ACCA Financial Reporting (F7) Practice Exam 2025 - Free Financial Reporting Practice Questions and Study Guide

The two profitability ratios identified in the correct answer are the Gross Profit Margin and Net Profit Margin. These ratios specifically measure a company's ability to generate profit relative to sales and costs, making them vital indicators of a company's financial health.

The Gross Profit Margin reflects the percentage of revenue that exceeds the cost of goods sold (COGS). It indicates how efficiently a company is producing its goods or services and how well it's managing its production costs. A higher gross profit margin suggests that a company retains more per dollar of sales to cover other expenses and generate profit.

The Net Profit Margin goes a step further by looking at the overall profitability of the company after accounting for all expenses, including operating expenses, taxes, and interest. This ratio shows the proportion of revenue that remains as profit after all expenses are deducted. It’s crucial for assessing the overall financial performance and efficiency of a company’s operations.

Understanding these two ratios is fundamental for evaluating the profit-generating capabilities of a business, making them essential tools for investors and analysts in financial reporting.