The decision to capitalize (as opposed to expense)a given expenditure will have a favourable effect on the debt-to-equity and debt-to-total-assets ratios.

Question

Quizplus · Accepted Answer

Capitalizing an expenditure increases total assets and does not immediately affect equity, thus the debt-to-equity ratio may increase if additional debt is incurred to finance the expenditure. The debt-to-total-assets ratio may decrease slightly due to the increase in total assets, but this does not necessarily translate to a favorable effect, especially if the capitalization is financed through debt.

The Decision to Capitalize (As Opposed to Expense)a Given Expenditure