C16 POA Theory Profitability

Define Profitability

• the ability of a business to generate excess income to cover its expenses.

• the ability of a business to generate excess expenses to cover its income.

• the ability of a business to generate profit

• the ability of a business to generate income

Which of the following are ways to improve profitability

• sells goods at a higher selling price

• buy goods at a lower cost price

• sell excess Non Current Assets to gain extra cash

• reduce operating expenses

• obtain long term borrowings

State the importances of profitability

• to have enough cash to pay for current liabilities

• to be able to reward and retain employees

• to continue the business operations in the long run

• to attract shareholders and investors to invest more into the business

State the formula gross profit margin

• Gross profit / Cost of sales x 100%

• Gross profit / Net sales revenue x 100%

• Profit for the year / Net sales revenue x 100%

• Profit for the year / Average equity x 100%

Net sales revenue = $180 000

Gross profit = $60 000

Profit for the year = 25 000

Calculate the gross profit margin, provide the answer in 2 decimal places.

• 3.00%

• 7.2%

• 13.88%

• 33.33%

State the profit margin formula

• Gross profit / Cost of sales x 100%

• Gross profit / Net sales revenue x 100%

• Profit for the year / Net sales revenue x 100%

• Profit for the year / Average equity x 100%

State the mark-up on cost formula

• Gross profit / Cost of sales x 100%

• Gross profit / Net sales revenue x 100%

• Profit for the year / Net sales revenue x 100%

• Profit for the year / Average equity x 100%

Net sales revenue = $400 000

Cost of sales = $250 000

Gross profit = $120 000

Profit for the year =$50 000

Calculate the mark up cost, provide your answer in 2 decimal places

• 62.50%

• 12.50%

• 48%

• 20%

Net sales revenue = $400 000

Cost of sales = $250 000

Gross profit = $120 000

Profit for the year =$50 000

Calculate the profit margin , provide your answer in 2 decimal places

• 12.5%

• 30%

• 62.5%

• 8%

State the return on equity formula

• Gross profit / Cost of sales x 100%

• Gross profit / Net sales revenue x 100%

• Profit for the year / Net sales revenue x 100%

• Profit for the year / Average equity x 100%