If a company recognizes revenue faster than justified, which of the following best describes whether accounts receivable, inventory, and retained earnings are overstated or understated? ----Accounts Receivable --Inventory ---------Retained Earnings A. -Overstated -------------Overstated -------Overstated B. -Overstated -------------Understated -----Overstated C. -Understated -----------Understated -----Overstated D. -Understated -----------Understated -----Understated Pleae explain why, thanks
i’d go for C
B) sales are higher, cogs are also higher to match sales (so inv understated), and RE overstated
actually © the higher sales from “stuffing the channel” will lower A/R, all else above the same
I would say B
Hmmm FETCH DOG, FETCH!:)) I would say B. Here is what I think: if revenue is recognized faster than it should be, it artificially increases accounts receivable, you recognize the fact that customers have to give you the revenue faster. since they did not paid yet, it would increase AR. Now, when you don’t recognize revenue, all you produce sits in your inventory account, as an ongoing production (like construction in progress under construction contracts with completed method). But, if you recognized revenue, then the COGS is recognized as well, so your inventory would be lower/understated. Recognize revenue sooner, have NI higher, have sooner RE, therefore higher/overstated equity.
B. -Overstated -------------Understated -----Overstated too many sales (revenue) too much inventory gone (sales overstated) too much RE
so how is Portfolio? how off were we?
you don’t have to ask me, my topic is map1, come here, that means your answer is the correct answer. Thanks again
I don’t always have the answer:)