Company is attempting to make itself look more profitable. To accomplish this, the company is most likely to: A) overstate equity. B) overstate sales. C) understate assets.
would go with C because this way ROA will be higher. A and B would make ROE and Profit Margins lower.
B
i would say c so that return ratios look better a would hurt roe b would hurt profit margins
B because overstating sales but keeping all other fixed costs equal would simply flow through to the bottom line. if SG&A doesnt change, interest payments dont change, and they can hide variable costs, only taxes would increase but they would be better off on a bottom line prospective by what flows through*(1-t). turnover ratios would be higher, ending equity would be higher etc etc etc
Correct answer is C. kh.asif & imcrnhlio1 gave the correct reasoning.
Got it, they meant “profitable” , has to imply inflating “profitability ratios” and increasing sales or equity wouldn’t do it. I had chosen A 
Thanks.
doesnt answer C related to asset utilization ratios, not profitability ratios?
CPAbeatsCFA Wrote: ------------------------------------------------------- > doesnt answer C related to asset utilization > ratios, not profitability ratios? net income / assets — if you understate assets ratio goes up.
if you overstate sales, NI goes up, as does that very same ratio so you’re saying understating assets to overstate profitability at the expense of leverage is better than just inflating sales? IMO, in the real world overstating sales has less negative effects on a company than understating assets. Isnt this why companies move liabilites off the balance sheet to reduce their leverage. So reducing assets would increase it…
If you overstate Sales to increase your NI, your NI increases in proportion to your Net Profit Margin, right? And your Net Profit Margin still remains the same, unless you manipulate your expenses too. Whereas understating your assets to get same Sales and NI, increases your Asset turnover and asset efficiency and increases your profitability ratios like ROE and ROA. Also, reducing assets does not necessarily mean, reducing or increasing leverage. If with reduction in assets, you reduce liability, then Leverage would decrease. And if with reduction in Assets, you reduce Equity, then Leverage would increase.
Overstating your sales increases your “profits”, not the “profitability” … the way I (now) see it. So the answer C seems acceptable.
B
… B is definitely not the answer to this question! I was quick to jump to that option too, but on careful analysis the only correct answer is C. When you choose B, you supported it with other assumptions not in the question, that is the “danger”. B in itself is not correct to increase profit or profitability except some other costs remain constant. this fact is not in this question! Growing Sales does not mean increasing profit, guys beware. But C is just enough to make a company look more profitable!!! Please lets take time to read questions twice, we are all very knowledgeable on this matter. This is a tricky question.
this question is crazy tricky. understating assets implies some kind of impairment to understate them, which will reduce NI and make profitability look worse. you can make the argument either way
It always looks so easy.
CPAbeatsCFA Wrote: ------------------------------------------------------- > this question is crazy tricky. understating > assets implies some kind of impairment to > understate them, which will reduce NI and make > profitability look worse. > > you can make the argument either way Let me say again, do not “support” questions with assumptions not mentioned. Answer all questions with the facts or limited information provided. Understating Assets “implies” some kind of impairment??? are you sure? I know you understand perfectly the extent to which Leases could be reported off balance sheet to achieve increased profitability (now you are laughing)