In a Period of Rising Sales, Utilizing Past Cost and Expense

question 16

Multiple Choice

In a period of rising sales, utilizing past cost and expense ratios (percent-of-sales method) when preparing pro forma financial statements will tend to

• A) overstate costs and understate profits.
• B) understate costs and understate profits.
• C) understate costs and overstate profits.
• D) overstate costs and overstate profits.

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Definitions:

Pareto Optimal

A condition where no individual or preference criterion can be better off without making at least one individual or preference criterion worse off, representing an optimum allocation of resources.

Labor

The human effort, including physical and mental capabilities, used in the production of goods and services.

Capital

Financial assets or the financial value of assets, such as funds held in deposit accounts and/or the physical factories, machinery, and equipment used to produce goods or services.

Pareto Optimal

A state of allocation of resources in which it is impossible to make any individual or preference criterion better off without making at least one individual or criterion worse off.