Q:expenses vs. capitalizes all costs

07cv3Q34 4. Two companies are identical except for their accounting treatment of research and development costs. One company expenses all costs immediately, while the other company capitalizes a portion of the costs. Compared to the company that capitalizes costs, the company that expenses immediately will most likely: a. earn a lower return on assets b. have lower financial leverage c. exhibit a smoother pattern of net income over time d. report lower cash flow from operations in the statement of cash flows. answer :smiley: report lower cash flow from operations in the statement of cash flows. company that capitalize research and development costs report those expenditures in the investing activities section of the statement of cash flows; companies that expense research and development costs report those expenditures in cash flow from operations. --I think a. earn a lower return on assets is also right. the company that expenses has lower income and lower asset. The expenses impact income bigger % than asset. So the ROA is lower.

But the question ask which choice is the most likely, so d will be the correct selection. Answer a maybe right but it also can be wrong, so a cannot be selected i think.

The company capitalizing a portion of the R&D expense will also have depreciation deducted for the portion capitalized, so there you have a lower NI, and a higher value for assets in the denominator. No way you’re going to have lower return on assets with all R&D expenses deducted.