Last year a Vancouver firm had a profit margin of 7%. This year the profit margin is 6%. Sales remained constant. Which one of the following statements is correct based on this information?
A) The return on assets declined.
B) The return on equity increased.
C) The net income increased.
D) The price earnings ratio decreased.
E) The interval measure decreased.

Question

Quizplus · Accepted Answer

Since the profit margin decreased from 7% to 6% with constant sales, it indicates that the net income relative to sales has decreased. A lower profit margin, with all else being equal, typically leads to a lower return on assets because the return on assets is calculated based on net income divided by total assets. If net income decreases, the return on assets would also decrease, assuming no significant change in total assets.

Last Year a Vancouver Firm Had a Profit Margin of 7