6.Which of the following statements regarding firms that capitalize versus expense costs is least accurate?

A)   Cash flow from financing is the same whether costs are capitalized or expensed.

B)   Firms that capitalize costs initially have lower profitability ratios compared to expensing firms.

C)   Costs of acquiring a trademark by purchasing it are capitalized.

D)   Marketing costs related directly to sales are capitalized.

7.The management of Berger Investments has changed their policy and will capitalize some costs instead of expensing them. Due to the new policy, Berger will:

A)   have smoother reported income over time.

B)   report the same income pattern as when it expenses the costs.

C)   report a smooth income pattern initially, but income variability will increase over time.

D)   have lower income variability as it grows, but the variability will increase as the firm matures.

8.Meyer Investment Advisory and Smith Brothers Investments are operationally identical except that Meyer capitalizes some costs that Smith expenses. Compared to Smith, Meyer is likely to have:

A)   lower profitability (ROA & ROE) in early years and higher in later years.

B)   higher debt/equity ratio and higher debt/assets ratio.

C)   higher cash flows from operations and lower cash flow from investing.

D)   cash flows that are higher in early years and unchanged in later years.

9.For firms that expense rather than capitalize costs, which of the following statements is least correct?

A)   Higher debt/equity and debt/assets will occur because of lower asset and equity levels.

B)   Net cash flows are the same regardless of which method is used.

C)   Lower ROA and ROE will occur because of higher asset and equity levels in the early years.

D)   Higher income variability will occur.

10.A firm that capitalizes rather than expensing costs will have:

A)   higher income variability.

B)   lower cash flows from operations.

C)   lower profitability in the earlier years.

D)   lower cash flows from investing.

答案和详解如下：

6.Which of the following statements regarding firms that capitalize versus expense costs is least accurate?

A)   Cash flow from financing is the same whether costs are capitalized or expensed.

B)   Firms that capitalize costs initially have lower profitability ratios compared to expensing firms.

C)   Costs of acquiring a trademark by purchasing it are capitalized.

D)   Marketing costs related directly to sales are capitalized.

The correct answer was B)    

In the early years, firms that expense costs will have lower profitability ratios such as return on assets (ROA) and return on equity (ROE). In later years as growth subsides, expensing firms will have lower asset and equity balances and hence higher profitability measures such as ROA and ROE.

Marketing costs that are NOT directly related to sales are expensed when incurred but marketing costs directly related to sales are capitalized.

Cash flow from financing is not affected by the expensing or capitalizing decision only cash flow from operations and cash flow from investing.

Brands and trademarks if acquired in arm's-length transactions may be capitalized.

7.The management of Berger Investments has changed their policy and will capitalize some costs instead of expensing them. Due to the new policy, Berger will:

A)   have smoother reported income over time.

B)   report the same income pattern as when it expenses the costs.

C)   report a smooth income pattern initially, but income variability will increase over time.

D)   have lower income variability as it grows, but the variability will increase as the firm matures.

The correct answer was A)

If management decides to capitalize costs instead of expensing them, it will report smoother reported income over time. If the firm decided to expense costs as incurred, it will have greater variability in reported income. This variability declines as the firm matures and is lower for larger firms.

8.Meyer Investment Advisory and Smith Brothers Investments are operationally identical except that Meyer capitalizes some costs that Smith expenses. Compared to Smith, Meyer is likely to have:

A)   lower profitability (ROA & ROE) in early years and higher in later years.

B)   higher debt/equity ratio and higher debt/assets ratio.

C)   higher cash flows from operations and lower cash flow from investing.

D)   cash flows that are higher in early years and unchanged in later years.

The correct answer was C)    

The net cash flow remains the same regardless of which accounting method is used. But components of cash flows change and cash flows from operations (CFO) will be higher when costs are capitalized and lower when expensed. On the other hand, cash flows from investing (CFI) will be lower when costs are capitalized and higher when expensed. Compared to firms expensing costs, firms that capitalize costs will have smaller debt to equity ratios and higher initial ROAs, but lower ROAs in the future.

9.For firms that expense rather than capitalize costs, which of the following statements is least correct?

A)   Higher debt/equity and debt/assets will occur because of lower asset and equity levels.

B)   Net cash flows are the same regardless of which method is used.

C)   Lower ROA and ROE will occur because of higher asset and equity levels in the early years.

D)   Higher income variability will occur.

The correct answer was C)

Firms that expense costs versus capitalize costs, they will have a lower ROE and ROA in early years because of lower profits and not due to higher assets and equity levels (actually the assets and equity are lower due to expensing the costs).

10.A firm that capitalizes rather than expensing costs will have:

A)   higher income variability.

B)   lower cash flows from operations.

C)   lower profitability in the earlier years.

D)   lower cash flows from investing.

The correct answer was D)

A firm that capitalizes costs classifies them as an investing cash flow rather than an operating cash flow. Investing cash flows will be lower and cash flow from operations will be higher when costs are capitalized.