Question

In the context of identifying fraud, which of the following describes capitalizing items that should be expensed?

1) Fraudulent financial reporting
2) Misappropriation of assets
3) An error, not a fraud
4) Defalcation

Answer 1

Final answer:

Capitalizing items that should be expensed is considered fraudulent financial reporting, which involves the improper deferral of expenses and misleading presentation of financial health.

Step-by-step explanation:

In the context of identifying fraud, capitalizing items that should be expensed is referred to as fraudulent financial reporting. This practice involves recording expenses as capital investments rather than expenses. In the context of identifying fraud, capitalizing items that should be expensed is a form of fraudulent financial reporting. This occurs when a company improperly records expenses as long-term assets on its financial statements, instead of recognizing them as immediate expenses. By doing so, the company overstates its assets and profitability.

When a company does this, it defers the recognition of those expenses, which in turn inflates the company's net income and total assets in the short term. Therefore, the correct answer to the student's question is (1) Fraudulent financial reporting.