(CMA adapted, Dec 87 #1) When a balance sheet amount is related to an income statement amount in computing a ratio,
A)the balance sheet amount should be converted to an average for the year.
B)the income statement amount should be converted to an average for the year.
C)both amounts should be converted to market value.
D)the ratio loses its historical perspective because a beginning-of-the-year amount is combined with an end-of-the-year amount.
E)none of the above.

Question

Quizplus · Accepted Answer

When computing a ratio that involves both a balance sheet amount and an income statement amount, the balance sheet amount should be converted to an average for the year. This is because the income statement amount represents a period of time (usually one year), while the balance sheet amount represents a specific point in time (usually the end of the year). By averaging the balance sheet amount over the entire year, the ratio becomes more meaningful and avoids the problem of using a point-in-time measurement with a period-of-time measurement. Converting both amounts to market value is not necessary in this situation. The ratio will still provide historical perspective as long as both amounts are from the same period (e.g., both from the end of the year).

(CMA Adapted, Dec 87 #1) When a Balance Sheet Amount