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

Introduction to Ratios

Financial Accounting

14. Financial Statement Analysis

Introduction to Ratios

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Multiple Choice

Which of the following formulas is used to determine the margin of safety?

Margin of Safety = Actual Sales - Break-even Sales

Margin of Safety = Gross Profit / Net Sales

Margin of Safety = Net Income / Sales

Margin of Safety = Current Assets / Current Liabilities

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Verified step by step guidance

Step 1: Understand the concept of Margin of Safety. It represents the difference between actual sales and break-even sales, indicating how much sales can drop before the business incurs a loss.

Step 2: Review the formula options provided in the problem. The correct formula for Margin of Safety is: Margin of Safety = Actual Sales - Break-even Sales.

Step 3: Eliminate incorrect formulas by analyzing their components. For example, 'Margin of Safety = Gross Profit / Net Sales' calculates the gross profit margin, not the margin of safety.

Step 4: Similarly, 'Margin of Safety = Net Income / Sales' calculates the net profit margin, and 'Margin of Safety = Current Assets / Current Liabilities' calculates the current ratio, neither of which are related to the margin of safety.

Step 5: Conclude that the correct formula for Margin of Safety is: Margin of Safety = Actual Sales - Break-even Sales, as it directly measures the sales buffer above the break-even point.