Profit and losses Flashcards
(25 cards)
What is the formula for Profit?
Profit = total costs – total revenue
This formula calculates the financial gain of a business after accounting for all costs.
What incentivizes businesses to enter competitive markets?
The reward for enterprise is profit
Profit acts as a motivation for businesses to seek opportunities in the market.
What is Sales Revenue?
Money coming in from sales = Quantity sold x selling price
This represents the total income generated from the sale of goods or services.
What are Costs of Sales?
Costs directly linked to the production of the goods or services sold e.g. raw materials
This includes expenses that are directly associated with the manufacturing of products.
What is Gross Profit?
Sales revenue – cost of sales
Gross profit indicates the profitability of a company’s core activities.
What are Other Operating Expenses?
All other costs associated with the trading of the business e.g. salaries and marketing expenditure
These are expenses that are not directly tied to the production of goods.
What is Operating Profit?
Gross profit – expenses
This represents the profit a company makes from its core business operations.
These are financial obligations that affect the net profit.
What are Exceptional Items?
Any unusually large or infrequent transaction
These items can significantly impact a company’s financial statements.
What is Profit for the Year (Net Profit)?
Operating profit - interest and taxation
This is the final profit after all expenses, including taxes and interest, have been deducted.
What does Gross Profit Margin (GPM) measure?
The relationship between gross profit and sales revenue
GPM indicates how efficiently a company is producing its goods.
If GPM is low or falling, what might this indicate?
It may indicate:
* Not managing its cost of sales effectively
* Sales are in decline
A declining GPM can be a warning sign for a business.
What is the formula for Gross Profit Margin?
Gross profit/sales revenue x 100
This formula expresses gross profit as a percentage of sales revenue.
What does Operating Profit Margin (OPM) measure?
The relationship between net profit and sales revenue
OPM assesses how well a company is managing its operating expenses.
If OPM is low or falling, what might this indicate?
It may indicate:
* Not managing its expenses effectively
* Sales are in decline
A decline in OPM can reflect rising costs or decreasing sales.
What is the formula for Operating Profit Margin?
Operating profit/sales revenue x 100
This formula calculates operating profit as a percentage of sales revenue.
What does Profit for the Year (Net Profit) Margin measure?
The relationship between profit for the year and sales revenue
This margin indicates overall profitability after all expenses.
If the profit for the year margin is low or falling, what might this indicate?
It may indicate:
* Gross profit or operating profit are in decline
* Interest rates have changed
* Taxation rates have changed
Changes in this margin can signal financial health issues.
What is one way to increase profits?
Sell the same quantity but at a higher price
This approach directly increases revenue without increasing sales volume.
What is another way to increase profits?
Sell more at the current price
Increasing sales volume while maintaining price can significantly enhance profitability.
What is a third method to increase profits?
Sell the same at the same price but reduce costs
Cost reduction can lead to greater profit margins.
What is the purpose of a break-even analysis?
Shows how many sales are needed to start making a profit
This analysis helps to evaluate the viability of a business idea.
What is an advantage of break-even analysis?
Helps work out how much profit or loss might happen at different sales levels
It provides insights into financial risk and potential returns.
What is a disadvantage of break-even analysis?
It’s based on guesses about costs and sales, which might not be accurate
Predictions can often be unreliable, impacting decision-making.
