Multiple Choice
If XYZ Company has net sales of $500,000 and net income of $25,000, the profit margin is:
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14. Financial Statement Analysis
Ratios: Profit Margin
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Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
Which of the following statements correctly defines profit margin?
A
Profit margin is the difference between current assets and current liabilities.
B
Profit margin is calculated as net income divided by net sales.
C
Profit margin is the ratio of total assets to total liabilities.
D
Profit margin is calculated as gross profit divided by total expenses.
Verified step by step guidance1
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 indicates how much profit a company generates for every dollar of sales.
Step 2: Eliminate incorrect options. Review each statement provided in the problem and compare it to the definition of profit margin. For example, the statement 'Profit margin is the difference between current assets and current liabilities' refers to working capital, not profit margin.
Step 3: Evaluate the statement 'Profit margin is the ratio of total assets to total liabilities.' This describes a financial leverage ratio, not profit margin.
Step 4: Assess the statement 'Profit margin is calculated as gross profit divided by total expenses.' This is incorrect because profit margin is not calculated using gross profit and total expenses.
Step 5: Confirm the correct definition. The statement 'Profit margin is calculated as net income divided by net sales' aligns with the standard definition of profit margin. This is the correct answer.
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