What effect does improperly expensing capital costs have on financial statements?

Improperly expensing capital costs directly affects how financial statements reflect a company's financial health. When capital costs—which should typically be capitalized as assets—are instead expensed immediately, this leads to higher expenses on the income statement for the current period. As a result, net income is reduced since expenses directly reduce profit.

By failing to capitalize these costs, a company misses the opportunity to spread the expense over the useful life of the asset, which would be more appropriate. Instead, recognizing these costs as immediate expenses leads to an understatement of net income in that period.

This concept is fundamental in financial reporting, as aligning expenses with the revenue they help generate ensures that net income is more accurately portrayed. Thus, the correct choice highlights that improperly expensing capital costs negatively impacts net income, reflecting a less favorable profitability picture than what might actually be the case if the capital costs were appropriately handled.