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- 2011-7-11
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2#
发表于 2011-7-11 18:35
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I will use an example to illustrate.
MT is a retailer with outlets in China and India. It wants to install solar energy plates in all its outlet. MT has two options - either capitalize the cost or expense it.
Let's start with expensing. MT expenses the cost. Assume this company has no debt and thus pays no interest expense. Cost of goods sold, SG&A, depreciation and other expenses have been deducted and MT has $10m. Cost of opening the new outlet is $8m... after expensing this cost, earnings before tax is not $2m. Assuming that there is no change in earnings and expenses, the following year earnings before tax will be $10m because the outlet had been expensed the previous year. With expensing the income statement takes a major hit in the first year and then profitability jumps the following year. This leads to volatility in earnings which is a disadvantage if such expenses occur intermittently. Balance sheet will show the energy plates as assets that will be depreciated over time. Cashflow statement will reflect the fact the project was expensed (investing cashflow).
Now to capitalization. MT capitalizes the cost. The income statement will not show the expense. The cost will be capitalized and it will show as asset in the balance sheet. Apart from the normal depreciation of the plates that will be expensed through the income statement, the capitalized cost of the energy plates will also be amortized over time through income statement. What this means is that the income statement will not take a hit on the first year unlike expensing but from the second year on, earnings before tax will be lower than that of expensing; this is because while expensing only depreciation will reflect in income statement, capitalizing will reflect both depreciation and amortization of the capitalized cost.
This is just a bird's eye view and I hope you find it helpful.
Good luck. |
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