Question

1. Abaduah is a manufacturer of steel tubing. To be competitive in the marketplace, Abaduah spends significant amount of money on research and development in order to make their products better, stronger, lighter, and cheaper while maintaining income growth. The following information is available.

	2012	2013	2014	2015	2016	2017	2018	2019
Research & Development	13,168	12,149	32,114	8,487	15,169	14,199	18,445	22,116
Net income	55,649	58,224	48,189	77,442	78,119	85,442	83,118	94,119

   

    What adjustments to net income are necessary for an analysis of earnings growth? Why?

Answer 1

In order to arrive at the correct net income all the expenses which are incurred to earn such income should be deducted from that. Here in the given case they are incurring research and development expenses every year, and those expenses are getting deducted as expenses as and when they are incurred. But expenses which are incurred in 2012 may be used for generating income during 2016 also. In order to make this clear, these expenses should be capitalised every year and amortized over a period of estimated time of useful life of such expenses.

By doing so the correct net income will be arrived at satisfying the matching principle.