Profits - Income Statements

• What is profit defined as?

  The reward for taking risks and investments
• How is profit measured in absolute terms?

  By the £ value of profits earned
• What does relative profit represent?

  Profit as a proportion of sales or investment
• What is the formula for profit?

  Profit = Total Revenue - Total Costs
• What are the three measures of profit on an Income Statement?

  • Gross Profit
  • Operating Profit
  • Net Profit (Profit for the year)
• What does revenue represent?

  Sales during the period
• What is the Cost of Sales?

  Direct cost of generating revenue
• How is Cost of Sales calculated?

  Opening stock + purchases - closing stock
• What is Gross Profit?

  Difference between revenue and cost of sales
• How is Gross Profit Margin calculated?

  Gross Profit x 100 / Revenue
• What are administration expenses?

  Costs not directly related to production
• What does Operating Profit measure?

  Profit from trading activities before financing
• What is Finance Expense?

  Interest paid on borrowings minus interest income
• What is Net Profit?

  Profit after tax has been accounted for
• How is Net Profit calculated?

  Operating profit - interest - taxation
• What is Ratio Analysis?

  • Analyzing relationships between financial data
  • Assesses business performance
  • Compares revenue and profit
• What does Operating Profit represent?

  Profit after all costs are deducted from revenue
• How is Operating Profit Margin calculated?

  Operating Profit x 100 / Revenue
• What does Gross Profit Margin indicate?

  If direct costs are too high
• What does Operating Profit Margin indicate?

  How effectively sales are turned into profit
• How can a business increase profits?

  • Increase sales revenue
  • Reduce expenses
  • Manage direct costs
  • Lower interest and taxation
  • Use cheaper suppliers
  • Buy stock in bulk
  • Gain loyal customers
  • Use resources efficiently
• What are possible actions to improve profit?

  • Increase quantity sold
  • Increase selling price
  • Reduce variable costs per unit
  • Increase output
  • Reduce fixed costs
• What is Cash Flow?

  Difference between cash inflows and outflows
• How do profits relate to cash flow?

  Profits are a source of cash inflows
• What are timing differences in cash flow?

  Sales made on credit versus cash payments
• How are fixed assets accounted for in cash flow?

  Payment for fixed assets is cash outflow
• What is depreciation in relation to cash flow?

  Charged as cost when asset value reduces