One of the largest financial statement frauds of this century involved a US telecommunications company called WorldCom. The frauds involved overstating profits by $74.4 billion (yes, billion!) between 2001 and 2002. Expenditure that should have been recorded as expenses in 2001-02 was instead capitalised; that is, included in the costs of the asset.

1. Using the accounting equation, show how the equation (assume all expenditure have been paid in cash):

a. Would have been recorded by the company

b. Should have been recorded by the company.

2. Explain which of the following would be affected by the fraudulent reporting in 2001-02:

a. Total cash flows

b. Cash flow from operations

c. Cash flow from investing

d. Cash flow from financing.