Question

Regarding cost capitalization, I was wondering if you could explain to me why companies don't always want to capitalize costs if that means the current assets increase, which would make the current ratio (bottom line) of the company appear more favorable?--->ultimate end goal of most companies

Answer 1

First of all, capitalized costs form as= part of fixed assets and not current assets. Current Assets do not include fixed assets. Assets such as cash, accounts receivables, inventory form a part of current assets.

So your basic idea of having a favorable current ratio by capitalising costs is fundamentally wrong. Current Assets and current ratio will be unaffected by this decision.

Moreover, Why companies do not capitalise cost is because expensing it in the same year leads to a lower taxable income and hence lower taxes. Capitalised costs will allow depreciation over a number of years, while expensing it will reduce the taxes for the current year.