An analyst has calculated the ratio of research and development expenses to sales for a company he is following and noticed that it is significantly lower this year than in the previous years.What might this be an indication of?
A)That management might be attempting to increase current earnings.
B)That management might be attempting to increase future earnings.
C)That the earnings quality is higher than it was before.
D)That the profitability of the company is higher than it was before.

Question

Quizplus · Accepted Answer

A lower ratio of research and development expenses to sales might indicate that management is reducing R&D spending, possibly to boost current earnings by cutting costs. This does not necessarily imply an increase in future earnings, higher earnings quality, or higher profitability.

An Analyst Has Calculated the Ratio of Research and Development