- This topic has 5 replies, 2 voices, and was last updated 8 years ago by
.
- Posts
STATEMENT OF PROFIT OR LOSS (EXTRACT) $’000
Revenue 74,521
Cost of sales 28,256
Salaries and wages 20,027
Other costs 11,489
Profit before interest and tax 14,749
Interest 1,553
Tax 4,347
Profit after interest and tax 8,849
Dividends payable 4,800The above extract is taken from the BPP exam revision kit.
I think the formula of net profit margin is net income/sales and the answer should be 11.9%.
But the kit answer is 19.8% which is derived after adding back tax and interest .In the profit margin formula it,s PBIT/sales but Sir! can you please explain how can we add interest and tax in the net profit margin formula?(We are required to calculate the net profit margin)Although in financial accounts, the net profit normally means the profit after interest and tax, for ratio analysis it means the net operating profit, which is the profit before interest and tax.
The reason is that the ratios are being calculating in order to assess how well the managers are running the company. So for the net profit margin we are looking at how good a return they obtained from the total capital raised. The managers cannot control the rate of tax charged by the State. Although they do control how finance is raised, how they raise the finance does not affect how well they are earning profits.
@johnmoffat said:
Although in financial accounts, the net profit normally means the profit after interest and tax, for ratio analysis it means the net operating profit, which is the profit before interest and tax.The reason is that the ratios are being calculating in order to assess how well the managers are running the company. So for the net profit margin we are looking at how good a return they obtained from the total capital raised. The managers cannot control the rate of tax charged by the State. Although they do control how finance is raised, how they raise the finance does not affect how well they are earning profits.
Well then they should have used the word “Profit margin” instead of a “net profit margin”
Or may be it,s a printing error.No – they will use the term ‘net profit margin’, because again we are not doing financial accounts, and ‘net profit’ always means ‘net operating profit’ when calculating financial ratios (just as it did for Papers F3 and F5).
(Using the term ‘profit margin’ would not be making it clear whether they wanted gross profit margin or net profit margin)@johnmoffat said:
No – they will use the term ‘net profit margin’, because again we are not doing financial accounts, and ‘net profit’ always means ‘net operating profit’ when calculating financial ratios (just as it did for Papers F3 and F5).
(Using the term ‘profit margin’ would not be making it clear whether they wanted gross profit margin or net profit margin)ok Sir! all clear 🙂
- The topic ‘Net profit margin formula’ is closed to new replies.