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# V04-16

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Math Expert
Joined: 02 Sep 2009
Posts: 47918

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16 Sep 2014, 02:01
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Difficulty:

45% (medium)

Question Stats:

67% (01:29) correct 33% (01:15) wrong based on 36 sessions

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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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Joined: 02 Sep 2009
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16 Sep 2014, 02:01
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.

Situation:Mark-to-market accounting can be used to make a company’s profits seem larger than its cash flow; it is especially common in large corporations in the utility and energy sectors.

Reasoning: Which conclusion can be drawn from information in the passage? Mark-to-market accounting is a bookkeeping technique that opens up the possibility that annual revenue will seem larger than actual cash flow, making a company seem more profitable than it actually is. In order to calculate that actual net worth of a company, then, information in addition to annual revenue figures, such as the company’s tax return or expenditures statements, will be necessary.
1. The passage does not suggest that executives routinely exaggerate the net worth of companies.
2. Mark-to-market accounting may be used frequently, but the passage does not state it is a necessity.
3. The words all dishonest and seek to deceive take a strong position not suggested by the passage.
4. If annual revenue figures of companies that use mark-to-market accounting can make the company seem more profitable than it actually is, then other information will be needed to determine its actual net gain.
5. This is not supported by the passage.

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30 Jan 2018, 21:38
Team/Expert,

Answer choice D is the correct answer. I am trying to understand where it is mentioned or where argument seeks to explain some one on profit , or to stakeholders. Choice E was my answer to conclude since if technique is followed by large sector companies then they will eventually fall accordingly.

Thanks - AN
Re: V04-16 &nbs [#permalink] 30 Jan 2018, 21:38
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# V04-16

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