ACCA Applied Knowledge · Financial Accounting · Importance and purpose of analysis of financial statements
Kiva Co reports revenue of $800,000 for the current year and $640,000 for the prior year. Profit from operations was $96,000 this year and $96,000 last year. Which statement is correct about the operating profit margin?
The operating profit margin fell from 15.0% to 12.0%. Current year is 96,000 divided by 800,000, which is 12.0%, and prior year is 96,000 divided by 640,000, which is 15.0%. Revenue grew by 25% but profit stayed flat.
- AIt has improved from 12.0% to 15.0%
- BIt has fallen from 15.0% to 12.0%Correct
- CIt has fallen from 15.0% to 13.3%
- DIt has remained at 15.0%
Explanation
Current margin = 96,000/800,000 = 12.0%. Prior margin = 96,000/640,000 = 15.0%. So margin fell from 15.0% to 12.0% despite revenue growth of 25%, because profit did not grow. The option showing an improvement reverses the years.
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