The Pierce Corporation,a U.S.business,is a direct competitor of the Zeiss Company,a German firm.The two firms not only compete for customers,but also for investment capital.In 2016,each company spent about $35,000 U.S.dollars or the equivalent on research and development.U.S.GAAP requires the entire amount to be expensed,while Germany requires its businesses to record R&D expenditures as an asset and then to expense it over its useful life.Assuming the treatment of R&D is the only difference between the two firms,which of the following is correct?

Question

Quizplus · Accepted Answer

Since Pierce expenses all of their R&D costs in 2016, it will reduce their net income, which will reduce their total equity for the year. Since total assets equal total equity plus total liabilities, Pierce will have lower total assets than Zeiss. Additionally, since Pierce will have lower equity, their debt-to-assets ratio will be higher than Zeiss. The difference in accounting principles affects the total amount of assets reported by the two companies since Pierce will have lower total assets due to expensing all R&D costs. Finally, it is unclear whether Zeiss will have lower net income since we do not know the amount of their R&D expenditures.