Which of the following statements regarding horizontal analysis is incorrect?
A) Percentage analysis involves establishing the relationship of one amount to another.
B) A horizontal analysis of cost of goods sold on the income statement includes dividing net income by total revenue.
C) Percentage analysis attempts to eliminate the materiality problem of comparing firms of different sizes.
D) In doing horizontal analysis, an account is expressed as a percentage of the previous balance of the same account.

Question

Quizplus · Accepted Answer

Dividing net income by total revenue is not a method used in horizontal analysis of cost of goods sold on the income statement. Horizontal analysis looks at changes in amounts over time, not relationships between different items on the financial statements.

Which of the Following Statements Regarding Horizontal Analysis Is Incorrect