Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

14. Financial Statement Analysis

Ratios: Profit Margin

Financial Accounting

14. Financial Statement Analysis

Ratios: Profit Margin

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Multiple Choice

Which of the following statements about the profit margin ratio is typically true?

A lower profit margin always means a company is more efficient.

A higher profit margin indicates a company is generating more profit from its sales.

Profit margin is calculated by dividing total assets by net income.

Profit margin is unaffected by changes in operating expenses.

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Verified step by step guidance

Understand the concept of the profit margin ratio: The profit margin ratio measures how much profit a company generates from its sales revenue. It is expressed as a percentage and is calculated using the formula: Profit Margin = (Net Income / Sales Revenue) × 100.

Analyze the first statement: 'A lower profit margin always means a company is more efficient.' This is incorrect because a lower profit margin typically indicates less profitability, not necessarily efficiency. Efficiency is better assessed using other metrics like asset turnover or operating efficiency ratios.

Evaluate the second statement: 'A higher profit margin indicates a company is generating more profit from its sales.' This is correct because a higher profit margin shows that the company is retaining more profit relative to its sales revenue, which is a sign of better profitability.

Examine the third statement: 'Profit margin is calculated by dividing total assets by net income.' This is incorrect because the formula for profit margin involves net income and sales revenue, not total assets.

Review the fourth statement: 'Profit margin is unaffected by changes in operating expenses.' This is incorrect because operating expenses directly impact net income, which in turn affects the profit margin ratio.