# Capitalizing vs Expensing

If the company changed policy and capitalizes some costs instead of expensing them, the company will: A) have a higher reported income as long as capitalized expenditures exceed depreciation on them. C) have a higher reported income initially, with lower income levels to follow invariably.

Why is the answer A and not C? What does A means?

This is what I think they mean with answer A. Let’s say in 2014, Company X only has an expense of \$ 100

2014 P&L with expensing: \$ (100)

2014 P&L with capitalizing (4 yr depreciation): \$ (25)

P&L using capitalizing is higher because capitalized expenditures > depreciation.

Then in 2015, there’s no activity at all:

2015 P&L with expensing: \$ 0

2015 P&L with capitalizing \$ (25)

Now, P&L using capitalization is lower because capitalized expenditures < depreciation.

C) implicitly assumes every year thereafter these capital expenses are taking place. Eg. assume EVERY year 100 dollars is either expensed or capitalized. so company A expenses 100 every year and company B capitalizes 100 every year. well the capitalizing company will remain more profitable of the two UNTIL their cumulative depreciation starts exceeding that 100 dollars.