Profit Flashcards
what is net profit also known as?
Profit for the year
What is revenue also known as?
Turnover
What are the different ways accountants define profit?
1.Gross profit
2.Operating profit
3.Profit for the year (net)
a)What is gross profit
b)how is it calcluated?
a)It is the difference between revenue and cost of sales (direct)
b) gross profit=revenue- cost of sales
What is a direct cost?
The cost of buying in stock to resell
a)What is operating profit?
b)how is it calculated?
a)The difference between gross profit and business overheads (indirect)
b)operating profit=Gross profit-Operating expenses
a)What is profit for the year (net)
b)How is it calulated?
a)The difference between operating profit and interest and any other exceptional costs
b)Profit for the year=operating profit-interest (and exceptional cost)
What is the statement of comprehensive income?
A financial document showing a company’s income and expenditure over a particular time period, usually one year
(used to calculate different types of profit)
What is a profit margin?
Measuring the size of profit in relation to revenue/turnover
a)what is gross profit margin?
b)How do you calculate gross profit margin?
a)Gross profit expressed as a percentage of revenue
b)gross profit/revenue x 100
(the higher the better)
How is gross profit margin increased?
-Raising revenue relative to the cost of sales by increasing price
-cutting the cost of sales by finding cheaper suppliers
What does gross profit margin depend on?
the type of industry
-the quicker the turnover of inventory the lower the gross profit margin needed eg supermarkets
What is operating profit margin?
Operating profit expressed as a percentage of revenue
=gives an idea of how much profit is made before interest/taxes
How do you calculate operating profit margin?
Operating profit/revenue x 100
higher is preferred
What is profit for the year margin?
Net profit before tax, expressed as a percentage of revenue
How is the profit for the year margin calculated?
net profit before tax/revenue x 100
How can profit margins be raised?
1.Increase revenue
2.Lowering costs
What are the ways to increase revenue?
-Increase prices
-create awareness and desire through marketing
-add value to the product (features)
What are the benefits and drawbacks of raising prices?
+more revenue for every unit sold
-impact on demand=sales (however price elasticity of demand?)
-how competitors will react
what are the ways a business could lower costs?
- buying cheaper resources
2.using existing resources more efficiently
3.eliminate unprofitable product lines
4.Lower overheads
What are the benefits and drawbacks of buying cheaper resources?
+cheaper labour
-materials may be off low quality
-unreliable eg abroad
Why may a business be unprofitable?
-no demand for product
-selling at wrong price
-poor management of costs
What is the difference between cash flow and profit?
cash flow=inflow-outflow
profit=revenue-costs
What are the ways in which profit and cash flow are different?
TIMING=problem of managing cash is that business expenses are often incurred before revenue is generated or recieved
1.Offering credit for sale- rev but not inflow
2.depreciation of non current assets- car dep=cost
3.Bank loan-inflow but long term cost
