8. [Capitalization of development costs] Ericsson [ERICA] is a major producer of wireless telephone equipment, and reports ac- cording to Swedish GAAP. Its financial statements report that: "Research and development costs are expensed as incurred."

a. Discuss the effect of the differences between the accounting methods used by Ericsson and Nokia (sce text) for develop- ment costs on reported: (i) Net income (assume that expenditures are rising rapidly) (ii) Cash from operations (iii) Stockholders' equity

b. Describe the effect of those differences on each of the follow- ing ratios: (i) Interest coverage ratio (times interest earned) (i) Debt-to-equity ratio

c. Describe the analytical steps required to eliminate the effect of the accounting difference on the comparison of these two competitors.