What effect would the improper recording of an expenditure as a capitalized asset have on the financial statements?

What effect would the improper recording of an expenditure as a capitalized asset have on the financial statements?

• A. Net Income Would Be Falsely Understated, Lowering the Company's Tax Liability
• B. Expenses Would Be Overstated, Giving the Appearance of Poor Financial Performance
• C. Assets Would Be Falsely Overstated, Giving the Appearance of a Stronger Company
• D. None of the Above

Answer: (C)

Capitalizing an expenditure that should be expensed records the cost as a long‑term asset instead of a current period expense. This increases assets on the balance sheet while reducing the expenses shown in the income statement, so net income would be higher than it should be. The most direct and accurate consequence described is that assets would be falsely overstated, giving the appearance of a stronger company. The other statements don’t fit: expenses wouldn’t be overstated (they’d be understated), and net income would not be understated (it would be overstated).

Capitalizing an expenditure that should be expensed records the cost as a long‑term asset instead of a current period expense. This increases assets on the balance sheet while reducing the expenses shown in the income statement, so net income would be higher than it should be. The most direct and accurate consequence described is that assets would be falsely overstated, giving the appearance of a stronger company. The other statements don’t fit: expenses wouldn’t be overstated (they’d be understated), and net income would not be understated (it would be overstated).