The Percent of Sales Method Does Not Accurately Estimate the Balances

question 16

Multiple Choice

The percent of sales method does not accurately estimate the balances for lumpy assets.Which of the following statements best describes the possible errors?

• A) if excess capacity exists, the percent of sales method will overestimate asset requirements
• B) the percent of sales method consistently underestimates the forecasted balances of lumpy assets
• C) the percent of sales method consistently overestimates the forecasted balances of lumpy assets
• D) if fixed assets are utilized at full capacity currently, the percent of sales method will underestimate the forecasted fixed asset balance

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Definitions:

Carrying Value

The book value of assets and liabilities as presented on a company’s balance sheet, which is the original cost minus any depreciation, amortization, or impairment costs.

Secured Bonds

Bonds that have specific assets of the issuer pledged as collateral.

Collateral

An asset pledged by a borrower to secure a loan or other credit, and subject to seizure if the loan is not repaid according to the agreed terms.

Specific Assets

Assets identified and itemized separately for accounting, legal, or financial purposes.