Unit 4.3 - profit and loss accounts

Question 1

Define income statement (profit or loss account)

Answer 1

A financial document showing a business’s sales revenue and costs, therefore profit or loss over a period

Question 2

Define cost of sales.

Answer 2

These are the direct costs involved in making the sales revenue

Question 3

Define gross profit.

Answer 3

Profit made before expenses have been paid

Question 4

What’s the formula for gross profit?

Answer 4

Sales revenue - cost of sales

Question 5

Define expenses.

Answer 5

Costs that are not directly involved in the production process or the making of goods

Question 6

Define net profit.

Answer 6

The final profit made by a business after all costs have been paid

Question 7

What’s the net profit formula?

Answer 7

Gross profit - expenses or sales revenue - costs of goods sold + expenses

Question 8

What’s the gross profit margin formula?

Answer 8

Gross profit/sales revenue x 100

Question 9

What’s the net profit formula?

Answer 9

Net profit/sales revenue x 100

Question 10

What do the gross and net profit margins show?

Answer 10

How much of the revenue is profit, if 10% then 10p of every £1 of revenue is gross/net profit

Question 11

What can a business do to improve revenue? (3)

Answer 11

Increase advertising and promotion to encourage people to buy​
Increase the price of goods​
Reduce the price of goods

Question 12

What can a business do to cut costs? (6)

Answer 12

Buy lower quality materials ​
Buy materials in greater bulk to take advantage of bulk discounts ​
Cut wages and salaries of workers​
Introduce technology to reduce the number of workers​
Move to a different location where rents may be cheaper ​
Reduce spending on maintenance of equipment and refurbishment of buildings