Question

How does Mr. blowhards scheme affect the amount of income that the company would otherwise report and its financial statements and how does the scheme of fact the companies balance sheet? Explain your answer.

Answer 1

Find the impact of the Mr.B's on financial statement:

Mr. Blowhard's scheme of capitalizing the line charges results in a decline in the operating expenses that will be charged to income statement.

By capitalizing the expense, only a smaller portion of the expense is charged to income statement instead of the entire expense being charged.

This in turn will increase the earnings before tax as income remains constant and operating expenses decline.

Consequently, the income statement will be incorrect. Further as the earnings after tax will be transferred to the retained Earnillng Account, its balance will also increase.

As a result, the balance sheet will show higer level of retained earnings. further a fictious asset by way of Line Charges to be caplitaized will appear on the asset side of balance sheet.