If a Company Capitalizes a Cost That Should Have Been

question 135

Multiple Choice

If a company capitalizes a cost that should have been expensed:

• A)expenses and net income will be overstated in the year of the error.
• B)expenses and net income will be understated in the year of the error.
• C)expenses will be overstated and net income will be understated in the year of the error.
• D)expenses will be understated and net income will be overstated in the year of the error.

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Definitions:

Net Present Value (NPV)

A method used to evaluate the attractiveness of an investment opportunity, calculating the difference between the present value of cash inflows and the present value of cash outflows.

Cash Flows

The cumulative amount of capital moving into and leaving a company, impacting its liquidity.

Internal Rate of Return (IRR)

The discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero, used to assess the profitability of potential investments.

Mutually Exclusive Projects

Investment opportunities where the acceptance of one project prevents the acceptance of another, requiring a choice to be made based on potential returns.