| Course | FSA-7120 Financial Statement Analysis |
|---|---|
| Module | Module 2 |
| Paper type | Module 2 written assignment: expense recognition |
| Length | About 765 words, 5 pages |
| Format | APA 7 student paper |
| School | Thomas Edison State University |
| Program | Master of Business Administration |
| Updated | October 2026 |
Free sample paper for FSA 7120 Module 2
Moving Costs Between Years: How Expense Choices Shaped a Lighting Maker's 2024 Profit
Student Name
Master of Business Administration, Thomas Edison State University
FSA-7120: Financial Statement Analysis
Mentor Name
Month Day, Year
Moving Costs Between Years: How Expense Choices Shaped a Lighting Maker's 2024 Profit
Introduction
Every cost a company incurs eventually reaches the income statement. Expense recognition decides when. A cost capitalized as an asset today is expensed later through depreciation or amortization; a cost expensed today never appears again. Because the timing is a judgment, Fridson and Alvarez (2011) treat expense recognition as one of the main places where reported profit can depart from economic performance. This paper recasts the 2024 expenses of Harlow Fixtures, the composite lighting manufacturer introduced in Module 1, and explains what each choice means for the quality of its earnings.
Capitalizing Versus Expensing
Harlow capitalized $3.2 million of software development for the control chips in its smart fixtures. Accounting rules allow software to be capitalized once technological feasibility is reached, so the choice is permitted, but it depends on when management decides that point arrived. Had the costs been expensed, 2024 operating income would have been $3.2 million lower, less the $0.4 million of amortization already recorded on the asset.
The extreme case shows why analysts watch this line. In 2002 the SEC charged WorldCom with treating ordinary line costs, fees paid to other carriers to carry its calls, as capital expenditures, which moved about $3.8 billion of operating expense onto the balance sheet over five quarters (Securities and Exchange Commission, 2002). The costs did not create future benefits, so capitalizing them was not a judgment but a misstatement. Harlow's software costs at least plausibly create future benefits, which places them inside the rules; the analyst's job is to judge whether the feasibility date was chosen to fit the result.
Depreciation and Useful Lives
In 2024 Harlow extended the useful lives of its production equipment from 8 to 10 years. On equipment with about $120 million of depreciable cost, straight-line depreciation falls from $15.0 million to $12.0 million a year, a $3.0 million gain in operating income. The change is a change in estimate under GAAP and is applied going forward, so prior years are not restated, which makes the trend look better than it was. An analyst can test the estimate by comparing gross property with annual depreciation: an average life well above peers' suggests a generous assumption.
Reserves and Restructuring Charges
Harlow holds $84 million of inventory, including $6.5 million of fluorescent fixtures that it stopped selling to new customers in mid-2024. Its reserve against that stock is $1.0 million. Distributors are clearing similar fixtures at about half of cost, which implies a reserve nearer $3.2 million. The shortfall of $2.2 million is profit recognized now that is likely to reverse later.
Harlow also reported a $1.8 million "restructuring charge" below a subtotal it calls adjusted operating income. It was the third such charge in four years. Charges that recur are a cost of running the business, and treating them as unusual inflates the adjusted measure that management highlights. Dichev et al. (2013) report that chief financial officers themselves see repeated special items as a warning sign of low earnings quality.
The Combined Effect
The recast income of $35.2 million falls below the $42 million bonus threshold described in Module 1. The restructuring charge is already inside reported operating income, so it does not change the total, but treating it as recurring removes $1.8 million from management's adjusted measure. None of the adjustments shows wrongdoing. Together, however, they show that most of Harlow's apparent improvement over 2023 came from accounting choices rather than from selling more fixtures at better margins.
| Adjustment to 2024 operating income | Amount ($ millions) |
|---|---|
| Operating income as reported | 43.2 |
| Expense the capitalized software, net of amortization | (2.8) |
| Keep the 8-year useful lives | (3.0) |
| Raise the fluorescent inventory reserve to half of cost | (2.2) |
| Recast operating income | 35.2 |
| Recast operating margin | 7.3% |
| Reported operating margin | 9.0% |
Implications for the Analyst
Richardson et al. (2005) found that earnings built on less reliable accruals are less persistent, meaning they are less likely to recur in later years. For forecasting, this argues for starting from the recast $35.2 million rather than the reported $43.2 million. For credit and equity analysis in Modules 4 and 5, it argues for watching cash from operations, capital expenditures that include capitalized software, and the reserve balances that will absorb future write-downs.
Conclusion
Expense recognition decides in which year a cost reduces profit. Harlow's choices on software, useful lives and inventory each fall within GAAP, but they consistently move expense out of 2024. An analyst who recasts them sees a company earning a 7.3 percent operating margin, not 9.0 percent, and plans accordingly.
References
Dichev, I. D., Graham, J. R., Harvey, C. R., & Rajgopal, S. (2013). Earnings quality: Evidence from the field. Journal of Accounting and Economics, 56(2-3), 1-33. https://doi.org/10.1016/j.jacceco.2013.05.004
Fridson, M., & Alvarez, F. (2011). Financial statement analysis: A practitioner's guide (4th ed.). John Wiley & Sons.
Richardson, S. A., Sloan, R. G., Soliman, M. T., & Tuna, I. (2005). Accrual reliability, earnings persistence and stock prices. Journal of Accounting and Economics, 39(3), 437-485. https://doi.org/10.1016/j.jacceco.2005.04.005
Securities and Exchange Commission. (2002). SEC charges WorldCom with $3.8 billion fraud (Press Release No. 2002-92). https://www.sec.gov/news/press/2002-92.htm
What the FSA 7120 Module 2 instructions ask for
The second FSA-7120 written assignment asks how the timing of expense recognition shapes reported profit. Expect questions on capitalizing versus expensing, depreciation methods and useful lives, reserves for inventory, receivables and warranties, and nonrecurring or restructuring charges. Many versions ask you to quantify how a different choice would change operating income for a company you analyze, and some ask you to discuss a well-known case in which capitalization went too far. Give each topic its own APA heading so the four choices stay separate. Expect to explain when each practice is legitimate, not only when it is abused, and to say what the choice means for forecasting future earnings. Some prompts name a company's 10-K and ask you to find the expense policies in its notes, so locate the summary of significant accounting policies before you start.
How the FSA 7120 Module 2 example is put together
The introduction explains that expense recognition decides when, not whether, a cost reduces profit. Separate sections take capitalized software, the change in useful lives, the inventory reserve and the recurring restructuring charge, sizing each in dollars. The WorldCom line cost case marks the point where capitalization becomes misstatement. A table combines the adjustments and recasts operating income from $43.2 million to $35.2 million, and the paper notes that the restructuring charge affects management's adjusted measure rather than the reported total. A final section uses research on accrual reliability to say which figure should anchor a forecast. Every recast shows its arithmetic. Dollar effects, rather than adjectives, carry the argument in every section, so the reader can see which choice moved profit most.
FSA 7120 Module 2 rubric: what earns full marks
The rubric for this assignment rewards correct explanation of expense recognition principles, accurate quantification, critical evaluation of management's choices and clear APA writing. Mentors look for the difference between permitted judgment and fraud, and for recast figures that are computed rather than estimated loosely. Showing the effect of each choice on operating income and margin earns more than describing the choices in general terms. Linking expense quality to later analysis, such as forecasting or credit work, shows the synthesis expected at the graduate level. Sources should include the textbook and at least one study or regulatory document. A paper that shows how a recast changes the margin trend, not only one year's figure, demonstrates the analytical depth the rubric describes as exemplary work.
FSA 7120 Module 2 help: mistakes that cost marks
Common errors include treating every capitalized cost as manipulation, forgetting to net existing amortization when expensing a capitalized asset and double counting a charge that is already in operating income. Some answers recast profit without showing the arithmetic, which makes partial credit impossible. Explain the accounting rule before judging the choice. Size each adjustment, then combine them in one table. Say which figure you would forecast from and why. Keep case discussions short and tie them back to your company. A free first sample on your own FSA-7120 Module 2 company is available on request. Before you submit, total your adjustments and confirm that the recast operating income equals the reported figure less each listed item.
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FSA 7120 Module 2 questions, answered
Where can I find a free FSA 7120 Module 2 sample paper?
The full Harlow Fixtures expense recast is above, with four adjustments, a combined table and the WorldCom capitalization case.
What is the difference between capitalizing and expensing a cost?
Capitalizing records the cost as an asset and spreads it over future years; expensing charges all of it against profit now.
How did WorldCom misuse capitalization?
It recorded ordinary fees paid to other carriers as capital assets, moving about $3.8 billion of operating expense off its income statement.
Does a longer useful life increase profit?
Yes. It does, because a longer life spreads the same equipment cost thinner, so each year's depreciation charge shrinks and operating income rises.
Why are recurring restructuring charges a warning sign?
Charges that appear year after year are a normal cost of the business, so excluding them overstates adjusted earnings.