Florze Software Inc.

(Florze) is a software development company located in Kanata, Ontario. Software is a highly competitive industry and the life of a software product is usually quite short.

To remain competitive, companies must invest heavily in research and development to keep their existing products up to date and to develop new ones. Florze expenses all research costs and any development costs that don’t meet the criteria for capitalization.

Florze has never capitalized any development costs. The following information has been summarized from Florze’s financial statements:

Required:

a. Recalculate net income for 2015 through 2017, assuming that R&D costs were capitalized and amortized over three years using straight-line amortization.

b. What would total assets be at the end of 2015 through 2017 if R&D costs were capitalized and amortized over three years?

c. What would shareholders’ equity be at the end of 2015 through 2017 if R&D costs were capitalized and amortized over three years?

d. What would cash from operations and cash expended on investing activities be for 2015 through 2017 if R&D costs were capitalized and amortized over three years?

e. What would the following ratios be assuming that (1) R&D costs were expensed as incurred and (2) R&D costs were capitalized and expensed over three years?
Assume that Florze didn’t have an interest expense over the period 2013-2017.
i. return on assets ii. debt-to-equity ratio ili. profit margin percentage

f. How would your interpretation of Florze differ depending on how R&D costs are accounted for? Which accounting approach do you think is more appropriate?
Explain. Your answer should consider the objectives of the stakeholders and the managers who prepare the accounting information, as well as the accounting concepts discussed throughout the book.

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Florze Software Inc. Extracts from Financial Statements 2017 2016 2015 2014 2013 Summarized from the income statement Revenue $4,491,900 $2,805,500 $1,891,000 $ 527,000 $ 449,500 2,052,975 1,631,375 1,402,750 Expenses* 1,061,750 1,042,375 R&D expenditures 1,743,750 1,356,250 775,000 290,625 193,750 Net income (loss) 695,175 (182,125) (286,750) (825,375) (786,625) Summarized from the balance sheet Total assets 4,892,188 4,353,563 4,088,125 1,259,375 542,500 Total liabilities Total shareholders' equity 2,886,390 2,005,798 1,523,748 1,226,438 2,829,815 2,861,687 365,219 135,625 894,156 406,875 Summarized from the cash flow statement Cash from operations Cash expended on investing activities 232,500 (387,500) (116,250) (542,500) (1,162,500) (697,500) (542,500) (2,712,500) (775,000) (441,750) *Includes all expenses incurred by Florze except for research and development.