capitalizing and expensing long lived assets assets

burnsy562000

Can someone please explain this statement in schweser notes;
" If the tax treatment is changed to match the financial reporting treatment of the expenditure, expensing will result in higher operating cash flow in the first year because of the tax savings".


Ty,

John10

Capitalizing goes through the CFI portion in the cash flow statement. Also, NI under capitalization is higher therefore the amount you pay as taxes is higher. If you were to expense it, NI is reduced (and consequently you save on taxes) and since this is considered operating, it is added back to operating cash flow thus increasing it. Hope this makes sense. Remember net cash flow does not change though.

firat

e.g Depreciation. Non cash expense. Depreciation can be accounted for differently for reporting and tax purposes. giving rise to deferred taxes. eg. For reporting a company can use straight line and for tax acelrated or other.

jbaldyga

Greatly appreciate the explanations. Makes perfect sense to me now!!!