Question

In: Finance

Which of the following items does NOT have a constant relationship with sales in general when...

Which of the following items does NOT have a constant relationship with sales in general when we use the percent of sale method to construct pro forma financial statements?

Common stock

Inventory

Accounts receivables

Accounts payables

Solutions

Expert Solution

Incase if Percentage of Sale method is used for constructing the Proforma Financial Statements, the Operating aspects of the Income statement like variable costs etc shall be tagged to the % of the Sales. Also, the Receivables are anyway will have direct implications based on the sales numbers. Depending on the Variable cost requried for sales, the Accounts Payables shall have implication. And depending on the sales (no. of units etc), the value of inventory shall change accordingly.

Hence these current assets like Inventory, Accounts Receivable and Accounts payables are related to operations and shall have relationship with the sales in general as well as when used as a % based application;

Common Stock is purely related to the Equity of the Company and is no way have implications with increase/decrease of sales. This shall have impact only when there is any new issue of equity, buyback of share, rights issues etc.


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