A company records the purchase of a machine as an expense instead of as a non-current asset. What is the immediate effect, ignoring depreciation?
Correct answer: B. Profit and assets are understated
- A. Profit and assets are overstated
- B. Profit and assets are understated
- C. Profit is overstated and assets are understated
- D. Profit is understated and assets are overstated
Explanation
A machine purchase is capital expenditure and should be recognised as an asset. Recording it as an expense makes current profit and reported assets lower than they should be.
Last updated
About Financial Statements
Financial statements present a business's financial performance and position through the income statement, statement of financial position, cash flow statement and changes in equity. Questions involve preparing and interpreting these statements, adjusting entries, depreciation, closing inventory, accrued and prepaid items, and distinguishing profit from cash flow.
Practise Financial Statements
50 free Financial Statements MCQs from Accounting, each with the correct answer and an explanation. Unlimited attempts, no account needed.
Exams that ask Accounting questions like this
Accounting is on this paper prepared for on TestUstad, and all of them draw the same bank, so this question is worth knowing for it.
Related questions
A bank loan is repayable in 18 months from the reporting date. How is the unpaid loan normally classified in the statement of financial position?
A business begins the year with cash of Rs. 75,000. During the year, operating activities provide Rs. 55,000, investing activities use Rs. 40,000 and financing activities provide Rs. 20,000. What is the closing cash balance?
A business earns revenue of Rs. 800,000, incurs cost of goods sold of Rs. 500,000 and operating expenses of Rs. 180,000. What is its operating profit before tax?
A business has current assets of Rs. 240,000 and current liabilities of Rs. 160,000. What is its current ratio?
A business has opening inventory of Rs. 40,000, purchases of Rs. 150,000 and closing inventory of Rs. 30,000. What is its cost of goods sold?