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- 2013-8-21
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Question on expensing versus capitalizing. Reading 18 questi
Hello, thanks for reading. Classic confusion where I think the curriculum is contradictng itself but its probably user error. In Reading 18, they talk about expensing versus capitalizing. They talk about expensing leading to lower net income/ profit margin because of the higher expenses (question 1 in the problem set). Then, they talk about how capitalizing results in lower profits because the lease expense (if it were an operating lease vs a finance lease) is less than the combined depreciation plus interest costs (for the finance lease). As far as I can tell, both deal w the perspective of the lesseee, so I didnt screw that one up. And thay didnt provide numbers, so it was conceptual versus calculating the exact tax etc effect.
Is there a different consideration between expensing vs capitalizing an asset and operating vs finance lease? I would think the process would be the same effect on the is (expensing equivalent to operating lease and capitalizing equivalent to finance lease), but maybe I am wrong
answer to 1:
C is correct. Expensing rather than capitalising an investment in long-term assets will result in higher expenses and lower net income and net profit margin in the current year. Future years’ incomes will not include depreciation expense related to these expenditures. Consequently, year-to-year growth in profitability will be higher. If the expenses had been capitalised, the carrying amount of the assets would have been higher and the 2009 total asset turnover would have been lower.
Answer to 9:
is correct. The cash flow from operating activities will be lower, not higher, because the full lease payment is treated as an operating cash outflow. With a finance lease, only the portion of the lease payment relating to interest expense potentially reduces operating cash outflows. A company reporting a lease as an operating lease will typically show higher profits in early years, because the lease expense is less than the sum of the interest and depreciation expense. The company reporting the lease as an operating lease will typically report stronger solvency and activity ratios. |
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发表于 2013-4-28 09:30
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