Financial Accounting Questions

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Read the following excerpt from a complaint filed by the Securities and Exchange Commission against WorldCom (posted online at (Links to an external site.)).

officers and employees fraudulently made and caused the making of false
and fictitious entries in WorldCom’s general ledger which effectively
“transferred” a significant portion of its line cost expenses to a
variety of capital asset accounts, thereby effectively recharacterizing,
without any supporting documentation, and in a manner inconsistent with
GAAP, the operating expenses it had incurred for access to third party
networks as “assets.”

Post your answers to the following questions as a
response to this post. Please give this some thought! I look forward to
hearing your ideas and opinions on this case!

  1. When a company
    incurs a cost, its accountants have to decide whether to record the cost
    as an asset or expense. When costs are recorded as an asset, they are
    said to be capitalized. This builds on ideas first presented in Chapter 2,
    where you learned that it was appropriate to record costs as assets,
    provided that they possess certain characteristics. What are those
  2. Some
    authors claim that even with clear rules like those referenced in
    question 1 above, accounting still allows managers to use “tricks” like capitalizing expenses. What do you suppose is meant by the expression “capitalizing expenses”?
  3. Suppose
    that, in the current year, a company inappropriately records a cost as
    an asset when it should be recorded as an expense. What is the effect of
    this accounting decision on the current year’s net income? What is the
    effect of this accounting decision on the following year’s net income?
  4. Do
    you think it is always easy and straightforward to determine whether
    costs should be capitalized or expensed? Do you think it is always easy
    and straightforward to determine whether a manager is acting ethically
    or unethically? Give examples to illustrate your views.

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