Question

Which method of analytical procedure analysis is most useful because many expenses, such as cost of goods sold, might be expected to bear a predictable relationship to net sales?

a) horizontal analysis
b) reasonableness analysis
c) trend analysis
d) vertical analysis

Answer 1

Vertical analysis is the most useful analytical procedure when expenses are expected to have a predictable relationship with net sales because it compares expenses to net sales as percentages. Option D.

Step-by-step explanation:

The method of analytical procedure analysis that is most useful when expenses such as the cost of goods sold are expected to bear a predictable relationship to net sales is d) vertical analysis.

Vertical analysis allows you to look at each expense as a percentage of net sales, making it possible to compare expenses and income statements over different periods and assess trends and patterns.

This is particularly useful when you consider that certain costs, despite their numerical fluctuations, have general patterns and predictable relationships with net sales, as reflected in average cost, average variable cost, and marginal cost metrics.

Hence, the right answer is option D.