Flashcards · 1BS0 · Topic 2.4

Making financial decisions flashcards

11 cards on Topic 2.4, subtopics 2.4.1 to 2.4.2. Pick a subtopic or study them all.

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Gross profit and net profit (Appendix 3 forms): Gross profit = sales revenue − cost of sales. Net profit = gross profit − other operating expenses and interest.
Gross profit margin and net profit margin: Gross profit margin (%) = gross profit ÷ sales revenue × 100. Net profit margin (%) = net profit ÷ sales revenue × 100. Both divide by sales revenue.
Sales revenue £96,000, cost of sales £52,800, other operating expenses £31,200, interest £1,800. Find both margins.: Gross profit = £43,200; margin = 45.0%. Net profit = 43,200 − 33,000 = £10,200; margin = 10,200 ÷ 96,000 × 100 = 10.6% (1 d.p.).
Average rate of return (ARR): formula and example: ARR = average annual profit (total profit ÷ years) ÷ cost of investment × 100. A £15,000 machine makes a total profit of £15,600 over 4 years: £3,900 a year; 3,900 ÷ 15,000 × 100 = 26%.
Gross profit margin steady but net profit margin falling: what does it suggest?: Other operating expenses or interest have risen, because gross margin is not affected by them. A falling gross margin points to selling prices or cost of sales.
Limitations of the average rate of return: The profits are forecasts; an average hides when the profits arrive; a high rate on a small investment can give less total profit than a lower rate on a larger one; it ignores non-financial factors.

The kinds of data to interpret in 2.4.2: Graphs and charts; financial data (profit and loss, profitability ratios, average rate of return, cash-flow forecasts); marketing data (market research); market data (market share, changes in costs and prices). Used to support, inform and justify decisions.
Percentage change versus percentage points: Percentage change = change ÷ original × 100. A share falling from 15% to 13% is a fall of two percentage points, not two per cent.
A pie chart sector is 72°. What share of the whole is it?: 72 ÷ 360 × 100 = 20%.
A firm's sales rose 10% while its market grew 25%. What happened to its market share?: It fell, because the market grew faster than the business, so rivals gained a larger slice.
Uses and limitations of financial information: Uses: shows profit, margins, cash and change over time; compares with targets or rivals; compares investments. Limitations: backward-looking, shows what not why, ignores quality, reputation and staff; forecasts are estimates.