What is round-tripping and how can it distort financial results?

• A. A tax avoidance scheme using intra-company transfers.
• B. A cycle of related-party sales and repurchases to inflate reported revenue or assets.
• C. A legitimate method of securing financing by reselling assets.
• D. A process of normalizing revenue recognition across periods.

Answer: (B)

Round-tripping is a cycle of related-party sales and repurchases designed to inflate reported revenue or assets without real economic value being created. In this pattern, a company sells an asset or service to a related party, records revenue, and then that related party repurchases or returns the asset, making it look as if more activity or higher asset levels occurred than actually happened. The result is distorted financial results: revenue looks higher than genuine operations support, and asset balances appear inflated, which can temporarily boost earnings, margins, and key ratios even though the underlying business hasn’t gained real value. This can mislead investors and lenders about growth, profitability, and liquidity, and may later require restatements or lead to regulatory scrutiny.

The other descriptions don’t fit because they describe legitimate financing or tax strategies or standard revenue recognition practices, which don’t involve cycling transactions between related parties to create fake revenue or inflated assets.