Definition of in the black
in the black
Making a profit.
The cash flow from the operating activities of a business
can be negative, which means that its cash balance decreased from
its sales and expense activities during the period. When a business is
operating at a loss instead of Making a profit, its cash outflows for
expenses very likely may be more than its cash inflow from sales. Even
when a business makes a profit for the period, its cash inflow from sales
could be considerably less than the sales revenue recorded for the
period, thus causing a negative cash flow for the period. Caution: This
term also is used for certain types of investments in which the net cash
flow from all sources and uses is negative. For example, investors in
rental real estate properties often use the term to mean that the cash
inflow from rental income is less than all cash outflows during the
period, including payments on the mortgage loan on the property.
The sale of a security or financial instrument not
owned, in anticipation of a price decline and Making a profit by purchasing the
instrument later at a lower price, and then delivering the instrument to
complete the sale. See Long position.
The ratio of net income to net sales.
The ratio of net income before taxes to net sales.
The cumulative book income plus any gain or loss on disposition of the assets on termination of the SAT.
This equals the cash inflow from sales during the period minus the cash
outflow for expenses during the period. Keep in mind that to measure
net income, generally accepted accounting principles require the use of
accrual-basis accounting. Starting with the amount of accrual-basis net
income, adjustments are made for changes in accounts receivable,
inventories, prepaid expenses, and operating liabilities—and depreciation
expense is added back (as well as any other noncash outlay
expense)—to arrive at cash flow from profit, which is formally labeled
cash flow from operating activities in the externally reported statement
of cash flows.
The profit made by a division after deducting only those expenses that can be controlled by the
divisional manager and ignoring those expenses that are outside the divisional manager’s control.
A method for understanding the relationship between revenue, cost and sales volume.
analysis a procedure that examines
changes in costs and volume levels and the resulting
effects on net income (profits)
the process of choosing among the alternative
solutions available to a course of action or a problem
This first-line measure of profit
equals sales revenue less cost of goods sold. This is profit before operating
expenses and interest and income tax expenses are deducted. Financial
reporting standards require that gross margin be reported in
external income statements. Gross margin is a key variable in management
profit reports for decision Making and control. Gross margin
doesn’t apply to service businesses that don’t sell products.
The profit a company makes before expenses and taxes are taken away.
The difference between the price at which goods or services are sold and the cost of sales.
Income The revenue generated from the sale of goods or services.
The result of subtracting cost of goods sold from sales. Synonymous with gross margin.
Revenue less cost of goods sold.
Gross profit margin
Gross profit divided by sales, which is equal to each sales dollar left over after paying
for the cost of goods sold.
Gross Profit Margin
Gross profit divided by revenue.
Refers to the seller's actually turning over to the buyer the asset agreed upon in a forward contract.
See operating profit.
Net profit margin
Net income divided by sales; the amount of each sales dollar left over after all expenses
have been paid.
The profit made by the business for an accounting period, equal to gross profit less selling, finance, administration etc. expenses, but before deducting interest or taxation.
See earnings before interest and income tax (EBIT).
Operating profit margin
The ratio of operating margin to net sales.
a temporary absorption costing profit caused
by producing more inventory than is sold
What’s left over after you subtract the cost of goods sold and all your expenses from sales.
The difference between income and expenses.
The general term profit is not precisely defined; it may refer to net
gains over a period of time, or cash inflows less cash outflows for an
investment, or earnings before or after certain costs and expenses are
deducted from income or revenue. In the world of business, profit is
measured by the application of generally accepted accounting principles
(GAAP). In the income statement, the final, bottom-line profit is generally
labeled net income and equals revenue (plus any extraordinary gains)
less all expenses (and less any extraordinary losses) for the period. Inter-
nal management profit reports include several profit lines: gross margin,
contribution margin, operating profit (earnings before interest and
income tax), and earnings before income tax. External income statements
report gross margin (also called gross profit) and often report one
or more other profit lines, although practice varies from business to
business in this regard.
Profit and Loss account
A financial statement measuring the profit or loss of a business – income less expenses – for an accounting period.
profit and loss statement (P&L statement)
This is an alternative moniker
for an income statement or for an internal management profit report.
Actually, it’s a misnomer because a business has either a profit or a loss
for a period. Accordingly, it should be profit or loss statement, but the
term has caught on and undoubtedly will continue to be profit and loss
Profit before interest and taxes (PBIT)
a responsibility center in which managers are responsible for generating revenues and planning and controlling all expenses
An entity within a corporation against which both revenues and costs are
recorded. This results in a separate financial statement for each such entity, which
reveals a net profit or loss, as well as a return on any assets used by the entity.
A division or unit of an organization that is responsible for achieving profit targets.
Indicator of profitability. The ratio of earnings available to stockholders to net sales.
Determined by dividing net income by revenue for the same 12-month period. Result is shown as a
the ratio of income to sales
Profit Margin Ratio
A measure of how much profit is earned on each dollar of sales. It
is calculated by dividing the net income available for distribution to
shareholders by the total sales generated during the period.
This concept refers to a separate source of revenue and
profit within a business organization, which should be identified for
management analysis and control. A profit module may focus on one
product or a cluster of products. profit in this context is not the final, bottom-
line net income of the business as a whole. Rather, other measures
of profit are used for management analysis and decision-Making purposes—
such as gross margin, contribution margin, or operating profit
(earnings before interest and income tax).
Ratios based on sales revenue for a period. A measure of
profit is divided by sales revenue to compute a profit ratio. For example,
gross margin is divided by sales revenue to compute the gross margin
profit ratio. Dividing bottom-line profit (net income) by sales revenue
gives the profit ratio that is generally called return on sales.
an incentive payment to employees that is
contingent on organizational or individual performance
Profit Sharing Plan
A retirement plan generally funded by a percentage of company
profits, but into which contributions can be made in the absence of profits.
a visual representation of the amount
of profit or loss associated with each level of sales
The present value of the future cash flows divided by the initial investment. Also called
the benefit-cost ratio.
See cash value added.
A method for determining the profitability of an investment. It is
calculated by dividing the present value of the future net cash flows
by the initial cash investment.
Ratio of net present value to initial investment.
profitability index (Pl)
a ratio that compares the present value of net cash flows to the present value of the net investment
Ratios that focus on the profitability of the firm. profit margins measure performance
with relation to sales. Rate of return ratios measure performance relative to some measure of size of the
pseudo microprofit center
a center for which a surrogate
of market value must be used to measure output revenue
real microprofit center
a center whose output has a market value
The amount of profit after deducting interest, taxation and dividends that is retained by the business.
A probability used to determine a "sure" expected value (sometimes called a
certainty equivalent) that would be equivalent to the actual risky expected value.
A broad, all-inclusive term that refers to the methods and procedures
of financial record keeping by a business (or any entity); it also
refers to the main functions and purposes of record keeping, which are
to assist in the operations of the entity, to provide necessary information
to managers for Making decisions and exercising control, to measure
profit, to comply with income and other tax laws, and to prepare financial
An obvious but at the same time elusive term that refers to cash
inflows and outflows during a period. But the specific sources and uses
of cash flows are not clear in this general term. The statement of cash
flows, which is one of the three primary financial statements of a business,
classifies cash flows into three types: those from operating activities
(sales and expenses, or profit-Making operations), those from
investing activities, and those from financing activities. Sometimes the
term cash flow is used as shorthand for cash flow from profit (i.e., cash
flow from operating activities).
financial reports and statements
Financial means having to do with
money and economic wealth. Statement means a formal presentation.
Financial reports are printed and a copy is sent to each owner and each
major lender of the business. Most public corporations make their financial
reports available on a web site, so all or part of the financial report
can be downloaded by anyone. Businesses prepare three primary financial
statements: the statement of financial condition, or balance sheet;
the statement of cash flows; and the income statement. These three key
financial statements constitute the core of the periodic financial reports
that are distributed outside a business to its shareowners and lenders.
Financial reports also include footnotes to the financial statements and
much other information. Financial statements are prepared according to
generally accepted accounting principles (GAAP), which are the authoritative
rules that govern the measurement of net income and the reporting
of profit-Making activities, financial condition, and cash flows.
Internal financial statements, although based on the same profit
accounting methods, report more information to managers for decision
Making and control. Sometimes, financial statements are called simply
Includes all the sales and expense activities of a business.
But the term is very broad and inclusive; it is used to embrace all
types of activities engaged in by profit-motivated entities toward the
objective of earning profit. A bank, for instance, earns net income not
from sales revenue but from loaning money on which it receives interest
income. Making loans is the main revenue operating activity of banks.
A relatively small percent increase or decrease in
sales volume that causes a much larger percent increase or decrease in
profit because fixed expenses do not change with small changes in sales
volume. Sales volume changes have a lever effect on profit. This effect
should be called sales volume leverage, but in practice it is called operating
The short-term liabilities generated by the operating
(profit-Making) activities of a business. Most businesses have three types
of operating liabilities: accounts payable from inventory purchases and
from incurring expenses, accrued expenses payable for unpaid expenses,
and income tax payable. These short-term liabilities of a business are
non-interest-bearing, although if not paid on time a business may be
assessed a late-payment penalty that is in the nature of an interest
Operating expenses that vary in proportion to
changes in total sales revenue (total dollars of sales). Examples are sales
commissions based on sales revenue, credit card discount expenses, and
rents and franchise fees based on sales revenue. These expenses are one
of the key variables in a profit model. Segregating these expenses from
other types of expenses that behave differently is essential for management
decision-Making analysis. (These expenses are not disclosed separately
in externally reported income statements.)
Persons who take positions in securities and their derivatives with the objective of Making profits.
Traders can make markets by trading the flow. When they do that, their objective is to earn the bid/ask spread.
Traders can also be of the sort who take proprietary positions whereby they seek to profit from the directional
movement of prices or spread positions.
Expenses that vary in close proportion to changes
in total sales volume (total quantities of sales). Examples of these types of
expenses are delivery costs, packaging costs, and other costs that depend
mainly on the number of products sold or the number of customers
served. These expenses are one of the key factors in a profit model for
decision-Making analysis. Segregating these expenses from other types
of expenses that behave differently is essential for management decisionMaking
analysis. The cost-of-goods-sold expense depends on sales volume
and is a unit-driven expense. But product cost (i.e., the cost of
goods sold) is such a dominant expense that it is treated separately from
other unit-driven operating expenses.
The profit per unit sold of a product after deducting product
cost and variable expenses of selling the product from the sales price of
the product. Unit margin equals profit before fixed operating expenses
are considered and before interest and income tax are deducted. Unit
margin is one of the key variables in a profit model for decision-Making
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