CFA Practice Question

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CFA Practice Question

A pharmaceutical company has been very successful for the past several years, increasing its sales many-fold over that of its competition. It has been able to meet or beat analysts' optimistic quarterly earnings estimates and consistently registers very high sales towards the end of each quarter. Most of the company's sales are to two of its major wholesalers. The firm covers the carrying costs for these two wholesalers and guarantees them a return on investment until the wholesalers sell the products.

Which of the three risk factors related to fraudulent financial reporting would best explain the behavior of this company?

A. Opportunities
B. Incentives/Pressures
C. Attitudes/Rationalizations
Correct Answer: B

The company is recognizing revenue for sales on shipment while the risks and rewards of ownership have not yet been transferred to the wholesalers. The motivation behind the activity is most likely the pressure to meet the expectations of investment analysts for ever-increasing sales growth forecasts.

User Contributed Comments 3

User Comment
Safiya921 High sales towards the end of the quarter indicate a red flag of being pressured into achieving certain targets/ expectations set by management.
The company did not make use of certain chances, nor did it explain certain behaviors by the sales team. So answers A & C are incorrect.
lux240392 thank you :)
kingirm where all these are written ?
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