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Following are the 2019 income statements for Katy Com and Mike Com, competitors in the computer industry. Use these financial statements to answer the required.

Following are the 2019 income statements for Katy Com and Mike Com, competitors in the computer industry. Use these financial statements to answer the required.

Katy Com

Income Statements

(in millions)

Sept. 24,

2019

Sept. 26,

2018

Sept. 27, 2017

Net sales

$215,639

$233,715

$182,795

Cost of sales

131,376

140,089

112,258

Gross margin

84,263

93,626

70,537

Operating expenses

Research and development

10,045

8,067

6,041

Selling, general and administrative

14,194

14,329

11,993

Total operating expenses

24,239

22,396

18,034

Operating income

60,024

71,230

52,503

Other income/(expense), net

1,348

1,285

980

Income before provision for income

taxes

61,372

72,515

53,483

Provision for income taxes

15,685

19,121

13,973

Net income

$ 45,687

$53,394

$39,510

Mike Com

Income Statements

(in millions)

June 30,

2019

June 30,

2018

June 30,

2017

Revenue

Product

$61,502

$75,956

$72,948

Service and other

23,818

17,624

13,885

Total revenue

85,320

93,580

86,833

Cost of revenue

Product

17,880

21,410

16,681

Service and other

14,900

11,628

10,397

Total cost of revenue

32,780

33,038

27,078

Gross margin

52,540

60,542

59,755

Research and development

11,988

12,046

11,381

Sales and marketing

14,697

15,713

15,811

General and administrative

4,563

4,611

4,677

Impairment, integration, and restructuring

1,110

10,011

127

Operating income

20,182

18,161

27,759

Other income (expense), net

(431

)

346

61

Income before income taxes

19,751

18,507

27,820

Provision for income taxes

2,953

6,314

5,746

Net income

$16,798

$12,193

$22,074

Required:

a.

How do the two companies account for R&D expenditures?

b.

Katys and Mike's R&D expense includes many different types of costs. List three specific costs included in R&D expense on the income statement.

c.

Compare R&D expenses of the two companies. What trend do you notice in the R&D expenses of each company over time? (Hint: determine the common-size R&D amounts. Consider both direct R&D expenses as well as acquired R&D.)

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