Much has been written about the accounting fraud and subsequent bankruptcy of WorldCom. The Baltimore Sun reported that the “fraud was brazen (and) easy to spot.. The scheme was not complicated: the company’s financial officers recorded routine maintenance expenses totaling $3.9 billion as capital expenditures, which can be written off over decades rather than booked as immediate expenses.”

REQUIRED:

a. Explain. How capitalizing an item, instead of expensing it, affects the financial statements.

b. Which principle of accounting is being violated? Are other principles involved? Discuss.