Exploring Profit and Loss (CH 21)

Question 1

What does Falling demand and low prices lead to?

Answer 1

Falling Revenue and Profit- Resources exit the industry

Question 2

What does High demand and prices lead to?

Answer 2

Rising Revenue and Profit- Resources attracted- New entrants (Firms entering market)

Question 3

Barriers to entry Meaning

Answer 3

Obstacles to new entrants which effect some industries where competing firms are very large

Question 4

What does Statement of Comprehensive income (Profit and Loss account) show?

Answer 4

• Shows revenue and expenses of a firm
• Gives overview of firms financial position

Question 5

What is the net income used to measure?

Answer 5

• Firm’s performance (income and expenses)

Question 6

Gross Profit Formula

Answer 6

Revenue - Variable cost ( cost producing goods sold)

Question 7

Gross Profit Margin Formula

Answer 7

GP/ Sales Revenue x 100

Question 8

Operating Profit Meaning

Answer 8

Profit earned from firms operations.

(EBIIT)

Earning before Interest, Investments, Taxes

Question 9

Operating Profit Formula

Answer 9

Gross Profit - Fixed Costs

Question 10

Operating Profit Margin Formula

Answer 10

Operating Profit/ Sales Revenue x 100

Question 11

Net Profit Margin (Profit for year)

Answer 11

Net Profit/ Sales Revenue x 100

Question 12

Why use accounts?

Answer 12

• to raise finance via banks
• set objectives for future
• analyse success in reaching profit objectives
• identify trends over time can be revealing