Ethical Accounting – Organizational Ethics and Corporate Governance (C03) Practice Test

Revenue overstatement happens when the amount reported as revenue is higher than what was actually earned. Recording gross revenue instead of net revenue does this clearly because it ignores reductions that will ultimately come out of that revenue, like sales returns, allowances, and discounts. By presenting revenue in a gross form, the company makes the top line look bigger than the net amount it realistically expects to keep, which distorts profitability and financial performance.

Other options don’t fit as examples of overstatement in the revenue line. Manipulating reserves affects assets, liabilities, or expenses to manage earnings but doesn’t directly inflate revenue. Recording cost of sales as a non-operating expense misclassifies expenses rather than inflating revenue. Deferring revenue delays recognition to a later period, which lowers current period revenue instead of increasing it.