Question

Which of the following is an example of fraudulent financial reporting?

1) Unauthorized discounts or refunds to customers
2) Capitalizing items that should be expensed
3) Writing checks to fictitious vendors
4) Using a company credit card for personal use

Answer 1

Capitalizing items that should be expensed is an example of fraudulent financial reporting, where companies misrepresent their financial position by improperly deferring expenses to inflate profits.

Step-by-step explanation:

An example of fraudulent financial reporting is capitalizing items that should be expensed. This is a misrepresentation of a company's financial condition by improperly delaying the recognition of expenses in order to show higher profits in the short term. Capitalizing expenses that should be recognized immediately as costs of operation can inflate a company's assets and equity, as well as understate its current expenses, presenting a deceitfully positive financial position to investors, analysts, and other stakeholders. This behavior is not only unethical, but also illegal and can lead to serious consequences for those involved, including financial penalties and criminal charges.