Ratio analysis

• What is the first ratio examined in the study material?

  Gross profit margin (GPM)
• What is the formula for gross profit margin?

  $\frac{\text{Gross Profit}}{\text{Revenue}} \times 100$
• If gross profit is $150,000 \text{ pounds}$ and revenue is $200,000 \text{ pounds}$, what is the gross profit margin?


  75%
• What does gross profit margin express?

  A percentage of gross profit to revenue
• What does a higher gross profit margin indicate?

  Better profitability and efficiency
• Why is gross profit margin important for management?

  It informs decision-making and comparisons
• What is the second ratio discussed in the study material?

  Operating profit margin (OPM)
• What is the formula for operating profit margin?

  $\frac{\text{Operating Profit}}{\text{Revenue}} \times 100$
• How do you calculate operating profit?

  Sales revenue minus costs and expenses
• If operating profit is $50,000 \text{ pounds}$ and revenue is $200,000 \text{ pounds}$, what is the operating profit margin?


  25%
• What does a higher operating profit margin indicate?

  Better operational efficiency of the business
• What does operating profit margin not include?

  Profit from other activities and taxes
• What is the final margin discussed in the study material?

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

  $\frac{\text{Profit for the Year}}{\text{Revenue}} \times 100$
• How do you calculate profit for the year?

  Sales revenue minus costs and expenses
• If profit for the year is $40,000 \text{ pounds}$ and revenue is $200,000 \text{ pounds}$, what is the profit for the year margin?


  20%
• What does a higher profit for the year margin indicate?

  Better overall business performance
• Why is net finance cost important in profit for the year margin?

  It reflects business gearing and debt levels
• How does profit for the year margin help management?

  Informs decision-making and comparisons
• What are the three types of profit discussed?

  Gross profit, operating profit, profit for the year
• What are the key profitability ratios discussed?

  • Gross Profit Margin (GPM)
  • Operating Profit Margin (OPM)
  • Profit for the Year Margin (Net Profit Margin)
• Why do you need to use the income statement to calculate profits?

  It provides necessary financial data
• What are the analysis points for gross profit margin?

  • Higher margin is better
  • Measures efficiency and productivity
  • Informs management decisions and comparisons
• What is the difference between profit and margin?

  Profit is an amount; margin is a ratio
• What are the analysis points for operating profit margin?

  • Higher margin is better
  • Measures operational performance
  • Informs management decisions and comparisons
• What is the formula to calculate gross profit?

  Sales revenue minus cost of sales
• If sales revenue is £200,000 and cost of sales is £50,000, what is the gross profit?

  £150,000
• What are the analysis points for profit for the year margin?

  • Higher margin is better
  • Reflects overall business performance
  • Informs management decisions and comparisons
• What is the formula to calculate operating profit?

  Gross profit minus operating expenses
• If gross profit is £150,000 and operating expenses are £100,000, what is the operating profit?

  £50,000
• What is another name for profit for the year?

  Net profit
• What is the formula to calculate profit for the year?

  Operating profit plus profit from other activities minus tax and net finance costs
• If operating profit is £50,000, profit from other activities is £10,000, tax is £20,000, and net finance costs are £10,000, what is the profit for the year?

  £30,000
• Why is it important to differentiate between profit and margin in calculations?

  Confusion can lead to incorrect financial analysis
• What are the key components of an income statement relevant for profit calculations?

  • Sales revenue
  • Cost of sales
  • Operating expenses
  • Profit from other activities
  • Tax
  • Net finance costs
• What are the steps to calculate gross profit, operating profit, and profit for the year?

  1. Calculate gross profit: Sales revenue - Cost of sales
  2. Calculate operating profit: Gross profit - Operating expenses
  3. Calculate profit for the year: Operating profit + Profit from other activities - Tax - Net finance costs