Profitability ratio taxonomy: identify the correct statements about ratios that relate profitability to sales and to investment, with examples such as Gross Profit Ratio and Return on Total Assets.

Difficulty: Easy

Ratios showing profitability in relation to sales and those showing profitability in relation to investment are collectively called profitability ratios.
Gross profit divided by net sales is a profitability-in-relation-to-sales ratio.
Net profit after taxes divided by total assets is a profitability-in-relation-to-investment ratio.
All of these
None of these

Correct Answer: All of these

Explanation:

Introduction / Context:
Profitability ratios help stakeholders assess how efficiently a firm converts sales into profit and how effectively it uses its investment base to create earnings. This question distinguishes between sales-related profitability ratios and investment-related profitability ratios and checks recall of standard exemplars for each.

Given Data / Assumptions:

Sales-based measures: e.g., Gross Profit Ratio, Net Profit Margin.
Investment-based measures: e.g., Return on Assets (ROA), Return on Equity (ROE), Return on Capital Employed (ROCE).
Net sales and total assets are measured consistently from financial statements.

Concept / Approach:
Sales-related ratios evaluate margin structure; investment-related ratios evaluate earnings yield on resources employed. Together they provide a comprehensive picture of pricing power, cost control, and capital productivity. The examples cited—Gross Profit/Net Sales and Net Profit After Tax/Total Assets—are canonical forms of these two classes.

Step-by-Step Solution:

Confirm that “profitability ratios” is an umbrella term.Identify Gross Profit Ratio = Gross Profit / Net Sales.Identify ROA ≈ Net Profit After Tax / Total Assets (average assets in many texts).

Verification / Alternative check:

Use DuPont decomposition to link margins (sales-based) with asset turns (investment-based) to explain ROA/ROE behavior.

Why Other Options Are Wrong:

Each individual statement is correct; only “All of these” reflects the complete taxonomy.“None of these” is inconsistent with standard definitions.

Common Pitfalls:

Mixing operating and non-operating items when computing net sales or net profit, distorting ratios.Using end-of-period assets instead of average assets where the convention requires averages.

Final Answer:

All of these

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Profitability ratio taxonomy: identify the correct statements about ratios that relate profitability to sales and to investment, with examples such as Gross Profit Ratio and Return on Total Assets.

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