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.

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.

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.

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