Reading 36: Analysis of Long-Lived Assets: Part I - The Ca

答案和详解如下：

1.Train, Inc.’s cash flow from operations (CFO) in 2004 was $14 million. Train paid $8 million cash to acquire a franchise at the beginning of 2004 that was expensed in 2004. If Train had elected to amortize the cost of the franchise over eight years, 2004 cash flow from operations (CFO) would have been:

A)   $22 million.

B)   $21 million.

C)   $7 million.

D)   unchanged.

The correct answer was A)

If Train decided to amortize the franchise cost, it would be capitalized and $1 million each year would be treated as a reduction in cash flow from investing (CFI). None of the cash expended would flow though CFO, and all of the $8 million would be added back to CFO.

2.Which of the following statements regarding capitalizing versus expensing costs is least accurate?

A)   Total cash flow is higher with capitalization than expensing.

B)   Capitalization results in higher profitability initially.

C)   Expensing results in higher income variability than capitalization.

D)   Cash flow from investing is higher with expensing than with capitalization.

The correct answer was A)

Total cash flow is higher with capitalization than expensing is least accurate because total cash flow would be the same under both methods, not considering tax implications.

3.Compared with firms that expense costs, firms that capitalize costs can be expected to report:

A)   higher asset levels and higher equity levels in the early years of the asset's life.

B)   lower asset levels and higher equity levels in the early years of the asset's life.

C)   higher asset levels and lower equity levels in the early years of the asset's life.

D)   lower asset levels and lower equity levels in the early years of the asset's life.

The correct answer was A)

The capitalized cost is recorded as an asset, which is then expensed in the form of depreciation over future years. Spreading the depreciation out over future years causes net income to increase along with retained earnings and equity in the early years of the asset’s life.

4.Compared to firms that expense costs, firms that capitalize expenses will have:

A)   lower income variablity.

B)   lower cash flow from operations.

C)   higher leverage ratios.

D)   lower current net income.

The correct answer was A)

Firms that capitalize expenses have less variability of net income because the capitalized expense becomes an asset that is depreciated over years instead of all at once which happens when costs are expensed. Capitalizing expenses will result in higher cash flows from operations because capitalizing an expense becomes an investing cash flow instead of an operating cash flow which occurs when expenditures are expensed. Firms that capitalize expenses have lower leverage ratios because assets and equity are increased so any leverage ratio that have assets and equity in the denominator will decrease.

5.When comparing capitalizing versus expensing costs which of the following statements is most accurate?

A)   Capitalizing costs creates higher cash flows from operations and lower cash flows from investing.

B)   Capitalizing costs creates lower cash flows from operations and higher cash flows from investing.

C)   Expensing costs creates higher cash flows from operations and lower cash flows from investing.

D)   Expensing costs creates lower cash flows from operations and lower cash flows from investing.

The correct answer was A)

Although net cash flows are not affected by the choice of capitalization or expensing, the components of cash flow are affected. Because, a firm that capitalizes classifies the expenditure as investing (not operations), cash flow from operations will be higher for firms that capitalize and investing cash flows will be lower than that of an expensing firm.