What is meant by the term gross profit ?

Gross profit is the difference between sales revenue and the costs directly related to production.

What is meant by the term operating profit ?

Operating profit is gross profit minus the indirect expenses involved in operating the business.

True or False? Higher and increasing profit margins are preferable, as it means that more revenue is being converted to profit.

True . Higher and increasing profit margins are preferable, as it means that more revenue is being converted to profit.

What is the statement of comprehensive income ?

The statement of comprehensive income is an end of year financial statement that shows all of a business's income and expenses over the previous twelve months .

True or False? Leasing rather than buying machinery can strengthen the balance sheet.

False . Leasing rather than buying machinery weakens the balance sheet as a business owns fewer non-current assets .

What does the gross profit margin show?

The gross profit margin shows the proportion of revenue that is turned into gross profit and is expressed as a percentage.

What does the net profit margin show?

The net profit margin shows the proportion of revenue that is turned into net profit before tax and is expressed as a percentage.

True or False? Fixed costs can be reduced by buying cheaper stock.

False . Variable costs can be reduced by buying cheaper stock.

What is meant by the term liquidity ?

Liquidity is the ability of a business to meet its short term commitments with its available assets, e.g. payments to creditors.

What is the difference between the current ratio and the acid test ratio ?

The acid test ratio is a more precise way to measure liquidity than the current ratio, as it excludes inventory and stock from current assets.

Define the term working capital .

Working capital is the money that a business has to fund its day-to-day activities .

True or False? A business can have too much working capital.

True . A business can have too much working capital and may miss out on the benefits of using it to purchase better fixed assets or make other investments.

What is the statement of financial position ?

The statement of financial position summarises business assets, liabilities and capital at a specific point in time.

Define the term current assets .

Current assets are assets that can be converted into cash within one year.

What is the difference between cash and profit ?

Profit is the difference between revenue generated and the business costs . Cash is measured by taking into account the full range of money flowing in and out of a business over a period of time.

True or False? A change in legislation can mean that products or processes may require significant redesign or withdrawal.

True . A change in legislation can mean that products or processes may require significant redesign or withdrawal.

State two internal causes of business failure?

Internal causes of business failure include: Poor planning Lack of leadership Ineffective marketing Cash flow problems Lack of funds

True or False? Economic challenges like rising interest rates or a recession are a key cause of business failure.

True . Economic challenges like rising interest rates or a recession are a key cause of business failure.

Define the term business failure .

Business failure is when a business becomes insolvent and is unable to meet its financial obligations.

True or False? Inventory is the most liquid of a business's current assets and can be used to settle debts immediately

False . Cash is the most liquid of a business's current assets and can be used to settle debts immediately

What is an example of an external cause of business failure?

External causes of business failure include: Economic challenges Changes in consumer tastes Legal factors Market challenges Technological change

True or False? A lack of cash flow or working capital can cause swift business failure.

True . A lack of cash flow or working capital can cause swift business failure as it becomes difficult to operate on a day-to-day basis.

Define the term insolvency .

Insolvency is the inability of a business to pay its debts and financial obligations when they are due.

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2.3 Managing Finance (Edexcel A Level Business)

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Front2.3.1 Profit
What is meant by the term gross profit?

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What is meant by the term gross profit?
Gross profit is the difference between sales revenue and the costs directly related to production.
State the formula to calculate gross profit.
Formula.
$Gross profit = Revenue - Cost of sales$
What is meant by the term operating profit?
Operating profit is gross profit minus the indirect expenses involved in operating the business.
True or False?
Higher and increasing profit margins are preferable, as it means that more revenue is being converted to profit.
True.
Higher and increasing profit margins are preferable, as it means that more revenue is being converted to profit.
What is the formula to calculate net profit?
Formula.
$Net profit = Operating profit - (Net interest + Exceptional costs)$
What is the statement of comprehensive income?
The statement of comprehensive income is an end of year financial statement that shows all of a business's income and expenses over the previous twelve months.
True or False?
Leasing rather than buying machinery can strengthen the balance sheet.
False.
Leasing rather than buying machinery weakens the balance sheet as a business owns fewer non-current assets.
What does the gross profit margin show?
The gross profit margin shows the proportion of revenue that is turned into gross profit and is expressed as a percentage.
What does the net profit margin show?
The net profit margin shows the proportion of revenue that is turned into net profit before tax and is expressed as a percentage.
True or False?
Fixed costs can be reduced by buying cheaper stock.
False.
Variable costs can be reduced by buying cheaper stock.
What is meant by the term liquidity?
Liquidity is the ability of a business to meet its short term commitments with its available assets, e.g. payments to creditors.
State the formula used to calculate the current ratio.
Formula.
$Current ratio = \frac{Current assets}{Current liabilities}$
What is the difference between the current ratio and the acid test ratio?
The acid test ratio is a more precise way to measure liquidity than the current ratio, as it excludes inventory and stock from current assets.
State the formula used to calculate the acid test ratio.
Formula.
$Acid test ratio = \frac{Current assets - inventory}{Current liabilities}$
Define the term working capital.
Working capital is the money that a business has to fund its day-to-day activities.
State the formula used to calculate working capital.
Formula.
$Working capital = Current assets - Current liabilities$
True or False?
A business can have too much working capital.
True.
A business can have too much working capital and may miss out on the benefits of using it to purchase better fixed assets or make other investments.
What is the statement of financial position?
The statement of financial position summarises business assets, liabilities and capital at a specific point in time.
Define the term current assets.
Current assets are assets that can be converted into cash within one year.
What is the difference between cash and profit?
Profit is the difference between revenue generated and the business costs.
Cash is measured by taking into account the full range of money flowing in and out of a business over a period of time.
True or False?
A change in legislation can mean that products or processes may require significant redesign or withdrawal.
True.
A change in legislation can mean that products or processes may require significant redesign or withdrawal.
State two internal causes of business failure?
Internal causes of business failure include:
- Poor planning
- Lack of leadership
- Ineffective marketing
- Cash flow problems
- Lack of funds
True or False?
Economic challenges like rising interest rates or a recession are a key cause of business failure.
True.
Economic challenges like rising interest rates or a recession are a key cause of business failure.
Define the term business failure.
Business failure is when a business becomes insolvent and is unable to meet its financial obligations.
True or False?
Inventory is the most liquid of a business's current assets and can be used to settle debts immediately
False.
Cash is the most liquid of a business's current assets and can be used to settle debts immediately
What is an example of an external cause of business failure?
External causes of business failure include:
- Economic challenges
- Changes in consumer tastes
- Legal factors
- Market challenges
- Technological change
True or False?
A lack of cash flow or working capital can cause swift business failure.
True.
A lack of cash flow or working capital can cause swift business failure as it becomes difficult to operate on a day-to-day basis.
Define the term insolvency.
Insolvency is the inability of a business to pay its debts and financial obligations when they are due.