Harvard Business Review Leadership & Strategy Boxed Set (5 Books)

Part Three

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EXPENSE? OR CAPITAL EXPENDITURE?

When a company buys a piece of capital equipment, the cost doesn’t show up on the income statement; rather, the new asset appears on the balance sheet, and only the depreciation appears on the income statement as a charge against profit. You might think the distinction between expense (showing up on the income statement) and capital expenditure (showing up on the balance sheet) would be clear and simple. But of course it isn’t. Indeed, it’s a prime canvas for the art of finance.

Consider that taking a big item off the income statement and putting it on the balance sheet—so that only the depreciation shows up as a charge against profit—can have the effect of increasing profit considerably. WorldCom, ...