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ACCA Applied Knowledge · Financial Accounting · Importance and purpose of analysis of financial statements

Alpha Co's revenue grew from $2,000,000 to $2,300,000 and its profit from operations grew from $300,000 to $322,000. Beta Co, in the same industry, has a profit margin on operations of 15% in the current year. Which conclusion is best supported by the data?

Alpha's operating margin fell from 15% (300,000/2,000,000) to 14% (322,000/2,300,000), even though profit and revenue both rose. It is therefore below Beta's 15%. Rising absolute profit does not mean improved profitability relative to revenue.

  1. AAlpha's operating margin fell from 15% to 14%, which is below Beta's, although both profit and revenue roseCorrect
  2. BAlpha's operating margin rose from 15% to 16%, which is above Beta's
  3. CAlpha's operating margin stayed at 15%, equal to Beta's
  4. DAlpha's operating margin fell from 16% to 15%, equal to Beta's

Explanation

Prior margin = 300/2,000 = 15%. Current margin = 322/2,300 = 14%. So the margin fell by one point even though profit rose, and it is below Beta's 15%. The other options misstate the margins, e.g. judging from absolute profit growth (7.3%) rather than margin.

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