Profit margin measures the income earned on each dollar of sales, and is caculat

Question

Profit margin measures the income earned on each dollar of sales, and is caculated by dividing net income by net sales. True False
Other things being equal, the higher the debt to equity ratio, the higher the risk of bankruptcy. True False
We use horizontal analysis to analyze trends in financial statement data, such as the dollar amount of change and the percentage change, for one company over time True False Profit margin measures the income earned on each dollar of sales, and is caculated by dividing net income by net sales. True False
Other things being equal, the higher the debt to equity ratio, the higher the risk of bankruptcy. True False
We use horizontal analysis to analyze trends in financial statement data, such as the dollar amount of change and the percentage change, for one company over time True False True False
Other things being equal, the higher the debt to equity ratio, the higher the risk of bankruptcy. True False
We use horizontal analysis to analyze trends in financial statement data, such as the dollar amount of change and the percentage change, for one company over time True False

Explanation / Answer

1) Profit margin measures the income earned on each dollar of sales, and is caculated by dividing net income by net sales - TRUE

Profit Margin is expressed in percentage and calculated as follows:

Profit Margin = Net Income / Net Sales x 100

It measures how much out ot every dollar of sales a company actually keeps in earnings.

Hence, the statement is TRUE

2) Other things being equal, the higher the debt to equity ratio, the higher the risk of bankruptcy.

Debt means the loan payable to outsiders and the equity is a shareholders' fund. As more as the Debt, the higher is Debt to equity ratio. It means company has higher risk of bankruptcy.

3) We use horizontal analysis to analyze trends in financial statement data, such as the dollar amount of change and the percentage change, for one company over time -- TRUE

Horizontal Analysis also known as trend analysis and use the dollar amount to change and the percentage change, for one company over time. Hence the statement is TRUE

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