 - What is quantitative data?

Answer 7

• Quantitative data is data about numbers
• Quantitative data is displayed in charts, graphs, as statistics and percentages

Question 8

2.4.2 - What is market data?

Answer 8

• Market data refers to the electronic streaming of prices, volumes and related information used for the trading of shares on the stock markets around the world
• PLCs will be interested to see how their share price is doing, and if their competitors shares are going up or down

Question 9

2.4.2 - What is financial data?

Answer 9

• A business which is a ltd or plc must produce an annual financial report each year.
• The financial data is important to anyone who is considering investing money in the business
• Financial data can be compared year-on-year to see how the business is doing

Question 10

2.4.2 - What are the uses of financial data when understanding business performance?

Answer 10

• A Ltd or plc will have to prepare two types of financial statement at the end of the financial year.
• Balance sheet – this is a snapshot in time of what the business owes and what it owns
• Income statement – this shows if the business has made a profit or a loss during the year

Question 11

2.4.2 - What are the uses of financial information when making business desicions?

Answer 11

• Banks - The bank would use the financial information of a business to see if they will lend more money in the future
• Government - HMRC would look at the financial information to see if the correct amount of tax has been paid

Question 12

2.4.2 - What are the limitations of financial data?

Answer 12

• May only show a snapshot of a short period of time
• Can quickly become out of date
• May have been inaccurately gathered
• Can be interpreted in different ways