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: D. Profit and assets are understated
- A. Profit and assets are overstated
- B. Profit is understated and assets are overstated
- C. Profit is overstated and assets are understated
- D. Profit and assets are understated
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.
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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.
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