ISMChapter07.docVIP

CHAPTER 7 INVESTING ACTIVITIES Solutions to Questions, Exercises, and Problems, and Teaching Notes to Cases Capitalization versus Expensing Decision. a. The effect in the first year would be an equal decrease in both the numerator (adjusted net income) and the denominator (average total assets) of ROA. Because net income is substantially smaller than average total assets, the percentage decrease in the numerator would be greater, and ROA would be understated. However, in the next two years, net income would be overstated because it is not burdened by a depreciation charge, average total