So I understand that in rising inventory enviornment, if a company does LIFO accounting, CFO will increase vs FIFO because paying less taxes, which increases CFO.
Is the same logic applicable for a company that capitalizes an expenditure related to capital assets instead of expensing it? I assume when you expense a capital asset, it doesnt show up in CFO… but when you capitalize it, then it lowers taxes in CFO which then increases CFO? Or is it something else?
If a company capitalizes an expense rather than expensing it, CFO would be higher but CFI would decrease because when a company expenses an expenditure it decreases CFO in the current period and since it is all being expensed and not capitalized, CFI in turn would be higher than if a company capitalized the same expense.
If you expense a capital asset, it definitely shows up in Cashflow from Operations because if you expense it to your P&L, it goes directly to decreasing your Net Income. In simple terms, CFO = NI + Depreciation + Change in non-cash W/C (obviously there are numerous other adjustments).
If you capitalize the fixed asset, your Cashflow from Operations increases while Cashflow from Investing goes down (bigger negative number).
As for tax effects, if you expense a fixed asset all in one period, you may save more in taxes during that period but obviously, the amount you expensed will be greater than your tax savings since your effective tax rate won’t be 100%.