Lesson 2 Flashcards
(25 cards)
What are all business owners required to do?
complete accounts and report to HMRC whether the business made a profit or a loss in a specific accounting period
What are the three main financial reporting documents?
- Income (profit & loss) statement
- Balance sheet
- Cash flow statement
Definition of accounting period?
the time frame of the set of accounts to be reported on.
Definition sales revenue/turnover?
the money that comes into a business as a result of trading activities – selling products or services
Definition of income statement?
a financial document that shows the income & expenditure of a business to see if it is making a trading profit or loss for an accounting period.
Definition of gross profit?
the revenue generated from the sales of goods or services minus the direct costs of producing those goods or services
What are used to describe the expenses of a business?
Costs/expenditure/overheads
What does the income statement allocate?
direct costs of sales to a specific section in the document.
Definition of net profit?
net income or ‘the bottom line’.
Where are company-wide operating expenses shared to?
the whole organisation
What does a profit margin do?
shows the results of a business in a percentage format
What are percentage margin figures more effective in?
analysing financial results
Percentage margin figures are more effective in analysing financial results than using actual monetary figures for what?
– Long term tracking
- Sales and costs fluctuate year on year
- Percentages measure any real changes
– Comparison purposes
- Can compare against other businesses
- Can compare against different time frames
- Can compare across different industries
What are 3 purposes profit margins?
- trend insights
- easy to interpret
- consistency
Describe trend insights in terms of its significance to profit margins?
- Check if profit is improving or declining
- Easier to see in % rather than money amounts
Describe ‘easy to interpret’ in terms of its significance to profit margins?
- How profitable is £4,000?
- 40% gross profit margin is easy to understand
- 40p in every £1 stays in the business after COGS
Describe consistency in terms of its significance to profit margins?
- Allows analysis even when scale of operations changes
- Business may expand or shrink
- % margins shows accurately if performance is better of worse
What is the calculation for gross profit margin?
Gross profit X 100 = Gross profit margin
Sales revenues
What does calculating the gross profit margin show?
if pricing is right and production costs are well managed
The higher the gross profit margin, the…………?
more money is kept from each sale.
What does the net profit margin show?
shows how much the business is really making after considering everything spent on keeping it running and taxes are paid.
How is the net profit margin calculated?
Net profit X 100 = Net profit margin
Sales revenue
What is the general rule of thumb that is a significant margin?
5-10%
What 2 ways can a business incur loss?
- poor management
- external forces
