In doing vertical analysis of an income statement, you notice that cost of goods sold increased from 50% of sales in year 1 to 60% of sales in year 2. All of the following are possible explanations except:
A) Inventory costs rose faster than sales prices.
B) Inventory is being stolen.
C) The accounting records are not accurate.
D) All of the above are possible explanations.

Question

Quizplus · Accepted Answer

A: This is a plausible explanation, but so are b and c.
B: If inventory was stolen it could be assumed that it was sold, but would have no corresponding sales; again, possible explanation, but so are a and c.
C: It's possible that this is attributable to error; a and b are also possible.

In Doing Vertical Analysis of an Income Statement, You Notice