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    Capitalization vs. expensing

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    1. What is the fundamental issue surrounding capitalization versus expensing?

    2. Which approach do you believe management would prefer?

    3. Which approach do you believe auditors would prefer? Why?

    In addition can you list your references, because I also read the articles, websites, etc. for my information.

    Thanking you in advance.

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    Solution Preview

    Meaning of capitalizing
    In general, capitalizing expenses is beneficial as companies acquiring new assets with a long-term lifespan can spread out the cost over a specified period of time. Companies simply take expenses that they incur today and deduct them over the long term without an immediate negative affect against revenues. However, if a company capitalizes regular operating expenses, it is doing so inappropriately, most likely to artificially boost its operating cash flow and look like a more profitable company. Because a company can't hide it's expenses forever, such a practice will fail in the long run.
    For example:
    1. In accounting, it is where costs to acquire an asset are included in the price of the asset.
    For example, if a machine has a price of $1 million this value would be recorded in the assets, if there was also a $20,000 charge for shipping the machine then this cost would be capitalized and included in assets.
    Thus criterian of capitalizing are:

    1. The item must be purchased for giving long term benefit to the organization.
    2. The useful life of the asset is increased or the productive capacity of the asset is improved.
    or the quality of units or services produced from the asset is enhanced.
    Other wise it will be expense.

    For example any major renovation in the fixed asset is capitalization.
    Capitalization Vs. Expensing
    are generally allowed to deduct any ordinary and necessary cost relating to your business. One exception to this rule is for a category of expenses called capital expenditures. These are amount you pay for long-lived business assets like buildings, vehicles, and computers. They also include any expense which adds to the value or useful life of other property, such as a building improvement or a new roof.

    Capital assets cannot be deducted in the year you pay for them; instead, they must be capitalized and then deducted over a period of years through depreciation, amortization, or depletion. Some capital expenditures cannot be deducted at all, in which case their cost is just added to the tax basis of the property.

    Not all capital assets are things you can ...

    Solution Summary

    This discusses the issue of Capitalization vs. expensing