I am just going over a question that was in the CFAI Mock and was wondering about their calculation of the adjusted interest coverage ratio.
I know that you are supposed to add back the capitalized interest included in depreciation expense to the numerator (EBIT) and add back the capitalized interest to the denominator (interest expense), but can someone explain why CFAI calculated the unadjusted EBIT as follows:
EBIT: Sales-COGS-SG&A
Why is depreciation not taken out when originally?
I think they are just not showing you the depreciation not related to a lease at all. They are assuming the only depreciation you would have is from a finance lease and there isn’t any under an operating lease.
Anyone can explain this? Why EBIT in this question does not include depreciation expense. I have a another question for question 6, "At the end of 2013, a test of impairment is required because events or changes in circumstances indicate that its carrying amount may not be recoverable.” I didnt see in the paragraph that there would be an events that will indicate carrying amount may not be recoverable.
Anyone shed any light on this? How can we be assumed to know that the original dep expense is already factored in when it’s not actually shown on the I/S???