FSA: capitalization of interest and cost before, amount, always, increase, interest

ba736

in one of CFA mock exam: Bianca Puglisi case:
the table gives capitalized development and capitalized interest costs.
when capitalize interest cost of some other cost, will they always increase EBIT by capitalized amount? how about interest, I think EBIT is before intesest, how capitalization could increase EBIT? Thanks.

OmarAdnan

CFO adjustment:
usually interest expense is operating expense.

In reported CFO, interest expense is capped, and therefore bypass CFO. To adjust CFO:
reported CFO-int expense

In reported CFI, the capped interest expense goes to CFI outflow, to adjust CFI:
reported CFI + int expense.

so we pretty much take interest expense from a CFI to CFO.

Total Asset adjustment:

reported Asset-capped interest+depretiation


I copied mostly from schweser notes, page 40, book 2

eoin

does capitalized interest cost increasd CFI or decrease it? Thanks.
does it decrease CFI and increase fixed asset on B/S? THanks.


hw0799 Wrote:
-------------------------------------------------------
> in one of CFA mock exam: Bianca Puglisi case:
> the table gives capitalized development and
> capitalized interest costs.
> when capitalize interest cost of some other cost,
> will they always increase EBIT by capitalized
> amount? how about interest, I think EBIT is before
> intesest, how capitalization could increase EBIT?
> Thanks.



Edited 1 time(s). Last edit at Sunday, May 29, 2011 at 01:45PM by hw0799.

WarrenB1

alright
as you know, interest expense should be expensed for analytical purposes.

Capitalization of interest expense (as reported) increases EBIT favorably:
EBIT+Capped int-depretiation--->reported EBIT with capped interest expense.

Because Capped int expense>depretiation, EBIT is thus increased.

To remove the effect,
we adjust reported EBIT:
reported EBIT-capped interest expense+depretiation

we adjust int expense:
reported int expense + capped interest expense that should be expensed.



Edited 2 time(s). Last edit at Sunday, May 29, 2011 at 01:45PM by passme.