Can anyone please explain to me the difference between the following: Total Expense = Depreciation + Interest Expense and Lease Payment = Change in Principal (CFF) + Interest Expense (CFO). I just can’t really understand what they mean. Also, I’m confused by the following wording taken from Schweser (p.223-225, Book 3) where it says that under capital lease CFO is reduced by the interest expense and then it says that “interest” is a non-operating expense. For me it sounds contradicting. Any advice would be greatly appreciated. Thanks !
Total expense= Depr. + interest expense is the accounting treatment of capital lease on the income statement. Interest expense is a non-operating expense because it is the cost of debt. Interest expense is not part of the day-to-day operation of the business. COGS and SG&A are all operating expense because they are part of the day-to-day operation of the business. Lease payment= Change in prinicipal (CFF) + Interest Expense (CFO) is the actual cash outflow that will be deducted (if a lessee) from the cash flow statement. Imbedded in a fixed lease payment are interest payments and principal, which will be reported separately on the cash flow statement, hence CFF and CFO.