Unit 6.4 - Analysing the financial performance of a business Flashcards
Define income statement
Income statement (profit and loss account) is a type of financial statement showing how income has changed over time
Different profits (3)
Gross profit
Operating profit
Net profit
Profit formula (3)
Gross profit = revenue - direct costs
Operating profit = gross profit - indirect costs (revenue - direct and indirect costs)
Net profit = operating profit - remaining costs (revenue - all costs)
Gross profit shows… (2)
Gross profit is low managers need to look at reducing the cost of making the product
Increasing the revenue to make gross profit higher
Operating profit shows… (3)
If operating profit lower than gross profit it could show the operating expenses are a weak area
Reduce these expenses
Banks and investors will look to assess the risk of lending or investing
Net profit shows… (4)
Tells you if a company is profitable or not
Shareholders and potential investors will look at this figure
Shows how much internal finance is available to invest
Potential to get bigger
Profitability ratios (3)
Gross profit margin
Operating profit margin
Net profit margin
Profitability formulae (3)
Gross profit margin = gross profit/sales revenue * 100
Operating profit margin = operating profit/sales revenue * 100
Net profit margin = net profit/sales revenue * 100
Gross profit margin shows…
Gross profit margin is the fraction of every pound spent by customers that doesn’t go directly towards making a product
For every £1 spent by customers (100 - profit margin figure) was used to make the product
Net profit margin shows…
Net profit margin is the fraction of every pound spent by customers that the company get to keep
For every £1 spent by customers the company gets (insert net profit figure) as net profit
Define statement of financial position
Statement of financial position (balance sheet) records what a company owes and owns at that point in time
OR
Statement of financial position (balance sheet) records what assets and liabilities a company has at that point in time
Define asset, current asset and fixed asset (3)
Asset is something a business owns
Current asset something a business owns for less than a year
Fixed asset something a business owns for more than a year
Define liability, current liability and non-current liability (3)
Liability is something a business owes (debt)
Current liability something a business has to pay in less than a year
Non-current liability (long term liabilities) something a business has to pay in more than a year
Define net current assets (working capital)
Net current assets = current assets - current liabilities
This is the money available for the day-to-day running of a business
Define net assets
Everything that a business has used the money put into the business for
