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

Question

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?

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.

hwgmat2015 · Answer

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.

tryambaks · Answer

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

AryamaDuttaSaikia · Answer

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".

ArjunJag1328 · Answer

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?

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

MS61 · Answer

Considering option D as correct answer choice, Is using outside information allowed in this type of question as it asks for conclusion?

DmitryFarberMPrep · Answer

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.)

Anamika2004 · Answer

could i get an explaination for b. Why not b

DmitryFarberMPrep · Answer

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?

shubhim20 · Answer

Hi  Bunuel   KarishmaB   MartyMurray  can you tell why E isn't correct?

Bunuel · Answer

Official Solution:

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.

General Approach

The general approach for GMAT critical reasoning questions is to understand the argument presented in the passage and then evaluate the answer choices in relation to the argument. In this case, the argument discusses the use of mark-to-market accounting, a technique that can inflate revenues and potentially give a misleading view of a company's profitability. After understanding this concept, we should check which answer choice best corroborates, or logically follows from, the information presented in the passage.

Correct Answer

Answer D (Information in addition to quoted annual revenue figures is needed in order to tell how profitable a company really is.) is correct. The passage argues that mark-to-market accounting can inflate revenue figures, thereby giving a misleading view of a company's profitability. This suggests that other information, beyond simply annual revenue figures, would be necessary to accurately determine a company's profitability.

Incorrect Answers

(A) Executives routinely exaggerate the net worth of these companies by millions of dollars a year. The passage does not support this statement. It explains that mark-to-market accounting can inflate revenue figures, but it never mentions anything about executives intentionally exaggerating a company's net worth.
 
(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. The passage doesn’t imply that mark-to-market accounting is a necessity. It simply states that it is a technique that can be used, especially by large corporations in the utilities and energy sectors.
 
(C) Executives of these companies are all dishonest and seek to deceive shareholders. This statement is too strong and not supported by the passage. While the passage suggests that mark-to-market accounting can give a misleading view of a company's profitability, it does not claim that all executives who use this technique are dishonest or deceptive.
 
(E) “These companies will eventually collapse when the difference between reported annual revenue and cash flow has grown too great. The passage does not make any predictions about companies collapsing due to discrepancies between reported annual revenue and cash flow. It simply states that mark-to-market accounting can inflate revenue figures.

Answer: D

KarishmaB · Answer

There is no reason to believe that they will collapse in the future. Whether they continue or collapse depends on their actual revenue and actual cost, not by the information they are reporting in the market and the form in which they are reporting it. The only thing is that the stockholders and investors need to be aware of mark-to-market being used to decide their investment strategy in the stocks of the company. Mark-to-market doesn't need to hurt the company's financial interests at all - if at all, it may help by artificially strengthening the stock. 
If the companies get the estimated profits, they may end up doing very well.

UnityBliss · Answer

As this is an "inference" and not hinted in the passage, how did you arrive at this conclusion. Why B is not the correct answer as it uses the same phrasing. If "necessity" is a very strong word, then is there a real answer?

DmitryFarberMPrep · Answer

An inference is something we can actually prove using the information in the passage. B cannot be proven. In fact, it's not supported at all. We're just told that m-to-m can have a deceptive effect. That doesn't tell us that it must be used. We don't even know what the alternatives are.

D, on the other hand, is provable. If revenue data can make a company look more profitable than it is, then we must not be able to tell profitability just from revenue data. Therefore, more information is needed to determine profitability.

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

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

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