Profit

Question 1

Define profit.

Answer 1

Profit is the financial gain of a business through trading and can be found by deducting expenditure from income

P =TR-TC

Question 2

What is a statement of comprehensive income?

Answer 2

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

As part of those accounts they need to show their profit and loss and this appears in their “statement of comprehensive income (SOCI)”

Question 3

What is the formula for gross profit?

Answer 3

GP = Sales revenue - cost of sales

Question 4

What is the formula for operating profit?

Answer 4

OP = GP - expenses

Question 5

What is the formula for net profit?

Answer 5

NP = OP - cost of finance

or

NP = GP - fixed costs

Question 6

How does a statement of comprehensive income help to measure profitability?

Answer 6

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 7

What is the formula for gross profit margin?

Answer 7

GP margin = (Gross profit / sales revenue) X 100

Question 8

What is the formula for operating profit margin?

Answer 8

OP margin = (operating profit / sales revenue) X 100

Question 9

What is the formula for net profit margin?

Answer 9

NP margin = (net profit / sales revenue) X 100

Question 10

Explain increasing revenue as a way to improve profitability.

Answer 10

Increase income by increasing sales.

This can be done in a number of ways;
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 11

Explain reducing costs as a way to improve profitability.

Answer 11

reduce costs in the business

This could be done through a number of ways, here are two suggestions:
Restructuring, delayering and redundancies
Automating production

Question 12

What is the difference between profit and cash?

Answer 12

Profit is recorded straight away but cash in not recorded until it is paid out or received.

A business can trade for many years without profit but a business may go bust if it runs out of cash to pay a supplier or wages

Cash can be introduced via savings or a loan and this will not affect the profit figure.