Profit

Question 1

Definition of profit

Answer 1

Profit is the financial gain of a business through trading and can be found be deducting expenditure from income; P =TR-TC where TR is total revenue and TC is total costs

Question 2

Three different types of profit

Answer 2

• Gross profit
• Operating profit
• Net profit

Question 3

What is statement of comprehensive income

Answer 3

PLCs and limited companies(Ltds) need to publish their accounts every year, this is UK law

Question 4

Gross profit calculations

Answer 4

• GP is Gross Profit
• SR is Sales Revenue
• Cost of Sales are costs that vary with output or level of sales, and may include
stock

Question 5

Operating profit formula

Answer 5

OP is operating profit
• GP is Gross Profit
• Expenses are other costs to the business aside from stock e.g. admin, an ad
campaign etc.

Question 6

Net profit formula

Answer 6

• NP is net profit
• OP is operating profit
• Interest are payments due on loans or debts

Question 7

How does comprehensive income help measure profitability

Answer 7

• A business that is profitable will be able to reward its investors with a return on their investment e.g. dividends paid on shares
• A business that is not profitable will not last long unless drastic changes are made
• The statement of comprehensive income helps managers, owners and investors to know how the business is doing by measuring the profitability

Question 8

Gross profit margin formula

Answer 8

GP margin = Gross Profit _____________ x 100
Sales Revenue

Question 9

Operating profit margin formula

Answer 9

OP margin = Operating Profit ________________ x100
Sales Revenue

Question 10

Net profit margin formula

Answer 10

NP margin = Net Profit ________________x100
Sales Revenue

Question 11

Ways to improve profitability-increase revenue

Answer 11

• Have a sale, reduce the prices
• Advertise more e.g. Yorkshire tea – see the advert on the right and the other advert HERE
• Promote the products more

Question 12

Ways to improve profitability- reduce costs

Answer 12

• Restructuring, delayering and redundancies
• Automating production

Question 13

Profit vs cash

Answer 13

• Profit is recorded straight away • A business can trade for many
years without profit
• To improve profitability a business must either increase their revenue or reduce their costs as:

• Cash will not be recorded until it is paid out or received which could be in a different trading year
• A profitable business may go bust of it runs out of cash to pay a supplier or wages of staff
• If owners introduce cash via savings or a loan this will not affect the profit figure