5. Below are income statements for Google and Yahoo! for fiscal 2011. Use these financial statements to answer the requirements. (In millions) Google Inc. CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31, Revenues 2009 2010 2011 $23,651 $29,321 $37,905 Cost of revenues 8,844 10,417 13,188 Research and development 2,843 3,762 5,162 Sales and marketing 1,984 2,799 4,589 General and administrative 1,668 1,962 2,724 Charge related to resolution of Dept. of Justice investigation 0 0 500 Total costs and expenses 15,339 18,940 26,163 Income from operations 8,312 10,381 11,742 Interest income and other, net 69 415 584 Income before income taxes 8,381 10,796 12,326 Provision for income taxes 1,861 2,291 2,589 Net income $6,520 $ 8,505 $9,737 (In millions) Yahoo! Inc. CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31, Revenues Cost of revenues Gross profit 2009 2010 2011 $6,460,315 $6,324,651 $4,984,199 2,871,746 2,627,545 1,502,650 3,588,569 3,697,106 3,481,549 Sales and marketing 1,245,350 1,264,491 1,122,302 Product development 1,210,168 1,082,176 1,005,090 General and administrative 580,352 488,332 495,804 Amortization of intangibles 39,106 31,626 33,592 Restructuring charges, net 126,901 57,957 24,420 Total operating expenses 3,201,877 2,924,582 2,681,208 Income from operations 386,692 772,524 800,341 Other income, net 187,528 297,869 27,175 Income before provision for income taxes, earnings in equity interests 574,220 1,070,393 827,516 Provision for income taxes (291,321) (221,523) (241,767) Earnings in equity interests 250,390 395,758 476,920 Net income 605,289 1,244,628 1,062,669 Less: Net income attributable to noncontrolling interests (7,297) (12,965) (13,842) Net income attributable to Yahoo! Inc. $597,992 $1,231,663 $1,048,827 Required: a. How are the balance sheets and income statements of Google and Yahoo! affected by the accounting for R&D costs? b. Compute common-sized R&D expense for both firms for the three-year period. Assess the differences and any trends that you notice. c. How can one evaluate the effectiveness of R&D spending? Does the difference in R&D as a percentage of sales necessarily imply that one company is more heavily invested in R&D? Why might this not be the case? d. In your opinion, would Google and Yahoo favor capitalizing R&D expenses, if that were an available alternative