An entity's profit margin is affected by which of the following ratios?
A) Gross profit margin and expense ratios.
B) Inventory and debtors days ratios.
C) Gross profit margin and return on assets.
D) Debt and equity ratios.

Question

Quizplus · Accepted Answer

Profit margin is calculated by subtracting expenses from revenue and dividing by revenue. Therefore, ratios that impact revenue and expenses will affect profit margin. Gross profit margin measures a company's profitability after accounting for the cost of goods sold, while expense ratios measure the efficiency of a company's operations. By improving gross profit margin and controlling expenses, a company can improve its profit margin. The other ratios listed (inventory and debtors days, return on assets, debt and equity ratios) do not directly impact profit margin.

An Entity's Profit Margin Is Affected by Which of the Following