Theme 2 - 2.3.1 - Profit

Question 1

What is 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 where TR is total revenue and TC is total costs

Question 2

What does HMRC stand for ?

Answer 2

Her Majesty’s Revenues and Customs

They are the taxman

Question 3

What are the 3 types of profit ?

Answer 3

• Gross profit
• Operating profit
• Net profit

Question 4

What is the statement of comprehensive income ?

Answer 4

It is a thing that PLCs and limited companies ( Ltds ) 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”

You will need to use extracts from a SOCI to make calculations

Question 5

What is gross profit ?

Answer 5

Gross profit = Sales revenue + Costs of goods sold ( Cost of sales )

It is the profit is the profit before the running costs have been taken into account

Question 6

What does CoGS stand for ?

Answer 6

Cost of Goods Sold

Question 7

What is the Operating profit formula ?

Answer 7

Operating profit = Gross profit - expenses ( costs to the business aside from stock e.g. admin, an ad campaign etc )

Question 8

What is the net profit formula ?

Answer 8

Net profit = Operating profit - interest ( payments due on loans or debts )

Question 9

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

Answer 9

• a business that is profitable will be able to reward its investors with a return on investment
• 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 10

Whats the Gross profit margin formula ?

Answer 10

GP margin = Gross profit / Sales revenue x 100

Express your answer as a %

Question 11

Whats another word for net profit ?

Answer 11

Comprehensive income

Question 12

Whats the operating margin formula ?

Answer 12

OP margin = Operating profit / Sales revenue x 100

Express your answer as a %

Question 13

What is the net profit margin formula ?

Answer 13

NP margin = Net profit / Sales Revenue x 100

Express your answer as a %

Question 14

What are some ways to improve profitability - increase revenue ?

Answer 14

If profit is TR - TC then it makes sense that one of the ways to improve profitability is to increase revenue OR to reduce costs in the business

This can be done in a number of ways:
- Have a sale, reduce the prices
- Advertise more
- Promote the products more
OR
- Restructuring, delayering ( removing the layers of management so u pay less wages etc ) and redundancies ( it is when you let an employee go because you no longer need their job )
- Automating production

Question 15

What is the difference between Profit and cash ?

Answer 15

Profit:
- Profit is recorded straight away
- A business can trade for many years without a profit

• To improve profitability a business must either increases their revenue or reduce their costs as - P = TR - TC

Cash:
- 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 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

Question 16

What is working capital ?

Answer 16

Working capital = Current assets - current liabilities