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

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

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New post 19 Jan 2016, 15:18
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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.

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.

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.

C.Executives of these companies are all dishonest and seek to deceive shareholders

D.Information in addition to quoted annual revenue figures is needed in order to tell how profitable a company really is.

E.These companies will eventually collapse when the difference between reported annual revenue and cash flow has grown too great
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Re: Mark-to-market accounting, a bookkeeping technique by which estimated  [#permalink]

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New post 20 Jan 2016, 06:10
kanigmat011 wrote:
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.

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.

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.

C.Executives of these companies are all dishonest and seek to deceive shareholders

D.Information in addition to quoted annual revenue figures is needed in order to tell how profitable a company really is.

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




IMO: D

Information in addition to quoted annual revenue figures is needed in order to tell how profitable a company really is.
We need to check the actual cash flow to verify the actual profitability of the company.
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Re: Mark-to-market accounting, a bookkeeping technique by which estimated  [#permalink]

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New post 23 Jan 2016, 10:12
kanigmat011 wrote:
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.

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.

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.

C.Executives of these companies are all dishonest and seek to deceive shareholders

D.Information in addition to quoted annual revenue figures is needed in order to tell how profitable a company really is.

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


As per the bookkeeping technique , A deal of $100 is signed today and annual revenue is shown $100.
May be the company has lost market share today and its original annual revenue is $20 where as cost is $30. So, there is a $10 loss to the company that is shadowed by the deal. Investors will only know the net worth of company is $100. They will get this $100 several years later when their product is ready and delivered. but no way the investors know it.
if the investor to know the real picture he has to get additional information about current loss of the company.
Hence option D is Correct.
It says - Information in addition to quoted annual revenue figures is needed to get the real picture of the performance of the company
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Re: Mark-to-market accounting, a bookkeeping technique by which estimated  [#permalink]

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New post 24 Jan 2016, 00:28
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]

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New post 22 Sep 2018, 00:44
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 &nbs [#permalink] 22 Sep 2018, 00:44
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