Question
Analyzing and Assessing Research and Development Expenses Advanced Micro Devices (AMD) and Intel (INTC) are competitors in the computer processor industry. Following is a table
Analyzing and Assessing Research and Development Expenses Advanced Micro Devices (AMD) and Intel (INTC) are competitors in the computer processor industry. Following is a table ($ millions) of sales and R&D expenses for both companies.
AMD | R&D Expense | Sales |
---|---|---|
2006 | $ 1,205 | $ 5,649 |
2005 | 1,144 | 5,848 |
2004 | 934 | 5,001 |
INTC | R&D Expense | Sales |
---|---|---|
2006 | $ 5,873 | $ 35,382 |
2005 | 5,145 | 38,826 |
2004 | 4,778 | 34,209 |
(a) What percentage of sales are AMD and INTC spending on research and development? (Round your answers to one decimal place.)
AMD | INTC | |
---|---|---|
2006 | Answer% | Answer% |
2005 | Answer% | Answer% |
2004 | Answer% | Answer% |
(b) Which of the following statements best describes how AMD's and INTC's balance sheets and income statements are affected by accounting for R&D costs?
R&D assets increase the balance sheets of both companies.
Accounting for R&D costs increases profitability because the expensing of R&D costs is deferred and revenues from R&D-related projects are recognized in current income.
R&D is initially recognized on the balance sheet and, subsequently, amortized (similar to depreciation of PPE).
Expensing R&D costs (rather than capitalizing and depreciating them) results in unrecorded assets on both AMD's and INTC's balance sheets.
(c) Which of the following statements best explains how we evaluate R&D spending for effectiveness and/or involvement (via R&D as a percent of sales)?
We can infer the sole effectiveness of R&D by measuring R&D expense as a percentage of sales.
Over time, the number and quality of new product introductions, number of patents, and related measures, can be compared across companies and against relative levels of R&D spending.
Because R&D costs are capitalized on the balance sheet, we can gauge the effectiveness of R&D spending by looking at the amount of R&D assets that are recognized.
R&D costs typically remain constant in absolute dollars, but decline each year as a percentage of sales when revenues increase.
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