In: Accounting
What types of business are more likely to have high profit
margins? What types of business are more likely to have lower
profit margins?
If you were a potential investor would rather have a single-step or
multiple-step income statement. Why?
In trying to predict future earnings, which is the more relevant
figure - net income or operating income?
Sr. No |
Questions |
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1 |
What types of business are more likely to have high profit margins? What types of business are more likely to have lower profit margins? |
The margin depends upon nature and type of the business. Several characteristics will decide the margin of profit.
Therefore based on above characteristics business can earn higher margin. Also other parameters such as location, management team, technology also play important role to get higher margin in business. Conventional trade and businesses have very low margins as traders have capitalised their segments, earned tremendous profits in the past and now use that capital to get reasonable returns on their investments. |
2 |
If you were a potential investor would rather have a single-step or multiple-step income statement. Why? |
All revenues and gains are added together at the top of the statement, while all of the losses and expenses are totalled below them. An example of the equation is represented as: (Revenues + Gains) - (Expenses + Losses) = Net Income
Operating sections of the statement generally involve revenues and expenses, while non-operating sections detail the gains and losses of indirect activity. The company's specific sources of revenue and expense are itemized and presented as different line items, making it easier for investors to digest performance and evaluate financial health. Accountants record every transaction separately and maintain a vigilant segregation of revenue or expense types. Based on above explanation a potential investor should have multiple-step income statement because it shows detailed information about company operation and its profitability from core business and expenses incurred under different categories. |
3 |
In trying to predict future earnings, which is the more relevant figure - net income or operating income? |
Operating Income = Gross Income – Operating Expenses – Depreciation and Amortization.
Net Income = Operating Income + Investment Income – Interest Expense +One-time Extraordinary Income – One-time Extraordinary Expenses – Taxes Operating income represents how the revenue and expenses flow in and out from business operations alone, regardless of whether your business operates on debt or has extra cash reserves. If your operating income is healthy, your business value will likely be healthy regardless of your net income. Therefore, In trying to predict future earnings, operating income is the more relevant figure. For any further clarification feel free to ask |