2.3 (Done)

Question 1

Define profit.

Answer 1

The financial gain of a business through trading.

Question 2

What is the formula for profit?

Answer 2

Total revenue - total costs

Question 3

What is the formula for gross profit?

Answer 3

Gross profit = Revenue - Cost of sales

Question 4

What is meant by ‘Cost of sales’?

Answer 4

The direct costs of a business, e.g. for a retailer it’s the cost of buying in stock to re-sell.

Question 5

What is meant by ‘overheads’?

Answer 5

Indirect costs, e.g. selling and administrative expenses.

Question 6

What is the formula for operating profit?

Answer 6

Gross profit - Operating expenses

Question 7

Define net profit.

Answer 7

The profit made by the business for the year.

Question 8

What is the formula for net profit?

Answer 8

Operating profit - Interest (and exceptional costs)

Question 9

What does the statement of comprehensive income (SOCI) show?

Answer 9

The income and expenses of a business during the financial year.

Question 10

What are the three profit margins?

Answer 10

• Gross profit margin.
• Operating profit margin.
• Profit for the year (net profit) margin.

Question 11

What does the gross profit margin show?

Answer 11

The gross profit made on revenue.

Question 12

What is the formula for gross profit margin?

Answer 12

Gross profit
——————X100%
Revenue

Question 13

Are higher or lower gross margins preferable? Why?

Answer 13

Higher gross margins are preferable to lower ones because it means that more gross profit is being made per £1 of sales.

Question 14

What are two ways the gross profit margin can be increased?

Answer 14

• By raising revenue relative to the cost of sales, by increasing price.
• By cutting the cost of sales; this might be achieved by finding cheaper suppliers of key materials.

Question 15

What does the operating profit margin show?

Answer 15

The operating profit made on sales revenue.

Question 16

What is the formula for operating profit margin?

Answer 16

Operating profit
————————— X100%
Revenue

Question 17

What is the formula for the profit for the year (net profit) margin?

Answer 17

Net profit before tax
——————————— X100%
Revenue

Question 18

What are two ways to improve profit margins?

Answer 18

• Raising prices.

- Lowering costs.

Question 19

Why is raising prices a good option for a business where the demand for its products is not too responsive to changes in price?

Answer 19

Because the increase in price will generate more revenue even though fewer units are sold.

Question 20

What is a problem with raising prices?

Answer 20

It’s always risky because it is never certain how competitors will react.

Question 21

What are two ways a business can lower its costs?

Answer 21

• Buying cheaper resources.

- Using existing resources more efficiently.

Question 22

What is a statement of financial position (balance sheet)?

Answer 22

A summary at a particular point in time of the value of a firm’s assets, liabilities and capital.

Question 23

Define assets and give three examples.

Answer 23

The resources owned by a business, e.g. buildings, machinery, vehicles.

Question 24

Define liabilities and give two examples.

Answer 24

The money owed by a business, e.g. to suppliers and banks (overdraft or a mortgage).

Question 25

Define capital.

Answer 25

The money put into the business by the owners.

Question 26

What is the formula for assets?

Answer 26

Assets = Capital + Liabilities

Question 27

In a statement of financial position, why does the value of assets equal the value of liabilities and capital?

Answer 27

Because all resources purchased by a business have to be financed either from capital or liabilities.

Question 28

What are non-current assets (fixed assets)?

Answer 28

Long-term resources that will be used by the business repeatedly over a period of time.

Question 29

What are non-current liabilities?

Answer 29

Money owed by the business for more than one year.

Question 30

What are current liabilities?

Answer 30

Money owed by the business that must be repaid within one year.

Question 31

What are current assets?

Answer 31

Liquid assets, i.e. those assets that will be converted into cash within one year.

Question 32

What are three examples of non-current assets?

Answer 32

Land, property, vehicles.

Question 33

What is an example of a current asset?

Answer 33

Inventories, such as stocks of raw materials and finished goods.

Question 34

Give 2 examples of current liabilities.

Answer 34

Bank loans and bank overdrafts.

Question 35

What are two examples of non-current liabilities?

Answer 35

Long term bank loans and mortgages.

Question 36

Formula for net assets?

Answer 36

Total assets - total liabilities.

Question 37

Define shareholders’ equity.

Answer 37

The amount of money owed by the business to the shareholders.

Question 38

What are the two financial ratios that can be used to measure liquidity?

Answer 38

- Current ratio. | - Acid test ratio.

Question 39

What does the current ratio assess?

Answer 39

Whether or not a business has enough resources to meet any debts that arise in the next 12 months.

Question 40

Formula for current ratio?

Answer 40

Current assets ————————— Current liabilities

Question 41

What is the acid test ratio?

Answer 41

A more severe test of liquidity because inventories (stocks) are not treated as liquid resources.

Question 42

Acid test ratio formula?

Answer 42

Current assets - Inventories ——————————————— Current liabilities

Question 43

What is working capital?

Answer 43

The amount of money needed to pay for the day-to day trading of a business.

Question 44

Why does a business need working capital?

Answer 44

To pay expenses such as wages, and to buy components to make products.

Question 45

Working capital formula?

Answer 45

Current assets - current liabilities

Question 46

If a business is experiencing liquidity problems, what are two things the business can do to improve liquidity?

Answer 46

- Raise current assets. | - Reduce current liabilities.

Question 47

What are four measures that might be used to either generate cash or save it?

Answer 47

- A business can increase its cash by borrowing more money on its overdraft. - Negotiate additional short term or long term loans. - A business might reduce the amount of stocks it holds. - Only make essential purchases.

Question 48

What are three difficulties that a business may face when either generating or saving costs?

Answer 48

- Businesses may not be able to borrow any more money from its overdraft if it’s up to its overdraft limit (and can’t be increased). - Businesses may find it difficult to negotiate additional loans if it is known that they are short of cash. - A problem with reducing stock levels is that a business might not have the stocks to cope with an increase in the demand of its products.