When a firm incurs costs on an item to be used in operations, management must decide whether to treat the cost as an asset or an expense. Assume that a company used cash to acquire machinery expected to contribute to the generation of revenues over a three-year period and the company erroneously expensed the cost to acquire the machine.
a. Describe the effects on ROA of the error over the three-year period.
b. Explain how the error would affect the statement of cash flows.