Question

Provide your evaluation based on the​ common-size income​ statements: ​ (Select all the choices that​ apply.) A. Operating expenses have decreased as a percentage of​ sales; this appears favorable unless this decline has contributed toward the fall in sales. B. The level of interest as a percentage of sales has increased​ significantly; this suggests that the firm has too much debt. C. Sales have declined and cost of goods sold has increased as a percentage of​ sales, probably due to a loss of productive efficiency. D. Selling expense has increased due to the increase in cost of goods sold. E. Further analysis should be directed at the increased cost of goods sold and the high debt level.

Answer 1

Answer:

The choices that apply as common-size income​ statements are options

A. Operating expenses have decreased as a percentage of​ sales; this appears favorable unless this decline has contributed toward the fall in sales

B. The level of interest as a percentage of sales has increased​ significantly; this suggests that the firm has too much debt.

C. Sales have declined and cost of goods sold has increased as a percentage of​ sales, probably due to a loss of productive efficiency.

Explanation:

A) when operating expenses are minimized, profit is maximized but if there is decrease in sales as a result of reduction in operating expenses, loss is inevitable.

B) When a business is funded with a loan facility, there is a projection on the sales or sales forecast that will generate funds for loan repayment and still make the business profitable. If that sales level is not met the debt level will increase.

C) When sales decline in the face of constant operating expenses, costs of goods sold will increase, this is productive inefficiency and a business can not be sustained if this situation persists.