Question

QUESTION 12 1. From among the following choices, identify those which are correct about operating expense percentage 1. It is a financial indicator over which management can exert significant control over the longer term. II. As management's control over operating expenses improves, business's operating expense percentage declines and cash flow improves. III. It is a financial indicator that is unaffected by changes in the competitive environment 1. It is a risk (cash) driver over which management typically has little innuence. a. I and II only. b. I and III only. c. II and III only. d. III and IV only.

Answer 1

Answer - Option (A ) I and II only because of following reasons.

The operating ratio shows the efficiency of a company's management by comparing the total operating expense (OPEX) of a company to net sales. The operating ratio shows how efficient a company's management is at keeping costs low while generating revenue or sales. The smaller the ratio, the more efficient the company is at generating revenue versus total expenses.

In the Long run company may have significant control over Operating expenses by managing efficiently.  

Secondly.,

An operating ratio that is decreasing is viewed as a positive sign, as it indicates that operating expenses are becoming an increasingly smaller percentage of net sales. A company may need to implement cost controls for margin improvement if its operating ratio is increasing over time.

This in turn helps in increasing cashflow of the management.