Theme 2 Topic 12 - Profit Flashcards
Define Statement of Comprehensive Income
Shows the income and expenditure (and therefore profit or loss) of a business over time
Define Revenue
Income made by selling goods and services before any costs are deducted
Revenue =
Price x Quantity Sold
Define Cost of Sales
Variable costs (e.g. raw materials) directly linked to the sale of the product or service
Define Gross Profit
Shows how effective a business is at adding value to the stock or raw materials by getting customers to pay more for the finished product
Gross Profit =
Revenue - Cost of Sales
Define Other Operating Expenses
Fixed costs (e.g. salaries) not directly linked to producing the product or service
Define Operating Profit
The difference between gross profit and operating expenses
Operating Profit =
Gross Profit - Other Operating Expenses
Define Interest
Paid to the bank in return for borrowing money
Define Net Profit
The difference between operating profit and interest
Net Profit =
Operating Profit - Interest
Define Profit
The money left when costs have been taken from revenue, it is an absolute figure
Define Profitability
Measured as a percentage and measures the amount of profit made in relation to some factor e.g. sales revenue
What are three reasons profit is important for businesses?
Ensure they can cover all their costs, Use it to finance expansion, Keeps the business sustainable
What are the three types of profit which profitability can be measured for?
Gross, Operating and Net
Define Gross Profit Margin
Shows how effectively a business turns its sales into gross profit
Gross Profit Margin =
Gross Profit/Sales Revenue x 100
Define Operating Profit Margin
Shows how effectively a business turns its sales into operating profit
Operating Profit Margin =
Operating Profit/Sales Revenue x 100
Define Net Profit Margin
Calculates what percentage of total revenue is profit
Net Profit Margin =
Net Profit/Sales Revenue x 100
What are three ways to increase profitability
Increase output, Lower costs, Change price in order to sell more
Net Cash Flow =
Total Inflows - Total Outflows
How are cash flow and profit different?
Cash flow is calculated at the exact time it leaves/enters a till, Profit is calculated by recording all transactions that count only as sales or costs
