Which would reduce the gross profit margin?

an increase in the price paid to suppliers. Only prices and costs of the goods affect it. Wages and rent come after gross profit.

Which would improve the profit margin but not the gross profit margin?

lower expenses. Expenses are deducted after gross profit.

depreciation. It is an expense with no payment.

drawings. Drawings are not an expense.

obtaining a long-term loan. Cash comes in, and the liability is not a current one.

In plain words

Calculating a ratio is half the job. The marks that matter come from saying what it means, why it changed and what the business should do about it.

Compare each ratio with last year's, or with another business's, and say whether it has improved or worsened.
Gross profit margin is changed by selling prices, by the cost of purchases, and by the valuation of inventory. It is not changed by selling more at the same prices.
Profit margin is changed by anything that changes gross profit, and also by other income and by expenses.
To improve profitability: raise selling prices, find cheaper suppliers, cut expenses, or sell more.
To improve liquidity and working capital: bring in more capital, take a long-term loan, sell non-current assets that are not needed, reduce drawings, or collect debts faster.
Profit is not the same as cash. Credit sales count as profit before the cash arrives. Depreciation reduces profit but no cash is paid. Buying a non-current asset, repaying a loan and drawings use cash without reducing profit.

A shop's gross profit margin fell from 32% to 27% while its sales rose. Suggest two possible reasons.

The margin is about the gap between selling price and cost. Either the selling prices fell or the costs rose.
Reason 1: selling prices were reduced, perhaps to increase sales. That fits the rise in sales.
Reason 2: suppliers raised their prices, and the shop did not pass the increase on to its customers.

Always comment in three steps: what happened to the ratio, whether that is better or worse, and a likely reason.
A profitable business can run out of cash, and a business with cash in the bank can be making a loss. Be ready to explain why with an example.

5 questions, about 2 minutes.

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5 questions

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3 questions, 7 marks. Write your answers on paper, then check them.

Cambridge IGCSE Accounting (9–1) 0985 · 7 marks · papermunch.org

Name ______________________________ Date ______________

A business made a profit of $20 000 in the year, but its bank balance fell. State three possible reasons.[3]
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It bought non-current assets. The owner took drawings. Customers who bought on credit have not yet paid. (Also: it repaid a loan, or increased its inventory.)
I got this one
Suggest two ways a business could improve its profit margin.[2]
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Reduce its expenses. Increase its selling prices. (Also: buy from cheaper suppliers.)
I got this one
Suggest two ways a business could improve its working capital.[2]
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The owner could introduce more capital. The business could take a long-term loan. (Also: sell surplus non-current assets, or reduce drawings.)
I got this one

1. It bought non-current assets. The owner took drawings. Customers who bought on credit have not yet paid. (Also: it repaid a loan, or increased its inventory.)
2. Reduce its expenses. Increase its selling prices. (Also: buy from cheaper suppliers.)
3. The owner could introduce more capital. The business could take a long-term loan. (Also: sell surplus non-current assets, or reduce drawings.)