Series 79 practice questionmediumFinancial due diligence – revenue recognition
Financial due diligence discovers the target recognizes revenue upon shipment, not delivery, despite most customers returning merchandise after delivery. What is the PRIMARY risk?
- AOverstated revenue and earnings✓ Correct answer
- BUnderstated inventory levels
- CIncreased cash flow
- DReduced accounts payable
Explanation
Why A — Overstated revenue and earnings
Recognizing revenue upon shipment may overstate revenue and earnings if significant returns occur. It does not increase cash flow or impact payables, and inventory impacts are indirect.
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