Assume you've been hired to replace an accounting clerk for a small public company. After your second month on the job, the chief financial officer (CFO) approached you directly with a "special project." The company had just finished installing a new production line earlier in the year, and the CFO wanted you to go through all of the company's expense accounts with the goal of finding any costs that might be related to the machinery's installation or to "tinkering with it" to get the line working just right. He said that the previous accounting clerk, whom you had replaced, didn't understand that these costs should have been recorded as part of the production line (an asset) rather than as expenses of the period. The CFO indicated that there was some urgency, as the company had to finalize its quarterly financial statements so they could be filed with the SEC. Also, the company was close to violating its loan covenants and it needed a few extra dollars of profit this quarter to ensure the bank didn't demand immediate repayment of the loan. As you thought about this situation, you tried to remember what Chapter 2 in your accounting textbook said regarding the key characteristics of assets.
Required:
1. Which of the three ratios discussed in this chapter (debt-to-assets, asset turnover, and net profit margin) are affected by the decision to record costs as an asset rather than an expense? Indicate whether each ratio will be higher or lower if costs are recorded as an asset rather than an expense.
2. Is there anything in the case that makes you uncomfortable with the work that you've been asked to do?
3. What should you do?