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 correctly defines a profit margin?

Profit margin is the ratio of total assets to total liabilities.

Profit margin is the ratio of net sales to net income, expressed as a percentage.

Profit margin is the ratio of net income to net sales, expressed as a percentage.

Profit margin is the ratio of gross profit to total expenses.

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Verified step by step guidance

Step 1: Understand the concept of profit margin. Profit margin is a financial metric used to assess a company's profitability by comparing its net income to its net sales. It is expressed as a percentage and indicates how much profit is generated for every dollar of sales.

Step 2: Analyze the options provided in the problem. Each statement describes a different ratio or relationship, but only one correctly defines the profit margin.

Step 3: Eliminate incorrect options. For example, the ratio of total assets to total liabilities is related to solvency, not profitability. Similarly, the ratio of net sales to net income is not the correct formula for profit margin, and the ratio of gross profit to total expenses is related to operational efficiency.

Step 4: Identify the correct formula for profit margin. The correct definition is the ratio of net income to net sales, expressed as a percentage. This formula is:

\frac{Net Income}{Net Sales} × 100

Step 5: Conclude that the correct answer is: 'Profit margin is the ratio of net income to net sales, expressed as a percentage.' This aligns with the standard definition used in financial accounting.