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Investments in capital items are shown on an income statement expensed over the life of the asset. Decreases in investment have no impact on increase in profit
by epa 12y ago
Investments in capital items are shown on an income statement expensed over the life of the asset. Decreases in investment have no impact on increase in profit (only the opposite is true, increase in investment will add a decrease in profit of 1/n of the cost where n is the life of the asset in years).
- wmf 12y agoIs Amazon capitalizing or expensing their R&D?
- deleted 12y ago[deleted]
- epa 12y agoGood point but this is a separate discussion, R&D must be expensed up to a certain point, so reduction in research would improve the statements..
- rahimnathwani 12y agoDecreases in investment have no impact on increase in profit Yes they do. Imagine I have a business which has steady gross margin of 100 dollars per year, but to keep it going so far I have been investing 50 dollars per year (capex). Assume my capex is depreciated over 5 years. So, in a single year, my profit is 50 dollars: - 100 dollars gross margin - Less 50 dollars depreciation (1/5th of my last 5 years' capex: 1/5 * (50 * 5)) Now, let's say I decide to decrease investment. My next profit will be 60 dollars: - 100 dollars gross margin - Less 1/5 * (50*4) So, by decreasing investment I have increased profit.
- epa 12y agoYes, technically, but your example is too simplistic and the year by year can fluctuate. But the specific capital items we are talking about today that are not purchased do not contribute to the IS. The effect is just existing capital items making it's way through the statements. We are talking about today, short term.