Reclassify expense to capex?
Hi guys:
How would you approach the following question? "If your auditor found out that a line item last year should have been capitalized but it was expensed, how would the correction flow through the 3 statements?"
Here's how I'm thinking about solving it, but I'm having trouble getting the BS to balance.
Q: Reclassify $100 from expense to capex (aka, an expense that's supposed to be capitalized was expensed last year), assuming 25% tax rate and 10 year straight-depreciation
My answer (but doesnt balance):
Operating expense: -100
Pre-tax income: +100
Tax provision: +25
Net Income changes by +100-25=+75
Net income: +75
Depreciation: +10
Accounts payable: no change
Cash Flow: +85
Cash: +85
PPE: +100-10 = +90
Nothing is changing on the liability side.. so it doens't balance.
Would appreciate any pointers on what I missed - thank you!
I/S:
Pre-tax income: +100
Tax: +25
Net Income: +75
Cash Flow Statement:
Net Income: +75
Capex: +100
OCF: -25
B/S:
Cash: -25
PPE: +100
Retained Earnings: +75
Is there no depreciation that’s accounted for this year
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