Question 60, regarding the correct answer choice D: Isn’t it true that capitalizing costs, rather than expensing them, results in lower profitability in the initial year? So, why is D correct? Thanks.
Isn’t it the other way around? When capitalising them, in effect they become assets to be depreciated. Whereas when expensing, all costs are expensed in the first year, meaning NI is lower and therefore profitability is lower in the first year for an expensing firm.
That’s what I thought, but looking at the summary between capitalizing and expensing in Stalla (page 10-42), it says that in the early years, the total reported expense for a cap lease (interest expense plus depreciation) is higher than the lease payment, resulting in lower profitability.
Ah ha! You’re confusing costs and leases. Ps I have Schweser so can’t see what you’re referring to
Damn, I’m an idiot. Thanks.
In Cap Expenses, CERH. Meaning Cap. Early years Ratios (such as ROE, ROA) are Higher. Cap lease is the opposite.