Using common-size balance sheet percentages to project individual assets,liabilities,or shareholders' equity has all of the following shortcomings except:
A) Individual assets, liabilities, and shareholders' equity are not independent
Of each other.
B) If a company experiences changing proportions for investments in securities among its assets, other asset categories may show decreasing percentages in some years even though their dollar amounts are increasing.
C) Individual assets, liabilities, and shareholders' equity are independent
Of each other.
D) The common-size percentages do not permit the analyst to easily change
The assumptions about the future behavior of an individual asset or liability.

Question

Quizplus · Accepted Answer

This is because common-size percentages are a tool used to highlight the relative proportion of different balance sheet items, but they do not change the underlying relationships between assets, liabilities, and shareholder's equity. Therefore, individual components are not independent of each other in reality, even though they may appear that way when presented as common-size percentages. The other options listed are all valid shortcomings of using common-size percentages for forecasting individual balance sheet components.

Using Common-Size Balance Sheet Percentages to Project Individual Assets,liabilities,or Shareholders