Profit (AQA A Level Business): Flashcards
Exam code: 7132
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Define profit.
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Cards in this collection (36)
Define profit.
Profit is the amount left over from a business's revenue once all costs have been deducted.
When is profit recorded in the income statement?
Profit is recorded when income is earned and costs are incurred, which is not necessarily when money moves in or out of the bank.
Define cash.
Cash is the money a business has available at any given moment, such as its bank balance and any other immediately accessible funds.
True or False?
A profitable business can still run out of cash.
True.
If customers are slow to pay, a profitable business may not have enough cash to cover wages, rent or supplier invoices as they fall due.
Profit shows the long-term viability of a business, while cash shows its short-term ______.
Profit shows the long-term viability of a business, while cash shows its short-term solvency.
Why can rapid growth cause a cash deficit?
Expanding quickly requires cash for stock, staff and premises before the extra revenue arrives.
Why can seasonal demand cause a cash deficit?
Revenue is uneven across the year, but fixed costs must still be paid every month.
True or False?
A business with a large cash balance must be making a profit.
False.
A business with a large cash balance may still be losing money over time if its costs consistently exceed its revenue.
Define profitability.
Profitability is a measure of how efficiently a business converts its revenue or the resources it has invested into profit, and it is expressed as a percentage.
Profit is an absolute figure, whereas profitability is a ______ figure.
Profit is an absolute figure, whereas profitability is a relative figure.
Business A makes £500,000 profit from £10,000,000 revenue, and Business B makes £500,000 profit from £2,000,000 revenue. Which business is more profitable?
Business B is more profitable, because it generates the same profit from a fraction of the revenue.
Define gross profit.
Gross profit is the amount left from revenue after the direct costs of producing or supplying the product have been deducted.
Gross profit = Revenue − Cost of sales
Cost of sales includes raw materials, components, packaging and any labour ______ involved in production.
Cost of sales includes raw materials, components, packaging and any labour directly involved in production.
What does gross profit show about a business?
Gross profit shows how efficiently a business is managing its production costs.
Why might a business's gross profit be falling?
Raw material costs may be rising, selling prices may be cut to compete, or the production process may be becoming less efficient.
Define operating profit.
Operating profit is the amount left after operating expenses are deducted from gross profit.
Operating profit = Gross profit − Operating expenses
True or False?
Operating expenses include the raw materials used in production.
False.
Operating expenses are the indirect costs of running the business that are not directly tied to production, such as rent, utility bills, salaries and marketing.
Why is operating profit a fair basis for comparing one business with another?
Operating profit excludes interest payments and tax, so businesses with different levels of debt can be compared on their trading performance.
A business has revenue of £824,600, cost of sales of £427,900 and operating expenses of £294,100. What is its operating profit?
Gross profit is £824,600 − £427,900 = £396,700. Operating profit is £396,700 − £294,100 = £102,600.
Define profit for the year.
Profit for the year, sometimes called net profit, is the final profit figure after all costs, including interest on loans and corporation tax, have been deducted.
Profit for the year = (Operating profit + Profit from other activities) − (Net interest + Tax)
Which stakeholders is profit for the year most relevant to?
Profit for the year is most relevant to owners and shareholders, as it shows the return on their investment after every obligation has been met.
Profit for the year is used to calculate ______ profit after any dividends have been paid to shareholders.
Profit for the year is used to calculate retained profit after any dividends have been paid to shareholders.
True or False?
A business with a strong operating profit can still have a much lower profit for the year.
True.
Profit for the year can be much lower if the business carries significant debt, leading to high interest payments, or faces a large tax bill.
What are the two ways a business can increase its profit?
A business can increase its profit by increasing its revenue or by reducing its costs, or by tackling both at the same time.
Why might raising the selling price reduce total revenue?
If demand is price elastic, a price rise may cause sales volume to fall, potentially reducing total revenue.
True or False?
Increasing revenue improves gross profit but not operating profit.
False.
Increasing revenue improves both gross profit and operating profit, as more money comes in without costs necessarily rising at the same rate.
How can increasing sales volume reduce the cost per unit?
Selling more units spreads fixed costs across more units and can lead to economies of scale, such as bulk purchasing of materials at lower prices.
Improving the product mix means selling a greater proportion of products with a larger __________ per unit.
Improving the product mix means selling a greater proportion of products with a larger contribution per unit.
What is one challenge of improving the product mix?
Customers may prefer lower-margin products and resent being guided towards more expensive alternatives.
Define cost of sales.
Cost of sales is the direct cost of producing a product, including materials, components and direct labour.
True or False?
Reducing operating expenses improves operating profit without affecting gross profit.
True.
Cutting operating expenses improves operating profit, but it does not affect gross profit.
What is one risk of switching to cheaper suppliers of materials?
Cheaper materials may reduce product quality, which could damage the brand and reduce customer loyalty.
Why can overhead costs be hard to cut quickly?
Many overheads are fixed in the short term. For example, a lease cannot be broken without a penalty.
Reviewing production processes to eliminate inefficiencies and reduce ___ achieves the same output at a lower cost.
Reviewing production processes to eliminate inefficiencies and reduce waste achieves the same output at a lower cost.
Why can automating processes reduce operating profit in the short term?
Technology has a high upfront cost, which reduces operating profit before the long-term labour cost savings are realised.
True or False?
Deep cost cuts always increase profit in the long term.
False.
Cuts that are too deep can harm quality, staff morale or the customer experience, which can damage revenue in the longer term.
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