Chapter 34- Profit Flashcards

1
Q

Gross Profit

A

The difference between revenue and sales

=revenue – cost of sales

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Operating profit

A

operating profit is the difference between gross profit and business overheads

= gross profit – cost of sales

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

net profit

A

The difference between operating profit and interest and exceptional costs

= operating profit – interest (and exceptional costs)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Statement of Comprehensive Income

A

A financial document showing a company’s income and expenditure over a particular period of time

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Measuring profit margins (three ways)

A

It is possible to measure the profitability of a business in a more meaningful way – this is done by calculating profit margins, which may be measure the size of profit in relation to revenue/turnover
Three profit margins can be calculated:

Gross profit margin
Operating profit margin
Net profit margin

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Gross profit margin

A

Shows the gross profit made on sales turnover/revenue

= gross profit/ revenue x 100%

Higher gross margins are usually preferable to lower ones because it means that more gross profit is being made per £1 of sales

Can be increased by raising revenue relative to cost of sales, by increasing price

May be increased by cutting the cost of sales; this might be achieved by finding cheaper suppliers of key materials

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Operating profit margin

A

Shows the operating profit made on sales revenue/turnover – operating margin is used to measure a company’s pricing strategy and operating efficiency.

= Operating profit/ revenue x 100%

A high or increasing profit margin is preferred – this is because more money is made on each £1 of sales.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Net profit margin

A

The net profit margin takes into account all business costs, including interest, other non-operating costs and exceptional terms

= Net profit before tax/ revenue x 100%

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Ways to improve profitability

A

All businesses will want to improve their performance – an improved performance is likely to benefit all stakeholders – the returns on capital can be increased by making more profit with the same level of investment

  • Raising prices – if a business raises the price, it will get more revenue for every unit sold – however raising price might also have an impact on the level of sales – generally, when price is raised demand will fall.
  • Lowering costs: it might be possible to buy raw materials and components from new suppliers that offer better prices; another option might be to find ways of using cheaper labour – for examples some businesses have moved overseas for cheap eastern European labour
  • Using existing recourses more efficiently is also an option – making better use of current recourses will improve efficiency and lower costs – a business might do this by introducing new working practices or training staff- this would help to raise labour productivity
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Amortisation

A

The writing off of an intangible asset

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Cost of Sales

A

The direct costs of a business

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Exceptional Costs

A

A one off cost

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Revenue

A

The total income of a business

How well did you know this?
1
Not at all
2
3
4
5
Perfectly