In finance, the term round tripping denotes the practice of performing transactions between two or more companies for the sole purpose of boosting income flows. As it implies, round tripping involves transferring assets out of a company, while simultaneously having those assets returned to the same company.
Example: Candy Wholesaler 1 makes an agreement with Candy Wholesaler 2 by which it will sell 100 pallets of chocolate to Candy Wholesaler 2 for 100,000 Swiss francs. Candy Wholesaler 1, for its part, agrees to buy 100 pallets of chocolate from Candy Wholesaler 2 for 100,000 Swiss francs. Both companies record 100,000 francs of sales.
The above example shows that while round tripping generates sales for accounting purposes, it does not create any new value. The assets of both companies essentially remain the same.
Round tripping is generally considered an accounting malpractice because it enables companies to artificially boost sales and income on their accounts. Companies which engage in round tripping can mislead investors by misrepresenting their return on equity (ROE), their notes receivable, their cost of goods sold (COGS) and many other fundamentals.
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