Hi all… Does capitalizing have higher or lower income variability generally?? I had 2 contradicting opinions. Thankkss… Please reply in 3 dayss
capitalizing has lower income variability. Assume u have 10,000 costs and u r spreading it over 5 years at 2000 each year compared to expensing 10,000 in the first year. The N.I is smoothened out under capitalization compared to expensing where u have fluctuations. However whether or not the N.I is higher under each decision in the later years depends on if the capitalizing and expensing continues every year in the future ( expansion and rapid growth leading to more spending)
yup, capitalising leads to smoother income… since, instead of taking the expense in ONE BIG HIT, you’re putting it in an asset account, and expensing it gradually thru depreciation
Thanks!