Financial Accounting Questions

Need help with my Accounting question – Im studying for my class.

Read the following excerpt from a complaint filed by the Securities and Exchange Commission against WorldCom (posted online at http://www.sec.gov/litigation/complaints/comp17829.htm (Links to an external site.)).

WorldCom
officers and employees fraudulently made and caused the making of false
and fictitious entries in WorldComs 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!

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
characteristics?

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?
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 years net income? What is the
effect of this accounting decision on the following years net income?
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.
not specified

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