Two Firms in the Same Industry Are the Same Size

question 31

Multiple Choice

Two firms in the same industry are the same size and have very similar real-world financial results. Which of the following describes the profitability ratios of these firms?

• A) They could be very different because ratios are based on projections of future performance rather than on actual real-world performance.
• B) They should be identical because regulations require all firms in the same industry to use the same accounting methods to construct their financial statements and compute their key financial ratios.
• C) They should be very similar because both firms must use exactly the same mathematical formulas to calculate their ratios.
• D) They could be different if they used approved but dissimilar methods to construct their financial statements.

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Definitions:

Direct Labour Budget

A direct labour budget estimates the total labor cost and number of labor hours required for production in a given period, based on forecasted sales and production levels.

Materials Purchases

involves the acquisition of raw materials required for the production process, an essential part of managing manufacturing inputs.

Cash Collections

The process of gathering all cash received from sales, services, or other business activities.

Production Budget

An estimate of the total output, costs, and resources required for production within a specific period to meet forecasted demand.