Adjustment- expense interest vs capitalise

Question says: ignoring the effects of income taxes, the expensing of previously capitalised interest causes cash flow from operations to be lower, unchanged or higher? answer is unchanged. For adjustment purposes, in order to expense the amount previously capitalised, wouldn’t you add the amount to CFI and subtract the amount from CFO (net change is 0)?

expensing a previously capitalized asset is a non-cash charge.

Guys careful- afranks1 if your quesiton is from that brutal 2013 CFA Mock 2013 then yes, no impact on the CFO, but the reason is the US GAAP and how the capitalized portion of interest expense is being recognised in COGS (read the reason carefully in that solution - arguably a ‘tricky quesiton’…i would have never gotten this right)…

However as explained in that 2013 solution as well as in CFA BB #3, page-60, while the total cash flow is unchanged but generally the CFO (inflow) goes down and Cash outflow from investing goes down

I think the key here is the cash flow from operations will be X, regardless if you expensed the previous cost in this period, or the next.

This is from 2014 cfai June mock, item set 6, question 5. When expensing previously capitalised interest, why is it considered a non-cash charge?

I hate to say this for 2014 mock- you will mock me :)…but this problem was discussed in my local CFA prep society - we had this Accounting prof 20+ yr exp (CFA,CPA etc…)- even he got this one wrong the first time!!

Anyway the wording of the question is that what would happen if all the previously capitalized interest is expensed in the current period, the answer is NO IMPACT - Note that this is different from saying that if you go back in 2012/2013 and then would have expensed the capalized portion, the answer would change (i.e. CFO would be lower). - Read this in conjunction with BB #4

Expensing previously capitalised interest is a non-cash charge (i.e. the total cash position is unchanged) Companies usually capitalise interest cost associated with constructing a long term asset . Any interest cost prior to completion to finance this constuction is capitalized. Note that interest expense (cash) had already left the company in Yr-1 itself. However, the capitalized interest appears on the BS as part of long term asset and is expensed gradually as that property is depreciated over time --------------

I would beg to differ to from Galli because the curriculum has few problems on almost exactly the same lines and while total cash flow is unchanged (capitalize vs expense), but the CFO & CFI changes depending on the treatment. Would recommend you to refer to curriculum (the example i refered to above as well as EOC #7.

I agree, there are several problems in the text that have answers where CFI is impacted in place of CFO during year 0 capitalization.

I do think it’s also important to be aware of how year 0 treatment differs from year 5 CF impacts, which is the point I was trying to emphasize. We have to be careful with the tricky wording!

I am a financial analyst, and i personally have learnt 0 from this FRA curriculum.

Thank god i never pursued this exam while i was interviewing actively for (Financial modeling courses helped me 100 times more in understanding the Financial stmts then anything i have done so far in CFA)- this is my view offcourse people who have passed will not like to listen to this or disagree…

Cheers and all the best guys!