Topic 2.4.1 Business calculations

Question 1

What is gross profit?

Answer 1

The profit that a business makes in its trading activity before any indirect costs have been deducted.

Question 2

How is gross profit calculated?

Answer 2

Sales revenue - Cost of sales (the cost of buying, producing and distributing products and services)

Question 3

What is net profit?

Answer 3

The final profit that the businesses has after covering ALL expenses, this is returned to shareholders and/or reinvested back into the business.

Question 4

How is net profit calculated?

Answer 4

Gross profit - Others operating expenses and interest (like salaries, rent, electricity etc.)

Question 5

What is profit margin?

Answer 5

It is the ratio of profit compared to the sales revenue. Business will calculate the gross profit margin, GMP, and net profit margin, NPM, of their products and services. Profit margins give an indication of a product’s profitability.

Question 6

Gross profit margin formula?

Answer 6

Gross profit / Revenue x 100

Question 7

Net profit margin formula?

Answer 7

Net profit / Revenue x 100

Question 8

What is average rate of return (ARR)?

Answer 8

The percentage increase or decrease in value of the cost of initial investment. In other words, the amount, as a percentage, that an investment has grown or decreases by over a year.

Question 9

How is ARR calculated?

Answer 9

Average annual profit
——————————————- x100
Cost of investment