Profit & Loss
What is the formula for calculating gross profit?
Revenue – Cost of Sales
What is overtrading?
When a business is attempting to fund a large volume of production with inadequate cash.
What does the current ratio measure?
A business’s ability to pay short-term debts
A business has £100,000 in revenue and £40,000 in cost of goods sold. What is the gross profit margin?
60%
State two natural phenomena that might cause business failure.
weather & disease
A business has current assets of £60,000 and current liabilities of £30,000. What is its current ratio?
2:1
Name two limitations of using profit as a measure of business success.
Ignores cash flow; affected by accounting methods
Name two causes of internal business failure
Poor management of cash flow, overestimation of cash flow, overestimation of sales, overtrading, poor inventory control, poor marketing, poor quality
Explain one limitation of relying on liquidity ratios alone.
They don’t show timing of cash flows or quality of assets
what is net profit?
the difference between operating profit and finance costs
True or False. Markets are dynamic, which means they change all of the time.
True
Sale of assets or leaseback, supplier credit terms, factoring, reduction of inventory
What is meant by the "bottom line"?
The profit left after all deductions have been made.
Give three possible causes of cash flow problems for a business.
investing too much in fixed assets. allowing too much credit. overborrowing, seasonal factors, unforeseen expenditures, external factors, poor financial management.
What is working capital?
The funds left over to meet day to day expenses after current debts have been paid.