Effect of Capitalized R&D / Software Costs on 3 statements
If a company incurs 10K of R&D expenses and decide to capitalize them b/c software is still in development, how does this affect the three statements at yr 0 and 1 year out? A follow-up question is can you continue to amortize pre-existing capitalized R&D expenses if your software fails to move past development stage and is scrapped?
I'm thinking: Year 0 I/S - no effect b/c capitalized R&D is recorded as an asset on B/S
B/S - assets up 10K with new line item "capitalized software costs" but cash is down 10K so net change is 0
C/F - CFI down 10K -> cash ultimately down by 10K. Makes sense given that cash is used to pay for the development of the software
Year 1 Assuming a useful life of 5 years, the 10K of capitalized R&D expenses would have annual amortization of 2K.
I/S - amortization expenses up 2K, NI falls by 2K(1-T). Assume tax rate of 30%, NI falls by 1.4K
N/I flows into B/S under retained earnings. RE down 1.4K, capitalized R&D line item down 2K.
C/F - NI down 1.4K under CFO, but amortization not cash expense so add-back of 2K. Change in cash is a +0.6K for the period, which flows into B/S.
B/S balances - on asset side, cash up 0.6K, capitalized R&D down 2K for net change of -1.4K. Retained earnings down 1.4K.
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Bump would rly appreciate any feedback
Yup, that's correct. It would help to structure your thinking using a Income Statement > CFS > BS flow, i.e. net income flows into CFO which flows into net cash which flows into balance sheet with other changes on assets and equity
On your question regarding pre-capitalised expenses, it depends on accounting rules, but you would possibly need to write down your capitalised R&D expense attributed to that software and recognise a loss on your income statement.
interesting, ive always gone about the same as OP as i was taught the CF statement is derived from is and bs. I guess the IS ->BS works too?
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