1. Suppose two companies acquire a machinery for use in operations.

Company A expenses the

transaction whereas, company B capitalizes the same transaction. What repercussions will this
have on the financial reporting?

Answer:

Machinery use in operations either to expense or capitalizes, well it is depends on net worth of the
company and on the strategy. Repercussion of both transaction is disused under;

Company “A” financial report will be:

1. It reduce net income by the after-tax amount of the expenditure.

2. No asset will be record on the balance sheet and therefore no depreciation or amortization will
occur in subsequent periods.

3. Firms that expense those costs as incurred tend to have higher variability of net income.

4. Expensing leads to higher ROA and ROE because these expensing firms report lower assets and
equity.

5. The lower amount of net income is reflect in lower retained earnings on the balance sheet.

6. The expense will appear as an operating cash outflow in the period in which it is made, and
there will be no effect on the financial statements of subsequent periods.

Company “B” financial report will be:

1. It will increase the amount of assets reported on the balance sheet.

2. It will also appear as an investing cash outflow on the statement of cash flows.

3. Firms that capitalize costs and depreciate them over time show "smoother" patterns of reported
income.

4. Expensing leads to lower ROA and ROE because these capitalization firms report higher assets
and equity.

5. Capitalization firms have better (lower) debt-to-equity and debt-to-assets ratios since they
report higher assets and equities.

6. In subsequent periods, the company will allocate the capitalized amount over the asset’s useful
life as depreciation or amortization expense.

7. This expense will reduce net income on the income statement and reduce the value of the asset
reported on the balance sheet.
8. Depreciation and amortization expenses are non-cash in nature and therefore, apart from their
effect on taxable income and taxes payable, have no impact on the cash flow statement.