Which of the following is not a fraud method to overstate revenues?

• A. Recording future sales in the current period
• B. Recording sales of products that are out on consignment
• C. Recording sales based on F.O.B. shipping point
• D. Recording revenues of other companies by acting as a middleman

Answer: (C)

Revenue recognition timing and when control passes to the buyer is what this item tests. Booking future sales in the current period inflates revenue before it’s earned, since those sales haven’t actually occurred yet. Recording sales of products you don’t own or don’t have the right to sell—such as goods out on consignment—also inflates revenue because the seller hasn’t yet transferred ownership or the right to a sale. Similarly, recording revenues of other companies by acting as a middleman creates artificial or phantom revenue.

The method described as FOB shipping point is not by itself a fraud about overstatement. Under FOB shipping point, revenue is recognized when the goods are shipped and the buyer assumes control and risks, which is a legitimate basis for recognizing revenue if that transfer of control has actually occurred. It only becomes problematic if the terms are misrepresented or control hasn’t truly passed, but as stated it is not inherently a fraudulent method to inflate revenue.