Reference no: EM131752476

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 ($ millions) of sales and R&D expenses for both companies.

(a) What percentage of sales are AMD and INTC spending on research and development? (Round your answers to one decimal place.)

(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.