Note that none of thecurrent year’s expenditurehas been
amortizedbecauseitisassumed tooccurattheend ofthe
year,butthatalloftheexpensefromfiveyearsagohasbeen
amortized.ThesumofthedollarvaluesofunamortizedR&D
fromprioryearsis$9.92billion.Thiscanbeviewedasthe
valueofCisco’sresearchassetandwouldbealsoaddedtothe
book value of equity for computing return on equity and
capitalmeasures.Thesumoftheamortizationinthecurrent
year for all prior year expenses is $3.28 billion.
Thefinalstepintheprocessistheadjustmentoftheoperating
income to reflect the capitalization of research and
developmentexpenses. Wemaketheadjustmentbyadding
backR&Dexpenses totheoperating income (toreflectits
reclassificationasacapitalexpense)andsubtractingoutthe
amortizationoftheresearchasset,estimatedinthepreceding
step.ForCisco,whichreportedoperatingincomeof$7,416
millioninitsincomestatementforthemostrecentfiscalyear,
the adjusted operating earnings would be:
The stated net income of $5,741 million can be adjusted
similarly.