Which of the following statements is most correct?
A) One of the key steps in the development of pro forma financial statements is to identify those assets and liabilities which increase spontaneously with net income.
B) The first, and most critical, step in constructing a set of pro forma financial statements is establishing the sales forecast.
C) Pro forma financial statements as discussed in the text are used primarily to assess a firm's historical performance.
D) The capital intensity ratio reflects how rapidly a firm turns over its assets and is the reciprocal of the fixed assets turnover ratio.
E) The percentage of sales method produces accurate results when fixed assets are lumpy and when economies of scale are present.

Question

Quizplus · Accepted Answer

The first and most critical step in constructing pro forma financial statements is establishing the sales forecast, as all other projected line items depend on this figure. A is not entirely correct as identifying those assets and liabilities which increase spontaneously with net income is an important step, but not the most critical. C is incorrect as the purpose of pro forma financial statements is to project future performance, not analyze historical performance. D is incorrect as the capital intensity ratio reflects a firm's fixed assets per dollar of sales and is not directly related to asset turnover. E is incorrect as the percentage of sales method may not accurately account for changes in fixed assets and economies of scale.

Which of the Following Statements Is Most Correct