Question

Managing a specific financial ratio is tremendously important to the company's profitability. As a result, management and outside analysts pay close attention to this ratio and its trends. This company's reported quarterly ratio hovered within an incredibly narrow range, even though the period was an extremely volatile time for the industry. a. Good business practice b. Perfectly ethical, but raises a red flag c. Improper, but not fraudulent d. Improper and a possible indicator of fraud e. Fraudulent accounting

Answer 1

Answer:

Correct answer is:

b. Perfectly ethical, but raises a red flag

Explanation:

It is good business practice to report ratios quarterly. It is better to generate, analyze and report ratios quarterly so that the stakeholders can review. It is perfectly ethical. However, reported quarterly ratio hovering in an incredibly narrow range in a period which extremely volatile for industry, will be viewed with suspicion that the statements may not represent the operations fairly. This will lack credibility.

As such option b is correct.

Option a is also correct but option b is more appropriate.

Options c and d are incorrect since the practice is not improper.

Option e is also incorrect since, although it raises red flag, it need not necessarily be fraudulent accounting.