Hi all, I’m not sure about the answer given so I thought i’d see if anyone could help… Q. 20 (pg 95, vol 3, CFAI) If a company reported ficititious revenue, it would most likely try to cover up its fraud by A. decreasing assets. B. increasing liabilities. C. creating a fictitious asset. D. creating a fictitious liability. Thanks!
B. Accruals are easily manipulated
Could it not also create a fictitious asset?
C how could it be B - two credits ??
c
Well the answer is C but I’m not sure why…would D - creating a fictitious liability, not offset the revenue, therefore covering it up?!?
Why would you try to cover up fictitious revenue by creating a matching fictitious liability (not equity)? You are trying to say your company is healthier than it actually is to inflate stock prrice or some other nefarious thing. Creating a fictitious debt doesn’t do that.
I see, I assumed that the fictitious revenue was actually an error (which would be fraudulent) rather than an intended deceitful act…
fictitious revenue increases equity, therefore you have two options, Decease liability or increase assets according to accouting equation. therefore, a is wrong, b is wrong, d is wrong becuase revenues are always offset by an account in the asset side. So the correct answer is C
Ah, show them where in ambush stand To seize their prey the murtherous band…
As RIGWDL3 pointed out, at the end of the day your blance sheet has to balance. Since revenue ie recognized with a credit, you need an offsetting debit. C is correct, and is basically creating phoney accounts receivable from revenue that never occured. The other possibility is to falsely accelerate revenue recognition, which can happen if you have unearned revenue (a liability), and take it into income by debiting it when you have not yet met the revenue recognition requiremnts (ie delivery of goods services to customer)
I agree with Super I. Some companies have shipped out un-ordered finished goods along with a bill to customers at the end of reporting periods. They then book fictitious revenue and COGS which boosts profit. They balance the balance sheet with a fictitious debit to A/R and credit to inventory.
For example, Shipping goods to a rented warehouse and recording a transaction as sold goods. Balance sheet and income statement effects -> Receivables up and Sales revenue, Inventories down and COGS. So, the correct answer is c) creating a fictitious asset (trade receivable). This is just a simple example p.s. I think that the example above is from Schilit’s book “Financial Shenanigans” Milos
Do people go to jail for that stuff?