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 would increase the net profit margin ratio in the current year?

Increasing sales revenue with a proportional increase in cost of goods sold

Decreasing sales revenue while fixed costs remain unchanged

Increasing interest expense while sales remain constant

Reducing operating expenses while sales remain constant

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Verified step by step guidance

Understand the net profit margin ratio formula: Net Profit Margin = (Net Income / Sales Revenue) × 100. This ratio measures how much net income is generated for every dollar of sales revenue.

Analyze the impact of reducing operating expenses while sales remain constant. Operating expenses are subtracted from gross profit to calculate net income. Reducing operating expenses increases net income, assuming sales revenue remains unchanged.

Consider the proportional increase in cost of goods sold with increasing sales revenue. While sales revenue increases, the proportional increase in cost of goods sold means gross profit remains unchanged, and thus the net profit margin ratio does not improve.

Evaluate the effect of decreasing sales revenue while fixed costs remain unchanged. Fixed costs do not change with sales volume, so a decrease in sales revenue would reduce net income, leading to a lower net profit margin ratio.

Assess the impact of increasing interest expense while sales remain constant. Higher interest expense reduces net income, which negatively affects the net profit margin ratio.