Final answer:
The answer is True. The percent-of-sales method is more accurate under a steady sales assumption because it assumes that sales will remain relatively constant over time. When sales are steady, it is easier to predict and estimate expenses and profits based on a consistent percentage of sales.
Step-by-step explanation:
The percent-of-sales method is a technique used in financial analysis to estimate future financial performance based on a company's historical sales data. It calculates various financial metrics, such as expenses and profits, as a percentage of sales. In this case, the question is asking whether the percent-of-sales method would be more accurate under a steady sales assumption or with cyclical sales.
The answer is True. The percent-of-sales method is more accurate under a steady sales assumption because it assumes that sales will remain relatively constant over time. When sales are steady, it is easier to predict and estimate expenses and profits based on a consistent percentage of sales.
On the other hand, when sales are cyclical and fluctuate a lot, it becomes more challenging to accurately estimate future financial performance using the percent-of-sales method.
For example, let's consider a company that experiences steady sales growth of 5% each year. If their expenses and profits have historically been 80% and 20% of sales respectively, the percent-of-sales method would provide a reasonably accurate estimate of future expenses and profits.
However, if the company's sales fluctuate significantly from year to year, such as experiencing a 10% growth in one year and a 2% decline in the next, using the percent-of-sales method may lead to less accurate predictions.