Under the cash basis of accounting, the purchase of a new piece of equipment for cash would be treated as an expense of the accounting period when the purchase occurred.
Required:
a. If you were a shareholder, how would this treatment affect your assessment of the company’s earnings and financial position?
b. If you were a prospective buyer of the company (someone who wanted to purchase all the company’s shares), how would this treatment affect your assessment of the company as a potential acquisition?