Expenses

The exam loves the capitalize-versus-expense decision because it reshuffles cash-flow and earnings effects without changing total lifetime pretax profit. The “tell”: a question gives a cost and asks the year-one effect, or hands you adjusted figures. Lock the rule — capitalizing raises year-one net income, total assets, and ROA (the income boost outweighs the larger asset base early on), lowers asset turnover, and shifts the outflow from CFO to CFI; expensing does the opposite. The advantage reverses in later years as depreciation bites, so the trap is treating one method as “more profitable” overall — cumulatively it nets to zero.

Don’t confuse expenses (which reduce the net income that revenue starts) with the cost-allocation method: straight-line front-loads earnings versus accelerated (DDB) methods, mirroring the depreciation contrast. Another classic trap — recognition tracks the sale, not the cash; a paid invoice can still sit in inventory as COGS-in-waiting until that inventory sells. Memory hook: CapEx = “save it on the balance sheet for later,” OpEx = “spend it on the income statement now.”