question archive Which of the following is a limitation of the “percent of sales method” of preparing pro forma financial statements? A
Which of the following is a limitation of the “percent of sales method” of preparing pro forma financial statements? A
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Which of the following is a limitation of the “percent of sales method” of preparing pro forma financial statements?
A. Inventory levels are seldom affected by changes in sales volume.
B. A firm’s investment in accounts receivable is seldom related to sales volume.
C. Not all assets and liabilities increase or decrease as a constant percent of sales.
D. The dividend payout ratio may change from one year to the next.
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Answer:
Correct option is (C)
Only the spontaneous liabilities (Ex: Accounts payables) and spontaneous assets (Ex: Accounts receivable) will only increase or decrease with changes in sales.
