Which of the following is the most appropriate way for a company to measure profit growth over time?

• A. By analyzing total assets at the end of each period
• B. By reviewing the gross sales before any deductions
• C. By calculating the total liabilities for each period
• D. By comparing net income from one period to the next

Answer: (D)

Verified step by step guidance

1. Understand the concept of profit growth: Profit growth refers to the increase in a company's profitability over time, typically measured by comparing financial performance metrics across different periods.
2. Identify the key metric for measuring profitability: Net income is the most appropriate metric for assessing profit growth because it represents the company's earnings after all expenses, taxes, and deductions have been accounted for.
3. Explain why other options are less suitable: Total assets, gross sales, and total liabilities do not directly measure profitability. Total assets reflect the company's resources, gross sales show revenue before deductions, and total liabilities represent obligations rather than earnings.
4. Describe the comparison process: To measure profit growth, calculate the net income for each period and compare the figures. This comparison reveals whether the company’s profitability is increasing, decreasing, or remaining stable over time.
5. Highlight the importance of consistency: Ensure that the net income figures being compared are calculated using consistent accounting methods and standards to avoid discrepancies that could distort the analysis.