Imagine FASB Passes a New Rule That Required the Capitalization

question 22

Multiple Choice

Imagine FASB passes a new rule that required the capitalization of R&D. The effect for a drug company would be to:

• A) Increase its current ratio
• B) Decrease debt/equity ratio
• C) Decrease working capital
• D) Improve asset turnover

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Definitions:

Book Value

The net value of a company's assets as recorded on the balance sheet, typically used as a measure to assess whether a stock is under- or overvalued.

Historical Cost

The original monetary value of an asset or transaction, based on the purchase price or cost at the time of acquisition.

Accumulated Depreciation

The total amount of depreciation expense that has been recorded against a company's assets over time.

Double-Declining-Balance Method

A method of accelerated depreciation which computes depreciation expense by doubling the straight-line rate and applying it to the book value of the asset at the beginning of each year.