2.4 Making Financial Decisions Flashcards
All 14 cards in this deck
What is the formula for gross profit?
Gross profit = sales revenue − cost of sales.
What is the formula for net profit?
Net profit = gross profit − other operating expenses and interest.
What is the formula for gross profit margin, and what does it show?
(Gross profit ÷ sales revenue) × 100. It shows the percentage of sales revenue left after paying the cost of sales.
What are the steps to calculate and interpret net profit margin?
e.g. net profit £400,000, sales revenue £900,000- Divide net profit by sales revenue: £400,000 ÷ £900,000
- Multiply by 100: 44.44% (to 2 d.p.)
- Interpret: 44.44p of every £1 of sales revenue is net profit.
What are the steps to calculate the average rate of return (ARR)?
e.g. total profit £500,000 over 5 years, machine costs £200,000- Total profit ÷ number of years: £500,000 ÷ 5 = £100,000
- Divide by cost of investment: £100,000 ÷ £200,000
- Multiply by 100: 50% per year.
What are the steps to work out a forecast closing balance from a cash-flow forecast?
e.g. opening balance £4,000, cash inflows £8,600, cash outflows £11,000- Net cash flow = inflows − outflows: £8,600 − £11,000 = −£2,400
- Add to the opening balance: £4,000 + (−£2,400)
- Closing balance = £1,600.
True or false? Of two investment options, the one with the higher average rate of return gives the greater average annual return per £ invested.
True. ARR shows average yearly profit as a percentage of the amount invested.
True or false? If a business's sales revenue rises, its market share must have risen too.
False. Market share compares the business's sales with total market sales, so the whole market may have grown faster.
Give one limitation of using financial information to judge business performance.
It is historical — it shows what has already happened and may not reflect future performance.
Besides quantitative financial data, what should a business use to justify a decision?
Qualitative factors, e.g. customer satisfaction, staff motivation and brand reputation.
True or false? A business with a higher gross profit margin than a rival must also have a higher net profit margin.
False. Net profit margin also depends on other operating expenses and interest, which may be much higher.
A business's gross profit margin has risen from 30% to 40% over three years. What does this show?
Each £1 of sales revenue now generates more gross profit, so cost of sales is a smaller proportion of revenue.
What are the steps to calculate revenue for a month using figures read from a sales chart?
e.g. the chart shows a selling price of £5.20 and 7,200 units sold in March- Read the selling price and quantity sold for that month from the figure: £5.20 and 7,200.
- Revenue = selling price × quantity sold: £5.20 × 7,200.
- Revenue for March = £37,440.
True or false? A line graph showing a business's sales revenue rising every month proves the business is becoming more profitable.
False. Revenue is not profit — costs may have risen faster, so profit could be falling.