When companies spend money on capital expenditures (as opposed to spending money on operating expenses such as marketing, salaries, repairs, etc.), the amount is omitted from the income statement. In other words, these capital investments are not subtracted from revenue to come up with the company's net profit, the reason being that these expenditures represent investments that may generate revenue (or losses) in the future.
For understandable reasons, research and development (R&D) is classified as an expense under GAAP, even though the benefits (if any) of the R&D will occur in the future. How should the prudent investor treat such expenditures in determining a company's earnings power?
No comments:
Post a Comment