Utilizing past cost and expense ratios (percent-of-sales method) when preparing pro forma financial statements will tend to
A) neither understate nor overstate profits.
B) understate profits when sales are increasing.
C) understate profits when sales are decreasing.
D) overstate profits when sales are increasing.

Question

Quizplus · Accepted Answer

When sales are increasing, using past cost and expense ratios may not accurately reflect the economies of scale or improved efficiencies, leading to an understatement of profits.

Utilizing Past Cost and Expense Ratios (Percent-Of-Sales Method) When Preparing