When preparing pro forma income statements which

Ans:B.
Interest expense is considered a fixed burden and a function of a firm’s capital structure, not sales.
A is incorrect. Current assets are normally a sales driven account.
C is incorrect. Administrative expenses, although they may contain fixed costs, are primarily sales driven.
14. Which of the following pairs of general categories are least likely to be considered in the formulas used by credit rating agencies to determine the capacity of a borrower to repay a debt?
A. Operational efficiency; leverage.
B. Margin stability, availability of collateral.
C. Leverage; scale and diversification.
Ans: B.
The four general categories are:
(1) scale and diversification,
(2) operational efficiency,
(3) margin stability, and
(4) leverage. Larger companies and those with more different product lines and greater geographic diversification are better credit risks. High operating efficiency indicative of a better credit risk. Stable profit margins indicate a higher probability of repayment and thus, a better credit risk. Firms with greater earning in relation to their debt level are better credit risks. While the availability of collateral certainly reduces lender risk, it is not one of the general categories used by credit rating agencies to determine capacity to repay.
Specifically, they would consider
(1) several specific accounting ratios and
(2) business characteristics. The availably of collateral falls into neither category.