Question

Capitalizing costs that should be expensed: a. is a practice mostly found in large, well-established companies. b. is a healthy practice if they written off shortly after the transaction takes place. c. usually has no effect on net income. d. has the effect of increasing net income by the same amount of the capitalized costs.

Answer 1

Option D. Has the effect of increasing net income by the same amount of the capitalized costs.

Step-by-step explanation:

The reason is that the capitalized costs are the invesments in any assets whose useful life is more than one year and must be depreciated over useful life of the assets. If a expense nature cost is capitalized which must not be capitalized according to IAS 16 Porperty, Plant & Equipment then the expenses are understated which means that the profits are overstated. This means that presenting expenses as assets will increase the profits as costs will be fewer in amount presented in the financial statements.