Gross Profit and Net Profit Flashcards

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  • Make sure you understand the information on each card. If something's unclear, click the link to the revision notes at the bottom of the page for more details.

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Note: We may include questions that have multiple correct answers. It's useful to remember specific examples to understand these concepts better.

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What is gross profit?

The money left when you take cost of sales away from revenue.

What does cost of sales mean?

The cost of making or buying the goods you actually sold, like raw materials and stock.

How do you calculate gross profit?

Gross profit = revenue – cost of sales. Example: £10,000 – £6,000 = £4,000.

What is net profit?

The profit left after all expenses are taken from gross profit. It is also called profit for the year.

How do you calculate net profit?

Net profit = gross profit – expenses (overheads). Example: £4,000 – £2,500 = £1,500.

What is the key difference between gross profit and net profit?

Gross profit looks at trading only (revenue minus cost of sales). Net profit also takes off expenses like rent and marketing.

Name two expenses that reduce net profit but not gross profit.

Rent and marketing costs. Others include office wages, insurance and utility bills.

Where would you find gross profit and net profit in a business’s accounts?

In the statement of comprehensive income (income statement).

If cost of sales rises but revenue stays the same, what happens to gross profit?

It falls, because you are spending more to make or buy the goods.

If expenses fall and gross profit stays the same, what happens to net profit?

It rises, because you are paying less in overheads.

Give two ways a business could increase gross profit.

Raise selling prices or lower cost of sales by cutting waste or finding cheaper supplies.

Give two ways a business could increase net profit without changing gross profit.

Cut expenses, such as renegotiating rent or reducing energy and admin costs.

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