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.
AMD
| R&D Expense | Sales |
| 2012 |
$ 1,354 |
$ 5,422 |
| 2011 |
1,453 |
6,598 |
| 2010 |
1,405 |
6,494 |
| INTC | R&D Expense | Sales |
| 2012 |
$ 10,148 |
$ 53,341 |
| 2011 |
8,530 |
53,999 |
| 2010 |
6,576 |
43,623 |
(a) What percentage of sales are AMD and INTC spending on research and development? (Round your answers to one decimal place.)
| AMD | INTC |
| 2012 |
Answer% |
Answer% |
| 2011 |
Answer% |
Answer% |
| 2010 |
Answer% |
Answer% |
(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.