Which of the following statements about an organization's operating profit margin is true?

• A. It excludes depreciation and amortization from its calculation.
• B. It reflects the company's ability to pay its short-term liabilities.
• C. It measures the percentage of revenue remaining after deducting only operating expenses.
• D. It is calculated by dividing net income by total assets.

Answer: (C)

Verified step by step guidance

1. Understand the concept of operating profit margin: Operating profit margin is a financial metric that measures the percentage of revenue remaining after deducting operating expenses, such as cost of goods sold (COGS), wages, and other day-to-day expenses, but before deducting interest and taxes.
2. Clarify what operating expenses include: Operating expenses are costs directly related to the core operations of the business. They do not include non-operating expenses like interest, taxes, or extraordinary items.
3. Identify the formula for operating profit margin: The formula is Operating Profit Margin = (Operating Income / Revenue) × 100. Operating income is calculated by subtracting operating expenses from revenue.
4. Evaluate the incorrect statements: Depreciation and amortization are included in operating expenses, so the first statement is false. The second statement refers to liquidity, not operating profit margin. The fourth statement confuses operating profit margin with return on assets (ROA), which is calculated as Net Income / Total Assets.
5. Confirm the correct statement: The correct statement is 'It measures the percentage of revenue remaining after deducting only operating expenses,' as this aligns with the definition and formula of operating profit margin.