Steve is in charge of accounting for the purchase of equipment at Cal Works, Inc. The company has a policy that all expenditures greater than $1,000 (1% of total expenditures) have to be capitalized; less than $1,000 expensed. Steve is under pressure to report high earnings. He takes one $600 and $900 expenditure, adds them together, and records a capital expenditure for $1,500. Which of the following reasons and rationalizations might Steve use for his action:
A) One-time request
B) Standard Practice
C) Representational faithfulness
D) Materiality

Question

Quizplus · Accepted Answer

Steve may use the materiality concept as a reason for his action. Materiality refers to the concept that an item is considered material if its omission or misstatement could influence the economic decisions of users taken based on the financial statements. In this case, Steve may argue that the difference between the actual total of $1,500 and the threshold of $1,000 is not material, and therefore, it is acceptable to record both expenditures as capital expenditures.

Steve Is in Charge of Accounting for the Purchase of Equipment