Question

2.2 A well-known accounting malpractice is to book expenses as investment. An example was WorldCom, which tried to book "line costs" (interconnection expenses with other telecommunication companies) as capital expenditures instead of expenses.

(i) If Prufrock, of the Chapter 3 spreadsheet, incurs $50 million of expenses in 2009, then how do the financial statements change? How do the Profit Margin, ROE, ROA change?

(ii) If Prufrock allocates this a capital expenditure, how does the balance sheet change? How do the Profit Margin, ROE, ROA change?

(iii) Does the firm look better under (i) or (ii)?

Answer 1

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