Question

Which of the following is an example of fraudulent financial reporting?

a. Company management changes inventory count tags and overstates ending inventory, while understating cost of goods sold.
b. The treasurer diverts customer payments to his personal due, concealing his actions by debiting an expense account, thus overstating expenses.
c. An employee steals inventory and the "shrinkage" is recorded in cost of goods sold.
d. An employee steals small tools from the company and neglects to return them; the cost is reported as a miscellaneous operating expense.

Answer 1

Answer: a. Company management changes inventory count tags and overstates ending inventory, while understating cost of goods sold.

Step-by-step explanation:

Answer 2

Fraudulent financial reporting is exemplified by manipulating inventory counts to overstate assets and understate expenses, misrepresenting the firm's financial health.

Step-by-step explanation:

An example of fraudulent financial reporting is when company management changes inventory count tags and overstates ending inventory, while understating cost of goods sold.

This act intentionally misrepresents the financial condition of the company to stakeholders such as investors, creditors, or regulators, making it appear more profitable or financially sound than it truly is. This kind of fraud negatively impacts decision making based on the entity's reported financial results.

Company management changes inventory count tags and overstates ending inventory, while understating cost of goods sold. This is a form of financial statement fraud, where the management manipulates financial information to deceive stakeholders about the company's financial performance.