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A-level Edexcel Business > Paper 2 > Flashcards

Paper 2 Flashcards

1
Q

What is the formula for Gross profit?

A

Gross profit = Revenue - Cost of Sales

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2
Q

What are costs of sales?

A

> Direct costs of selling (e.g. cost of raw materials, a variable cost)

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3
Q

What is the formula for Operating profit?

A

Operating profit = Gross profit - Fixed overheads

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4
Q

What are Fixed overheads?

A

> Fixed, ongoing costs which don’t vary with output or demand (e.g. rent, electricity, advertising)

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5
Q

What is the formula for Profit for the year (net profit)?

A

Profit for the year (net profit) = Operating profit - (Net financing cost + Tax)

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6
Q

What does profitability measure?

A

Profitability measures profits as a percentage of sales revenue

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7
Q

How is gross profit margin calculated?

A

Gross profit margin = (Gross profit/Sales revenue) x 100

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8
Q

How is operating profit margin calculated?

A

Operating profit margin = (Operating profit/Sales revenue) x 100

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9
Q

How is Profit for the year (net profit), margin, calculated?

A

Profit for the year (net profit), margin = Profit for the year (net profit), margin/Sales revenue)) x 100

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10
Q

What is break-even used to determine?

A

The level of output necessary to cover a business’s fixed and variable costs (and, therefore, total costs)

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11
Q

What is the formula for break-even output?

A

Break-even output = Fixed costs/contribution per unit

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12
Q

What is the formula for contribution per unit?

A

Contribution per unit = selling price per unit - variable cost per unit

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13
Q

What is the formula for Total contribution?

A

Total contribution = contribution per unit x sales volume

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14
Q

What is a break-even chart?

A

> A break-even chart is a line graph showing a business’s total revenues and total costs at all possible levels of demand or output from zero to maximum capacity

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15
Q

What does ‘Margin of safety’ mean?

A

> Amount by which current output exceeds break-even output

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16
Q

What is the x-axis on a break-even chart?

A

> Output (e.g. kg, thousands)

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17
Q

What is the y-axis on a break-even chart?

A

Costs (e.g. £, thousands)

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18
Q

What are the limitations of break-even analysis?

A

> Doesn’t take sales trends into account&raquo_space;only true at a point in time
Assumes all output is sold&raquo_space;ignores seasonal demand, or low demand
Doesn’t take potential economies of scale into account (benefits of bulk buying)&raquo_space;fails to highlight potential variable cost savings, and, therefore, total cost savings
Hard to do with little experience of the market
No guarantee of sales success

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19
Q

What is the formula for Margin of safety?

A

Margin of safety = Current output - Break-even output

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20
Q

How is Total profit using Total contribution calculated?

A

Total profit = Total contribution - Fixed costs

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21
Q

What is zero-budgeting?

A

> Zero budgeting is setting all future budgets at £0, forcing managers to justify their future spending requests.

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22
Q

What is the formula for contribution per unit?

A

Contribution per unit = selling price per unit - variable cost per unit

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23
Q

What is a historical budget?

A

A historical budget is a budget determined largely by last year’s budget, with minor adjustments e.g. for inflation, and other foreseeable changes.

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24
Q

What is a Favourable variance?

A

> a Favourable variance is a difference between budgeted and actual FIGURES which boost a business’s profits (e.g. increased revenue, or decreased costs)

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25
Q

What is Criteria?

A

> Criteria is yardsticks against which success (or the lack of it) can be measured

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26
Q

What is Adverse variance?

A

> Adverse variance is a difference between budgeted and actual figures which damage a business’s profit (e.g. revenue decrease, costs increase)

27
Q

What are the difficulties of budgeting?

A

> Budgets made may be unrealistic >creates stress for employees who must meet them
Budgeting may lead to departmental conflict > damages motivation and workforce cohesion
Budgeting is no guarantee of sales success
Budgeting can be complex and time-consuming for large businesses, e.g. MNCs

28
Q

What is budgeting strictness indicative of?

A

> Business culture:
Autocratic management >budgeting used to control, employees have no say >damages motivation
Democratic management >budgeting used as decision-making tool>empowers employees >improves motivation, improves decision-making of business

29
Q

How can businesses improve profitability?

A

> Increase Revenues
Decrease Costs
Do both
Inspect price elasticity of products, then act accordingly (e.g. increase, or decrease prices)

30
Q

What is the risk of cutting costs?

A

> Decrease in product quality, or service >damages reputation and brand

31
Q

What are ways of cutting costs?

A 
>Redundancies
>Switching to cheaper suppliers
>Offshoring to a cheaper production base
>Closing stores
>Using cheaper raw materials
>Discontinuing sponsoring
>Reducing production wastage (e.g. JIT, lean production, Kaizen)
32
Q

Why is cash inflow and revenue not the same?

A

Revenue is the value of sales over a period of time.
Cash inflow could also be revenue (e.g. sales paid in cash), but doesn’t have to be, e.g. selling an expensive asset, getting a bank loan

33
Q

What are dividends?

A

Dividends are annual financial rewards paid to shareholders

34
Q

Why is cash outflow and costs not the same?

A

Cash outflow could be paying dividends, or buying a new asset as an investment (e.g. machinery which increases efficiency)
While cash outflow could be used to pay for business costs, e.g. employee wages paid in cash, cash outflow is not always a cost.

35
Q

How is Current ratio calculated?

A

Current ratio = Current assets/Current liabilities

36
Q

What is the ‘ideal’ current ratio?

A

> ‘Ideal’ current ratio > 1.5:1

37
Q

How is Acid test ratio calculated?

A

Acid test ratio = (Current assets - inventories)/Current liabilities

38
Q

What is the ‘ideal’ Acid test ratio?

A

> ‘Ideal’ acid test ratio> 1:1

39
Q

What is the most illiquid current asset?

A

> Stocks (hardest to turn to cash without a loss in value)

40
Q

What is the formula for capacity utilisation?

A

Capacity utilisation = (current output/maximum possible output) x 100

41
Q

What are the negative implications of a low capacity utilisation?

A

> Fixed costs cost per unit rises (fixed costs cannot be spread over as many units of output)&raquo_space;business may have to increase prices >may decrease demand

42
Q

What are the positive implications of a high capacity utilisation?

A

Fixed costs per unit decreases (fixed costs can be spread over a greater output) >business can decrease prices to incentivise demand, or keep prices the same and enjoy higher profit margins

43
Q

What are the implications of over-capacity utilisation?

A

> If demand increases further, business may have to turn potential customers away >could benefit competitors

> Business may struggle to keep up machinery maintenance and staff training >may be
costly in long-term, and increases likelihood of short-term production breakdowns

44
Q

What are Porter’s 5 forces?

A

> Threat of new entrants; substitute products or services
Bargaining power of buyers; suppliers
Rivalry amongst existing competitors

45
Q

What is SWOT analysis?

A

Analysis of a business’s:
>Strengths, Weaknesses (Internal)
>Opportunities, Threats (external)

46
Q

What are the limitations of quantitative sales forecasting techniques?

A

> Doesn’t take into account NEW ENTRANTS into the market
Doesn’t take into account LEGAL CHANGES (e.g. cap on sugar content in drinks, or cap on carbon emissions)
Doesn’t take into account, new, viral support or criticism of a social media influencer who promotes the business’s products (doesn’t take CANCEL CULTURE into account)

47
Q

How can a strong or weak correlation be determined?

A

> The level of deviation from the line of best fit

48
Q

What is a positive correlation?

A

> When the independent variable increases, the dependent variable increases

49
Q

What is a negative correlation?

A

> When the independent variable increases, the dependent variable decreases

50
Q

How is the maximum amount that the y-axis goes up to, calculated?

A

selling price x maximum output

51
Q

What do you need to plot on a break-even chart?

A 
>Fixed costs
>Variable costs
>Total costs
>Revenue
>Break-even point (point at which total revenues = total costs)
52
Q

What is the current sales VALUE on a break-even chart?

A

> Current sales on a break-even chart is the MAXIMUM OUTPUT (AS FAR AS THE X-AXIS GOES)

53
Q

What are ‘profitability’ ratios?

A

Profitability ratios >profit margin ratios (profit as a percentage of sales revenue)

54
Q

What do liquidity ratios measure?

A

Liquidity ratios >short-term financial stability of business

55
Q

What does GEARING measure?

A

GEARING >how dependent the business is on borrowed money >long-term financial stability of business

56
Q

How is GEARING calculated?

A

GEARING = (non-current liabilities/capital employed) x 100

57
Q

How is GEARING expressed?

A

GEARING >expressed as a percentage (%)

58
Q

How high is highly GEARED?

A

Above 50% >highly GEARED

59
Q

What does having a low GEARING mean?

A

Low gearing >business is less risky to lend to >business can negotiate loans more easily, and cheaply

60
Q

How is return on capital employed (ROCE) calculated?

A

ROCE = (operating profit/capital employed) x 100

61
Q

What are the limitations of ratio analysis?

A

> Ratio analysis creates averages, meaning extremities may be smoothed out and therefore hidden.

> Ratio analysis ignores market share performance, which may be important to the business’s objectives

> Changing society is showing a greater interest in ethics of business performance (e.g. environmental friendliness, treatment of employees)

62
Q

What is the formula for capital employed?

A

Capital employed = Debt + Equity

63
Q

What is the difference between working capital and capital employed?

A

Working capital >short-term finance (day-to-day running of business)
VS
Capital employed >long-term finance (debt + equity)

64
Q

What are the risks of current ratio and acid test ratio?

A

Receivables made up of bad debts could be hidden >over-estimates liquidity (short-term financial stability) of business

A-level Edexcel Business (30 decks)

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