Question 1

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

Accepted Answer

Utilizing past cost and expense ratios (percent-of-sales method) assumes that costs and expenses follow a predictable pattern relative to sales. However, this may not always be the case in reality, especially if significant changes occur in the business environment or operations. As such, when sales increase, past ratios tend to underestimate actual costs and expenses, leading to an overstatement of profits. Conversely, when sales decrease, past ratios tend to overestimate actual costs and expenses, leading to an understatement of profits. Therefore, option C best reflects the effect of past cost and expense ratios on pro forma financial statements.

Question 2

If transportation costs were a huge portion of a firm's expenses and the firm expected gas prices to increase greatly in the next year,then in preparing its pro forma income statement the firm should ________.

Accepted Answer

If the firm expects gas prices to increase greatly in the next year and transportation costs are a huge portion of its expenses, it is likely that the firm will need to increase the percentage of transportation costs from the percentage of last year's sales in the pro forma income statement to reflect the expected increase in expenses. Therefore, C is the best choice.

Question 3

The weakness of the judgmental approach to preparing a pro forma balance sheet is ________.

Accepted Answer

The weakness of the judgmental approach is that it assumes the values of certain accounts can be forced to take on desired levels, which may not reflect the actual financial condition of the firm. This can lead to inaccuracies in the pro forma balance sheet. The other options are not weaknesses of the judgmental approach.

Question 4

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

Accepted Answer

The answer of Utilizing past cost and expense ratios (percent-of-sales...

Question 5

A weakness of the percent-of-sales method of preparing a pro forma income statement is ________.

Accepted Answer

The answer of A weakness of the percent-of-sales method of...

Quiz 4: Cash Flow and Financial Planning

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

If transportation costs were a huge portion of a firm's expenses and the firm expected gas prices to increase greatly in the next year,then in preparing its pro forma income statement the firm should ________.

The weakness of the judgmental approach to preparing a pro forma balance sheet is ________.

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

A weakness of the percent-of-sales method of preparing a pro forma income statement is ________.