Capitalization - Cash flow from Operations problem, increase, material, amount, decrease

richer

Schwesers's 2009 level 1 book page 167:

There is a sample problem that says that a firm discovered that $150 of its operating expense should have been capitalized, which would have increase depreciation expense by $20.

Now in calculating CFO (Cash flow from Operations) with the new information, the material says that cash operating expense decreased by $150 and CFI (Cash flow from Investments) decrease by $150.

However, doesn't CFO decrease by the depreciation amount of $20?

FVPV

I don't have schweser anyway..

Let's break it in parts , So if you capitalized 150 instaed of expensing it.. then the transfer is right from OCF to ICF

And if the depreciation increases I think that should be added to OCF instead of decreasing it .. I haven't read anycase where you reduce depreciation from OCF (In direct method) atleast where we do adjustment for accruals to net income.

Though I have just finished the reading this is what I understand.. Hope we get more answers

JRossSter

remember always that depreciation is a non-cash expense. NI would have been affected (LOWER) bcos depr. expense was higher - but if you remember the indirect method - entire depreciation is ADDED BACK. Higher depreciation expense - would mean lower taxes paid - but all in all - there would be NO IMPACT on CFO.

CP

bapswarrior

Depreciation has NO impact on cash flow (assuming no impact on taxes).

It is true that depreciation is added to net income in the calculation of CFO under the indirect method. However, if depreciation increases, net income also falls by the same amount. The net result is no change in cash flows.

cyber21

Makes sense. Thanks guys!

dcfox83

depreciations is tax effected so not exactly by the depreciation amount.