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# Mark-to-market accounting, a bookkeeping technique by which estimated

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Re: Mark-to-market accounting, a bookkeeping technique by which estimated [#permalink]
The argument states that even when actual cash flow is not there corporate executives are able to quote large annual revenue figures to stockholders. So this particular book keeping technique does not allow stockholders to judge the actual cash flow of the company. Hence the obvious conclusion is additional information is needed to judge how profitable a company is which leaves us with one answer choice that is "D".
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Re: Mark-to-market accounting, a bookkeeping technique by which estimated [#permalink]
Mark-to-market accounting, a bookkeeping technique by which estimated future revenue is counted as money in hand, can be used to make a company appear more profitable. This is especially true for large corporations in the utility and energy sectors, where multi-million dollar contracts are often signed for services that will not be delivered for several years. Corporate executives are then able to quote large annual revenue figures to stockholders, even when actual cash flow is almost nonexistent.

Key points:
Profit is the key word
M-to-M accounting is used make company appear more profitable.
It's a tool used by companies to mask their actual profit and quote a larger revenue figures to stockholders.
What can be concluded from the above information? Actual profit figure and fabricated profit figure are different.

Based on the information above, which of the following could most properly be concluded about companies that use mark-to-market accounting?

A.Executives routinely exaggerate the net worth of these companies by millions of dollars a year.
Explanation: We can infer this from the passage. Corporate executive do quote large annual revenue figures however we cannot determine if they are exaggerating or not. -INCORRECT

B.Mark-to-market accounting, though dangerous, is a necessity in corporations which contract for services that will not be delivered until a later date.
Explanation:

C.Executives of these companies are all dishonest and seek to deceive shareholders
Explanation: Too extreme! - INCORRECT

D.Information in addition to quoted annual revenue figures is needed in order to tell how profitable a company really is.
Explanation: Bingo! we need more information to determine profit since corporate executives quote large annual revenue even when the actual cash flow is non existent. -CORRECT

E.These companies will eventually collapse when the difference between reported annual revenue and cash flow has grown too great
Explanation: IRRELEVANT

Answer: D

Thank you
Arjun
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Re: Mark-to-market accounting, a bookkeeping technique by which estimated [#permalink]
­Considering option D as correct answer choice, Is using outside information allowed in this type of question as it asks for conclusion?
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Re: Mark-to-market accounting, a bookkeeping technique by which estimated [#permalink]
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Mauryashristi61 wrote:
­Considering option D as correct answer choice, Is using outside information allowed in this type of question as it asks for conclusion?

­No, we should be able to derive the correct answer choice from the given information. Only very basic knowledge of the world (e.g. dollars are a form of currency, trees are large plants, etc.) should be needed. In this case, D is directly inferable, even if we know nothing about accounting, profitability, etc. The text tells us that this method can make companies appear more profitable than they are, and that we may see high revenue figures even if a business is not making any cash. So we know that revenue figures alone don't give us enough information to determine profitability.

(If we got more into the real-world calculations, of course we'd also need to know about costs to determine profits. But I think the idea here is that even if you knew costs, this method would obscure the actual degree of revenue, so you still couldn't calculate actual profit.)
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Re: Mark-to-market accounting, a bookkeeping technique by which estimated [#permalink]
could i get an explaination for b. Why not b
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Re: Mark-to-market accounting, a bookkeeping technique by which estimated [#permalink]
Expert Reply
Anamika2004

We're looking for something that can be "properly concluded." In other words, we need an inference that can be proven true using only the info in the passage. B makes very specific and extreme claims that are not supported by the text. I can see why someone might find the method "dangerous," but we aren't qualified to judge that based on the given info. Same for "necessary." Why is it necessary? How do we know that it *must* be used in those cases?
Re: Mark-to-market accounting, a bookkeeping technique by which estimated [#permalink]
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