Which of the following was one of the major fraudulent accounting practices that contributed to the WorldCom scandal?

• A. Capitalizing operating expenses as assets
• B. Understating accounts payable to reduce liabilities
• C. Overstating cash balances by double-counting deposits
• D. Recording fictitious sales revenue

Answer: (A)

Verified step by step guidance

1. Understand the context of the WorldCom scandal: It was one of the largest accounting frauds in history, where the company manipulated its financial statements to appear more profitable than it actually was.
2. Review the concept of capitalizing operating expenses: Normally, operating expenses are recorded as expenses in the income statement. However, fraudulent practices may involve recording these expenses as assets on the balance sheet to inflate profits.
3. Analyze the other options provided: Understating accounts payable reduces liabilities, overstating cash balances inflates assets, and recording fictitious sales revenue inflates income. These are examples of fraudulent practices but are not the specific method used in the WorldCom scandal.
4. Focus on the correct answer: The major fraudulent accounting practice in the WorldCom scandal was capitalizing operating expenses as assets. This allowed the company to avoid recognizing these expenses in the income statement, artificially inflating profits.
5. Conclude by emphasizing the importance of ethical accounting practices and adherence to Generally Accepted Accounting Principles (GAAP) to prevent such scandals.