Chapter 5.3 Flashcards
(20 cards)
What is profit?
Profit is total revenue minus total cost.
How can a business increase profit?
Increase revenue or reduce costs.
Why is profit important? (Reason 1)
It rewards entrepreneurs for taking risks.
Why is profit important? (Reason 2)
Profit is a source of finance (retained profit can be reinvested).
Why is profit important? (Reason 3)
It shows success and attracts investors and banks.
What is the difference between profit and cash?
Profit is not always available right away, but cash is available immediately.
What is an income statement?
A financial statement showing revenue, costs, and profit.
What is revenue?
Revenue = selling price × number of items sold.
What is cost of goods sold (COGS)?
The variable cost of making the product (e.g. materials).
How do you calculate cost of goods sold?
Quantity × cost per item.
What are expenses (overheads)?
Fixed costs like rent, wages, and insurance.
What is gross profit?
Gross profit = revenue − cost of goods sold.
What is net profit?
Net profit = gross profit − expenses.
What is retained profit?
The profit left after paying tax and dividends, reinvested in the business.
What are dividends?
Payments made to shareholders from the profit.
What is the formula for net profit using total revenue?
Net profit = total revenue − COGS − expenses.
In an income statement, what does higher revenue and profit mean?
It may be the better option for the business.
If one option has lower costs but also much lower revenue, is it always better?
No. Higher revenue and profit can be more important than just low costs.
What is the conclusion in the example from the video?
Option 1 is better because it has more revenue, gross profit, and net profit.
