Which of the following, if true, strengthens the case that Streeter &

QUESTION

Which of the following, if true, strengthens the case that Streeter & Sons is profitable?

A) The company’s sales revenue is low relative to its cost of goods sold.
B) The company’s cost of goods sold is low relative to its sales revenue.
C) The company has had the same number of customers for some time.
D) The company has had the same owners over its lifetime.
E) The company’s selling expenses are high relative to its administrative expenses.

ANSWER

Answer: B
Explanation: B) If the company’s cost of goods sold is low relative to its sales revenue, this makes it likely that the company is profitable. By the same token, low sales revenue relative to the cost of goods sold (Choice B) decreases the probability that it is profitable. Maintaining the same number of customers (Choice C) and having the same owners over time (Choice D) may or may not affect whether the company is profitable. It’s not clear what effect on net income would result from the relationship of the company’s selling expenses to its administrative expenses (Choice E), lacking data on sales revenue and cost of goods sold.