Utilizing Past Cost and Expense Ratios (Percent-Of-Sales Method) When Preparing

question 26

Multiple Choice

Utilizing past cost and expense ratios (percent-of-sales method) when preparing pro forma financial statements will tend to

• A) understate profits when sales are increasing and overstate profits when sales are decreasing.
• B) understate profits when sales are decreasing and overstate profits when sales are increasing.
• C) overstate profits, no matter what the change in sales, as long as fixed costs are present.
• D) understate profits, no matter what the change in sales, as long as fixed costs are present.

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Definitions:

Appreciate

To increase in value or price over time, often used in the context of currencies, assets, or investments.

Floating Exchange Rates

A currency valuation system in which exchange rates are determined by the free market forces of supply and demand without direct intervention by national governments.

Price Level

The average of current prices across the entire spectrum of goods and services produced in the economy.

Brazilian Real

The official currency of Brazil, symbolized as R$ and denoted by the ISO code BRL.