In a period of rising sales utilizing past cost and expense ratios (percent-of-sales method), when preparing pro forma financial statements and planning financing, will tend to ________.

Question

Quizplus · Accepted Answer

Utilizing past cost and expense ratios during a period of rising sales may lead to underestimating the costs and overestimating the financing needed. This is because a higher level of sales may require additional expenses and investments, which the past data may not account for accurately. As a result, the pro forma financial statements may understate the retained earnings and overstate the financing needed. Therefore, option C is the correct choice.

In a Period of Rising Sales Utilizing Past Cost and Expense