2.4 Making Financial Decisions Flashcards
All 23 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?
Gross profit margin = (gross profit ÷ sales revenue) × 100
What is the formula for net profit margin?
Net profit margin = (net profit ÷ sales revenue) × 100
What is the formula for average rate of return (ARR)?
ARR = (average annual profit ÷ cost of investment) × 100
What is gross profit?
The difference between the money received from selling goods and services and the cost of making or providing them, ignoring fixed costs or overheads.
What is cost of sales?
The costs incurred as a direct result of making a product or providing a service, such as raw materials.
True or false? Net profit margin is normally lower than gross profit margin.
True. Net profit margin takes more costs into account (other operating expenses and interest), not just cost of sales.
What does gross profit margin show a business?
How much gross profit is made for every £1 of sales revenue. A higher margin suggests the business adds significant value.
What is average rate of return used for?
Comparing the profitability of different investment choices over the expected life of each investment, and against the interest rate from a bank.
Give one limitation of average rate of return as a way of judging an investment.
Any one of: it ignores inflation reducing the value of future cash; it ignores when returns are received (sooner is better); it relies on forecast profits that may be wrong.
Give one limitation of using financial information to judge business performance.
Any one of: it is historical, so it may be out of date; businesses use different accounting periods and policies, so comparison is difficult; the same data can be interpreted in different ways.
True or false? Financial data is the only indicator of whether a business is successful.
False. Some businesses judge success by other aims, such as environmental impact or ethical aims.
Why must one set of financial data be compared with something else before a decision is made?
On its own it is meaningless — it needs context from historical data for the same business or from similar businesses.
When reading a graph or chart of business data, what should you check before interpreting it?
The title and labels, the scales on the axes, and whether values are units, percentages or percentage changes.
What is the formula for percentage change?
Percentage change = ((new value − original value) ÷ original value) × 100
What is the formula for an average (mean) of a set of business figures?
Average = sum of the values ÷ number of values
What is net profit?
The profit left after every cost has been taken off: cost of sales, other operating expenses and interest. The business can reinvest it or pay it out to its owners.
What does net profit margin show a business?
How many pence of net profit it keeps from each £1 of sales revenue once all its costs, including overheads and interest, have been paid.
What is the average rate of return (ARR)?
The average profit an investment earns each year over its life, shown as a percentage of what the investment cost at the start.
When calculating ARR, how is the average annual profit found?
Average annual profit = total profit from the investment ÷ number of years the investment lasts
Give two examples of marketing data.
Any two of: customer satisfaction scores; customer feedback and opinions; the number of visitors to a shop or website; how sales responded to a promotion.
Give two examples of market data.
Any two of: market share; market size; how fast the market is growing; the number of competitors; changes in competitors' prices or costs; the demographics of the market's customers.