2.3.1 Profit

Edexcel A2 Business
2.3.1 Profit
Revisionstation
Calculators will be needed for this topic
Worksheet
From Edexcel
a) Calculation of:
• gross profit
• operating profit
• profit for the year (net profit)
b) Statement of comprehensive income (profit and loss account):
• measuring profitability:
- calculation of gross profit margin, operating profit margin, and profit for the
year (net profit) margin
• ways to improve profitability
c) Distinction between profit and cash
Definition: Profit
• Profit is the financial gain of a business through trading and can be
found be deducting expenditure from income; P =TR-TC where TR is
total revenue and TC is total costs
• Three types of profit that your exam board would like you to know
about and to be able to calculate from a statement of comprehensive
income:
• Gross profit
• Operating profit
• Net profit
Statement of comprehensive income
• PLCs and limited companies(Ltds)
need to publish their accounts every
year, this is UK law
• As part of those accounts they need

to show their profit and loss and this
appears in their “statement of
comprehensive income (SOCI)”
• You will need to use extracts from a

SOCI to make calculations
SuperGroup Plc.
statement of
comprehensive
income 2016
Calculations
Gross profit formula
GP = SR – Cost of sales
Where:
• GP is Gross Profit
• SR is Sales Revenue
• Cost of Sales are costs that vary with output or level of sales, and may include
stock
What is the Gross Profit for SuperGroup Plc?
• Use the Statement of Comprehensive income for
SuperGroup plc to read their GP figure for 2016
and 2015
• Use the total figures
2015
2016
What is the Gross Profit for SuperGroup Plc?
2015 £296.2m
2016 £365.3m
What conclusions can you make from

these two profit figures?
Conclusions from the Gross Profit figures
• The statement of comprehensive
income for SuperGroup plc shows that
between 2015 and 2016 the gross
profit increased by £69.1 million (Can
you calculate this as a percentage
increase?)
• At first glance this is excellent financial

progress but we would need more
information plus ratio analysis to make
an informed judgment about their
suitability as a company to invest in
Operating Profit formula
OP = GP - expenses
Where:
• OP is operating profit
• GP is Gross Profit
• Expenses are other costs to the business aside from stock e.g. admin, an ad
campaign etc.
What is the Operating Profit for SuperGroup
Plc?
• Use the Statement of Comprehensive
income for SuperGroup plc to read their
operating profit figure for 2016 and 2015
• Use the total figures
2015
2016
What is the Operating Profit for SuperGroup
Plc?
2015 £60.2m
2016 £56.1m
What conclusions can you make from

these two profit figures?
Conclusions from the Operating Profit figures
income for SuperGroup plc shows
that between 2015 and 2016 the
operating profit figure decreased
by £4.1 million (what is this as a
percentage decrease?)
• How does this compare with

gross profit figure? What might
be causing this?
Net profit formula
NP = OP - interest
Where:
• NP is net profit
• OP is operating profit
• Interest are payments due on loans or debts
What is the Net Profit for SuperGroup Plc?
• Read the SuperGroup statement of
comprehensive income and find the net
profit figure. It is NOT called net profit on
the statement – it is called Total
comprehensive income / (Expense ) for the
period
2015
2016
What is the Net Profit for SuperGroup Plc?
2015 £34.6m
2016 £44.8m
Looking at these two figures, if you

were considering investing in
SuperGroup plc – what would this
information tell you?
Conclusions from the Net Profit figures
income for SuperGroup plc
shows that between 2015 and
2016 the net profit increased by
£10.2 million
• Can you calculate the
percentage increase?
• What can you do with the net

profit data?
Statement of comprehensive
income
How the statement of comprehensive
income helps to measure profitability
• A business that is profitable will be able to reward its investors with a
return on their investment e.g. dividends paid on shares
• A business that is not profitable will not last long unless drastic
changes are made
• The statement of comprehensive income helps managers, owners and

investors to know how the business is doing by measuring the
profitability
Gross profit margin formula %
GP margin = Gross Profit

_____________ x 100
Sales Revenue
•Express your answer as a %

What is the gross profit margin % for
SuperGroup plc?
• Use the GP figure from earlier PLUS use the
total revenue figure from the statement
• Don’t forget to multiply your result by 100
to get a %
• Show your answer to 2 decimal places
2015
2016
Answers
2015 60.87%
2016 61.14%
Looking at these two figures, what

conclusions can you make about the
profitability of the business?
Conclusions
• Calculation of gross profit
margins for the SuperGroup plc
from the statement of
comprehensive income indicate
that the gross profit margin has
increased from 2015 to 2016.
• How much has it increased by?

Operating profit margin formula %
OP margin = Operating Profit
________________ x100
Sales Revenue
Express your answer as a %

What is the operating profit margin % for
SuperGroup plc?
• Use your OP calculation from
earlier and the sales revenue
total from the statement
• Express your answer as a % to
two decimal places
2015
2016
Answer
2015 12.37%
2016 9.39%
Looking at these two figures, what

conclusions can you make about the
profitability of the business?
Conclusions
that the operating profit margin
has increased from 2015 to
2016.

Net profit margin formula %
NP margin = Net Profit
________________x100
Sales Revenue
Express your answer as a %

What is the net profit margin % for
SuperGroup plc?
• Use your NP calculation from
earlier and the sales revenue
totals from the statement to
make your calculation
• Express your answer as a % to
two decimal places
2015
2016
Answer
2015 7.11%
2016 7.50%
If you were looking to invest in this

business, what conclusions about
profitability could you make from these
figures?
Conclusions
that the net profit margin has
increased from 2015 to 2016.

Ways to improve profitability – increase
revenue
• If profit is TR-TC then it makes
sense to say that one of the
ways to improve profitability is
to increase revenue
• This can be done in a number of
ways;
• Have a sale, reduce the prices
• Advertise more e.g. Yorkshire tea –
see the advert on the right and
the other advert HERE
• Promote the products more
Ways to improve profitability – reduce costs
• If profit is TR-TC then the other
way to improve profitability is
the other side of the equation
and reduce costs in the business
• This could be done through a

number of ways, here are two
suggestions:
• Restructuring, delayering and
redundancies
• Automating production
Distinction between profit and cash
Profit vs cash
Profit Cash
• Profit is recorded straight away • Cash will not be recorded until it is paid
out or received which could be in a
different trading year
• A business can trade for many years
without profit
• A profitable business may go bust of it
runs out of cash to pay a supplier or
• To improve profitability a business wages of staff
must either increase their revenue
or reduce their costs as: • If owners introduce cash via savings or a
• P = TR- TC loan this will not affect the profit figure
Sample Edexcel A2 questions
Case study for question 1 – from 2017 paper
Sample question 1
[4]
Knowledge Application Analysis

2 1 1
Answer sample question 1
Case study for question 2
Sample question 2
Knowledge Application
1 3
Answer sample question 2
Glossary
• Basic profit formula; P = TR-TC
• Gross profit formula; GP = TR-COS
• Operating profit formula; OP= GP - expenses
• Net profit formula; NP = OP – interest
• Gross profit margin formula; GP / SR x100
• Operating profit margin formula; OP / SR x 100
• Net profit margin formula; NP / SR x 100

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Edexcel A2 Business

• As part of those accounts they need

• You will need to use extracts from a

What conclusions can you make from

• At first glance this is excellent financial

What conclusions can you make from

• How does this compare with

Looking at these two figures, if you

• What can you do with the net

• The statement of comprehensive income helps managers, owners and

GP margin = Gross Profit

•Express your answer as a %

Looking at these two figures, what

• How much has it increased by?

Express your answer as a %

Looking at these two figures, what

• How much has it increased by?

Express your answer as a %

If you were looking to invest in this

• How much has it increased by?

• This could be done through a

Knowledge Application Analysis

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