Series 79 practice questionmediumFinancial Statement Analysis
A company’s gross margin improved while its net margin declined. Which scenario could explain this?
- AReduced cost of goods sold and lower SG&A
- BLower interest expense and higher revenues
- CStable revenues and declining taxes
- DHigher operating expenses offsetting the gross margin gain✓ Correct answer
Explanation
Why D — Higher operating expenses offsetting the gross margin gain
If operating expenses rise, net margin can fall even if gross margin improves. Ignoring expense structure changes can lead to wrong conclusions about profitability.
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