A-AS Level (CIE) Business Studies Paper-1: Specimen Questions with Answers 1 - 2 of 50

Question 1

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Write in Short

Short Answer▾

Explain the formula to measure profitability of a business

Explanation

The main object of every business concern is to earn profits. A business must be able to earn adequate profits in relation to the capital invested in it. The efficiency and the success of a business can be measured with the help of profitability ratios.

The following are the important profitability ratios:

  • Gross profit ratio: It shows the relationship between gross profit and sales. Gross profit measures the margin of profit available which is available on sales.
  • Net Profit Ratio: It measure the rate of net profit earned on sales. It determines the overall efficiency of the business operations. An increase in the ratio over the previous year shows improvement in overall efficiency and profitability of the business.

Question 2

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Describe in Detail

Essay▾

Explain the purpose of a company՚s profit and loss statement.

Explanation

Trading account shows the gross profit earned by the business by buying and selling of

goods. As such, a Profit & Loss Account is prepared which contains all the items of losses and gains pertaining to the accounting period. According to Prof. Carter:

“Profit & Loss Account” is an account into which all gains and losses are collected in order to ascertain the excess of gains over the losses or vice-versa.

Need and Importance of Profit & Loss A/c

  • To ascertain the Profit or Loss: A Trading Account only depicts the Gross Profit earned from trading activities, on the other hand the Profit & Loss Account shows the net profit (or net loss) a proprietor earns in each period which is credited to his capital account.
  • Comparison with previous years profits: The net profit of the current year can be compared with that of the previous years. It enables the businessman to know whether the business is being conducted efficiently or not.
  • Expenses Control: Profit & Loss Account compares various expenses with previous year expenses. Such comparison will be helpful in taking concrete steps for controlling the unnecessary expenses.
  • Helpful in the preparation of balance sheet: A balance sheet can only be prepared after ascertaining the Net profit through preparation of profit and loss account.

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