Question

Using ratio analysis, a firm earns ________ when its performance is greater than the industry average.

A) above average economic performance
B) below average accounting performance
C) above average accounting performance
D) below average economic performance

Answer 1

Using ratio analysis, if a firm performs better than the industry average, it typically means that the firm is achieving above average economic or accounting performance.

Step-by-step explanation:

When using ratio analysis, if a firm earns a higher return than the industry average, this typically indicates that the firm is achieving above average economic performance or above average accounting performance. To be specific, average profit is calculated by taking the price and subtracting the average cost - this is known as the firm's profit margin. Consequently, if the market price is above average cost, it follows that average profit, and, therefore, total profit, will be positive, indicating a strong performance compared to the industry average.