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Flashcards in Profitability Indicators Deck (16)
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1

List the Profitability Indicators

Gross Profit Margin, Net Profit Margin, Asset Turnover, ROA, ROI

2

Define GPM

The gross profit margin is the PERCENTAGE of SALES DOLLARS that is retained as gross profit

3

What is the equation for GPM

Gross Profit Figure / Net Sales

4

Define NPM

The net profit margin is the PERCENTAGE of SALES DOLLARS that is retained as net profit

5

What is the equation for NPM

Net Profit Figure / Net Sales

6

Define Asset Turnover

The asset turnover measures the number of times per year the business is able to use its assets to generate revenue

7

What is the equation for Asset Turnover

Net Sales / Average Total Assets

8

Define Return on Assets

The ROA measures the ability of the business to earn a profit with its assets

9

What is the equation for ROA

Net Profit Figure / Average total assets
AND
Asset Turnover x NPM

10

Define Return on Investment

The ROI measures how effectively the business has used the owners funds to generate a profit

11

What is the equation for ROI

Net profit figure / Average Owners Equity

12

What are strategies to improve the GPM (2)

1. Increase the selling price of the inventory
2. Decrease the cost price of the inventory

13

What are strategies to improve the NPM (4)

1. Increase the selling price to increase the revenue earned per sale
2. Manage staff more effectively by training them or having better wage control
3. Manage Inventory better by reducing inventory loss or write down
4. Find a cheaper supplier but maintain quality

14

What are strategies to improve the Asset Turnover (2)

1. Increase the net sales by decreasing selling price to attract more sales
2. Decrease average total assets by getting rid of idle assets

15

What are strategies to improve the ROA (3)

1. Reduce the average total assets by getting rid of idle assets and monitoring the amount of assets controlled
2. Manage A/C Receivable more effectively to increase net profit and reduce the allowance for doubtful debts
3. Improve expense control through managing inventory or employees more effectively

16

What are strategies to improve the ROI (2)

1. Try to limit capital contributions or loans being taken out to reduce the average capital
2. Improve profit figures by increasing sales revenue or decreasing expenses.