How certain expenses are capitalised in the balance sheet, though shown as expenses in the PL statement.

 Generally, expenses are shown in the Profit and Loss statement. There are some expenses which are normally shown in Pl statement, but sometimes also are capitalized in the balance sheet. An example is R &D expenses. But some companies resort to aggressive accounting by capitalizing expenses, more than the necessary amount. This obviously helps to inflate  the bottom line. Since over capitalizing the expenses is illegal, they often use some hidden entries, to achieve this.

 Consider the following example.

A company has incurred annual R&D expense of $400000. Out of this expense, the company can legally capitalize up to $100000. The entries are.

                                                 

This is a normal entry. The cash flow for the R&D Expenses cannot be found as a separate head in the Cash Flow statement. This is because, this is already embedded in the Profit before tax line, which is used to derive the operating cash flow, under the in direct method

However, the Capitalized R&D Expenses can be found in the Cash flow statement, as this is a non cash entry (not a non cash charge), which is added back to the PBT, to arrive at the operating cash flow.

Now consider the next entries, wherein the company resorts to aggressive accounting to reduce the R&D expenses.

Here as you see, the R&D expense is reduced to $200000, thereby increasing the bottom line by $100000. We cannot go deeper into the third entry as the notes to accounts can be quite vague for receivables. Now if we think that we can go to the cash flow statement for clarity, there too the entries can be vague. The reason is, receivables can be entered in the working capital changes section in the cash  flow statement. There also 'wont be any notes to accounts on this one too. These receivables can be carried forward perpetually to future financial years, under various premises. Of course, it is difficult, what with the world class auditors touted by these companies.  But even the auditors are sometimes hood winked.