POFM - gross profit and net profit ratios

Question 1

what is the purpose of a financial ratio

Answer 1

highlights relationships between variables and allow the businesses financial position to be assessed.

Question 2

profitability

Answer 2

o The financial statements needed to be assess profitability are the balance sheet and the income statement.

Question 3

three ratios that are used to assess profitability within the business

Answer 3

1. Gross profit ratio (income statement)
2. Net profit ratio(income statement)
3. Return on equity ratio (balance sheet and income statement)

Question 4

gross profit

Answer 4

Sales - COGS

What is the difference between your revenue and how much you paid for those things you sold?

Question 5

net profit

Answer 5

gross profit - total expenses

What is the difference between the your revenue and all expenses in running the business?

Question 6

gross profit ratio

Answer 6

The gross profit ratio is to assess profitability

gross profit/sales x 100

It is written as a percentage ie. X% and shows how for every $1 of sales how much the business receives as gross profit

Question 7

net profit ratio

Answer 7

The net profit ratio is next ratio to assess profitability

net profit/sales x 100

It is always written as a percentage ie x% and shows how for every $1 of sales how much the business receives as net profit

Question 8

what does gross profit ratio mean?

Answer 8

allows the business to assess the relationship between revenue earned and the cost of goods

A business wants to maximise their gross profit ratio because that means the cost of the goods is low or revenue high

Question 9

If the gross profit ratio is perceived as too low (compared to previous years and competitors)

Answer 9

suppliers or the sourcing or alternative inputs maybe required.

the price being charged may need to be re-evaluated

Question 10

what does net profit ratio mean

Answer 10

allows the businesses to assess the relationship between revenue earned total expenses

A business wants to maximise their net profit ratio because that means expenses are low or revenue high

Question 11

If the net profit ratio is perceived as too low

Answer 11

expense minimisation must occur or efforts to generate greater revenue through marketing strategies considered.