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← Series 79: Collection, Analysis & Evaluation of Data
Series 79 practice questionmediumFinancial Statement Analysis

A software issuer capitalizes $12 million of development costs that a peer group generally expenses as incurred. How does that choice affect the current period?

  1. AOperating cash flow is automatically higher by the same amount
  2. BRevenue is lower because capitalization reduces billings
  3. CEBITDA and net income are higher in the current period because expenses are deferred to future amortization✓ Correct answer
  4. DEnterprise value must decline because assets increase
Explanation

Why C — EBITDA and net income are higher in the current period because expenses are deferred to future amortization

EBITDA and net income are higher in the current period because expenses are deferred to future amortization Capitalizing a cost shifts it from the income statement to the balance sheet, which increases current-period earnings. A banker should normalize that policy difference so valuation comparisons are not distorted.

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