Critical Reasoning

Mark-to-market accounting, a bookkeeping technique by which estimated future revenue is counted as money in hand, can be used to make a company appear more profitable. This is especially true for large corporations in the utility and energy sectors, where multi-million dollar contracts are often signed for services that will not be delivered for several years. Corporate executives are then able to quote large annual revenue figures to stockholders, even when actual cash flow is almost nonexistent.

Based on the information above, which of the following could most properly be concluded about companies that use mark-to-market accounting?

A. Executives routinely exaggerate the net worth of these companies by millions of dollars a year.
B. Mark-to-market accounting, though dangerous, is a necessity in corporations which contract for services that will not be delivered until a later date.
C. Executives of these companies are all dishonest and seek to deceive shareholders.
D. Information in addition to quoted annual revenue figures is needed in order to tell how profitable a company really is.
E. These companies will eventually collapse when the difference between reported annual revenue and cash flow has grown too great.

This question is a little sloppy and includes omissions and other issues. At the same time, there are some key things to be learned from it, and one can work one's way to the OA.

The first thing to do here is notice what the prompt is and is not saying.

The prompt is saying that mark to market accounting is used by corporations that have estimated future revenues, such as those from signed contracts for services not yet delivered or paid for.

The prompt also says that mark to market accounting can be used to make a company appear "more profitable". The prompt neglects to say what the companies are more profitable than, but I guess maybe we can fill in, "than they would otherwise seem" or "than they really are".

In any case, what is also key is noticing that while the prompt says that executives can use mark to market accounting in various ways, the prompt does not say that executives actually do this or give any indication of what proportion of executive do this.

So let's see which of the answer choices makes sense.

A) While in a way this seems to be the case from the tone of the prompt, the prompt does not actually say that executives actually exaggerate. This is a classic GMAT trick answer, one that seems to say something that can be inferred from the prompt but that does not really.

B) The prompt seems to indicate that mark to market accounting is dangerous, but it does not show that it is necessary.

C) The prompt does not actually say what this trick answer says either.

D) While the wording of the prompt could be better and what the prompt says clearer, what D says seems to be a conclusion that is supported by the prompt. If mark to market accounting can be used to show revenue the existence of which is not a solid indication of the actual profitability of a company, which idea is what I guess the prompt is conveying, then in order to really tell how profitable a company is one would need information in addition to quoted revenue figures.

E) The prompt gives no indication that the companies will collapse. This answer might "sound right", but choosing "sounds right" answer choices is not really the way to CR success.

So D is the best answer.