CFE – Financial Transactions and Fraud Schemes — Question 78

An analytical review reveals that XYZ Company's cost of goods sold has increased by 75% over the last year. However, its sales revenues have only increased by 25% during the same period. This situation MOST LIKELY indicates which of the following?

Answer options

• A. The company started recording warranty liabilities
• B. Inventory has been depleted by theft.
• C. There were many more sales returns this year than in the prior year.
• D. Sales were unusually poor this year compared to last year.

Correct answer: D

Explanation

The correct answer is D, as a significant increase in cost of goods sold without a proportional increase in sales revenue suggests that sales were not strong enough to cover the rising costs. Options A, B, and C do not directly address the imbalance between the increase in costs and sales revenue.