Question

Following are the 2019 income statements for Katy Com and Mike Com, competitors in the computer industry. Use these financial statements to answer the required.

Katy Com Income Statements

(in millions)	Sept. 24, 2019		Sept. 26, 2018		Sept. 27, 2017
Net sales	$215,639		$233,715		$182,795
Cost of sales	131,376		140,089		112,258
Gross margin	84,263		93,626		70,537
Operating expenses
Research and development	10,045		8,067		6,041
Selling, general and administrative	14,194		14,329		11,993
Total operating expenses	24,239		22,396		18,034
Operating income	60,024		71,230		52,503
Other income/(expense), net	1,348		1,285		980
Income before provision for income taxes	61,372		72,515		53,483
Provision for income taxes	15,685		19,121		13,973
Net income	$ 45,687		$53,394		$39,510

Mike Com Income Statements

(in millions)	June 30, 2019		June 30, 2018		June 30, 2017
Revenue
Product	$61,502		$75,956		$72,948
Service and other	23,818		17,624		13,885
Total revenue	85,320		93,580		86,833
Cost of revenue
Product	17,880		21,410		16,681
Service and other	14,900		11,628		10,397
Total cost of revenue	32,780		33,038		27,078
Gross margin	52,540		60,542		59,755
Research and development	11,988		12,046		11,381
Sales and marketing	14,697		15,713		15,811
General and administrative	4,563		4,611		4,677
Impairment, integration, and restructuring	1,110		10,011		127
Operating income	20,182		18,161		27,759
Other income (expense), net	(431	)	346		61
Income before income taxes	19,751		18,507		27,820
Provision for income taxes	2,953		6,314		5,746
Net income	$16,798		$12,193		$22,074

Required:

a.	How do the two companies account for R&D expenditures?
b.	Katy’s and Mike's R&D expense includes many different types of costs. List three specific costs included in R&D expense on the income statement.
c.	Compare R&D expenses of the two companies. What trend do you notice in the R&D expenses of each company over time? (Hint: determine the common-size R&D amounts. Consider both direct R&D expenses as well as acquired R&D.)

Answer 1