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 is the correct formula for the profit margin ratio?

\( \text{Profit Margin Ratio} = \frac{\text{Net Income}}{\text{Net Sales}} \)

\( \text{Profit Margin Ratio} = \frac{\text{Net Sales}}{\text{Net Income}} \)

\( \text{Profit Margin Ratio} = \frac{\text{Gross Profit}}{\text{Total Assets}} \)

\( \text{Profit Margin Ratio} = \frac{\text{Operating Expenses}}{\text{Net Sales}} \)

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Verified step by step guidance

Step 1: Understand the concept of the Profit Margin Ratio. It is a financial metric used to evaluate a company's profitability by comparing its net income to its net sales. This ratio indicates how much profit is generated for every dollar of sales.

Step 2: Analyze the given formulas and identify the components involved. The Profit Margin Ratio specifically uses 'Net Income' and 'Net Sales' in its calculation, as it measures profitability relative to sales revenue.

Step 3: Recall the correct formula for the Profit Margin Ratio: \( \text{Profit Margin Ratio} = \frac{\text{Net Income}}{\text{Net Sales}} \). This formula aligns with the definition of the ratio, focusing on net income as the profit and net sales as the revenue base.

Step 4: Eliminate incorrect options by comparing their components to the definition of the Profit Margin Ratio. For example, \( \frac{\text{Net Sales}}{\text{Net Income}} \) reverses the intended relationship, \( \frac{\text{Gross Profit}}{\text{Total Assets}} \) measures a different concept, and \( \frac{\text{Operating Expenses}}{\text{Net Sales}} \) does not relate to profitability.

Step 5: Confirm that the correct formula is \( \text{Profit Margin Ratio} = \frac{\text{Net Income}}{\text{Net Sales}} \), as it accurately represents the relationship between profit and sales revenue.