Q11. Compared with firms that expense costs, firms that capitalize costs can be expected to report:

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

Q12. Ironman Nutrition has traditionally followed a conservative policy of expensing most costs. However, the new CFO is an advocate of capitalization. During a meeting with company executives he explains that compared to expensing, capitalization is least likely to result in:

A)   lower debt to equity ratio.

B)   greater initial return on assets.

C)   higher net cash flows.

Q13. A firm that capitalizes rather than expensing costs will have:

A)   lower cash flows from operations.

B)   lower profitability in the earlier years.

C)   lower cash flows from investing.

Q14. 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)   unchanged.

B)   $21 million.

C)   $22 million.

Q15. 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.

答案和详解如下：

Q11. Compared with firms that expense costs, firms that capitalize costs can be expected to report:

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

Correct answer is C)         

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.

Q12. Ironman Nutrition has traditionally followed a conservative policy of expensing most costs. However, the new CFO is an advocate of capitalization. During a meeting with company executives he explains that compared to expensing, capitalization is least likely to result in:

A)   lower debt to equity ratio.

B)   greater initial return on assets.

C)   higher net cash flows.

Correct answer is C)         

There is no difference in net cash flow. However, a firm that capitalizes classifies the expenditure as investing (not operations) cash flow from operations will be higher and cash flow from investing will be lower.

The other statements are correct. Capitalizing firms have higher asset and equity levels (due to the booking of the asset and the higher net income.)

Q13. A firm that capitalizes rather than expensing costs will have:

A)   lower cash flows from operations.

B)   lower profitability in the earlier years.

C)   lower cash flows from investing.

Correct answer is C)         

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.

Q14. 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)   unchanged.

B)   $21 million.

C)   $22 million.

Correct answer is C)         

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.

Q15. 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.

Correct answer is 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.

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