Which of the following statements is correct?
A) One of the key steps in the development of pro forma financial statements is to identify those assets and liabilities which increase spontaneously with net income.
B) The first,and most critical,step in constructing a set of pro forma financial statements is establishing the sales forecast.
C) Pro forma financial statements as discussed in the text are used primarily to assess a firm's historical performance.
D) All else equal,if a firm operates at full capacity,the greater its payout ratio,the less additional funds that will be needed for a particular growth in sales.
E) The projected balance sheet forecasting method produces accurate results when fixed assets are lumpy and when economies of scale are present.

Question

Quizplus · Accepted Answer

The first step in constructing a set of pro forma financial statements is to establish the sales forecast, as the forecasted sales will impact all other items on the statements. Option A is incorrect as the key step is to identify those assets and liabilities that increase with sales, not net income. Option C is incorrect as pro forma financial statements are used to forecast future performance, not assess historical performance. Option D is incorrect as the payout ratio is unrelated to a firm's capacity to generate additional funds for growth. Option E is incorrect as the projected balance sheet method is not specifically suited for lumpy assets or economies of scale.

Which of the Following Statements Is Correct