Profit

Question 1

How do businesses measure progress of profit

Answer 1

Businesses compare their profits from the current period (usually a year to profits from previous periods

Question 2

Why do businesses work out percentage increase or decrease in their profits from year to year

Answer 2

Makes it easy to see how well they’re performing in comparison with other years

Question 3

What’s the formula for measuring percentage change in profit

Answer 3

Current years profit - previous years profit

Divided by previous years profit

X100

(New-old, divided by old, x100)

Question 4

What are the three measures of profit

Answer 4

Gross profit
Operating profit
Profit for the year (net profit)

Question 5

What is profit

Answer 5

Difference between total revenue and total costs

• But there’s different ways of looking at it

Question 6

What’s gross profit

Answer 6

Amount left over when cost of sales is subtracted from sales revenue(total revenue)

Gross profit= sales revenue - cost of sales

Question 7

What’s costs of sales

Answer 7

Costs directly related to making the product

E.g. the cost of raw materials

Question 8

What’s operating profit

Answer 8

Considers both cost of sales and operating expenses, such as administrative expenses.

• If a business’s gross profit is increasing but operating profit is decreasing, it usually means the business is not controlling its operating costs

Question 9

Formula for operating profit

Answer 9

Gross profit - other operating expenses

Question 10

What’s profit for the year (net profit)

Answer 10

Takes into consideration the cost of any interest the business has to pay for borrowing money

Net profit= operating profit - interest

Question 11

If a business made any profits or losses from one-off events throughout the year (money made from investments) what type of profit would this be taken into account with

Answer 11

Profit for the year (net profit)

Question 12

Profit can be shown on a statement of comprehensive income

What is a statement of comprehensive income

Answer 12

Shows how much money has been coming into the business (revenue) and how much has been going out (expenses) over a period of time

Question 13

What can figures on statement of comprehensive income shown

Answer 13

A business’s financial performance

Question 14

Why are statements of comprehensive income helpful

Answer 14

• Can contain previous years data, for easy comparison, to see what’s changed

Question 15

Order of a statement of comprehensive income

Answer 15

Revenue 
Cost of sales
Gross profit
Operating expenses
Operating profit 
Finance costs (interest) 
Profit for the year (net profit) before tax 
Tax
Profit for the year (net profit) after tax
Dividends
Retained profit

Question 16

What do profit margins measure

Answer 16

They measure the relationship between the profit and the revenue

• They tell you what percentage of the selling price of a product is actually profit

Question 17

What’s gross profit margin

Formula for it

Answer 17

• Gross profit margin (GPM) measures gross profit as a percentage of revenue:

Gross profit / Sales Revenue X100

Question 18

What counts as a good GPM

Answer 18

Depends on type of business, but a higher percentage is usually better.

• A business with high sales volume (e.g. bakery) can afford to have a low GPM

Question 19

How can GPM be improved

Answer 19

Increasing prices or reducing direct costs (cost of sales)

Question 20

What’s operating profit margin (OPM)

Formula for it

Answer 20

-OPM takes into account all costs of regular trading (operating costs)

Operating profit / Sales revenue X100

Question 21

Is it best to have a high or low OPM

How can it be improved

Answer 21

Higher OPM is better, but depends on type of business

• Can be improved by increasing prices or reducing cost of sales or operating expenses

Question 22

Why’s it useful to compare a business’s OPM with its GPM over a period of time

Answer 22

• A business with a decreasing OPM compared to GPM is struggling with operating expenses
• A business with an increasing OPM compared to GPM is controlling operating expenses well

Question 23

What’s profit for the year (net profit) margin

Formula for it

Answer 23

• The profit for the year margin measures the profit for the year as a percentage of revenue

Profit for the year / Sales revenue X100

Question 24

What are the different methods for a business to increase profit margins

Answer 24

• Increasing prices (if PED is inelastic), or reducing prices (if PED is elastic)
• Improve product quality, which could lead to greater sales volume and possibly a higher selling price
• Reducing cost of sales (find cheaper supplier of materials)

Question 25

How could you increase OPM

Answer 25

• Reduce operating expenses

E.g. finding cheaper premises to rent and by cutting out unnecessary administrative tasks

Question 26

What’s the difference between cash and profit

Answer 26

• Cash is what a business has now to pay its bills. Cash is constantly flowing in and out of a business
• A business doesn’t get the profit it makes straight away- customers may not pay for their goods straight away or the business may not have to pay its costs straight away
• So a business that makes a lot of profit might still run out of cash, and a business that has lots of cash might still end up not making a profit