Fraud has a direct dollar for dollar impact on a company's:

Question

a. Revenues.
b. Net income.
c. Profit margin.
d. Stock price.

Answer 1

b
FEEDBACK: a. Incorrect. Fraud does not have a $ for $ impact on revenues. It takes significantly more revenues to cover the effect of the fraud on net income. Because revenues don't include the business costs, and the fraud directly hits the bottom line, ultimately, the fraud is much more expensive than it sounds.
b. Correct.
c. Incorrect. The profit margin is a percentage. It really tells the company how much revenue the company must generate to recover the fraud losses. For example, if the company has a 10% profit margin, and the fraud cost $436 million, the company would have to generate $4.36 billion or (436 million/.1) to recover the costs of the fraud.
d. Incorrect. The stock price literally cannot drop by the amount of the fraud. If price per share was $5 and the fraud was $100,000, then stock price could not drop below $0 . However, if the fraud is $100,000, the price per share multiplied by the # of shares outstanding will probably drop considerably more than $100,000.