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LOS a: Distinguish between costs that are capitalised and costs that are expensed in the period in which they are incurred.

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

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.

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

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

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.

Which of the following statements regarding the capitalization of an expense is least accurate?

A)	Capitalizing an expense lowers current period net income.

B)	Capitalizing an expense creates an asset.

C)	Capitalized expenses increases equity.

Capitalizing expenses reduces current period expenses by the amount capitalized. The amount capitalized is added to assets which increases equity by increasing net income and retained earnings in the current period.

Capitalizing interest costs related to a company’s construction of assets for its own use is required by:

Both U.S. GAAP and IFRS require companies to capitalize the interest that accrues during a the construction of capital assets for their own use.

Capitalized interest costs are typically reported in the cash flow statement as an outflow from:

Capitalized interest costs are reported as CFI on the statement of cash flows, as they are treated as part of the cost of the constructed capital asset.

Dobkin Company decides to expense costs that it would have otherwise capitalized. Compared to capitalizing, expensing these costs will result in:

A)	lower asset levels and lower equity levels.

B)	lower asset levels and higher equity levels.

C)	lower asset levels and lower liability levels.

Expensing instead of capitalizing results in lower assets. Since the entire expense is recognized in the current period (whereas only a portion of the expenditure is amortized when capitalizing), net income (and therefore equity, via retained earnings) is lower with expensing than with capitalizing. Liabilities are unaffected.

A)	lower cash flows from investing.

B)	lower cash flows from operations.

C)	lower profitability in the earlier years.

A firm that capitalizes costs classifies them as an investing cash flow rather than an operating cash flow. Investing cash flows will be lower and cash flow from operations will be higher when costs are capitalized.