Misclassification of Expenditure Type

Steps:

• Revenue expenditure is expensed in the current period, reducing profit.
• Capital expenditure is capitalized as a non-current asset and depreciated over time.
• Wrongly treating revenue as capital adds it to assets instead of expensing it.
• Result: Assets increase without current expense, overstating both non-current assets and profit.

Why A is correct:

• Per accounting principles (IAS 16/IFRS), revenue expenditures hit profit immediately; capitalizing them defers expense via depreciation, overstating current profit and assets.

Why the others are wrong:

• B: Profit is overstated, not understated, due to skipped expense.
• C: Non-current assets are overstated from improper capitalization, not understated.
• D: Both assets and profit are overstated, not understated.

Final answer: A