Utilizing past cost and expense ratios (percent-of-sales method) when preparing pro forma financial statements will tend to
A) understate profits when sales are increasing and overstate profits when sales are decreasing.
B) understate profits when sales are decreasing and overstate profits when sales are increasing.
C) overstate profits, no matter what the change in sales, as long as fixed costs are present.
D) understate profits, no matter what the change in sales, as long as fixed costs are present.

Question

Quizplus · Accepted Answer

When sales increase, fixed costs remain constant, leading to a lower cost ratio and higher profits. Conversely, when sales decrease, the fixed costs remain constant, leading to a higher cost ratio and lower profits.

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