Question

Executives at ABC, Inc. Committed an $11 billion fraud by capitalizing costs that should have been expensed. The fraud had several effects on the ABC, Inc. Balance sheet. Which of the following DOES NOT describe one of the misstatements that resulted on ABC, Inc’s balance sheet?

A. ABC, Inc’s total assets were too high

B. ABC, Inc’s retained earnings were too high

C. The ABC Inc balance sheet was in balance

D. ABC Inc total liabilities were too low

Answer 1

Answer:

Option D i.e. ABC Inc Total Liabilities were too low.

The fraud of Capitalizing costs which should be recorded as Expenses would have effect of the following:

• The Total Assets would be too high, as the Capitalization of Cost would increase the value of Fixed Assets where the cost is capitalized;
• The Expenses will be too, which will result in lesser Net Income which inturn would reduce Retained Earning at the end of the year;
• The Balance will be in equal, as each transaction has dual effect. The Assets will be increased and the Retained Earning will also be increased, making the Balance in balance.
• Capitalization of costs would not decrease the Liabilities.