An investment banker is preparing an analysis for a sell-side mandate. The target company capitalizes a significant portion of its software development costs. If these costs were expensed instead, which of the following would be true?

Why C — Net income would be lower and total assets would be lower

When software development costs are capitalized, they are recorded as assets on the balance sheet and amortized over time rather than being expensed immediately. If those costs were instead expensed, the full amount would hit the income statement in the current period, reducing net income. Simultaneously, total assets would be lower because the capitalized asset would not appear on the balance sheet. This accounting policy choice is a common area of scrutiny in investment banking due diligence.