HEA

Question 1

Gross profit margin

Answer 1

A profitability indicator that measures the average mark-up by calculating the
percentage of Net Sales revenue that is retained as Gross Profit
TO increase gross profit margin- Increase selling price
Carries the risk of lowering demand, and thus reducing the volume of sales. This
could mean that while GPM increases, Gross Profit in dollar terms may actually
decrease. that is, the business may make more Gross Profit per item but make
fewer actual sales. If the drop in the number of sales outweighs the increase in
profit per item, Gross Profit will actually fall
2. Reduce cost price
If quality of inventory is reduced through a change to a cheaper supplier, this
could cause a decrease in sales volume, or an increase in Sales returns or
Inventory losses (through damage)
Gross profit margin will always be higher than net profit margin
Trend in Gross Profit margin in it is 36.47%
Trend: increase/decrease
36.47% of Net Sales revenue is retained as Net Profit, or 63.53% of Net Sales is
consumed by Costs of Goods Sold.
For every $1 of Net Sales generated, approximately 37 cents are retained as Gross Profit

Question 2

Cash vs Profit

Answer 2

• Cash and profit are different things. Cash refers exclusively to the inflows and outflows of cash, as reflected in the Cash Flow Statement. Alternatively, profit is calculated by deducting revenues from expenses. Whilst some items affect both cash and profit, this is not always the case.
• One reason cash and profit are different, is that not all cash inflows and outflows are revenues or expenses. For example: the receipt of a loan increases the bank balance of the business, and therefore cash. However, as it has no effect on the owner’s equity of the business, it is not included in the calculation of profit.
• Comparatively, not all revenues and expenses affect cash. For example: an inventory loss decreases assets and owner’s equity, and is therefore an expense, however there is no corresponding cash flow.
• Furthermore, some items affect cash and profit by differing amounts. A credit sale will increase sales revenue and therefore profit. However, the cash collected by the business as a result of that sale may differ, due to factors such as discount expense and GST.
• Therefore, it is clear that whilst cash and profit may be related, they are very different things.